As investors gear up for the new year, JP Morgan Asset Management’s Chief Investment Officer, Michael Cembalest, shares insights into the 2024 economic landscape and market trends.The overarching theme suggests a shift towards a soft landing rather than a recession, supported by falling US inflation and prospects for a more accommodative Federal Reserve policy.Leading indicators are signalling weaker US growth, but Cembalest emphasizes that these indicators point to a slowdown rather than a sharp decline. While there’s talk of a potential recession in 2024, Cembalest notes that even if it occurs, it is likely to be mild, thanks in part to the Federal Reserve providing ample liquidity to the banking system.
Despite an increase in Fed policy rates, Cembalest explains that the risk of a recession has been mitigated by factors such as the corporate sector’s solid cash flow, the terming out of debt maturities, and ongoing liquidity support from the Fed.He cautions, however, that recessions typically occur several quarters after the initial Fed hike.Turning to inflation, Cembalest acknowledges the success in curbing inflation in the US and other developed economies.
Factors contributing to this include falling supply chain pressures, rising auto inventories, and declining used vehicle values.The outlook also considers the potential impact of new US energy and industrial policies on inflation risks.The dominance of mega-cap stocks in the US equity markets is a focal point. Cembalest notes that markets are at a unique juncture with yields on various assets converging.Despite elevated equity valuations, the market already reflects expectations of a soft landing. The concentration of gains among megacap stocks, particularly the “magnificent 7,” poses challenges, but Cembalest suggests that adjusting for higher earnings growth expectations tempers concerns about overpricing.
In a sectoral perspective, industrials and energy catch Cembalest’s attention, driven by US industrial policies.
The report delves into antitrust risks facing US tech stocks and includes a detailed analysis of weight loss drugs, the US Federal debt, China, and the top ten surprises for 2024.
Shifting the focus to the global stage, Cembalest briefly touches on European and Japanese equities, pointing out the continued underperformance of Europe compared to the US.
The “barbell” investment strategy, favouring the US and Emerging Markets while underweighting Europe and Japan, has yielded positive returns in the majority of three-year rolling periods.The report concludes with an extensive overview of antitrust developments, highlighting ongoing lawsuits against major tech companies.
Notable cases include the Department of Justice’s lawsuit against Google, the Federal Trade Commission’s case against Meta, and legal battles involving Amazon and T-Mobile.Investors are urged to monitor these dynamics closely in what Cembalest characterizes as a make-or-break year for efforts to address monopoly power in the digital realm.The report also touches on Japan’s improving investment landscape, the state of fixed-income markets, and the evolving challenges and potential solutions in the face of the US debt trajectory.As 2024 unfolds, investors are advised to adopt a diversified portfolio approach, considering cash, long-duration government bonds, high-quality corporate bonds, and equities.The intricate interplay of economic factors and market dynamics will undoubtedly shape the investment landscape throughout the year.
