J.P. Morgan Asset Management’s 2019 Long-Term Capital Market Assumptions come at a time of intense speculation about when the current cycle of economic expansion may end.
While trying to precisely time the downturn is “likely futile,” John Bilton, head of global multi-asset strategy at J.P. Morgan, says that understanding the complexities of the late cycle and preparing for the next phase can be a vital exercise.
“If we can … think not just of the end of this cycle, which I think a lot of people fixate on, but on the contour of the next one, that’s how we build long-term returns,” Bilton said at a press briefing in New York.
J.P. Morgan’s Long-Term Capital Market Assumptions focuses this year on helping investors and advisors understand the headwinds and opportunities in the current late-cycle economy. As part of this, the study delves into the changing nature of recessions and recoveries.
(Read about last year’s market assumptions here: J.P. Morgan Forecasts a Drop in Returns for 60/40 Portfolios.)
David Kelly, chief global strategist at J.P. Morgan, explained that it’s no accident that the U.S. is in the second longest expansion in U.S. history and quite possibly the longest if it lasts until next July.
“There’s a certain global warming going on when it comes to expansions,” Kelly said during the press briefing. “We’ve got longer summers and shorter winters. We’ve got fewer recessions.”
J.P. Morgan looked into why this is, and found that it’s likely because the U.S. has become more stable in recent decades.
According to the study, several factors explain this increased economic stability, including better inventory management and diminished volatility in the housing sector, government spending and the services sector. In addition, some of the ultimate causes of recessions — the deeper imbalances that build up over time — have faded in their relevance.
What does this mean for future recessions? J.P. Morgan used a simple model to consider the question.
According to J.P. Morgan, data between 1948 and 1998 suggest the probability of recession is around 4% per quarter; however, data over the past 20 years suggest a lower probability. The model suggests that there is a 50% chance that, ignoring late-cycle dynamics, the current U.S. expansion would survive for another 17 quarters.