- David Kelly, JPMorgan Asset Management’s chief global strategist, says it makes sense to buy stocks at current prices. He points out that stock prices have dropped 25% in the past six weeks and will return to those previous highs within the next few years, which he says gives you a pretty good return.
- Stocks could dip further from here, Kelly adds but thinks US stocks will do better than cash and bonds over the next five years.
- Some industries like traditional retail and business travel will be “potential long-term losers from this transition to a more socially distant economy” according to the strategist.
- Kelly expects downward pressure on commercial real estate rents but he does not anticipate a collapse in housing prices.
- We are not headed for a depression, according to Kelly. He says during the Great Recession and the Great Depression we didn’t know what was going on. In this case, Kelly argues, we know what is going on and we know the endpoint — the day the vaccine is available this will be over.
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David Kelly is the chief global strategist for JPMorgan’s asset-management business, which has $2 trillion in assets under management. Kelly spoke with Business Insider’s Sara Silverstein about how investors should be navigating markets during this crisis. Following is a transcript of the video.
Sara Silverstein: David, there’s a lot of equity investors who are seeing their portfolios hit very hard right now. What is your outlook for the stock market and more importantly, what’s your advice to these investors?
David Kelly: Well, I think the first thing is clearly the stock markets have taken a huge tumble and very justifiably so because of this pandemic and the big recession that it has triggered. That’s more than enough of an excuse for a market to fall, particularly when it was pretty high before, but I think for long-term investors, the real question is not so much what the market will do short term. It could fall further, to be honest, that could absolutely happen. But I think the bigger issue is once we come out of this, once the economy rebounds… The right way to think about this is 2020 is the year of the virus. 2021’s going to be the first year of the rebound. By 2022, we should be rolling, in fact booming as an economy, as we try to get back to full employment.
So, you’ve got to think about it that way. If you’ve got a portfolio that can survive the downturn, it should really flourish in the upturn. And that’s why I don’t think the stock market ought to go down more even though it might.
Silverstein: And what’s your advice for investors? How should they prepare their portfolio right now?
Kelly: Well, I think the first thing is think about things in terms of their actual valuation today. So, there were things that were too expensive going into this situation and the things that are still expensive today. Personally, for long-term investors, I don’t understand why you’d buy TIPS, for example, at a negative two-tenths of a percent interest rate. Why are you actually paying to lose money in real terms in the long run?
So, I’d be sure things like that. But I think there are plenty of good companies, particularly in the areas not affected by this. Things like healthcare, there’s going to be plenty of demand for healthcare. Financial services, plenty of demand. Utilities, plenty of demand. So, I think you can see areas which have been hurt badly by the market sell-off but really in the long run, have the fundamentals changed that much? Probably not. I think that’s an area to concentrate on.
Silverstein: And for investors that have a lot of money in bonds, whether it’s tips or municipals or corporate bonds, what’s happening to their portfolios and how should they be reacting?
Kelly: Yeah, well I think a lot of them, particularly if they are very high-quality bonds, have actually rallied. You’ve made some money here and that’s good. That’s what bonds are supposed to do. They were supposed to diversify your portfolio. The things that are supposed to zig when the rest of the market zags. That’s what they’ve done.
But from this point here, if you can do it without exposing yourself to lots of taxes, I’d want to make sure I wasn’t overweight bonds that. And remember this, since the start of the year, the stock market’s down a lot. The bond market overall isn’t. So, your portfolio has actually become more conservative as the year has gone on and it’s really important when you think about, “Well, maybe I should get more conservative,” you have been made more conservative.
If you add onto that, if you sell stocks and buy bonds now, you’re adding onto something that the market has already done to you. And That’s a bigger question. That’s what people I think really need to think about here.
Silverstein: And we’re talking about an economic recovery in 2021, what is the relationship between the economy and the markets? How do you look at that?
Kelly: Yeah. Historically, every recession is different of course, but one almost constant in recessions is the market tends to hit bottom before the economy does. And I think that could well be the case still.
