Fewer Recessions but Weaker Recoveries: J.P. Morgan

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.

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.

The same model shows that downturns will be less deep, according to the study.

Between 1948 and 2018, the average recession included a 1.9% decline in real GDP. In a hypothetical future recession the decline could be just 1.4%, according to J.P. Morgan.

At the same time, the study finds that recoveries will be less robust. On average, in the three years following the 11 recessions since 1948, the economy grew by 13.9%. However, based on the last 20 years of GDP volatility, a hypothetical future recovery could involve just 7% growth in the first three years.

“We do come up with the conclusion that the cycle is important, but over time we could probably plan for smaller recessions, weaker recoveries, and less frequent recessions,” Kelly explained. “Which is certainly a positive for returns and for the public in general.”

J.P. Morgan’s analysis focused chiefly on the U.S., in part because U.S. recessions have often sparked downturns overseas, but also because trends highlighted in the U.S. appear to be relevant elsewhere.

However, the study also examined the mean and variance of other economies — including Japan, the U.K. and a group of 15 European countries — and found in all cases GDP volatility has diminished and growth has slowed, resulting in more stable global growth.

Looking ahead, J.P. Morgan expects this trend to continue.

The Long-Term Capital Market Assumptions are developed as part of a deep, proprietary research process that draws on quantitative and qualitative inputs as well as insights from a team of more than 30 experts across J.P. Morgan Asset Management.

In their 23rd year, these projections guide strategic asset allocations and establish reasonable expectations for risk and returns over a 10- to 15- year timeframe for more than 50 major asset and strategy classes. These assumptions fuel decision-making in J.P. Morgan’s multi-asset investing engine and inform client conversations throughout the year.