After Jeremy Grantham’s “creeping to bubble land” keynote that kicked off Morningstar’s annual investment conference, JP Morgan Asset Management’s David Kelly was, relatively speaking, optimistic.
A litany of economic indicators—housing, auto sales, employment, retail sales, capital good orders—are all pointed in the right direction.
“It’s not a booming economy, but it’s bouncing back,” he said. “We are tied for the fifth longest economic expansion in modern history, but it’s been miserably slow,” he said. “It reminds me of a Yankees, Red Sox game. It’s long because it’s slow.” Kelly predicted growth of between 2 and 4 percent in the second quarter.
Kelly sees rising corporate earnings and falling unemployment as reasons that the Fed is going to have to raise interest rates this year, and even then they may be “behind the curve.”
“Janet Yellen talks about slack in the labor market. There is no slack,” he said. Sixty million people were hired last year, for a net job gain of 3 million. Slightly more than one in ten adult males in the U.S. have a felony conviction, he said. “Think about what that does to the labor market.”
“We are running out of available workers quickly,” he said. One policy solution for the problem is immigration reform to allow more skilled workers to stay in the U.S. “We educate them, but then tell them they can’t stay here.”
He said the dollar is overvalued, dampening U.S. manufacturing. “There is a global currency war going on, the the U.S. is the only pacifist.”
Even so, Kelly isn’t concerned with overvaluation in the stock market. The forward price-to-earnings ratio in the current market, at 16.8 percent, is a mere 0.3 percent over its average of 15.7 percent. “This is by no means a screaming buy, but we should not worry about valuations yet.”
A bear market, he said, is marked by recession, spike in commodity prices and aggressive fed tightening, none of which we have now (the Fed is “a bunch of cooing doves,” he said.) “That doesn’t mean a bear market couldn’t happen, but we should not worry yet.”
Investors should also not worry about Greece. “It’s quite possible Greece will default,” but 80 percent of Greek debt is held by the European Central Bank and the International Monetary Fund and other institutions, not private banks. “A Greek collapse will not bring Europe down.”
The main threat from Greece is the election of the populist Syrize party. “These jokers don’t know what they’re doing.”
“There is a lot of opportunity internationally,” for investors, he said. Emerging markets, in particular, are cheap.
“Diversification has worked throughout this turbulent period,” he said. “The most important thing is to invest. A blindfolded monkey could hit something that performs better than cash. It’s a time to invest, but a time to really think about what you’re investing in. The global market and the U.S. are doing okay. Returns won’t be what they were over the past five years.”
