The U.S. economy is moving from recovery into expansion, and could grow 4 percent this year, according to David Kelly, chief market strategist of JP Morgan Funds, who struck an optimistic note as the keynote speaker of the American Bankers Association’s annual Wealth Management and Trust Conference in Miami Beach Sunday.
“It’s not a good economy, but it is getting betting better by the numbers,” Kelly said. Pent-up demand, underscored by plentiful cash on corporate balance sheets, was likely to be a primary driver of growth, he said, followed by the improved financial condition of consumers, who are now spending less of their income to service their debt.
Personal savings rates among U.S. consumers rose to nearly 6 percent in 2009 and 2010, Kelly noted, the highest level in over a decade, while the household debt service ratio (debt payments as a percentage of disposable personal income, seasonally adjusted) dropped to 11.6 percent at the end of 2010, down from a high of 14 percent in the third quarter of 2007.
Wealth managers shouldn’t be concerned about unemployment and inflation, Kelly said. While he conceded that it would take a “long time” to regain all the jobs that had been lost in the recession, Kelly noted that movement in the job market was nonetheless dynamic and that 51 million people were hired for jobs last year. He also pointed out that slow wage growth has helped corporate profits rise and said 2011 may set “an all-time high for corporate earnings.”
On Friday, the U.S. Labor Department reported that the unemployment rate fell to 8.9 percent, the lowest since April 2009.
Inflation Fear Overstated
Fear of inflation is also overstated, Kelly maintained. “Do not worry about inflation getting out of hand,” Kelly said, noting that inflation rates under 2 percent remain “very low.” Kelly was bearish on bonds but bullish on stocks. “I think stocks are basically cheap,” he said. “I feel good about the fundamentals for stocks and think the bull market still has plenty of room to run.”
The possibility of a sovereign debt and oil crisis were the biggest threats to the economy’s recovery, Kelly said. In addition to the high sovereign debt interest rates for Greece, Ireland and Portugal, Kelly said he was also “nervous” about Japan’s structural government deficit. And skyrocketing oil prices resulting from fighting in Libya and possible trouble in Saudi Arabia could potentially plunge the economy into a double-dip recession, Kelly warned.
Wealth managers should diversify their portfolios and make sure to put part of their international portfolio into developed as well as emerging markets, Kelly advised. What’s more, equity correlations and volatility have made this “a good time for active managers,” he asserted. “I see it as a harvest of alpha.”