The US economy is at risk of tilting towards stagflation, or a period marked by low growth and persistently high inflation, which would prompt investors to favor stocks over bonds, per JPM.
JPMorgan warns that the US economy may be heading towards stagflation, a period characterized by low growth and persistently high inflation, leading investors to favor stocks over bonds.
The firm suggests that the current situation could mirror the stagflationary environment of the 1970s. During that period, equities remained stagnant from 1967 to 1980, while bonds, with yields averaging above 7%, significantly outperformed stocks. JPMorgan highlighted that a yield increase from options like private credit could greatly enhance long-term portfolio performance.
Despite previous optimistic forecasts of "goldilocks" conditions with cooling inflation and robust growth, concerns over stagflation have grown due to recent economic indicators surpassing expectations.
JPMorgan also pointed to geopolitical tensions as a factor contributing to potential stagflation. They noted that conflicts in the 1970s, such as those in Vietnam and the Middle East, resulted in energy crises, shipping disruptions, and a surge in deficit spending. They suggested similarities to current events, including the Israel-Hamas conflict, disruptions in the Red Sea, Russia's actions in Ukraine, and US-China tensions.
The uncertain geopolitical climate, coupled with high interest rates, could lead to reduced liquidity, according to JPMorgan. They added that the volatility stemming from political, geopolitical, and regulatory uncertainty could further disadvantage public markets compared to private markets that can avoid daily volatility.
JPMorgan Chase CEO Jamie Dimon has previously likened 2024 to the 1970s, citing significant fiscal deficits, changes in trade patterns, and a commitment to substantial government expenditures as factors that are all inflationary.