- Tom Kennedy, head of private banking strategy at JPMorgan, believes the U.S. can still avoid a recession.
- Kennedy is confident in the Fed’s ability to cool inflation without freezing growth.
- The following details Kennedy’s outlook on the real estate market, as well as some of his investment ideas.
It’s been an ugly five-and-a-half months for stocks as investors start to realize just how disruptive historically high inflation Probably for the economy.
Soaring prices weighed on corporate earnings and led to
US Federal Reserve
Implement stricter financial conditions. The unpleasant combination led JPMorgan Chase Private Bank to downgrade its economic growth outlook for 2023 as the post-pandemic recovery begins to lose steam.
But Tom Kennedy, chief investment strategist at JPMorgan Chase Private Bank, told Insider in a recent interview that he remains bullish on stocks because he thinks the U.S. still has about a two-thirds chance of avoiding it.
picture Many of his Wall Street counterparts, Kennedy entered the year bullish. He sees the S&P 500 rising 5% to 5,000 in 2022, extending its four-year winning streak to four. Kennedy and his team were forced to recalculate earlier this year, but their revised year-end price target of 4,650 still points to an index upside of about 19% from current levels.
“In our base case, we keep that number for now,” Kennedy told Insider. “But we’re clearly seeing a downside because of the Fed’s anti-inflation campaign and what’s needed to rein in U.S. inflation growth.”
Kennedy continued: “If interest rates rise enough, the Fed can still design a soft landing. But after that the most likely scenario is that they end up tightening too much, which has historically been the cause of recessions, such as –financial crisis.”
Why the US may avoid a recession
Kennedy said that for the U.S. to avoid a second recession in three years, the Fed must rein in inflation without completely suppressing growth.a so-called soft landing Still possible as evidence shows US central bank’s credibility ‘remains intact’ despite tsunami criticize it for takingsaid the head of strategy.
“The first is the way people trade inflation expectations,” Kennedy said. “The first chart the Fed will look at at every meeting is that if the market sees them as credible, they’ll start with five-year expectations, and then they’ll discuss a survey of inflation expectations for the next three years.”
He continued: “These numbers are up, but it doesn’t mean the Fed is getting out of control, or that people are saying, ‘They’ll never be able to control inflation.'”
Kennedy noted that the market’s long-term inflation expectations remain close to the Fed’s long-term goal of 2 percent. Economists consider a moderate level of inflation to be healthy because it is a sign of economic growth. Markets believe the U.S. central bank can handle inflation, and so does Kennedy.
“The Fed has the ability to control that because inflation isn’t going away from them,” Kennedy said.
But just because Kennedy is skeptical of an impending recession doesn’t mean he sees no problems in America at all.
One of the clearest signs of inflation is soaring house prices, as strong demand, limited supply and little ability to borrow money have led to a once-in-a-generation surge.Kennedy is speculation Trends are unsustainable – especially if interest rates rise.
“Something will give,” he said. “I’m not saying the housing market will crash, but the world has to slow down.”
The strategy chief added: “You should see a drop in house prices or a drop in the number of homes sold. But either way, the economic impact will slow growth.”
This view is consistent with most of the 32 experts interviewed by Insider Will the housing bubble burst?. About two-thirds of respondents said there would be no more financial crisis-style collapse, but the general belief was that the housing market would cool. “
In Kennedy’s words, a housing slowdown seems desirable given how high inflation is and the fact that housing affordability is “as bad as it was in years before the financial crisis.” But, as the strategist pointed out, a sharp reversal in home prices would hurt economic growth, while reducing the wealth of millions of Americans and raising fears of a recession.
Investing Ideas as the U.S. Dodges a Recession
While Kennedy’s primary focus is to offer his views on what’s next for markets and the economy, the strategy executive also shared some thoughts on how to manage a portfolio.
Kennedy said at the start of the year that JPMorgan Private Bank advised investors to stay risk-on by staying overweight equities and underweight fixed income.Both asset classes have underperformed so far this year as the economy showing signs of weakness.
While Kennedy remains confident that the U.S. will avoid a recession, he admits that a recession is much more likely than it has been in the past. That’s why he favors U.S. equities over international peers, while giving fixed income more love.
“The idea of our highest belief right now is to talk about ordinary, unsexy fixed income,” Kennedy said. “The probability of a recession is rising, our clients are underweight, and ultimately you can get yield and diversification in a liquid market.”
The strategist also offered the following on bonds: “If the probability of a recession rises, they will become more attractive as interest rates rise.”
In Kennedy’s view, the best opportunity in the bond market lies in core products such as investment-grade coupons and municipal bonds. Riskier high-yield bonds, which can be valuable in portfolios as a stock substitute, underperform in a recession, Kennedy said.
“As an immediate earnings opportunity, I think you’re doing a better job at the core,” Kennedy said.
Investors willing to take more risk in pursuit of higher yields may consider the idea of bank preferred stocks or extended credit, as yields have risen to the high single digits, Kennedy said.
“I can substitute higher risk equity exposure with lower risk, lower risk
volatility
Kennedy said, ideas, and still get equity-like returns. “That’s pretty much the name of the game.”