Now, I’m not saying that we necessarily have hit bottom. I think there’s a lot of bad news and potentially still to come on this virus, unfortunately. I don’t think that we’re really going to be clear of this problem until we have a vaccine.
Now, when we do a vaccine, I think to me that’s VC day, vaccine for coronavirus today, and we’re all going to line up in front of Walgreens and CVS, six feet apart of course, and then get the vaccine and then we’re going to be ready to get back to normal. I think that’s going to be a very positive day in America and around the world.
But until that day, [inaudible] through this, but having said that, the market’s going to anticipate this rebound before it actually shows up in the economy and I think people need to recognize that as they invest.
Silverstein: And when we’re talking about more downside shocks, is this economic news and how much further could the stock market go down?
Kelly: Yeah, sorry, I meant to say that. So, I think there’s both the potential for negative news on the coronavirus itself because frankly, this thing wants to infect us all. I would not be surprised if half the population ends up with this in the end and that’s going to have a horrible human toll in terms of mortality. So, that’s a problem. And then also in the economy, right now it looks to us as if unemployment is going to be in the teens. So, that will be the highest we’ve seen since the Great Depression and also real GDP growth for the second quarter could be negative 15 to 20% and that’s an enormous drop.
So, these numbers still have the potential to shock markets and that’s why we’re not necessarily at the bottom in terms of the market but for a long term investor, that’s not the question. The question is not timing where the bottom occurs, it’s asking, are these assets valuable today? Are they cheap or are they expensive today based on what we know about the long run?
Silverstein: And you say you expect unemployment to go into the teens, that’s about half of what some of the estimates that we’re hearing that it could be up to 30%, why do you think it will be in that range?
Kelly: Well, it could be worse. I certainly think it could be at least as bad as that because of the number of low wage workers in the retail restaurant and entertainment sectors and hospitality sectors who are going to be laid off.
I think one of the wild cards here is that this act, this Coronavirus Relief Act, which has just been signed into law. It gives unemployed workers an extra $600 per week on top of their normal weekly unemployment benefits and the thing is that for a lot of people who are working in retail, who are working in these low paid jobs, they’re actually going to get more in a weekly unemployment check than they would have if they’d stayed working and that sets up a weird dynamic by which businesses are saying, “I’m going to try and keep you on the payroll.” And the workers are going to say, “If you don’t mind, please fire me,” and I think that’s going to be an issue.
And I think also a lot of gig workers who are self-employed who are going to also file for unemployment. So, that’s all going to push it up, but I still look at finance, healthcare, utilities. A lot of businesses which will just have to operate as normal. And then there are others like food services, like grocery stores, online delivery. I think there are going to be plenty of places which are hiring there.
And also over time, we’re very adaptable. Human beings are adaptable. The US economy is adaptable. We will find ways of making money in this environment. There are going to be all sorts of services which are going to grow out of this as ways for people to, more safely from a health perspective, consume services. And we just have to see how all of this plays out.
Silverstein: Any industries that you think will be hurt long-term and won’t recover fully after this?
Kelly: Yes, the obvious one is cruise lines. It’s going to be a long time before people really feel comfortable going on cruises, but also more generally, I think retailers at the malls and so forth. They were struggling anyway because they were fighting with online businesses and the more times people use online facilities to, “Oh, I didn’t know I could buy this online. I didn’t know I could buy that online.” I think that’s going to have an effect.
And then frankly also with the travel, particularly business travel. A lot of people have learned how to work from home and so businesses are going to say, “Well, do I really want to send everybody across the country? Or now we can just put them on Zoom or Skype or Jabber or something and we’ll just put them all… We’ve got pretty good at this. We know how to do this and this conversation,” we’re all getting better at that. I think that’s going to accelerate teleconferencing but perhaps at the detriment of business travel.
And then one other thing, I think possibly it’s going to lead to more stay at home working in general and that could hurt office space downtown as well as of course retail malls. So, I think those are all potential long-term losers from this transition to a more socially distant economy.
