Based on a comprehensive study of decades of market history, JPMorgan has developed a detailed guide for how investors can ride out the next recession, Business Insider reports. With the so-called Great Recession of 2007–09 now a decade behind us, and the onset of the next economic downturn becoming increasingly imminent, JPMorgan recommends that investors start planning on defensive portfolio shifts.
However, the firm believes that a recession is unlikely to begin within the next 12 months, and warns that making big defensive shifts more than a year ahead of a recession can be costly. Nonetheless, John Normand, JPMorgan's head of cross-asset fundamental strategy, says, "But given the possibility of an earlier turn based on concerns about valuation or liquidity, there is some wisdom in averaging out of these exposures progressively each quarter even during a robust expansion." (For more, see also: 7 Ways to Invest in a Bear Market.)
JPMorgan has issued specific recommendations for how investors should protect themselves in four key asset classes: equities, bonds, commodities and currencies. Below are JPMorgan's recommendations regarding each class.
When it comes to stocks, a key matter of concern for Normand is high valuations, with both trailing P/E and forward P/E ratios above their levels during the dotcom bubble of the late 1990s. As a result, any hint of an impending economic downturn could send share prices tumbling, and the likelihood of a liquidity crunch could exacerbate the fall. He indicates that, once these fears start to arise, bonds could start outperforming stocks more than a year before an actual recession begins, ahead of the usual schedule dictated by history.
The table below gives more detail on JPMorgan's equity strategy, an area of especially high interest for Investopedia readers.
JPMorgan's Recession Equity Strategy
|Underweight equities vs. bonds|
|Underweight cyclical stocks vs. defensive stocks|
|Overweight value and quality stocks vs. growth and momentum stocks|
|Underweight emerging market vs. developed market stocks|
Source: JPMorgan; Business Insider
Investors in corporate debt should also take key steps, JPMorgan says. Normand warns that corporate debt is at record levels in the U.S. and some emerging markets, while the quality of so-called high grade (or investment grade) corporate debt is at record lows in the U.S. and Europe. He advises that investors go underweight in both high grade and high yield corporate bonds, shifting their debt holdings toward government bonds instead. He also suggests going underweight in European debt and overweight in cash.
Investors should be overweight in gold, but neutral or underweight in oil and base metals. While OPEC normally cuts production late in the business cycle to boost prices, JPMorgan expects that they will do the opposite in 2019, to help the oil market recover from its crash in 2014. Rising output in the U.S. is contributing to a glut, and thus oil may become a short selling opportunity in the second half of 2019. (For more, see also: Why Stocks Are in a Hidden Bear Market.)
In light of their forecast of declining oil prices, JPMorgan believes that demand for other commodities will weaken. As a result, they suggest shorting the currencies of emerging market countries that are heavily dependent on exports of commodities, starting in the first half of 2019. Meanwhile, the Japanese yen tends to strengthen during periods of market turbulence, with a historic success rate of 50%, so investors also should go long on the yen at the same time.
David Tice, the longtime manager of the Prudent Bear Fund before selling it to Federated Investors in 2008, is among a growing chorus of investment professionals who are becoming increasingly nervous about the market and the economy. "We're getting closer to a meltdown scenario," he told CNBC, adding, "I'm worried about whether the economy could enter a recession faster than a lot of people think." He's particularly concerned that stock markets and currencies in emerging markets have been tumbling, which may be a prelude to a U.S. downturn. Contrary to most predictions, he foresees a global trend towards deflation, rather than inflation.