Tag Archive for: equities

J.P. Morgan Funds’ measured optimism about U.S. economy

The economy is on a rebound, but it’s a long way back to normal, said David P. Kelly, chief market strategist, J.P. Morgan Funds, to NICSA’s East Coast Regional Meeting on Jan. 14, 2010. 

A Jupiter of a recession
Economists have seen recessions like 2008-2009 before. so they can predict the broad shape of the economic recovery, according to Kelly.

U.S. recessions are just like the solar system. There are big planets and little planets, but no medium planets, said Kelly. “This was a Jupiter among recessions,” said Kelly. Even though it’s the largest recession since World War II, it’s not unprecedented. In fact, it’s not that different in size from the recessions of 1957, 1980, and 1982. As a result, he foresees a robust recovery.

“The bigger the recession, the bigger the bounceback,” said Kelly. 

Keys to U.S. economic growth 
The U.S. economy will rebound strongly because the following areas became so weak, they must bounce back, said Kelly.
1. Auto consumption
2. Residential construction
3. Equipment
4. Inventories 

Employment outlook 
Kelly made the following predictions

  • Jobs will begin to grow in the first quarter of 2010, which will produce income to support economic expansion.
  • Unemployment will rise as new jobs are created. This is because unemployment statistics are calculated using the number of people actively seeking jobs. People will return to the market as they see better prospects for success.
  • It’ll take five years to get back to full employment. Employment may rise to 9% by year-end 2010. 

More predictions by Kelly

  • Corporate profits will improve. This is because of low costs, low interest rates, and especially because of the lack of upward pressure on wages. On the wage issue, Kelly quoted the singer Beyonce, saying that employees realize that employers know “I can have another you in a minute.”
  • The risk of deflation is greater than the risk of inflation.
  • The biggest risks to Kelly’s positive scenario are conflict with Iran, which would drive up oil prices; and  banks finding it difficult to lend due to regulation, taxes, and uncertainty about regulation and taxes.


  • It’s not too late to get back into stocks. Some people worry that maybe they “missed the train.” Davis’ reply? “This is a very long train on a very long platform.” He noted that stocks have recovered less than half of what they lost during the bear market. Also, there’s a lot of cash on the side lines that will eventually flow back into the stock market. On the flip side, bonds have become more risky, so now is a good time to overweight stocks relative to bonds, he said.
  • Non-U.S. economies will continue to outperform the U.S., and international stocks are cheaper than U.S. stocks. Also, a modest fall in the dollar will amplify gains somewhat for U.S. investors.
  • During Q&A, Kelly said, “I think buying a house will turn out to be a good investment, even over the next five years.”
  • On the topic of gold, Kelly said he wouldn’t put his mother into gold, even though the gold bubble has the potential to continue. The fundamentals don’t support gold’s price rise in 2009 because gold is supposed to appreciate in times of rising volatility and rising inflation. Meanwhile, volatility, as measured by the VIX has fallen and so has inflation. This bubble will eventually pop, he said.

Interesting graphs supported Kelly’s presentations. Financial advisors who participate in the J.P. Morgan’s Market Insights program can find the graphs in the firm’s quarterly Guide to the Markets.

Funds using alternative investment strategies gain steam

Alternative investments that are less correlated to major market indexes are gathering momentum in the advisor community. Two trends are fueling the movement. First, the sharp market declines since September 2008 have boosted the attraction of strategies that don’t dive along with stock market. “This year, people are looking to dial down risk in their portfolios,” says Bill Harding, director of research at Morningstar Investment Services in Chicago. Second, these strategies are increasingly available to those who don’t qualify as accredited investors (with investable assets of $1 million or more).

Continue reading “Against the Grain,” my article in the March 2009 issue of Financial Planning magazine (free registration may be required for access).

Also, here’s some information that didn’t make it into the article. It’s the list of funds used by the advisors whom I interviewed.

Absolute Opportunities
Absolute Strategies
Diamond Hill Long-Short
Direxion Commodity Trends
Highbridge Statistical Market Neutral
Hussman Strategic Growth
Nakoma Absolute Return
PIMCO CommodityRealReturn Strategy
Robeco Boston Partners Long/Short Equity
Rydex Managed Futures Strategy

"James Grant: A Positive Lesson from the Great Depression"

Great price tags on a number of investments are the silver lining of the current recession, according to James Grant, founder of Grant’s Interest Rate Observer

Grant shared his “Thoughts on the Financial Markets and the Current State of the Economy” with the Boston Security Analysts Society on February 11. He spoke at length about the virtues of value investing, as exemplified by the Depression era strategies of Floyd Odlum of Atlas Corporation. Today’s investors can learn from Odlum’s strategy of underpaying for assets, Grant said.

Continue reading “James Grant: A Positive Lesson from the Great Depression,” my article in Advisor Perspectives.

provocative quote about target date fund (TDF) advisers

Are target date fund advisers swayed by a conflict of interest?