Silverstein: And when you’re talking about brick and mortar retail and also commercial workspace, what will that do to commercial real estate?
Kelly: Well, it’s a problem. I think it will ultimately it’s going to push down rents. I think there’s going to be some pressure. I think we were already going to be seeing some pressure because the workforce really wasn’t growing anymore in America, but I think this is going to make it doubly hard to fill that space.
So, I think there’s going to be some downward pressure in that area but there are winners and losers. I think that those companies that are supplying various kinds of telecommunication services are going to be big winners out of this.
Silverstein: And what do you think about residential housing markets? What is going to happen to housing prices
Kelly: It’s hard to say. I think the market won’t be very informative, so to speak, over the next 12 months. Because I can see why people really wouldn’t want to go out and buy a house. But I could also see why people really wouldn’t want to sell a house.
We’re going to have low mortgage rates. That means that everything can be financed at potentially higher prices. I don’t really expect home prices to collapse here because as I say, I think there’s going to be a lack of supply in the market and also with these low mortgage rates. So, I’m not too concerned about movement. The last recession was all about housing. This one really won’t be about housing.
Silverstein: And you mentioned the $2 trillion stimulus package. What are the long-term economic impacts that we’re going to see from that, that will affect the markets? And also, I heard you say that a lot of that money is being wasted. Can you talk about that?
Kelly: Yeah. Well, I think it’s an enormous package first of all. It is three times the package that was introduced by the Obama administration in response to the financial crisis. So, it is an enormous package, $2.3 trillion.
I think that what it will achieve is before… If we hadn’t passed that package, then I think we would have an economy which would have basically fall, slide and then rebound. And I think what we’re going to have now is fall, stall and surge. So, it’s going to stop this… I think the second quarter is going to be terrible in terms of GDP, but beyond that, I don’t think GDP growth will fall that much because a lot of the secondary effects of mass poverty from mass unemployment or mass bankruptcies from business problems, I think we’re going to see less of that. And that allows the economy basically to stabilize without recovering.
So, I think in the short run it does help but a lot of it is wasted. I think it helps with worker income. Actually though, as I said earlier, I think it may actually push up the unemployment rate, but it doesn’t really help businesses that much. I think a lot of small businesses [inaudible] not much point in trying to maintain a fiction that you’re operating and for big businesses, yeah, you could take out a big loan from the federal government with the help from the federal reserve, but there’s so many strings attached in terms of keeping workers in place. If you don’t have the business, that’s no way to run a company.
So, I don’t really think it helps there, and then there’s a lot of other things. There’s a big break for real estate for accelerated depreciation or depreciation in recent years, you suddenly get a tax break. What’s that about? That’s got nothing to do with stimulating economic demand in the economy or really the healthcare problems caused by coronavirus.
And the one other thing I’d say is yes, it’s good to be able to help people keep food on the table, but you’re not going to get what you would traditionally get in terms of a multiplier effect because what are you going to spend the money on? And so, you’re going to end up with pent up demand here, money that has not been spent.
Now, when you get out of this on the other side, when the economy surges in 2021 and going into 2022, that extra money will add to economic demand. That could actually make us vulnerable to inflation at that stage but it certainly I think will help us recover fast.
Silverstein: And we have quite a few people in the audience who are asking, not necessarily about rebalancing your portfolio, but if you have money to put to work, is now a good time to be investing in stocks?
Kelly: Well, yes if you are taking a long term perspective on this. So, a good way of looking at this is we’re down about 25% from where we were on February 19th, six weeks ago. Will we ever get back there to where we were in February 19th? Yes, we will, and if we got back there in one year, then that would be about a 35% gain in terms of total return. If it took you two years, it’d be 17% per year. If it took you five years, you’re going to make about 10% per year. Do you think it’s going to take five years to get back to where you were in February? Probably not. We’re probably going to do it faster than that. So, if you look at it from that perspective, there’s going to be a very good return on stocks over the next few years.
