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How Do Banks Make Money?
Banks make money on the services they provide. They earn money by charging customers interest on various loans and through bank fees. As hubs for money and financial services, banks deal with lending money and keeping it secured for their customers, but how do banks make money? Much like any other profit-driven business, banks charge
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Buy Value Stocks, Says J.P. Morganâs David Kelly
An interview with the chief global strategist at J.P. Morgan Asset Management.
Whatâs your stock market outlook for the second half? Itâs a particularly challenging year, but Iâm reasonably optimistic. The major concerns this year have been about inflation, the Federal Reserve raising rates very rapidly and the possibility of recession. We donât know about geopolitical events, whether in Ukraine or other situations that will flare up. But I think economic growth can moderate without going into recession, I think inflation can moderate, and I think the Federal Reserve will cool its tone. That should make it a reasonably positive second half for U.S. stocks.
- SEE MORE Midyear Investing Outlook: Where to Invest Now
Whatâs your forecast for the economy and inflation? By the fourth quarter, I expect economic growth, adjusted for inflation, of less than 2.5% year-over-year; by the fourth quarter of next year, less than 2.0%. So I think the economy will grow, but at a much slower pace. On inflation, we expect the consumer price index to be back to 4.3% by the end of this year, 3.5% by the end of next year. Why do I think inflation is going to come down? Because there really is such a thing as transitory inflation. It was caused by the pandemic and the policy response. The pandemic is fading, and supply chains will improve. A lot of the money poured into the economy in terms of fiscal stimulus over the past two years is drying up. That money pushed up demand for a lot of goods. With less demand, inflation will naturally fade.Â
Why are you convinced weâll skirt a recession? Despite the two extraordinary recessions weâve seen since the start of the centuryâthe pandemic recession and the great financial crisisâI think the volatility of GDP has fallen. Itâs quite difficult to get a normal recession going. Thereâs a huge excess demand for labor, and that momentum will keep the economy out of recession. The unemployment rate will drift down to 3.3% by the fourth quarter of this year, which will be the lowest in 70 years, and to about 3.1% by the fourth quarter of next year.
- SEE MORE The 22 Best Stocks to Buy for 2022
Are U.S. corporate profits in good shape? It is tougher for corporations in general. It looks like operating earnings will be up about 7% to 8% in the first quarter compared to the same period last year. Thatâs representative of what weâll see this year. We saw huge gains in earnings last year. Profits are extremely high, but itâs very hard to grow them from here. And companies are facing pressures. A rising dollar hurts the value of overseas earnings. Also, youâve got rising wage costs, rising interest costs. So earnings overall will be growing more slowly. But within the market there are stocks that are cheap relative to earnings and others that are expensive. Looking at valuations is going to be much more important in the second half of this year and beyond. Investors will be a little more parsimonious about what they buy. But within the market there are plenty of opportunities.
How should investors position their portfolios? The first thing investors should do is look in the mirror. We had huge gains over the past three years. If you didnât rebalance, the good news is that youâve got a lot more money. The bad news is that youâre heavily overweight in large-cap growth stocks. Is that where you want to be? People have to look at how the environment has changed and make sure their portfolios are aligned appropriately in terms of risk and expected return. How much risk do you want to take?
In terms of where the opportunities are, valuations give you the answer. Value-priced stocks in general are selling at a steep discount to growth-oriented stocks. Over the past 25 years, the price-earnings ratio on value stocks has averaged 72% of that on growth stocks. Now itâs averaging 60%. People have been piling into mega-cap growth stocks. But the more sober world of 2022 and possibly 2023 will cause those valuation gaps to narrow. Similarly, international stocks in general have rarely looked as cheap as they do today compared with U.S. stocks. A lot of people are very underweight in international stocksâthis is a good time to load up. You can get double the dividend yield you can get in the U.S., and youâre buying at much better valuations.
