A top JPMorgan strategist is warning investors that the biggest risk in markets is not what people expect, but where excess has quietly built up.
In a new Fox Business interview, JPMorgan Asset Management chief global strategist David Kelly says the stock market is pricing in too much optimism relative to the underlying economy, creating vulnerability if an unexpected shock hits.
Kelly begins by stressing that surprise, not forecasted risk, is what historically drives major market downturns.
“Something could go wrong. Frankly, something always goes wrong. People feel too gloomy about the economy, I get that. But I think the stock market is too rosy relative to the economy, and I think you need to take a middle ground, or a middle path if you’re going to invest wisely.”
Kelly points to history as a reminder that the most damaging events are rarely anticipated.
“If you think about this century, what’s really got you. It’s not stuff you expected. It’s stuff that you didn’t expect like 9/11 or the pandemic or the Great Financial Crisis.”
According to Kelly, investors can never know when the next major downturn will begin, but they can identify where risk is most concentrated.
“And so something like that happens that you never know the hour nor the day. But you do know the location.”
He says the next bear market will likely form around the most overheated corner of the market.
“The location of the next bear market is going to be centered on whatever is the most frothy and frenzied at the time. And people have been piling money into concentrated mega-cap growth stocks. If you’ve got too much of your money in there, spread it out a bit.”
He notes that diversification is a form of protection rather than a market timing tool.
“I think that having an appropriate asset allocation is a little bit like having home insurance. You never know when you’re going to need it, but you should never feel comfortable not having it.”
He closes by urging investors to rebalance even if markets continue to push higher.
“You don’t know when this thing is going to crest, but you can see some froth. You realize there’s some imbalance here. So just make sure you’re balanced, even if the market isn’t.”
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