Investors Should Curb Their Enthusiasm, Warns JPMorgan’s David Kelly

David Kelly, chief global strategist for J.P. Morgan Asset Management, cautions investors to “curb” their enthusiasm about prospects for the U.S. economy and financial markets in 2017.

In a recent Guide to the Markets conference call, Kelly noted that optimistic expectations about the new Republican-led federal government, including plans to reduce regulations and personal and corporate income taxes while increasing spending on and infrastructure, may be overdone.

The ratio of U.S. debt to GDP, which has been rising steadily rising to 77% currently, for example, “limits what the new administration will be able to do,” said Kelly, explaining that some  House and Senate members could “balk at the idea of ballooning the deficit. 

A cut in personal income tax rates may be delayed and smaller than expected while postponement of the DOL fiduciary rule and easing of the Dodd-Frank Act “will not result in enormous change,” said Kelly.  The energy sector, however, could benefit from changes in regulation, he said.

In addition, he noted that a Republican House bill that restructures foreign earnings of corporate taxes so that companies are taxed on domestic sales but not sales of exports is complicated. The legislation could reduce the trade deficit and help companies that rely on exports but it could also hurt those companies that rely on imports, said Kelly.

Prices for imported goods would rise, leading to higher inflation and more-than-expected Fed rate hikes, which would “blunt economic efforts to grow the economy faster.”

 “Don’t expect a tortoise to suddenly turn into a hare,” said Kelly, discussing the U.S. economy.