J.P.Morgan is not overweight equities in their model portfolio and Jan Loeys the analyst team in the Global Asset Allocation group think they owe investors an answer. In an August 19 research report and a J.P.Morgan View video posted to Reuters Insider they point to trend growth not being good enough and the potential for an eventual recession.

JPM 8 22 EPS

We want better than trend growth

Equities have significantly outperformed credit investments over the last six weeks as recession risks faded, the August 20 report titled “Why no equity overweight?” observed.

“For the moment, we simply explain the outperformance of equities as a recognition that the near-term risk of a US and global recession has receded,” the report explained. “From here, our economists do not see reason to expect upside risk. That is, instead of significant odds of recession, we are back at the low and stable trend growth pace of the past five years.”

In this environment, why isn’t J.P.Morgan overweight equities?

For a myriad of reasons, the analysts think credit will be a less risky investment over the long term.

The firm’s economic outlook is based on the analysis that earnings have peaked and that while the economy may advance near trend growth “return to trend growth is to us not enough to go OW equities. We want a bit better than trend.”

JPM 8 22 yields

JPMorgan cites lower productivity growth, higher wage costs and more talk than action on fiscal stimulus

Economic strength like stock prices are likely to meander and in this environment trend growth gives low return on equities. The bank said they expect modestly higher but not trending oil prices, higher wage costs and lower productivity growth.

The market environment is low growth in a stable interest rate world where there is not much room for capital appreciation, Loeys explained. With these economic fundamentals, trend growth is expected to be consistently muted and there remains downside risk due to an eventual recession.

When considering the hot topic of a transition from monetary to fiscal stimulus, Loeys takes a believe it when you see it approach. In Japan, said to be the leader in this development, he says there are been much talk and promises, but little in the way of action or hard details.

In the US, while both Trump and Clinton are both talking aggressively about increased fiscal spending, the reality is that Congress will likely have a big role to play in the decision. The problem is Congress hasn’t passed a budget in three years and there is no reason to believe this trend is going to change.