- David Kelly, the chief global strategist at JPMorgan's investing arm, says continuing splits in the federal government could bridge a gap in stocks.
- He says investors are sharply divided into bearish and bullish camps and might find a middle ground as the apparent election results change their expectations.
- That has important implications for interest rates, oil, and global investing.
- Visit Business Insider's homepage for more stories.
If everything in America is starting to mirror its divided situation — its media, its favorite restaurants, its refrigerators somehow — it might not be a surprise that the market is doing it, too.
"It's almost like our markets are as polarized as our politics," said David Kelly, chief global strategist for JPMorgan Asset Management, in an exclusive interview on Wednesday. "There's no sensible middle. There are the Robinhood exuberants who buy mega-cap growth stocks, and then there are the sort of Armageddonists who buy long-term government bonds with negative real yields."
With votes still being counted as of Wednesday, it looked like the US was headed for two more years of divided federal government.
Solutions for the cultural and political gulfs aren't forthcoming and the fridge gap might have to remain unsettled, but Kelly says that the market's internal divisions should heal themselves.
"That's really a function of the uncertainty that we see with the pandemic and with the political situation. As that uncertainty diminishes, I think things will switch back," he said. "Most of the value in the market is in sort of the boring middle where you've got cheaper valuations."
If the split government does continue, Kelly says these trades should continue to play out over the long term.
(1) Betting against the dollar
While some sort of economic stimulus bill might finally happen in the next few months, it looks like Democrats' dreams of an aid bill worth $2 trillion or more are dead. That means weaker economic growth and a weaker dollar compared to other currencies, but Kelly argues that there are other contributors to that trend.
"If you have more predictable trade policy, it doesn't hurt emerging markets in anything like the way the trade war that broke out in 2018 did," he said. "If you have more calm than people don't use the dollar as a safe haven."
(2) Steeper curves, higher rates — in time
A bigger stimulus package would have boosted borrowing and interest rates in the near future and to a greater extent than a smaller one will. But Kelly says rates over the long term are still going to rise.
"Over time, the Federal Reserve will have to reduce its support to the federal government in terms of keeping the rates very low on the long end," he said. "I do think that you will see a steepening of the yield curve. I think long-term interest rates will go up somewhat."
When it does happen, Kelly says it's going to be a positive for the neglected middle he discussed earlier, as it will push investors toward less costly value stocks.
(3) Going global
Kelly says calmer international relations, a softer dollar, and reduced growth in the US will both encourage investors to look at non-US stocks, which have lagged behind American equities for more than a decade.
"That should amplify the return on international investments, and particularly emerging market stocks," he said. "One of the messages for this election is for people to make sure that they're diversified around the world and not just here in the United States."
(4) Spilling oil
Biden's comments about transitioning away from oil concerned some investors, and that might make it seem like the lack of a Democratic "blue wave" is bullish for oil. A weaker dollar also tends to boost oil prices by stimulating demand.
But Kelly warns that some of Biden's actions would diminish oil prices even if Republicans can block many of his plans. He'll have a freer hand in foreign policy and diplomatic areas, and could rejoin the Paris Climate Agreement and the Iran nuclear deal after Trump withdrew from both.
"You could see some movement towards things that I think would actually tend to push global oil prices down in that environment, with more emphasis on climate change, perhaps more supply of oil coming out of the Middle East," Kelly said.
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