JPMorgan’s chief strategist on why investors should reduce risk amid market distortions

• Indices rose on strong economic data and a big rate cut by the Fed.

• However, as markets eye a soft landing, potential shocks pose a greater risk to investors, says David Kelly.

• He says Americans should reduce risk and position funds away from growth stocks and toward value.

Strong economic data and a big rate cut last month fueled bullish sentiment, but investors should be careful not to add more risk, according to David Kelly of JPMorgan Asset Management.

The firm’s chief global strategist says the promise of a soft landing has encouraged Americans to invest in riskier assets at exactly the time they shouldn’t be.

“I will say that while I think this is positive for the stock market, I’m becoming more and more embarrassed that the stock market continues to price itself into a soft landing,” Kelly told Business Insider.

He said that as the market prices into a soft landing, valuations rise, meaning any shock to the market could cause asset prices to fall.

“Markets have gone up a lot and become more distorted, and because they’re more distorted and at higher valuations, they’re riskier,” he said.

At the same time, the wealth of the average American has grown. According to Fed data, the combined total wealth of American households has increased by about $50 trillion over the past five years. That means many middle-income households that couldn’t afford retirement a few years ago now can, Kelly says.

As a result, investors should not take on more risk than necessary, he says.

“It should reduce the risk. There’s no need to increase risk if you have enough money to do the things you want to do,” Kelly said.

Kelly was particularly cautious about keeping money tied up in high-flying growth stocks.

“At the point where I think logic would dictate that investors take a little bit of risk off the table, they’re passively allowing risk to accumulate on the table,” he said.

Instead, he advised investors to rebalance their portfolios, channeling funds away from growth stocks and into value, international and alternative stocks.

Kelly says the market has been trending toward a soft landing for some time, and Friday’s strong jobs report only strengthened the case. The report showed a drop in the unemployment rate from 4.2 percent to 4.1 percent, with 254,000 nonfarm payrolls added, beating past estimates of about 150,000.

The strong report dashed hopes for another big rate cut next month, with investors quickly downgrading the odds of a 50-basis-point move from 33% to less than 1%, according to CME’s FedWatch tool.

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Kelly acknowledged, however, that the data leaves room for error, so it’s possible that last month’s hiring looked weaker than it actually was and this month’s looked stronger than it actually was.

Regardless, he says the report validates that the U.S. has a healthy and strong labor market and that the economy is on “a very good landing path.”

Kelly expects the Fed to cut another 50 basis points over the next two meetings and another 100 next year.

In August, when a surprise rise in unemployment sparked a massive sell-off globally, Kelly told Business Insider that the Fed needed to do more to convey confidence in the economy.

Now, he says the Fed should continue to show confidence and show it can take its time cutting interest rates.

“The more the Federal Reserve appears to take its time and not be too concerned, the more it will help support confidence,” he said.

Read the original article on Business Insider