Based on his economic predictions, Kelly provided return forecasts to various sectors: Bonds Long-term bond yields should remain negative even if there is a major selloff in the bond market, Kelly notes. With the Fed's "aggressive" tightening, "long rates could move up further, limiting fixed income returns." Therefore, "any underweight to fixed income in portfolios should probably be more modest than at the start of the year, given higher coupons and a better potential for Treasuries to protect a portfolio if the economy were to tip into recession." U.S. equities He sees U.S. equities overall look "challenging particularly given a forward P/E ratio on the S&P 500 that is still roughly 15% above its 25-year average. However, within the market, value stocks carry a P/E ratio which is much lower-than-normal relative to growth stocks," pointing to "better returns for value going forward, particularly in a rising rate environment." International equities These are "very" cheap relative to U.S. stocks but could fare better if the Ukraine conflict is resolved, Kelly says, especially if U.S. economic growth slows relative to the rest of the world. Other asset classes Alternatives such as real estate and infrastructure would be wise to buy for diversification and income, and "clean energy for a new sources of growth," Kelly says. Check out his predictions for several major factors shaping the economy in the gallery above.
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