How The U.S. Can Avoid Recession

A major part of the S&P 500’s shaky start to 2016 has been growing fears that a U.S. recession is imminent. In a new report, JPMorgan analyst Marko Kolanovic discussed what needs to happen in order to avoid a potential recession.

According to Kolanovic, an end to the global oil wars would be a good first step. He remains hopeful that the oversupplied global oil market will begin its turnaround in 2016.

Secondly, the divergence between the U.S. Federal Reserve’s tightening projections and the easing (sometimes to negative territory) of other central banks around the world has produced a rally in the USD that has put pressure on other economies, specifically emerging markets. Kolanovic believes that this “negative global wealth effect” could be eased if the Fed were to take a slightly more dovish stance.

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Finally, Kolanovic believes that regulatory threats to the financial sector are also weighing heavily on equities. Bank stocks have sold off hard in 2016, and Kolanovic blames investor concerns over the impact of negative rates, increased regulatory pressure and the possibility that large U.S. banks could still be broken up or turned into Utilities for most of the selloff.

Until these trends reverse, JPMorgan recommends investors stay overweight gold, volatility and cash. So far this year, the SPDR Gold Trust (ETF) GLD is up 15.9 percent, while the iPath S&P 500 VIX Short Term Futures TM ETN VXX has surged 31.0 percent.

Disclosure: The author holds no position in the stocks mentioned.