JPMorgan Research Analysts Outline Two Contrasting Scenarios for Fed Easing Cycle, Highlight Asset Class That’s Primed To Outperform in Either

JPMorgan research analysts think two main scenarios could play out amid the Federal Reserve’s rate cuts.

The first is a recessionary environment, which Fabio Bassi, head of cross-asset strategy at J.P. Morgan Securities, says could benefit U.S. Treasuries and gold at the expense of risky assets.

“Not only does gold act as a natural hedge in a risk-off scenario, but it also benefits from the lower opportunity cost of holding the non-yielding asset as interest rates decrease. In contrast, riskier asset classes such as U.S. high-yield corporate bonds and the S&P 500 typically experience mainly negative returns during such periods.”

The second possible scenario is a non-recessionary easing cycle, which Bassi also thinks could benefit gold, in addition to equities.

“Gold could continue to provide diversification and see positive returns, but less so than in a recessionary environment.” 

JPMorgan research analysts note that in the latter stage of a non-recessionary easing cycle, when the Fed would begin rate cuts again after a pause, gold and US high-yield bonds would likely lead most asset classes in terms of positive returns. Most asset classes would be profitable in this scenario, they add.

Bassi thinks the second option is more likely.

“Looking ahead, the insurance rate cut and our baseline call for no recession lead us to anticipate a typical mid-cycle, non-recessionary easing scenario.”

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