J.P. Morgan Investment Outlook 2020 | J.P. Morgan Asset Management

In early June the market was pricing in a V-shaped recovery from the pandemic-driven economic contraction. We expect the recovery to be more gradual, with a few stop-starts along the way. Extremely low interest rates will help, but unemployment and corporate deleveraging could be a drag on growth.

The extent of near-term uncertainty, as well as the potential for political risk to mount as we approach the US election, could generate more market volatility.

For individual market sectors, the outlook depends on the path of the pandemic. If a full and sustainable reopening of the economy becomes possible, we may see a further rally for the most beaten-up sectors, coupled with a style rotation. For now, we believe it makes sense to maintain a nimble approach, with a focus on quality and an eye to ESG risks.

Low-risk options for income seekers are increasingly scarce. Rather than stretching for yield, investors may be better off being selective within fixed income and using a wider range of income-providing asset classes, including real assets for those who can accept lower liquidity.

Listen to our market strategists discuss the outlook

Low-risk options for income seekers are increasingly scarce. Rather than stretching for yield, investors may be better off being selective within fixed income and using a wider range of income-providing asset classes, including real assets for those who can accept lower liquidity.

Developed market government bonds look less and less likely to play their traditional roles of providing income and protecting portfolios in periods of market stress. Investors may need to look beyond the traditional 60:40 portfolio, with a greater role for alternatives and flexible fixed income strategies.

The market is pricing in a V-shaped recovery from the Covid-19 contraction. To be comfortable with this outlook, we will need more evidence that policy action is feeding through into fundamentals.

No one predicted that in the first half of 2020 the world’s economies would be brought to a virtual standstill by a global pandemic. Even had we have known the virus was coming, we would not have predicted that by mid-year the S&P 500 would have managed to climb back above 3000 (see chart below).

S&P 500 drawdowns and recoveries% price return since market peak

Source: Refinitiv Datastream, Standard & Poor’s, J.P. Morgan Asset Management. Dates labelled refer to the year of the market peak. Past performance is not a reliable indicator of current and future results. Data as of 11 June 2020.

We have global policymakers to thank for the market’s resilience. According to current analysts’ expectations, the policy response has helped one-year forward earnings expectations to find a floor and start to improve. In the sharp rally since 23 March, markets looked to be pricing that the combined actions of governments and central banks in recent months will have successfully absorbed the economic losses of Covid-19 to engineer the perfect V-shaped recovery. (See charts below).

US risk markets and S&P 500 forward earnings in prior downturns

S&P 500 and US investment-grade corporate bond yieldIndex level (LHS); % yield (RHS, inverted)

S&P 500 earnings-per-share (EPS) drawdowns and recoveries12-month forward EPS, rebased to 100 at pre-recession earnings peak

Source: (Top) Bloomberg Barclays, Refinitiv Datastream, Standard & Poor’s, J.P. Morgan Asset Management. US investment-grade is the Bloomberg Barclays US Aggregate – Corporate Index. (Bottom) IBES, Refinitiv Datastream, Standard & Poor's, J.P. Morgan Asset Management. Dates refer to the year of the peak in 12-month forward earnings-per-share. Past performance is not a reliable indicator of current and future results. Data as of 11 June 2020.

While the policy response has been commendable, we believe the market’s expectation of the recovery in early June was too optimistic. It’s not that we believe people will permanently change their behaviour – we are social animals, after all. We just think it will take a little longer to get back to full normality.

Chief among our concerns is that the virus itself may linger and some need for social distancing will remain, in countries such as the US and UK, at least. In addition, high unemployment and a dramatic increase in public and private debt may serve to restrain spending in the recovery. We may also be at the beginning of a period of difficult political fallout as politicians seek to apportion blame for the crisis. The US election of 3 November could have important market implications. With the UK having left the EU but not yet having secured a new trade deal, Brexit might also – once again – generate volatility.

In summary, we acknowledge that the commitment from governments and central banks shouldn’t be underestimated. And, if more stimulus is needed, it will come. This makes us cautious about being underweight risk assets. But we need to see that policy action is influencing fundamentals. Valuations and uncertainty around the economic and earnings outlook make us cautious about advocating an overweight position in equities. We therefore think investors may benefit from having more than one toe in this rally, but not from jumping in with two feet.

In what follows, we provide greater information on our view of the shape of the recovery. We then consider three investment themes for the second half of the year:

Considerations for investors in the near term, given uncertainties and potential volatility
Options for investors in need of income
Rethinking a 60:40 portfolio in a world of zero bond yields