“What America needs is a fiscal ladder, not a fiscal cliff,” David Kelly, chief global strategist for J.P. Morgan Funds, said Monday.
“This ladder,” he wrote in his Notes on the Week Ahead, “ought to be one where the deficit falls by about 1% of GDP per year, a pace that would cause the debt-to-GDP ratio to stabilize within four years.”
But Kelly (left) warns in the note that such a plan needs to be designed carefully, as a ladder that “is missing a rung or two could still do significant damage to a slowly recovering U.S. economy.” Despite good earnings and “great” relative valuations for equities, Kelly tells investors to “be careful not to be too overweight equities until they get some reassurance that Washington knows what it is doing.”
Indeed, Kelly says that investors remain pessimistic, one reason being the fear of the fiscal cliff. Without new legislation by the end of the year, Kelly says that “the Bush tax cuts, the temporary payroll tax cut and extended unemployment benefits will all expire just as higher Medicare taxes and both rounds of severe cuts to discretionary spending agreed to last August take effect.”