Despite the recent run-up in stocks JP Morgan is sticking to their ultra bullish outlook. To their credit they’ve nailed the reflation and recovery trade and they see most of the big macro trends continuing in the quarters ahead. They say the recovery has broadened in recent months and the risks to their current outlook currently lie to the upside:
“We started the year with two major themes—the recovery trade and the asset reflation trade—joined by smaller ones around growth gaps between regions and sectors, as well as pressure on sovereigns. The recovery trade depended on investors steadily raising growth forecasts. That has happened. Our own forecasts for world GDP growth in 2010 were higher and have not changed for over six months, but the recent broadening of the recovery across regions and sectors gives us now modest upside risk. More importantly, it reduces the risk that the recovery will falter.”
They think economic growth will continue to be bolstered by accommodative Fed policy as inflation remains very low and the Fed remains on hold throughout the year:
“A major part of our economic forecast was that core inflation in developed economies would come down faster than consensus. That also has happened. We retain the view that core inflation in Europe and the US will hover between zero and 1% this year and next, keeping monetary policy on hold through early next year.”
They see the equity market rising 20% by year-end:
“In our year-end J.P. Morgan View, we projected 20% returns in 2010 for equities, 12% for hedge funds, 10% for high-yield, 9% for EM currencies vs. USD, 3% for HGbonds, 2% for government bonds, and flat for commodities. Year-to-date returns for the first quarter show we are pretty much on track. Of our top 10 trades we recommended then (see here), eight worked—the ninth was a short in agencies and MBS (no return) and the 10th was long USD versus EUR and JPY (a loss). For the remainder of this year, we stay with these return forecasts, except in commodities, where we now expect high single-digits for the rest of 2010.”
Source: JP Morgan
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.