Now, is this the exact right day? Could it fall some more in the next few months? Of course it could. I don’t think that you can forecast that. I think that’s witchcraft. I don’t think anybody knows how to pick the day. The question you should ask yourself is looking at five years from now, am I going to be happier if I kept my money in cash, put my money in treasury bonds or high-quality bonds, or if I put my money in US stocks? I think US stocks will do better than cash and bonds over the next five years.
Silverstein: And we have another question from our audience who is wondering, are we headed for a depression?
Kelly: No, I don’t think we’re headed for depression because I remember the great financial crisis and I’ve read a lot, of course as everyone has, about the Great Depression and the difference this time around, the key difference, is we know the endpoint. In the Great Depression, people so distrusted the banks and distrusted the whole economic system that they thought that the economy would never recover. They just didn’t understand what was going on at all. In the great financial crisis, in many ways people still didn’t know what was going on because we knew all the banks had had problems. We didn’t know how big those problems were. We had no way of figuring out derivatives.
This one, we know exactly what’s going on, it’s social distancing is shutting down all these smaller businesses, but we also know there’s an end date.
We know there is a VC day, a vaccine for coronavirus day, and when that occurs, we know we’re out of this. And so to me… And also, the other thing is, this is a big recession, but without the poverty that is normally caused for unemployed workers because of this bill passed by Congress and I expect Congress will come back and pass another one to further supplement the income of people who are unemployed. So, we can see an end to it, so I don’t think it’s psychologically a depression. Frankly, it’s psychologically boredom for an awful lot of people and psychologically fear because of the virus. But we don’t doubt that the economy can come back once this virus is dealt with, and honestly, we shouldn’t doubt that medical science will eventually figure out how to deal with this virus because it will.
Silverstein: And I saw on a recent note, you said that you like dividend stocks right now. Can you explain why long-term investors should be looking at dividend stocks?
Kelly: Well, yes, because people are always looking… I think it’s the great hunt for income that goes on all over the world and that’s going on still, but think about what this has all done to the hunt for income. When the stock market fell, the dividend yield goes up because these companies are still paying dividends and the price of the market is down. So, the dividend yield in the S&P 500 right now is about two and a half percent. The yield in a 10-year treasury bond is about 60 basis points. And that gap is actually in favor of dividends now. For most of history, for most of the last 60 years, the yield on bonds was much higher than the yield on stocks, because after all, you buy the stock, you get the dividend plus you get all of that appreciation.
But now, the dividend yield in stocks is above the yields on treasuries and that gap actually is the highest that we’ve seen in 60 years. So, I think you have to be selective. There are certain industries where I wouldn’t trust the dividend because they are going to take a shellacking from this recession, but there are other parts of the market where yes, the stocks are down, but there’s no doubt that the companies will be able to pay the dividend. They’re going to continue to pay a dividend and that income stream from those dividends is substantially better than you can get from treasuries or from high-quality bonds. And so, I think people need to take a second look at equities as a source of income and not just capital return or capital appreciation.
Silverstein: And finally, before I let you go, is there anything you think investors are misunderstanding about the markets right now?
Kelly: Yes. You don’t have to be an optimist in the virus. You don’t have to be an optimist in the economy to be an optimist in equities in the long run. I’m actually a bit of a pessimist in the virus. I don’t think that we’re going to really get back to normal until we have a vaccine and that could be 12 to 18 months away, and I wish that wasn’t the case, but I think that’s the case.
I do think we’re going to have a very big recession and it’s not going to be easy to come out of it after that. But if you look at stocks in terms of the long run, if you think not just about the year of the virus, which is 2020 but also 2021, 2022 and for years and decades into the future, the vast majority of the value in a stock is embedded in earnings that aren’t going to occur for five, 10, 15, 20, 30 years in the future. And if you look at it from that perspective, it’s quite possible the stock market is actually good value today for a long-term investor even if you take a negative view on the virus and a negative view in the short run on the economy.
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