J.P. Morgan Economist Sees Room for Real Optimism

Just like presidential politics, often in finance what things feel like matters just as much as how they are actually going. 

By John Manganaro | September 12, 2016
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J.P. Morgan lead economist David Kelly, officially the firm’s chief global market strategist and head of the global market insight strategy team, opened the 2016 PLANADVISER National Conference with an in-depth look at the last year in macroeconomics; from China uncertainty to Brexit to deep demographic shifts, there’s a lot for advisers to consider on the road ahead.  

Giving attending advisers a bit of a history lesson, Kelly observed that the S&P 500 has had an impressively volatile ride in the last two decades, with the latest bull run pushing the price index well above 2,000. Right now price-to-earnings ratios may seem high, at roughly 16.6-times earnings against at 15-year average of 15.9-times, but historically this is actually a pretty modest price premium to own the market, he said.

“Prior to the market disruption in early 2000, P/E ratios in the S&P 500 had climbed higher than 24-times earnings,” Kelly observed. “Granted, P/E ratios have been on the rise since reaching a very low base in the wake of the financial crisis of 2008, when they had dropped for a short spell below 10-times earnings. But all indications are that the markets are much healthier today and that this bull market has more room to run.”

What is worrisome, of course, is that even informative metrics like P/E ratios are far from perfect, Kelly said. Notably, there was little indication in P/E data of trouble prior to the 2008/09 financial crisis. In fact, P/E ratios were lower then than they are today. The absolute level of corporate earnings per share was significantly lower from 2006 into the crisis, however.

“Where are we right now according to the numbers? What does it all means for clients?” Kelly asked. “These are the big questions we are all concerned with, and I think the answer will surprise a lot of people. According to Americans you poll on the street, things are tough, but based on the real numbers we are actually looking pretty darn rosy.”

As examples of positive data points, Kelly cited the unemployment rate below 5%, mortgage rates below 3%, low gas prices, and inflation below 2%. “And we’ve had just a single recession in the last 14 years. It’s really not that bad at all according to the numbers.”

NEXT: Looking at the American Economy