July 8, 2019, The New Abnormal

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Written by Taylor Financial Group, LLC

Dr. David Kelly, Chief Global Strategist of J.P. Morgan Asset Management, recently shared his economic outlook with us after the Federal Reserve’s meeting on June 19th, 2019. He believes that on top of the imminent rate cute this month, that there could be another one by the end of 2019. He also notes that there is a rising market volatility, and that the market continues to be challenged by political and policy shifts, rising populism, trade conflict, and a pause on monetary policy normalization. Read further to find out more about his perspective on our economy.

Federal Reserve

As we know, the Fed left rates unchanged on June 19th, but certainly left the door open for future rate cuts. The level of unemployment is very low at 3.6%, which is the lowest since 1969. The rate of inflation is under control, and the economic expansion is ten years old and about to be the longest in history. Everything looks to be fine. But, is it, Dr. Kelly?

Dr. David Kelly’s Insights

Dr. David Kelly believes it is abnormal that we are in the 10th year of expansion (and looking like we will make it to an 11th year). The US traditionally is a free enterprise-focused economy and in favor of global trade, but now we are shifting towards getting tougher on trade, and beginning to extensively use tariffs. Like many, Kelly thinks that this is a very aggressive trade policy and could be damaging to the World order.

Currently, unemployment is at 3.6%, which is the lowest in 50 years. Dr. Kelly cited that the job opening and labor turnover survey showed a lot more job openings than unemployed people. There is a declining number of legal immigrants, which is squeezing the labor supply. As a result, Dr. Kelly does not think we will see much job growth going forward, and his estimate is that unemployment rates will not get below mid-low 3’s.

Dr. Kelly also acknowledged that economic activity is growing at a moderate pace. This may sound like bad news to some, but to most, this is expected after such a long bull market. Some reasons behind this are due to the retail sales report implying higher consumer spending, but there being a “rather weak jobs report” for May. The Fed would like to take another look of month’s data before they make any judgements on the jobs market, however, hence that wait until later in July. The Fed meeting in July will come four days after they receive data on GDP, so they will have a much better sense on economic momentum ahead of the next Fed meeting.

July Rate Cut?

The Federal Reserve is strongly considering a rate cut in July. Historically, in the past 30 years, 81% of the time the Fed issues a rate cut, they’ve given us another rate cut within 6 months. “If you give a mouse a cookie, he’s going to want a glass of milk. If you give the markets a rate cut, they’re going to want another rate cut,” says Dr. Kelly. He believes that there is a chance that if we do get the rate cut in July (which it will take a lot not to at this point), we could get another one in October, November, or even December. This is a slippery slope as it will certainly not strengthen the economy.

Dr. Kelly thinks it is important that people are not too aggressive with their positioning as markets are not as cheap as they should be, trading at a 16,58 price to earnings ratio compared to the 25-year average of 16,20. The US equity markets are at all-time high, and it is far from justified given the uncertainty surrounding the impending rate cuts (and tariffs). Dr. Kelly noted that International Markets are relatively cheap at the moment, and likes the outlook of Emerging Markets moving forward, so long as we do not embark on a series of rate cuts.

All eyes look towards July 30th. Will the Fed cut rates, or keep them the same? Now that you know what Dr. David Kelly thinks of our economy, we now wait and see what will happen at the next meeting.


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