Countdown to Exchange: Dr. David Kelly

In less than one week, advisors will flock to sunny Miami for the annual Exchange conference. Content sessions this year offer advisors insight into growing their business models in unexpected ways, the macro and market environment of 2024, navigating the AI revolution, and more. Alongside great content, we’re also bringing some of the most prominent voices in finance to the stage. J.P. Morgan Asset Management’s chief global strategist Dr. David Kelly recently shared what he’s thinking about and watching in markets ahead of Exchange.

Caruso: Thank you so much for taking the time this morning to meet. We’re in the final stretch, so I want to take a bit of time to talk about your session next Monday morning at Exchange: The Long Last Leg on the Road to Normal: Investing in 2024 and Beyond. How would you summarize your session in your own words?

Kelly: I’m going to provide an economic market backdrop for investors: What’s the investment environment going to be like in 2024? Generally, our base case view is pretty good. I call my base case view for 2024 “two zero two four because we’re expecting 2% real economic growth, zero recessions, inflation falling to 2%, the unemployment rate staying at or below 4%.

The challenge is valuations, particularly for U.S. large cap equities. Valuations are much higher, and the returns from here are going to be lower because of that.

Overall, I’m going to talk about why we see the economy shaping up that way. Why do we still think the economy can avoid recession? Why are we so convinced that inflation is going to head down to 2%? Then, we’ll talk a little bit about the labor market and if unemployment is low, why don’t we get wage inflation? We’ll then talk a little bit about profits.

People will get a sense of how we see the backdrop and how to think about and talk about the economy. I’ll also say something about the election, but it’s mostly about not letting how you feel about politics affect how you think about investing.

Caruso: So you’ll be talking about why it’s important for investors to adopt a disciplined investing approach with an upcoming presidential election. In your perspective, how top of mind should this be for advisors at this point in the year? Do you have any additional color you can provide on that topic since it is so front and center right now?

Kelly: Well, a few points. The first one is that history shows that both the markets and the economy have fared well under both Democratic, Republican, and mixed governments over the years. Whatever Washington configuration there is, on average markets and the economy have tended to move forward.

The second thing is, research shows that when there’s a Democrat in the White House, Democrats feel much better about the economy and Republicans feel much worse, and vice versa. But we also know that people invest based on how they feel about the economy. That means that a lot of Republicans may have missed out on great market returns when Obama was president. A lot of Democrats missed out on great market returns when Trump was president.

But finally, if people are convinced that this is a terrible choice and we’re going to end up with a terrible president, then why are they underweight international? Because if you don’t like how the games will be played out the United States, then please don’t put all your chips on the U.S. square. So I think those are the points that I’ll make about politics.

Caruso: What are the biggest challenges that advisors will face in 2024? What should advisors be thinking about as they head to Exchange to try to gather the solutions needed to address these challenges?

Kelly: One of the challenges is that cash is still paying people over 5%. A lot of long-term investors are still lured away from long term investments by the fact that they can get good returns on cash. However, our research shows pretty overwhelmingly that when cash rates are at their peak, you make better returns over the next year in long term assets. So I think one of the key problems for advisors is going to get people to invest beyond cash. That’s one extreme; the other extreme is just piling all into large cap growth stocks in the US, which I don’t think is a very good idea either because valuations are very high.

The challenge is going to get people to be diversified when really one asset class has done so much better than all the others in recent years. People can be very tempted to put all their eggs in that basket. I think another challenge is getting people to invest around the world even though they want to invest at home. Invest in value, even though all they really want to do is growth. Invest in small cap, although all they really want to do is large cap.

I think it’s a real challenge for advisors to provide good advice to people who see a simple solution to their problems: If they feel optimistic, just buy large cap growth stocks. If they feel pessimistic, they just hide in cash. But there is a middle ground, which is a better ground for long term investors.

Caruso: What is the top area that’s either overlooked or misunderstood by advisors right now?

Kelly: I think probably non-U.S. equities. U.S. equities account for about 64% of global stock market capitalization right now. There is a record valuation gap between U.S. and non-U.S. equities, so there is opportunity elsewhere in the world. There have been long stretches of time where non-U.S. stocks have outperformed U.S. stocks. So I think there’s a big opportunity there.

But I think investors, they don’t just overlook it, they hate it — they don’t want to do international. I think it’s important that they get over their hatred and be balanced because there’s a lot of opportunity.

Caruso: Exchange kicks off in less than a week. What do you think will be the biggest financial news story that everyone will be talking about?

Kelly: How nice the weather is because it’s very cold up here. This week is a little bit of a quiet side in terms of economic news. I think the year has gotten off to a fast start. I think people will be waiting for the Federal Reserve to cut interest rates.

But honestly, what I think most people are going to be talking about on the sidelines is the fact that we have these two very old people running for president. That’s what they’re going to be talking about if we’re going to be to be honest. I don’t have much to say about it.

And of course, they’ll be talking about the aftermath of the Superbowl, which is on Sunday night. But that’s what they will be talking about: the Superbowl and politics.

Don’t miss Dr. David Kelly on stage at Exchange on Monday, February 12. Register for the conference here and see the agenda here.

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