One Man’s Opinion: Is The Current Recovery Driven By Leverage?

ManInvestors were focused on stocks outside the US last year and it’s very refreshing to see that balance to come back, said Richard Madigan, chief investment officer at JP Morgan Private Bank.

While investors can always look at Europe, Japan and some parts of Asia, they are over-thinking about growth in America. Growth in the US is slow and dynamic, and security valuations are high but not too bubbly. Most portfolio returns are going to be driven by equity market returns, he noted.

Asked if he preferred global equities to domestic stocks, Rich answered in affirmative. In the US, JP Morgan has been very focused on midcaps because the Merger & Acquisition-cycle has been incredibly constructive in that sector. About 92-93% of the M&A deals and transaction have been below half a billion dollars. The recent dollar strength plays into the deal cycle as well. Among the different sectors, investors can focus on that everyone’s talking about because of earnings; i.e. tech, health and consumer-discretionary, he observed.

Asked if investors should look at consumer discretionary stocks at all, since valuations have hit record levels, Rich said it is okay because investors need to learn to manage their expectations. It would be wrong to expect 20 percent returns between now and the end of the year.

With regards to relative earnings, stocks are doing okay and investors should be paid for earnings; second quarter earnings for S&P went up 11 percent excluding energy while index stock earnings went up three percent including energy. That’s great news coming from a market that was expecting those earnings to drop 3-4 percent and indicates the momentum is there, he argued.

Asked to comment on energy sector’s prospect, Rich said he’s not too optimistic about a price rebound and JP Morgan has stepped back from the sector. It has been incredibly difficult to have a fundamental view on energy stocks since pricing still very much revolves around market share; anybody competing for market share would not care much about price.

JP Morgan believes that’s net positive on the inflation front and puts less pressure on the Fed with a pass-through effect on growth, which is good news. Also, it would hopefully boost consumption, which has been missing for quite some time, he noted.

Asked when investors can expect consumption to revive amid record low interest rates, Rich said context is important and investors tend to lose sight on growth dynamic and the consumption dynamic. The economy is witnessing a tremendous deleveraging cycle. Leverage isn’t what is driving this recovery and that’s good news; that slow-and-steady dynamic is likely to keep this bull market running for the next two-to-three years, he observed.

Asked if the direction of the energy sector will dictate the overall market direction going forward, Rich said it depends how much prices fall. Energy prices are behaving like Chinese A-shares where investor’s don’t care unless they fall 25 or 30 percent.

Energy prices are already down 20 percent from their recent peak, and they are probably in the trading range of $10. If they fall dramatically from current levels, people will get nervous. In the current trading range, the markets can manage through, he concluded.

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About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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