David Kelly’s Guide to Markets
April 27, 2010
After facing dramatic losses in 2008 and 2009, it is easy for investors to lose confidence and adopt negative attitudes. “It is still a staggering thing to think about,” says David Kelly, Chief Market Strategist at JP Morgan Funds. “On the average day in autumn of 2008, you could wake up and expect that the stock market could be up or down 3.3%,”compared to the Dow’s 115-year moving average of .73%. With that unprecedented volatility now largely behind us, however, Kelly believes that the economy is entering a period of recovery. To move forward, we must abandon our negative mindsets and focus on opportunities for expansion.
“I know that there are a lot of problems out there,” he said. “But at some stage you’ve got to put emotion to one side and look at things logically. You’ve got to distinguish between what could possibly go wrong and what will probably go right.”
In his keynote presentation at the Financial Planning Association of New York’s Annual Spring Forum, held on April 22 at the JP Morgan Conference Center in New York, Kelly urged investors to think logically about where the market stands, highlighting both opportunities for economic expansion and the risks that we could encounter.
From recession to expansion
Though the financial crisis spawned a nasty recession, Kelly said, it’s now basically over. The economy grew by 2.2% in third quarter of last year, 5.6% in the fourth quarter, and by an estimated 3% in the first quarter of 2010. Kelly forecast growth between 4 and 6% in the second quarter.
What should we expect next? Kelly says historical data from past recessions hold the answer. The current recession, characterized by a 3.8% decline in GDP, was the largest since World War II, but it was not unprecedented. The recessions of 1982 (2.9% decline in GDP) and 1975 (3.2% decline in GDP) and 1957 (3.7% decline in GDP) approached this one in severity. Historically, strong economic growth followed those big recessions. Thus, Kelly’s analysis of recent recessions focused on four aspects of the economy: growth, jobs, profit, and inflation.
The four horsemen
“The one positive about a big recession is you get a big bounce back,” Kelly said. Over the past 50 years, the economy has grown by an average of 3.2% annually. Naturally, this growth shrinks during the average recession. During the first year of recovery, however, the economy has grown by an average of 5% in real terms. After a large recession – like the recessions of 1975 and 1982 – the economy has grown by 7%. While Kelly does not expect a growth rate of 7% now, he said history strongly suggests we can expect average growth of at least 4%.Display article as PDF for printing.
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