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PANC 2017: Guide to the Markets

J.P. Morgan Funds economist Dr. David Kelly sees the greatest opportunities in emerging markets and Europe.

By Lee Barney editors@strategic-i.com | October 12, 2017
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In his “Guide to the Markets” presentation at the 2017 PLANADVISER National Conference, David Kelly, Ph.D., CFA, and managing director, chief global market strategist and head of J.P. Morgan Funds’ global market insights strategy team, likened the U.S. economy to a “healthy tortoise” that will produce 2% annual gross domestic product (GDP) growth but, over the near term, will be unable to reach 4% or even 3%.

“[After] a 37-year bull run in fixed income, yields are now very low,” Kelly said, forecasting that the slow GDP growth will inevitably lead to a 2% return in fixed income over the next five years. Despite projections that stock earnings will be strong in the third quarter of this year, investors “will be lucky to earn 5% in equities in 2018. Valuations—a Shiller’s 30.1 price/earnings [P/E] ratio—are looking high, in the ninth year of a bull market. This is the third-longest stock market expansion since the Civil War,” he said, adding that, when the market inevitably contracts, “this will create a problem for long-term investors.”

However, drilling down on international equity earnings and valuations, Kelly said, “You need to look overseas. Emerging markets and Europe both have room to grow and will do better over the next five years, potentially delivering 10% returns a year. I don’t think the world economy has looked this good in a long, long time, so global central banks don’t need to keep helping it. In fact, they will begin to subtract assets. The U.S. Federal Reserve is now finally trying to normalize its balance sheet. The Fed’s securities are maturing, which will cause it to reduce its balance sheet by $450 billion a year, which will boost interest rates.”

Kelly noted that the Fed has announced it will raise the federal funds rate one more time this year, and he believes it will do so another three times in 2018 and 2019 each. “The market hasn’t priced this in yet because the cash market has been depressed by the actions of central banks,” he said.

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