Investors should prepare for a struggling housing market and the economy “wobbly on the brink of recession” before the Federal Reserve caves in its fight against inflation, said David Kelly, chief global strategist at JPMorgan Funds, in a client note on Monday.
Those were two of Kelly’s key takeaways from Federal Reserve Chairman Jerome Powell’s direct and brief speech at Friday’s Jackson Hole economic symposium, which helped spark a sharp rout in stocks.
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The Dow Jones Industrial Average DJIA,
continued its 1,000-point fall on Friday with back-to-back losses on Monday, as U.S. stocks SPX,
COMP,
finished lower for a second consecutive session.
Like others, Kelly expects the central bank to raise the federal funds rate to a range of 3.75% to 4% by the end of the year, up from 2.25% to 2, 5% currently. JPMorgan Funds is an investment subsidiary of JPMorgan Chase & Co. JPM,
a separate unit from its investment banking business.
“The Fed could then stop climbing and hope the economy just avoids recession,” he said, though it would still be “a very close call for recession” next year.
“It will be a waning fiscal stimulus environment that hurts consumption, higher mortgage rates that hamper housing, slow earnings growth that inhibits investment, and a higher DXY dollar,
and weakness overseas is hurting exports,” Kelly said.
It will also likely take the public becoming “more scared of recession than inflation” before the Fed slowly reverts to the kind of easy-money policy that has shaped markets in the decade since the crisis. financial world,” he said.
“This should provide a positive backdrop for stocks and bonds.”
But before that happens, Kelly sees the potential for increased volatility to keep investors focused on defensive plays and valuations, like value stocks, long-duration bonds and income-generating alternatives.
Energy and utilities are two S&P 500 sectors that managed to post gains on Monday, with US oil prices CL00,
CLV22,
ending above $97 a barrel on Monday, the highest in a month.
The 10-year Treasury rate TMUBMUSD10Y,
rose for a second consecutive session on Monday to 3.109%, the highest since June 28, according to Dow Jones Market Data.
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