Conflicted lines

(Runtime: 5:00. Read the audio transcript.)


Gaining clarity on potential investment opportunities hinges on anticipating Federal Reserve moves in the coming months, says Jack Manley, vice-president and global market strategist with J.P. Morgan Asset Management.

“That, to me, is the linchpin. It’s the one thing everybody’s got to have a view on,” he said. “If you’re trying to have a view on global markets [or] economies, you have to be able to have some sort of clarity on Fed policy.”

He acknowledged the futility of trying to get too granular with predictions, but said careful analysis of economic data could offer a big-picture view of when rates are going to move lower and by how much.

“If you have a firm or firm-ish idea on interest rate policy — not just over the next six months, but over the next two, three, four years — then you can have some clarity on what money is going to cost,” he said. That will lead to insights on the potential for consumption, investment, valuations, future earnings, growth expectations, future coupons and the role of duration.

He said U.S. interest rate policy influences rates around the world, particularly from a currency perspective.

“We are dealing with a world where the U.S. dollar is king, and has been for a very long time,” he said. “And many countries are very sensitive about their currency weakening even more.”

While some central banks — notably in Europe and Canada — have begun lowering rates, many others will take their cues from the Federal Reserve.

“Once the Fed starts to go, it is going to function as a black hole,” he said, “and many other countries around the world are going to get sucked into that gravity and be forced to lower interest rates as well.”

Manley said the year so far has been characterized by unexpected resilience in the U.S. economy and slower-than-expected acceleration in other developed economies.

It’s a departure, he said, from what some analysts were calling for — global economic convergence.

“We’re still heading towards the middle. It’s just not nearly as profound as what we would have expected only a few months ago,” he said. “The U.S. is slowing down a lot less than we thought, and the rest of the world is speeding up a lot less.”

Market risks on the horizon include worsening geopolitical strife, stability risks in emerging markets, and the potential failure of AI to live up to its promise.

“So much of this equity market has been driven by AI exuberance,” he said. “If AI does not do what it’s supposed to do … then we’ve got to figure out what the next thing may be that can help to support valuations. And if we don’t, the market may sell off.”

He said the reality is that even if AI fundamentally transforms the world, it’s going to take time.

“It’s not going to do that tomorrow, or next week, or probably even next year,” he said. “And so now investors are looking at the equity market, seeing the returns that have come over the last 18 months or so, and [are] wondering, did we get a little bit too excited about this?”

Manley said there are plenty of names beyond tech that offer quality at a reasonable price.

“This is a great market for active managers,” he said. “There are another 490-plus names out there in the S&P 500 alone; large-cap U.S. core equities that haven’t really done a whole lot of anything over the last 18 months.”

Best of all, he said, many offer dependable and sustainable earnings growth, as opposed to projections of what may be coming down the pipeline.

As for reasonable valuations, Manley said, “south of 21 times forward earnings probably is a good place to start.”


This article is part of the Soundbites program, sponsored by Canada Life. The article was written without sponsor input.

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