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Thursday, March 28, 2024

3 Key Asset Classes That Are Mispriced

Dr. David Kelly, Chief Global Strategist, J.P. Morgan Funds, believes three assets are currently and temporarily mispriced: oil, the US dollar and bonds. He suggests that interest rates will be raised in June. Although cheap oil is suppressing inflation, Kelly argues, the Federal Reserve recognizes this as a temporary phenomenon and will "continue to prepare for a long-overdue monetary normalization."

3 Key Asset Classes That Are Mispriced

By Dr. David Kelly

Oil is in the basement, the dollar is in the attic and the bond market’s sleeping in. In short, the house of financial assets is a house of confusion. While the passage of time and a steady flow of new data should restore some order, this progress could yet be halted or even reversed by significant geopolitical distractions. However, for investors, it is both important to understand the market’s mispricing of key asset classes and logical to invest on the assumption that the gravitational forces of macroeconomics and supply and demand will gradually bring markets to heel.

[…]

More jobs with rising wages should keep the Federal Reserve on track to begin to raise interest rates in June. Indeed, the only domestic fig leaf for a more dovish stance is the increase in labor force participation seen in this January report. This is improving with a 1.1% gain in labor force over the past year, more than the previous five years combined.

However, it is crucial to recognize that this is a temporary effect…

[…]

Oil prices are also being watched closely as surging short-term supply interacts with long-term fundamentals. For the moment the former seems to be having a bigger impact. However the reality is that while the world is currently producing excess oil, both production and consumption trends are calibrated to oil selling at over $100 a barrel. A sudden drop in prices to half that level will inevitably affect supply and demand. As just two examples of this, in January the share of U.S. light vehicle sales accounted for by relatively gas-guzzling light trucks reached 55.8%, its highest level since June of 2005, while employment in oil and gas drilling, which has boomed in recent years, fell by almost 1% in the month of January alone.

(my emphasis)

Full article: 3 Key Asset Classes That Are Mispriced – Barron's.

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