Investment Strategy
1 minute read
U.S. equities are on track for their first weekly decline in seven weeks.
Investors are recalibrating what stronger economic data and potential fiscal expansion could mean for the Federal Reserve and interest rates. That’s pushed rates higher this week, and lowered market expectations of rate cuts this cycle.
Earnings season continues, with ~33% of S&P 500 companies having reported with a 3.5% year-over-year growth rate.
Below we review the release of J.P. Morgan Asset Management’s 29th Long-Term Capital Market Assumptions.
Day trading, quarterly earnings and the newest economic data release all seem to dominate day-to-day financial headlines. Today, we are taking a step back from the “short-termism” of modern finance and shifting focus to the long term.
The 29th edition of J.P. Morgan Asset Management’s Long-Term Capital Market Assumptions (LTCMAs) was released this week. The document provides return and risk expectations for more than 200 assets and strategies in 19 base currencies. Importantly, as the name would suggest, these assumptions are for the long term (10–15 years), and should help guide investors when making strategic portfolio allocation decisions.
The headline change is that the return assumptions for a global 60/40 (stocks/bonds) portfolio has declined 60 basis points. The drop in the expected return on a year-over-year basis is the result of declining returns in both equity and fixed income. But the why is important to understand.
It’s the starting point. For equities, the impressive nearly 20% year-to-date global equity rally has led to higher starting valuations, particularly in the tech sector. Starting at a higher level lowers return expectations, all else equal.
For fixed income, economic resilience, especially in the United States, has led to tighter credit spreads. Investment grade and high yield spreads (the compensation an investor receives for investing in riskier bonds) are below their 20-year average—although elevated base yields combined with easing monetary policy should help drive positive returns.
With the prospect of lower returns for equities and fixed income in mind, there is some good news. The reward for taking public market 60/40 risk remains solid (and significantly above the forecasted returns of just four years ago.)
Despite lower return assumptions, the global economy’s resilience has surprised to the upside. Here are some of the positives:
Lower inflation and stronger economic growth create a favorable investing backdrop that lends itself to opportunities across asset classes.
Artificial intelligence: We’re believers that AI can help us to create a vastly more productive economy. This year, we boosted the impact of AI on developed market GDP growth to 0.2% per year. This upgrade largely reflects the strength of capital investment in AI.
Alternatives: We still see alternatives offering investors alpha, income and diversification. However, we think the dispersion of these outcomes will be wider than what investors experienced in the 2010s. Higher interest rates, increasing capital investment and rising geopolitical risks will all play a crucial part in shaping those outcomes.
Real estate: Elevated rates and challenging debt markets have driven down commercial real estate values.
Thus there is a need to rebalance portfolios. For example, if you invested in a 60/40 U.S. stock and bond portfolio at the beginning of 2020, it would now be an 80/20 stock/bond allocation without rebalancing.
We note as well that today’s levels of market dominance face several challenges, including business competition and government regulation. The current outlook for lower returns in equity and fixed income increases the relative benefits of potential alpha driven by active management in public markets.
Additional diversification can be achieved by investing across geographies. Governance-led reforms, an escape from deflation and capital returning to shareholders have resulted in Japanese equities offering the highest return expectations in five years (8.3%). We also believe the U.S. dollar is structurally overvalued, and that dollar-based investors should diversify their currency exposures.
The release of the LTCMAs is a good reminder to take a step back from the day-to-day noise and recalibrate our portfolios for the long term. Investors will have different strategic allocations in their portfolios depending on their goals. As such, it’s important to revisit them and recalibrate as needed. As always, your J.P. Morgan team is here to help.
All market and economic data as of October 2024 and sourced from Bloomberg Finance L.P. and FactSet unless otherwise stated.
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