When you talk about international investing, where do you mean? Both Europe and China. Europe is cheap. Itâs threatened by whatâs going on in Ukraine and by high energy prices that will slow the European economy. But one silver lining to the very dark cloud of Ukraine is that it has pulled Europe together. The pandemic helped pull Europe together also. Weâre seeing more common fiscal policies. In the end, Europe will get through its energy problems and get back on a path of moderate growth. European stocks are so cheap that thereâs a big opportunity there. The worldâs value play is European stocks. China is a different situation. China has taken a huge hit. There will be a bumpy year as China gets through its COVID vulnerability. But financial assets are long term, and China has got a lot of growth potential. Chinese stocks look very cheap relative to the rest of the world.Â
- SEE MORE The 10 Best Stocks for a Bear Market
What other pockets of opportunity do you see? Small-cap stocks could do well. They tend to do well when the economy is bouncing out of recession and do poorly when itâs threatened by recession, but I think we can avoid a recession here. Again, small-cap value looks cheap relative to small-cap growth.
What about inflation hedgesâstill a good strategy? The inflation threat may be receding a bit, but some exposure to commodities and parts of the real estate market is okay. And equities overall are an inflation hedge relative to fixed income or cash. A lot of people are tempted to buy Treasury inflation-protected securities. But the yield on 10-year TIPS is negative in inflation-adjusted terms. Basically, you give the government money for 10 years, and at the end theyâll give you less purchasing powerânot a great deal.
Whatâs ahead for fixed-income investors? People can feel more comfortable investing in fixed income than they could at the start of the year. Then, we had a 10-year Treasury yield of 1.5%; now, weâre closer to 3%. That gives you a better stream of income. And the Federal reserve is going to turn less hawkish over the next few months, reducing the risk of a big sell-off in bonds. I would still underweight fixed income relative to stocks, but Iâd only have a slight underweight rather than a significant underweight, which is what Iâd have had at the start of 2022.
Anything to add? I would emphasize to investors to think carefully about the actual value of the company or the assets youâre buying. Weâve had years in which meme stocks have done well, cryptocurrencies have done well. Thereâs a lot of excitement in these spaces. But in the end, thereâs a lot of smoke and mirrors in the crypto space. To be honest, I think itâs mostly nonsense. Itâs important for people to invest in companies that have a real product, a real good, a real service, a real cash flow being generated. Thatâs how you build a portfolio for the long run. The last few years have been great for fads. I donât think the next few years will be.
The Impact of Aging in Place on the Housing Market and Younger Generations
With the two biggest generations, Baby Boomers and Millennials, competing for space in America’s housing market, inventories of available homes have been affected drastically. But what does this mean for future generations when Boomers eventually start vacating their homes?
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Economic Recession – Definition, Causes & What Happens to Employment
Bull vs Bear Markets & What They Mean for Investors
If youâre curious about investing, or if youâve ever heard investors talking about how the market is doing lately, you may have come across the terms bull market and bear market. These two phrases describe the way that the market is trending â a bull market is generally trending upward, and a bear market is
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[Targeted Offer] Bank of America Cards: Extra 2x Everywhere Through December 2022
The Offer Check your emails for the following deal: Get an extra 2x points/2% back per dollar spent everywhere through December 31, 2022. Our Verdict Reader @capcalhoon got this on the Travel Rewards card and reader JJ on the Customized Cash Rewards card. I’m not sure how widely this offer was sent out. On almost […]
Simple vs. Compound Interest: How to Tell the Difference
Simple interest is calculated based only on the principal balance, whereas compound interest is calculated based on the principal balance and the accumulated interest from the previous periods. This means compound interest will make the amount owed grow at a much faster rate than simple interest. One of the first things you learn when it
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Off-the-wall things my family has done to earn more points and miles – The Points Guy
Whatâs the Average Student Loan Interest Rate?
With college tuition on the rise, students may take out student loans as they pursue their education. Student loans come with interest and sometimes other loan fees. As you repay student loans, that interest can add up. While there are options like scholarships, grants, and work-study, sometimes student loans can be necessary to help students […]
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