Predicting where the market might be headed can be complex and overwhelming, but the real key to investing can be as simple as having perspective

It’s been a week of ups and downs. Recently, we’ve pored over inflation, central bank policy, U.S. elections, geopolitics and what all of it means for our outlook and portfolio positioning. We acknowledge that those dynamics may create volatility, even as we envision a potentially strong year ahead for the economy and markets.

For most, volatility isn’t fun. Some question whether it’s time to “get out” of the market or hold onto excess cash.

We don’t think so. For many long-term investors, it’s probably the time to stay (or get) invested. That might feel like a cliché, but remember: Investors are human and humans are emotional beings. That has more value than you might think.

Today, we share five principles to enable investors to embrace the unknown:

• Don’t try to time the market
• Know your toolkit: Each asset has a role to play
• Volatility is normal: Don’t let it derail your plans
• Maintain a long-run mindset
• Above all, have a plan with intent

1) Don’t try to time the market

The adage “sell in May and go away” makes headlines every year, based on the idea that May tends to be a weaker month for stocks than others.

Yet, this year shows why that approach can lead to missing out on crucial opportunities to grow and compound wealth over time. For all the uncertainty that May has experienced, the S&P 500 is up nearly 4% this month, the second-strongest month of 2024 so far and well above the average May return over the last 30 years.

That makes trying to time the market a dangerous habit.

Here’s another example. Over the last two decades, an investor fully invested in the S&P 500 would have enjoyed a 10% annualized total return. Yet, if they sold at the “wrong” time and missed just the 10 best days, that return would be cut in almost half, just below 6%. Avoiding those mistakes can also be hard, given that bad days and good days tend to cluster together. Over that same time frame, seven of the best 10 days occurred within just over two weeks of the 10 worst days.

No one has a crystal ball. So while it may feel comfortable to sit in cash, fear, greed, or rash moves to “outsmart” the market can lead to emotional decisions or herd-following, rather than logical choices.

2) Know your toolkit: Each asset has a role to play

If you’re going the DIY route this summer, you’ll need different tools to get the job done. Your portfolio is no different. Whether it’s cash, stocks, bonds or alternative investments, each asset has a distinct role to play to achieve your long-term goals.

Cash: Everyone needs it. Many also often think of it as a safe haven or when interest rates are high. But because of inflation, cash comes with a cost. That means it’s important to think about how much you really need and what can be invested to achieve other goals. Over the last 30 years, cash and short term Treasury bills have barely kept pace with overall inflation and have failed to keep up with the cost of important goods and services like gasoline, medical care and education.

Stocks: Owning a stock means owning a stake in a company and its future. That often means benefitting from profit growth and dividends paid to reward shareholders. In the last three decades, earnings and dividends have together contributed about 95% of the S&P 500’s near 2,000% cumulative total return, with changes in valuation driving just 5%. So while stocks come with higher volatility, they can also drive capital appreciation.

Bonds: Bonds provide stable income through regular coupon payments. After the Global Financial Crisis, bonds didn’t yield much with policy rates pinned at emergency low levels. Now, the post-pandemic rate reset – while a painful adjustment – has made bonds more competitive. Tactically, short duration offers strong risk-reward potential as central banks eventually turn to rate cuts. Strategically, long duration can serve as a ballast to economic weakness.

Alternatives: As the name suggests, alternatives can offer differentiated sources of return, dampening volatility and enhancing returns. With today’s strong economy set within the contours of a fragile world, alternatives can be important. For instance, real assets and infrastructure can hedge against inflation, private credit can earn a premium amid higher rates and other managers can access early-stage or hard-to-access opportunities across AI, security and the energy transition.

In all, each has a role to play, and diversification is the key to consistent returns.

3) Volatility is normal: Don’t let it derail your plans

Investors should expect pullbacks – both big ones like 2022’s rout (which was the worst for U.S. stocks since the Global Financial Crisis), and small ones like we felt during 2023’s March’s bank stress.

But despite these selloffs, stock markets have rewarded long-term investors. Since 1980, the S&P 500 has suffered an average intra-year pullback of -14%, with 16 of those 44 years seeing even steeper losses. Yet the full-year return was positive in 33 of 44 years (75% of the time).

So again, while the “risk” for stocks is volatility, the “reward” has historically come with the return of long-term capital appreciation.

4) Maintain a long-run mindset

Over the short term, assets have a wide range of possible outcomes. Over the long term, the possibilities look much more certain, offering the chance to recoup losses and continue building your wealth. 

Consider this: If you invested in the S&P 500 for any one calendar year between 1950 and 2023, your highest total return could have been 52%, while your lowest could have been a painful 37% decline. That’s a big range – a reminder that it’s hard to predict where markets might go in any one year.

But, let’s say you took a longer mindset and invested for five years. That range gets a lot less scary, with annualized stock returns between a 29% gain and a 2% decline. Or, if you added the relative stability of U.S. core bonds, building to a 60/40 allocation, that stock/bond blend did not suffer an annualized negative return over any five-year rolling period in those 70 years.¹

Keep the time horizon of your goals in mind.

5) Above all, make a plan with intent

Often, one simple question is the most important and hardest to answer: What is the purpose of your wealth? It’s important to consider...

