The current environment is proving to be a very complicated time for investors, but active management may be a solution for capturing timely opportunities.
The economy has been strong during the past few years, as the economy recovered well coming out of the pandemic. However, there are new challenges that advisors need to contend with, Dr. David Kelly, chief global market strategist, J.P. Morgan Asset Management, said at Exchange.
There is a lot of discontent with inflation, Kelly said. To some extent, inflation and interest rate concerns had subsided, lending to two great years for financial markets, particularly U.S. ETFs. However, the U.S. market has now entered a period of extraordinary policy uncertainty, Kelly said.
Dr. David Kelly on Fixed Income Opportunities
Looking at fixed income markets, Kelly said he doesn’t expect to see any rate cuts before June, unless the economy really deteriorates. The most important takeaway for investors is that there’s nothing wrong with fixed income in the current environment.
“I wouldn’t be underweight fixed income, but I would be active within fixed income,” Kelly said. “You can passively buy the [Bloomberg U.S. Aggregate Bond Index]. The problem is you’re leaving out an awful lot of great stuff in terms of high yield, emerging market debt, municipal bonds, or asset backed securities.”
“There are all sorts of ways of packaging a better bond portfolio than just a passive fixed income portfolio,” Kelly added.
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Active May Offer Advantages in Equities
Looking at equities, the risk is not in the market overall, Kelly said. It’s in the concentration of the market. The top 10 stocks still have near record-high valuations despite coming off a lot in 2025 to date.
This environment calls for active management, Kelly said, as he expects the same 10 stocks will not power the market forever. It’s important to not overlook the level of concentration in the market right now.
“We know not the hour nor the day, but we do know the place that a bear market occurs,” Kelly said. It’s concentration, he added, as the names that had the highest valuations in the bull market face the largest risks.
“We had a correction this year. Maybe this correction is over, we will see,” Kelly said. “But that correction was concentrated on things that had the most fluff and euphoria, and that’s still the case.”
Additionally, Kelly sees opportunity in international stocks. The U.S. still comprises 66% of global stock market capitalization, but investors should not be heavily underweight international exposure in the current environment.
“Much of the risk is concentrated around U.S. policy,” