A JPMorgan heavyweight who advises a $1.9 trillion business breaks down 3 investing strategies set to thrive right now - even as he forecasts 'the virus is going to win'
- David Kelly, chief global strategist for JPMorgan's asset management business, says stocks will do well even if the recovery from the recent market plunge is very slow.
- His optimism about stocks contrasts with his belief that the coronavirus pandemic will keep spreading despite the ongoing efforts to contain it.
- Kelly explains how investors can position themselves as the outbreak continues and how its lingering influence might affect businesses and stocks.
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The coronavirus pandemic has forced everyone to contemplate ideas they wouldn't have considered in the past. And David Kelly, chief global strategist for JPMorgan Asset Management, is thinking about a big one.
Specifically, he's considering an outcome where efforts to contain the virus through social distancing fail and infections continue to grow - but stocks perform well anyway.
"It's possible to feel rather pessimistic about the war on the virus and still feel that there's longterm value in stocks," he told Business Insider in an exclusive interview.
Kelly adds that he's pessimistic about the war because humans are going to struggle to stay apart for long enough to stop the pandemic. Before long, we'll want to get back to normal and infections will start to rise again.
"Social distancing is unnatural for humans," he said. "I think the virus is going to win, because I don't think we can take it."
That means the virus will become a long-term issue that people and businesses will have to manage, and will re-shape life even after effective treatments and vaccines are developed.
"The future beyond this virus is going to be some amalgam of a social distancing economy and a return to business as usual," he said. "I think it's really difficult for bricks and mortar retailers. It's going to help a lot of online communications."
Kelly continued: "It's probably permanently damaging to the business travel business. Maybe a little bit less so far for vacation travel, because I think everybody will want a vacation when this is over."
While the world has changed dramatically, in some critical ways, Kelly says the stock market actually hasn't. After weeks of panicked selling, in a lot of ways it still looks the way it did two months ago.
"A lot of the imbalances that existed within the market are still existing today," he said. "In general, value still looks cheap relative to growth, and in general, international still looks cheap relative to the US. It should be possible to get better returns by being a little bit overweight value versus growth, a little bit overweight international versus US."
With that in mind, Kelly says these three strategies will help investors succeed through the ups and downs sure to come next.
(1) Fix your portfolio
Crashing stock prices and soaring bond prices have reshaped investors' portfolios over the last month, and Kelly says that no matter your plan, it's a good idea to adjust now.
"If you had a portfolio that was 60% equities and 40% fixed income on December 31st, just the S&P 500 and Barclays Ag, and you had not rebalanced, by Friday you were 52% equities 48% fixed income," he said. "So you became noticeably more conservative at a time when equities have become much cheaper and bonds become more expensive."
(2) Ride the economic recovery - however slow
What if it takes the market years to reverse the losses of the last month? That might sound terrible, but Kelly says that would translate to several years where stocks perform much better than their historic average.
"If you recognize the 2020 is the year of the virus and 2021 is the first year of recovery, but by 2022 we're back at full steam, than the market does not look that expensive," he said, noting that based on measurements like trailing price to earnings, stocks are unusually cheap right now.
And if it takes three years for the S&P 500 to get back to its February 19 closing high of 3,386.15, he explains, investors would get an annual return of about 17% per year, including dividends. If that's stretched out over five years, the return would be about 11% a year.
Kelly reiterates that that's also a lot better than bonds can offer right now.
(3) Stick with dividend payers
Some companies have already started to cut their dividend payments in response to the economic downturn that's coming, but Kelly investors who are seeking income should stick with them.
"Dividend paying stocks look extremely cheap relative to Treasury bonds if you're buying them for income," he said. "There are sectors in the US equity market which dividends look pretty secure, even under pretty negative scenarios."
Cutting dividends, he adds, won't be the first choice for most companies. When they do see a drop in earnings and revenue, it will affect stock buybacks and retained earnings first. Only after those are depleted will big dividend cuts take place for most companies.
"Most of the problems will be in the travel, leisure, entertainment sectors," Kelly said. "Healthcare, financial services, and most of tech should be in pretty good shape here."
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