How much cash do you need to feel comfortable? Do you have upcoming purchases or tax payments? Do you need assets that offer income and cash flow, growth to build your capital over time or take advantage of opportunities as they arise?

The things we want to do with money – our goals – are at the root of why we invest in the first place.

In sum, we know there’s always something to worry about. Yet, principles like these can be powerful tools to avoid the pitfalls of emotionally-driven, badly timed mistakes, as well as to capitalize on opportunities aligned with your goals.

Your J.P. Morgan advisor is here to ensure your portfolio achieves the intent of your wealth.

All market and economic data as of 05/31/2024 are sourced from Bloomberg Finance L.P. and FactSet unless otherwise stated.

DISCLOSURES

The information presented is not intended to be making value judgments on the preferred outcome of any government decision or political election.

JPMAM Long-Term Capital Market Assumptions

Given the complex risk-reward trade-offs involved, we advise clients to rely on judgment as well as quantitative optimization approaches in setting strategic allocations. Please note that all information shown is based on qualitative analysis. Exclusive reliance on the above is not advised. This information is not intended as a recommendation to invest in any particular asset class or strategy or as a promise of future performance. Note that these asset class and strategy assumptions are passive only – they do not consider the impact of active management. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Assumptions, opinions and estimates are provided for illustrative purposes only. They should not be relied upon as recommendations to buy or sell securities. Forecasts of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. This material has been prepared for information purposes only and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. The outputs of the assumptions are provided for illustration/discussion purposes only and are subject to significant limitations.

“Expected” or “alpha” return estimates are subject to uncertainty and error. For example, changes in the historical data from which it is estimated will result in different implications for asset class returns. Expected returns for each asset class are conditional on an economic scenario; actual returns in the event the scenario comes to pass could be higher or lower, as they have been in the past, so an investor should not expect to achieve returns similar to the outputs shown herein. References to future returns for either asset allocation strategies or asset classes are not promises of actual returns a client portfolio may achieve. Because of the inherent limitations of all models, potential investors should not rely exclusively on the model when making a decision. The model cannot account for the impact that economic, market, and other factors may have on the implementation and ongoing management of an actual investment portfolio. Unlike actual portfolio outcomes, the model outcomes do not reflect actual trading, liquidity constraints, fees, expenses, taxes and other factors that could impact the future returns. The model assumptions are passive only – they do not consider the impact of active management. A manager’s ability to achieve similar outcomes is subject to risk factors over which the manager may have no or limited control.

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Index definitions:

The Bloomberg USAgg Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate pass-throughs), ABS and CMBS (agency and non-agency).

The S&P 500 Equal Weighted Index is the equal-weight version of the widely-used S&P 500. The index includes the same constituents as the capitalization weighted S&P 500, but each company in the S&P 500 EWI is allocated a fixed weight – or 0.2% of the index total at each quarterly rebalance.

The Magnificent Seven stocks are a group of influential companies in the U.S. stock market: Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA, and Tesla.

The Magnificent 7 Index is an equal-dollar weighted equity benchmark consisting of a fixed basket of 7 widely-traded companies (Microsoft, Apple, Nvidia, Alphabet, Amazon, Meta, Tesla) classified in the United States and representing the Communications, Consumer Discretionary and Technology sectors as defined by Bloomberg Industry Classification System (BICS).

The S&P Midcap 400 Index is a capitalization-weighted index which measures the performance of the mid-range sector of the U.S. stock market.

The S&P 500 index is widely regarded as the best single gauge of large-cap U.S. equities and serves as the foundation for a wide range of investment products. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization.

Bonds are subject to interest rate risk, credit, call, liquidity and default risk of the issuer. Bond prices generally fall when interest rates rise.

The price of equity securities may rise or fall due to the changes in the broad market or changes in a company's financial condition, sometimes rapidly or unpredictably. Equity securities are subject to "stock market risk" meaning that stock prices in general may decline over short or extended periods of time.

Standard and Poor’s 500 Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The index was developed with a base level of 10 for the 1941–43 base period.

The Bloomberg Eco Surprise Index shows the degree to which economic analysts under- or over-estimate the trends in the business cycle. The surprise element is defined as the percentage difference between analyst forecasts and the published value of economic data releases. 

The MSCI World Index is a free float-adjusted market capitalization index that is designed to measure global developed market equity performance.

The NASDAQ 100 Index is a basket of the 100 largest, most actively traded U.S companies listed on the NASDAQ stock exchange. The index includes companies from various industries except for the financial industry, like commercial and investment banks. These non-financial sectors include retail, biotechnology, industrial, technology, health care, and others.

The Russell 2000 Index measures small company stock market performance. The index does not include fees or expenses.

We believe the information contained in this material to be reliable but do not warrant its accuracy or completeness. Opinions, estimates, and investment strategies and views expressed in this document constitute our judgment based on current market conditions and are subject to change without notice.

The views, opinions, estimates and strategies expressed herein constitutes the author's judgment based on current market conditions and are subject to change without notice, and may differ from those expressed by other areas of J.P. Morgan. This information in no way constitutes J.P. Morgan Research and should not be treated as such. You should carefully consider your needs and objectives before making any decisions. For additional guidance on how this information should be applied to your situation, you should consult your advisor.

All companies referenced are shown for illustrative purposes only, and are not intended as a recommendation or endorsement by J.P. Morgan in this context.

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