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The indexes have soared thanks to strong economic data and a major rate cut by the Fed.
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But with markets expecting a soft landing, potential shocks pose a greater risk to investors, says David Kelly.
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He says Americans should scale back risk and position funds away from growth stocks and toward value.
Strong economic data and a big rate cut last month have fueled bullish sentiment, but investors should be wary of adding more risk, said David Kelly of JPMorgan Asset Management.
The company’s chief global strategist says the promise of a soft landing has encouraged Americans to invest in riskier assets just when they shouldn’t.
“I will say that while I think this is positive for the stock market, I am increasingly concerned that the stock market continues to price in a soft landing,” Kelly told Business Insider.
He said as market prices soft land, valuations rise, meaning any shock to the market could send asset prices plummeting.
“The markets are up a lot and more distorted, and because they are more distorted and at higher valuations, they are riskier,” he said.
At the same time, the wealth of the average American has skyrocketed. Total U.S. household wealth has grown by about $50 trillion over the past five years, according to Fed data. That means many middle-income households that couldn’t afford retirement a few years ago now can, Kelly says.
As a result, investors should not take on more risk than necessary, he says.
“They should dial back the risk. There’s no need to increase the risk if you have enough money to do the things you want to do,” Kelly said.
Kelly has been particularly careful about keeping money in high-flying growth stocks.
“The moment I think logic would dictate that investors should take a little bit of risk off the table, they are passively allowing risk to accumulate,” he said.
Instead, he advised investors to rebalance their portfolios, moving money out of growth stocks and into value stocks, international stocks and alternatives.
Kelly says the market has been trending toward a soft landing for some time, and Friday’s blockbuster jobs report only strengthened that argument. The report showed a drop in the unemployment rate from 4.2% to 4.1%, with 254,000 nonfarm payrolls added, surpassing estimates of about 150,000.
The strong report all but dashed hopes for another major rate cut next month, with investors quickly cutting the odds of a 50 basis point move from 33% to less than 1%, according to the CME FedWatch Tool.
However, Kelly acknowledged that the data leaves room for error, so it’s possible that last month’s employment appeared weaker than reality and this month appeared stronger than reality.
Regardless, he says the report confirms that the US has a healthy, strong labor market and that the economy is on a “very nice soft runway.”
Kelly expects the Fed to cut another 50 basis points over the next two meetings, and another 100 next year.
When a surprise rise in unemployment triggered a massive global sell-off in August, Kelly told Business Insider that the Fed must do more to signal its confidence in the economy.
Now he says the Fed must continue to show its confidence and show it can take its time to cut rates.
“The more the Federal Reserve seems to take its time and not worry too much, the more that will do to support confidence,” he said.
Read the original article on Business Insider