On p. 41 of CFA Magazine (Jan./Feb. 2009), Mark Ruloff, director of asset allocation for Watson Wyatt Investment Consulting, says, “Advisers…are implementing the glidepath. They might have a bias toward keeping higher equity allocations longer because it helps their own fees…. There are legitimate reasons for advisers to arrive at different glide paths, but there’s the appearance of a conflict of interest.”

What do you think?

"Jeremy Siegel on why Equities are ‘Dirt Cheap’ ”

“I may be the lone optimist in this market,” said Prof. Jeremy Siegel in a Q&A published in Advisor Perspectives

He was responding to a question about his Oct. 31 Yahoo finance column, in which he said, “I would be very surprised that if an investor who bought a diversified portfolio today did not make at least 20% or more on his investment in the next twelve months.”

Are there any other optimists out there?

Independent investment research will suffer in the near term

The recent decline in commissions generated by buy-side equity trading will cut funding available for independent and sell-side investment research, according to “Integrity’s Outlook for Independent Research.” Michael Mayhew of Integrity Research Associates says that commissions are expected to fall by 40% next year.

However, there is a silver lining to this dark cloud. Integrity says, “However, once the dust settles (in late 2009 or early 2010) we anticipate that the market for investment research, and particularly non-traditional independent research, is likely to improve markedly.” Why? Because buy-side research staffs will have shrunk and the supply of good research will be tighter.

Interested in more news like this? Visit Integrity ResearchWatch or  subscribe by email or RSS feed.

Prof. Andre Perold on "Stable Risk Portfolios: A Timely Alternative to Static Asset Allocations?"

Risk matters. October’s wild stock market swings have reminded investors that volatility can be painful. They simply can’t stomach as much risk as they thought they could.

In this environment, it’s no surprise that Professor André F. Perold’s October 21 talk on “Risk Stabilization and Asset Allocation” attracted a bigger than usual crowd to the monthly meeting of the Boston chapter of the Quantitative Work Alliance for Applied Finance, Education, and Wisdom, affectionately known as QWAFAFEW.

Perold’s premise: A stable-risk portfolio that keeps risk constant is a viable alternative to investors’ classic static policy portfolio, such as 60% stocks and 40% bonds, and it may offer superior risk-adjusted returns.

Continue reading about stable risk portfolios in my Advisor Perspectives article.

Optimism watch: S&P 500 Index and major global events

If you have a long time horizon, you can survive just about anything. At least, that’s the implication of a graph I looked at today.

Fidelity Investments is showing off a graph called “S&P 500 Index & Major Global Events” in “Putting Short-Term Market Turmoil in Perspective: U.S. stocks have proven resilient over the long term.”

It’s a graph of the S&P 500 index with major events from JFK’s assassination in 1963 to this year’s collapse of Bear Stearns.

The article concludes:  “U.S. stocks have proven to be resilient over the long term. A $10,000 hypothetical investment in a diversified mix of large-cap domestic stocks at the start of 1963 would have been worth more than $865,000 at the end of June 2008.”

$865,000 is a nice big number. But how many investors think in terms of a 45-year time horizon? 

On the other hand, maybe that’s the point. A 45-year time horizon isn’t just for college kids. Even middle-aged folks may live another 45 years.

Does this graph give you comfort? 

Optimism watch: "Could Bear Talk Be a Contrary Signal?"

“Doing the reverse of the crowd has often worked well,” as New York Times columnist Floyd Norris points out in “Could Bear Talk Be a Contrary Signal?

So the fact that consumers feel unusually gloomy about the stock market, according to the Conference Board’s latest consumer confidence report, may bode well for stocks.

More than half of those polled expect stocks to decline over the next 12 months. However, as Norris reports:

In the past, there have been only six market cycles when the proportion of bears reached 36 percent. Five of them were excellent times to buy stocks, and the other one was followed by a decent return.

If you only want to read an optimistic spin on these numbers, do NOT read Mark Hulbert’s “The Stars Have Yet To Align For Stocks,” also published in The New York Times.

This blog post is part of a recently launched “Optimism watch” series on this blog.

Optimism watch: The case for maximum pessimism

Is the stock market getting you down? I’m starting an “Optimism watch” on this blog. 

In “Optimism watch” posts, I’ll highlight the case that other writers make for you and your clients to hang in there.

Let’s start with a quote from “Nowhere to Hide: Foreign Funds are Falling, Too,” from Morningstar’s Bridget Hughes.

…before you fall into deep despair, I’d remind you that the late Sir John Templeton made a highly successful career investing where he saw “maximum pessimism.” We’ve been here before. Markets are cyclical. Keeping a truly long-term perspective (10 years or more) can be liberating, and you may realize this is a time to add to your holdings.

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