JPMorgan Warns `Trilemma' Will Limit Stock Gains as Fed on Hold

(Bloomberg) -- As emerging-market assets rallied on signals from the Federal Reserve that it’s prepared to cut rates as early as next month, JPMorgan Asset Management warned traders not to get ahead of themselves.

Ben Mandel, a New York-based global multi-asset strategist at the firm, said that the Fed will probably keep borrowing costs on hold this year, even as investors price in a high probability of a cut next month.

His thinking is that the U.S. and China are on the verge of reaching a narrow trade deal and that the resulting gains in business confidence will stabilize the economic outlook. In that scenario, the extent of rate cuts priced by markets diminishes substantially, putting a cap on equity upside, according to Mandel. You can’t have a trade deal, faster growth and falling rates all at the same time, he said.

“There is clear optionality for a cut, but it will not be warranted if risks to the growth outlook begin to recede,” Mandel said. “The trilemma highlights the trade offs between that outcome, which reflects stable economic growth, and the Fed put.”

Mandel, who began his career as an economist at the Fed, said he favors U.S. equities over the rest of the world. The S&P 500 Index will absorb much of the good news on trade, whereas Europe, Japan and emerging markets are at greater risk in the event of future trade disputes, he said.

“In principle, one would also expect Treasuries to sell off in that instance, though we are wary of going underweight in an asset that has been the best hedge in portfolios for late cycle growth shocks,” Mandel said.

To contact the reporter on this story: Ben Bartenstein in New York at bbartenstei3@bloomberg.net

To contact the editors responsible for this story: Julia Leite at jleite3@bloomberg.net, Philip Sanders, Alec D.B. McCabe

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