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JPMorgan: Recession Unlikely, So Take Advantage of Extreme Valuations

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JPMorgan Chase & Co. strategists on Friday advised nervous investors to keep an eye on extreme valuations during this period of volatility because the chances of a double-dip recession are unlikely and the U.S. economy is likely to see slow growth into 2012.

“We have a lot of worries because of a lot of bad policy decisions,” said J.P. Morgan Funds Chief Market Strategist David Kelly during a conference call with institutional investors.

JPMorgan Funds Chief Market Strategist David KellyPointing to this week’s Federal Reserve Operation Twist announcement involving the purchase of $400 billion in Treasuries, Kelly (left) said it was a failure because the markets have reached the point where they must self-correct.

In a macro view of the economy, Kelly said he forecasts a 25% chance of a double-dip recession, and believes that third-quarter U.S. economic performance so far shows no signs of a recession. He expects slow growth over the next nine months as companies start hiring more and the employment rate creeps up slowly.

If anything, Kelly pointed out, investors should keep a close watch on extreme valuations in a number of asset classes, including Treasuries and equities. The 10-year Treasury yield has hit historical lows of 1.75%, below the U.S. inflation rate, and P/E ratios are at their lowest point in years.

Also on the call, JPMorgan fixed-income and equity strategists gave their views on how investors should be positioning their portfolios in light of the market turmoil.

“The key to the fixed-income market is how much you have in Treasuries,” said Doug Swanson, team leader for the JPMorgan Core Bond Fund (PGBOX). He recommended that investors maintain a core holding in Treasuries, and noted that JPMorgan has been selling 2- and 3-year Treasuries and buying a mix of longer-term securities such as mortgage-backed debt. New issuance in corporate bonds also will provide “opportunities to take advantage of the dislocations,” Swanson said.

As for equities, U.S. Equity Research Managing Director Robert Bowman said that “stocks are really cheap” and valuations are attractive. “From a portfolio perspective, we have a barbell approach of defense and offense,” Bowman said.

Pointing to Thursday’s market sell-off and the Federal Reserve’s Operation Twist announcement on Wednesday, Kelly said borrowers have taken a wait-and-see approach in the markets, which is damaging the economy right now.

“I think the Fed will be shocked and do some soul-searching about why Operation Twist isn’t doing any good,” he said.

At this point, the only other tool the Fed has available is pushing down interest rates in their reserves, Kelly said, adding that he hopes the Fed will avoid any more monetary ease.

Kelly characterized the global and U.S. economies as suffering a bad sickness that policymakers are trying to treat with as much medicine as possible. But these economies’ “natural immune systems” are sound enough to heal themselves if the governments would just stop making them sicker by masking their symptoms, he said.

“The Fed is applying medicine that everybody knows doesn’t work,” Kelly said.

As for the federal government’s current round of budget talks, Kelly predicted that U.S. lawmakers will reach a timely agreement on the current stopgap spending bill. “The public is so red hot mad at Congress for what they did in August that they will keep the government running,” he predicted.

Read Fed’s Operation Twist Offers Bond Investment Opportunities at


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