Today’s investment markets do not offer many “cheap” options, says JPMorgan Chief Global Strategist David Kelly. “But given how low cash yields are, you gotta get invested,” he told a crowd of about 2,000 financial professionals early Thursday at the 2015 Morningstar Investment Conference in Chicago.
“Focus on alpha. As beta-play eases off, you may get the extra percent,” he explained in his keynote speech. In general, investing requires “a mixture of courage and brains, but that mix changes over time.”
Whereas during a bear market, courage is the main ingredient, bull markets demand brains to “look at what is really overpriced and [what is] going to be hurt by [rising] interest rates,” he said.
The strategist outlined the economic and financial trends behind his view that both the U.S. and global economy are “doing OK.” (The figures are found in JPMorgan’s Q2’15 “Guide to the Markets,” which is based on March 31 data, as well as in Kelly’s updated conference slides of May 31.)
The next five years “will not be as good as the past five years,” he cautioned. Still, “This is the time to invest, and really more than that, [it’s] a time to think about investing.”
He agrees with Wednesday’s keynote speaker Jeremy Grantham: “The Fed and other central bankers have completely distorted the market.”
While the Federal Reserve would like to move lightly, “I do not think the Fed can be as slow as it thinks it can be,” he explained.
He sees two rate hikes this year and four next year, based on forecasts from the Federal Reserve and others. “Half-fast monetary tightening is what I would call it. But it’s what is going to happen,” Kelly said.
(The strategist explained that since derivate interest rates are “anchored to the cash market,” which is “being pulled down by low rates in cash market. That’s why I don’t trust what the market says [about interest-rate hikes]. It’s not a good forecast.”
While the Fed expects 2.2% real economic growth overall in the coming quarters, Kelly and his team expect 1.5%.
“They missed it,” he said of the Fed, “and say it’s a Goldilocks economy. It’s not. It’s Goldilocks’ grandma’s economy. Not too hot, not too cold and not too fast.”