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'Unloved' Bull Market Has 18-24 Months Left, but Trade War Is Top Risk: JPMorgan

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“This bull market is one of the most unloved bull markets, because everyone missed it and so many have been so skeptical about it the whole time,” said portfolio manager Susan Bao of JPMorgan.

She and other portfolio managers gave a fairly upbeat assessment for the U.S. economy and equity markets on Friday during Raymond James 2018 Women’s Symposium in Tampa, while pointing to possible headwinds from a drawn-out trade war with China.

“We are up 425% off of the bottom of the financial crisis. This is the longest expansion on record,” Bao said.

(Related: The Great Bull Market Is Dead: Merrill)

The bull market is 10 years old, she added, noting that bull markets don’t have “expiration dates” and end due to recessions. They also run into trouble from excess and euphoria. “I do not see much excess today … and euphoria, where do you see it? I don’t see it anywhere,” Bao explained.

“We have a long recession checklist, and we keep track of it. Most indicators are still green,” said the large-cap fund manager, who has been with JPMorgan since 1997. “The economy is good, and we still have a very healthy jobless rate.”

Still, the spread between two-year and 10-year bond yields is narrow, she points out. “That’s the only yellow sign … and it’s been a pretty reliable indicator for a recession.”  

According to Bao, “There are some warning signs, but that’s maybe 18 to 24 months out. The big tail risk is trade. If we have a protracted trade war, that will put some pressure on earnings.” She labels this as the biggest threat to the current bull market.

Spending Spree?

Catherine Stienstra, head of municipal investments for Columbia Threadneedle, generally agrees.

“People are out spending money. It’s hard to get into a restaurant without a reservation, and it’s hard for restaurants to hire labor,” she explained. “Things like consumer saving are higher and healthy.”

Also, while employment is up, “we are not seeing inflation, and that’s a good thing,” Stienstra said.

Her firm’s view is that a recession is probably 2.5 to three years down the road. “And we see 3.25% by the end of the year for 10-year Treasury yields, though there is always political risk to consider,” explained the muni specialist, who has been a fund manager for 30 years (the past 11 of which she has spent at Columbia Threadneedle).  

What to Do?

According to Bao, “I think the bull market will continue with a strong economy and no recession soon, as long as these things” like the trade war get worse.

During the late part of an economic cycle, she relies on “a barbell strategy” that includes cyclical and defensive holdings.

“I like financials, because we have a regulatory [climate] that is getting better. Also, rising interest rates are good for net interest margin,” Bao explained.

Her large-cap team also likes railroad companies, which have pricing power and operational leverage.

On the defensive side, health care firms such as United Healthcare (UHC), Merck and Pfizer are attractive. “They are not that economically sensitive and have a decent yield,” she said.

Overall, in the late part of up-market cycles, it’s best to “buy quality companies that can give you growth and [attractive] … prices — upside and downside protection,” Bao added.

As for JPMorgan’s earnings outlook, “We think 2019 will be good but not as strong as 2018,” the portfolio manager explained, meaning 8-9%. This year, the team is looking for a 24% jump in earnings thanks to the strong economy and top-line growth, margin expansions, the tax cut and momentum in technology stocks.

Profit margins have grown from 6 to 14% over the past 20 years or so, and that’s due to globalization, Bao points out. “It is important for everyone … so if a trade war drags on, it will impact the markets.”  

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