JPMorgan’s dual directional barrier notes on indexes require timing the next recession

By Emma Trincal

New York, Dec. 10 – JPMorgan Chase Financial Co. LLC’s 0% uncapped dual directional contingent buffered equity notes due Dec. 29, 2023 linked to the lesser performing of the Russell 2000 index and the S&P 500 index provide a satisfying balance between risk and return assuming a severe recession does not occur, especially if it is toward the end of the five-year investment period, advisers said.

If each index finishes at or above the initial level, the payout at maturity will be par plus the greater of the gain of the worse performing index and the contingent minimum return, which is expected to be at least 35% and will be set at pricing, according to a 424B2 filing with the Securities and Exchange Commission.

If either index falls but by no more than the 30% contingent buffer, the payout will be par plus the absolute value of the return of the worse performing index.

If either index falls by more 30%, investors will lose 1% for each 1% decline of the worse performing index from its initial level.

A better worst-of

Kirk Chisholm, wealth manager and principal at Innovative Advisory Group, said he usually does not like the risk-adjusted return of worst-of notes. But this one was different.

“Most worst-of pay a coupon that caps your upside while giving you full exposure on the downside,” he said.

“What I really like here is the minimum return of 35%. You get a nice 7% a year and you’re not capped on the upside, so that’s good.”

“The 30% protection is reasonable. My concern however is if we have a bad recession. If the market turns really ugly, you could breach the barrier and lose money.”

Such scenario would depend on the economy.

“We’ve had situations like 2000-03 when things kept going down for a while. So that would be a concern.

“Other than that, I think it’s a pretty reasonable note. The probabilities of getting a beneficial outcome seem quite decent.

“If I was going to look at a worst-of, this is one of the better ones I’ve seen.”

It’s not if but when

Carl Kunhardt, wealth adviser at Quest Capital Management, said the notes offered attractive terms with the uncapped upside, minimum guaranteed payment and absolute return.

Yet he was not entirely comfortable with the fact that the barrier may prove useless in the context of a late recession occurring toward the end of the five-year tenor. At this juncture calling the next recession after nearly 10 years in a bull market was not realistic.

“It’s a play on the Russell since it’s the more volatile of the two,” he said.

“My problem is that the entire play is based on where you think the market is going to be at the end of the five years.

“If we have a major correction or recession in the last 12 or 18 months, you could lose more than 30%.”

This would imply a flat to slightly positive market for the preceding years, which Kunhardt does not rule out given the state of the economy.

“When you look at the fundamentals we are in a pretty good shape. Unemployment is at record lows, growth is strong. The market is volatile but keeps plugging away. It’s not overheating.”

“The terms of this note are compelling,” he said.

“But the whole thing is predicated on what you think the market will be in four or five years.

“That’s a bet. I’m not smart enough to tell you when the market will come down. And that’s the reason why I wouldn’t do the note.”

The notes will be guaranteed by JPMorgan Chase & Co.

J.P. Morgan Securities LLC is the agent.

The notes (Cusip: 48130WFH9) will price on Dec. 21 and settle on Dec. 31.

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