In its 2024 Mid-Year Outlook, J.P. Morgan Private Bank found some positives for investors amid a complex environment with no shortage of broader challenges and geopolitical concerns.

The report is aptly titled “A Strong Economy in a Fragile World.”

“At the start of the year, most forecasters anticipated rapidly falling inflation to allow central banks to embark on a series of rate cuts. Those were reasonable projections, a fair reading of the situation at hand,” David Frame, CEO, J.P. Morgan U.S. Private Bank and Martin Marron, CEO, J.P. Morgan International Private Bank wrote in the report foreword. “But the economy has defied the forecasts. Inflation hasn’t declined as quickly as many have hoped. Still, across a range of macro variables, the global economy looks remarkably strong.”

The authors stress that the world is at a delicate juncture – and that geopolitical risk is real, and at the top of mind for investors large and small.

“They have a range of concerns. The potential for worsening global conflict. The unknown outcome – and unknown implications – of U.S. elections in November,” Frame and Marron continued. “Strains in the U.S.-China relationship. A widespread focus on national security, in traditional defense, energy sources, supply chains, and cybersecurity. Thus, we title our Mid-Year Outlook, ‘A Strong Economy in a Fragile World.’”

Some key takeaways from the report include:

• The economy is stronger than you think – the global market rally should continue
• AI is just getting started. The path is uncertain, but the impact could be massive
• Rates will be higher for longer, not forever. Dislocations in interest-rate-sensitive sectors may not last
• The U.S. election will have global effects. Don’t let them disrupt your plans
• Prepare for continued conflict. Diversify, and considering investing in security, defense and security

“Despite global inflation not falling as quickly as forecasters may have hoped, the global economy looks remarkably strong, defying the pressure of higher interest rates,” said Grace Peters, global head of investment strategy, J.P. Morgan Private Bank. “However, we note that the world is at a delicate juncture. On the one hand, higher growth, higher bond yields and higher equity valuations. On other hand, higher inflation, higher geopolitical risks and potentially higher taxes.”

“Despite these challenges, we think positive forces can power markets forward in 2024,” Peters continued. “The global equity rally can broaden beyond the U.S. and mega market cap stocks.”

“We think policy easing will support global risk assets,” said Jacob Manoukian, U.S. head of investment strategy, J.P. Morgan Private Bank. “Unlike the 2010s – but similar to the 1990s – policy rates should stay above the rate of inflation.”

Manoukian noted that U.S. household spending continues to be strong.

“This is a boon for companies which have rarely been better at turning sales into profits. These companies are now investing for the future,” said Manoukian. “A particular area of focus being on AI where the impact on growth could be substantial – perhaps even transformative – with evidence indicating that the AI productivity boost may appear in U.S. economic data by the end of the 2020s.”

On the ground

NJBIZ spoke with Kevin Morrison, managing director, market investment team lead and investment specialist, J.P. Morgan Private Bank to discuss the report further, including some of the trends being seen here in New Jersey.

“The headline, which I think is well-composed, is reconciling what we see as a very strong economy in what I think many people perceive as kind of a fragile world,” Morrison told NJBIZ. “I’m talking globally – whether it’s geopolitics and armed conflict around the world – or even just all the chaos that’s going on with our own political system.”

Morrison stressed that despite the uncertainty and confusion that is around, there continues to be strong economic growth — stronger than what was expected.

“And that strong economy has really powered all of the financial markets – the risk asset markets, like equities – to be quite strong, following on a very strong year in 2023,” Morrison continued. “I think the piece really tries to get into why the economy is strong and why we think it will continue to be strong; what the outlook is for inflation, which has been a big part of the narrative over the last two or three years where rates were basically zero coming out of COVID.”

He spoke about the inflation rollercoaster fueled by a mix of factors from the pandemic, such as supply chain disruptions and a boom in demand that caused inflation to spike. The Federal Reserve responded, of course, with a quick and aggressive rate hiking cycle.

Last year, the prevailing wisdom on Wall Street was that the tightening would lead to some kind of recession. Morrison said that the Fed has appeared to avoid that.

“It does appear – at this point – our base case is that they [Fed] basically have engineered a relatively soft landing,” said Morrison, noting that inflation has come down from 9% to 3% percent in the recent Consumer Price Index report. “What was perceived as a risk that inflation was going to be here to stay – they have made a ton of progress on it. The progress will be harder to come in the future. But I think that’s really how we see economic growth playing out over the next 12 months in terms of what we see.”

That drop in inflationary pressure has led to optimism from economists about potential upcoming rate cuts – starting as soon as during the Fed’s September meeting.

“It’s pretty much baked in right now that the Fed is going to lower rates by 25 basis points at their September meeting,” said Morrison. “Then we get closer to the election – maybe there’s some pause there right around it. But, if you look out over through the year-end and into their January meeting, the market expects, and this is kind of our view as well – that there will be two to three rate cuts over the next six months or so. It’s going to data dependent.”

During last week’s July Fed meeting, Chairman Jerome Powell indicated that inflation was still trending in the right direction, toward the 2% goal. He also confirmed the much-anticipated September rate cut could be on the table if that trend held.

“The question will be – whether the totality of the data, the evolving outlook, and the balance of risks are consistent with rising confidence on inflation and maintaining a solid labor market,” said Powell. “If that test is met, a reduction in our policy rate could be on the table as soon as the next meeting in September.”

As for here in New Jersey?

“There is tremendous investment going on in life sciences and technology around AI,” said Morrison. “There are some issues around commercial real estate. That tends to be concentrated in certain sectors of real estate – like office properties.”

The report touted the potential of AI for a number of reasons – beginning with the economic growth that can result from productivity gains.

Here in New Jersey, there are a number of big bets being made on AI by the Murphy administration and beyond. Notably, the AI Hub at Princeton and the recent signing of the $500 million Next New Jersey Program tax credit initiative.

“And it’s likely, as we look even further out, that entire new industries and new approaches to things will be created,” said Morrison. “That’s definitely something New Jersey has going for it – the highly educated workforce as well as the educational institutions that are making investments in this to make sure our state is at the leading edge.”

He noted that the Garden State still holds its own while facing certain constraints because of the high taxes and cost-of-living – and thus fends off challenges from much-lower taxed and cost-of-living states.

“But despite all of that, economic growth – while lagging the U.S. broadly on some level – there’s still tremendous innovation and tremendous economic growth potential in New Jersey because of that educated workforce; strong capital base; strong industrial base; and all those things,” said Morrison.

As the conversation closed out, Morrison gave his final takeaway about what J.P. Morgan projects for the coming months and how it is advising clients.

“Our view is that the economy is stronger than most people realize,” said Morrison. “And despite all of the negative headlines in news, there’s lots of opportunity, especially given the AI innovation that’s going on – that that can continue to drive earnings growth out of U.S. companies and will drive productivity, which will keep margins attractive for U.S. companies as well.”

He stressed that it is not a time to be playing too much defense in your portfolio.

“You have to be invested at the right level. I think you should monitor all of the risks that are around the world,” said Morrison. “But don’t let a news cycle dictate your investment strategy.”