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The Tell: Fed tightening comes ‘fraught with volatility’ in the stock market, but this JPMorgan portfolio manager says he isn’t betting on a U.S. recession

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In a wobbly stock market, Phil Camporeale, a portfolio manager at JPMorgan Chase & Co., is betting the U.S. will avoid a recession. 

Rising interest rates are the “number one culprit this year for the volatility and the chaos” seen in the market, said Camporeale, a portfolio manager for J.P. Morgan Asset Management’s global allocation strategy, in a phone interview. The Federal Reserve is “being extremely aggressive with multiple 50-basis-point hikes,” he said, referring to the Fed’s half-point rate hike earlier this month, and expectations for additional increases of that size, as it aims to cool the economy in an effort to tame high inflation. 

While investors worry that the Fed’s monetary tightening risks tipping the U.S. into a recession, Camporeale said he’s betting that won’t happen in the next 12 months. As part of that view, he has a “neutral” allocation to equities that includes bets on value and “profitable” growth stocks.

“We don’t want to be underweight equities in this environment,” said Camporeale. 

Meanwhile, rising rates have hurt stock-market valuations, particularly shares of high-growth companies in areas such as technology that are valued on earnings projected far out into the future. 

“Profitless tech” stocks are “the most vulnerable in a world where money isn’t free anymore,” said Camporeale.

The tech-heavy Nasdaq Composite index
COMP,
+0.06%

has plunged 27.3% this year, while the S&P 500
SPX,
-0.13%

has dropped 17.5% and the Dow Jones Industrial Average
DJIA,
-0.33%

has fallen 12.7%, according to FactSet data. The stock benchmarks ended mixed Thursday, with the Dow dipping 0.3%, the S&P 500 shedding 0.1% and the Nasdaq edging up about 0.1%. 

Read: The S&P 500 is on the brink of a bear market. Here’s the threshold.

While rates have been climbing in 2022 in anticipation of the Fed’s tightening, most of the move higher is probably “behind us,” according to Camporeale.

The yield on the 10-year Treasury note
TMUBMUSD10Y,
2.915%

has about doubled this year to more than 3%, but has slipped back below that level. The 10-year yield fell 9.5 basis points on Thursday to 2.815%, according to Dow Jones Market Data. That compares with a yield of about 1.5% at the end of 2021.

As part of his current bet that the U.S. will avoid a recession, Camporeale said that he has exposure to both high-yield and investment-grade corporate bonds as company balance sheets are strong. But within high-yield debt, or so-called junk bonds, his bias is toward higher-quality borrowers, he said. 

Camporeale said he’s positioned for an easing of inflation over the next couple of quarters as well as a slowdown in growth that stops short of an economic contraction over the next 12 months. He expects that inflation will remain above the Fed’s target, but should come down to a level where the central bank will be “much less aggressive tightening in 2023.” 

Read: Investors haven’t begun to price in recession: Here’s how far the S&P 500 could fall

Meanwhile, the Fed’s tightening plans include a reduction of its balance sheet at a faster pace than in the last cycle, said Camporeale. “That’s obviously going to come fraught with volatility and uncertainty, which is the reason why we’re not pounding our fist saying, ‘Be overweight equities.’”

To protect against the downside should Camporeale’s base case prove wrong, he said that his hedges include S&P 500 “puts,” which make money when the index falls, as well as a short position on small-cap stocks. 

The Russell 2000 index
RUT,
+1.24%
,
which consists of small-cap companies in the U.S., has tumbled 22.5% so far this year, according to FactSet data.

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