Pent-up demand will revive down economy, J.P. Morgan’s Kelly says
The economy may be bad, but David Kelly has had enough of the “Great Recession” talk.
The economy may be bad, but David Kelly has had enough of the “Great Recession” talk.
“This is nothing like the Great Depression,” the chief market strategist for J.P. Morgan Asset Management said in a presentation last Monday. “It’s bad enough to live through this recession, but there’s no need to think of it as any worse than it is.”
Mr. Kelly made the comments in Orlando, Fla., at the annual gathering of the Investment Management Consultants Association.
As part of his presentation, he said that from peak to trough, gross domestic product declined by 3.8% during the most recent recession.
This compares with a GDP drop of 27% during the Great Depression.
Concentrating on the bright side of the economy, Mr. Kelly said that investors should focus on the potential of the recovery.
“The key is to realize that the bigger the recession, the bigger the [recovery] bounce,” he said. “On average, the first year of a recovery after a recession the economy grows by 5%.”
The reason that Mr. Kelly is convinced that the economy is poised for a rebound boils down to four areas of pent-up demand: automobiles, homebuilding, business equipment spending and inventory restocking.
“We’ve got a long way to go just to get back to average in each of those four categories,” he said. “And this will not be driven by government stimulus; this is pent-up demand.”
There is, however, one potential hitch to Mr. Kelly’s theory about how the economy will start growing through business activity in those four categories.
“In each case, the person making the decision to buy has the option to wait,” he said. “That’s almost the definition of a recession.”
Across the board, Mr. Kelly thinks that the demand for automobiles, housing, technology upgrades and inventory will force decisions to start spending.
“These are things that you can put off for a while, but you can’t put it off forever,” he said.
On the unemployment front, Mr. Kelly is in line with a lot of economists and market watchers who think that the level of unemployment will remain above historical averages for a long time.
He added that people should be patient and realize that jobs always trail an economic recovery.
“Unemployment will be slow to come down and it could even come up more,” Mr. Kelly said. “It will take a long time to fix this.”
Although Mr. Kelly admitted that the financial stability in parts of Europe is one of his chief concerns, he thinks that all the bad news lately has overshadowed the strength in certain parts of the U.S. economy.
“We’re seeing a much faster corporate profit revival than we are economic revival, and profits always bounce strongly coming out of a recession,” he said.
The bottom line, Mr. Kelly said, is that investors need to somehow get the message that the world isn’t ending, and that it is OK to get back into the equity markets.
“We’ve had 28 consecutive months with more money going into bond funds than into equity funds, and that’s a big mistake because people need to be balanced,” he said. “A lot of investors have legitimate fears about what could go wrong, but they also need to know what could go right.”
E-mail Jeff Benjamin at [email protected].
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