Fixed-income yields “all look good,” and you might want to get some while you still can, according to JPMorgan Chase & Co.’s David Kelly.
It’s a “one time only sale,” said Kelly, chief global strategist at J.P. Morgan Asset Management, on stage Monday afternoon at the Exchange event at the Fontainebleau hotel in Miami Beach, Florida. “Put your fixed income positions in now,” he said, as in a couple years from now those yields “won’t be available.”
The Federal Reserve began rapidly raising interest rates last year in an effort to bring down the surge in U.S. inflation seen during the pandemic. The Fed had cut its benchmark rate to zero in March 2020 amid the COVID-19 crisis to help support the economy, and didn’t begin raising it to address soaring inflation until March 2022.
Now, the Fed’s rate is in the range of 4.5% to 4.75%, while U.S. Treasury yields are well above levels seen even a year ago. But some investors are expecting the Fed could pause its rate hikes — or even potentially cut them – this year as inflation cools and the U.S. economy slows.
The last three years have an “incredible roller coaster,” according to Kelly.
The yield on the 10-year Treasury note
TMUBMUSD10Y,
rose Monday to 3.632%, while two-year yields
TMUBMUSD02Y,
climbed to 4.454% in the wake of a surprisingly strong jobs report, according to Dow Jones Market Data. Bond yields and prices move in opposite directions.
“So right now we’re not in recession,” said Kelly, but “we are on the edge” of some kind of an economic slowdown. While the U.S. economy isn’t on “the edge of a cliff,” in his view, it’s at “the edge of a swamp” that may not be deep but could be hard to get out of.
“Consumer spending is bound to slow,” he said.
Meanwhile, the U.S. labor market has remained strong so far amid the Fed’s aggressive rate hikes, with the unemployment rate falling to 3.4% in January, the lowest level since 1969.
See: Jobs report shows blowout 517,000 gain in U.S. employment in January
Kelly described the labor market as “really weird,” with more job openings than unemployed people looking for work. There’s a “huge excess demand for labor,” he said, pointing to an insufficient supply of workers following a decline in immigration, baby boomers leaving the workforce, and long COVID resulting in almost no growth in people available to work.
‘Slinky’
The surprisingly strong employment report for January, which was released by the U.S. Bureau of Labor Statistics on Feb. 3, showed signs of wage pressures cooling. Average hourly earnings in January slowed to 4.4% year over year. That’s below the rate of U.S. inflation, said Kelly.
Inflation, as measured by the consumer-price index, ran at a 6.5% rate in the 12 months through December, according to a report from the Bureau of Labor Statistics last month. CPI data for January is due out on Feb. 14.
“All that wage growth is doing is slowing the pace of inflation coming down,” said Kelly. Inflation measured by the CPI data had been running as hot as 9.1% in June.
Instead of the feared wage “spiral,” where rising wages help fuel further inflation, hourly earnings seem more like a “slinky” moving down the stairs, Kelly said, referring to the spring toy.
He said he expects inflation to eventually return to 2% and expressed concern over the Fed continuing to tighten monetary policy into a slowing economy. “They’re overtightening,” he said.
An economic backdrop of low inflation and slow economic growth is generally “good for all financial assets,” according to Kelly.
As for equities, he is expecting international stocks to outperform the U.S. in 2023.
Overweight international?
“Nobody is overweight international because international has been disappointing us for years and years,” said Kelly. “I think international will beat the U.S. again this year.” International is “a lot cheaper” and pays better dividend yields, he said.
Both stocks and bonds slumped last year amid rising interest rates.
In 2023, the iShares MSCI ACWI ex U.S. ETF
ACWX,
which provides exposure to stocks in developed and emerging markets but excludes the U.S., is up 7.1% through Monday, according to FactSet data. That compares with a 7.2% gain for the SPDR S&P 500 ETF Trust
SPY,
over the same period.
Last year, the SPDR S&P 500 ETF Trust plunged 19.5%, sinking deeper than the iShares MSCI ACWI ex U.S. ETF’s 18.2% slide, FactSet data show.
“Over the next few years, the dollar should come down and amplify the return of international investments,” Kelly said.
Read: Why BlackRock prefers ‘selected’ stocks in emerging markets as U.S. dollar weakens
Source: https://www.marketwatch.com/story/edge-of-a-swamp-jpmorgan-strategist-sees-one-time-only-sale-in-fixed-income-as-u-s-economy-slows-11675774251?siteid=yhoof2&yptr=yahoo