This JPMorgan portfolio manager says he’s not betting on a US recession

In a shaky stock market, Phil Camporeale, portfolio manager at JPMorgan Chase & Co., is betting that the United States will avoid a recession.

Rising interest rates are “the main culprit this year for the volatility and chaos” seen in the market, Camporeale, portfolio manager for JP Morgan Asset Management’s global allocation strategy, said in a briefing. telephone interview. The Federal Reserve “is extremely aggressive with multiple 50 basis point hikes,” he said, referring to the Fed’s half-point rate hike earlier this month and expectations for increases. of this magnitude, because it aims to cool the economy. in order to control high inflation.

As investors fear the Fed’s monetary tightening could tip the United States into a recession, Camporeale said he’s betting that won’t happen in the next 12 months. Within this view, he has a “neutral” equity allocation that includes value bets and “profitable” growth stocks.

“We don’t want to be underweight equities in this environment,” Camporeale said.

Meanwhile, rising rates have hurt stock valuations, particularly stocks of high-growth companies in areas such as technology that are valued on long-term projected earnings.

“No-profit tech” stocks are “the most vulnerable in a world where money is no longer free,” Camporeale said.

The Nasdaq COMP composite index, with a strong technological component,
has plunged 27.3% this year, while the S&P 500 SPX,
fell 17.5% and the Dow Jones Industrial Average DJIA,
fell 12.7%, according to FactSet data. Stock indices ended mixed on Thursday, with the Dow Jones falling 0.3%, the S&P 500 losing 0.1% and the Nasdaq rising about 0.1%.

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While rates have climbed in 2022 in anticipation of Fed tightening, most of the upside is likely “behind us,” according to Camporeale.

The yield of the 10-year Treasury note TMUBMUSD10Y,
has roughly doubled this year to more than 3%, but has fallen back below that level. The 10-year yield fell 9.5 basis points on Thursday to 2.815%, according to Dow Jones Market Data. This compares to a return of around 1.5% at the end of 2021.

As part of its current bet that the United States will avoid a recession, Camporeale said it has exposure to both high-yield corporate bonds and investment grade as corporate balance sheets are strong. . But within high-yield debt, or so-called junk bonds, its bias is in favor of higher-quality borrowers, he said.

Camporeale said he was positioning himself for an easing of inflation over the next two quarters as well as a slowdown in growth that stops ahead of an economic contraction over the next 12 months. He expects inflation to remain above the Fed’s target, but is likely to ease back to a level where the central bank will be “much less aggressive in tightening in 2023.”

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Meanwhile, the Fed’s tightening plans include shrinking its balance sheet at a faster pace than in the last cycle, Camporeale said. “It’s obviously going to be fraught with volatility and uncertainty, which is why we’re not pounding our fists saying, ‘Overweight equities’.”

To protect against the downside if Camporeale’s base scenario turns out to be wrong, he said his hedges include “put options” on the S&P 500, which make money when the index drops, as well as a short position in small cap stocks.

The Russell 2000 RUT Index,
which consists of small-cap companies in the United States, has fallen 22.5% so far this year, according to FactSet data.

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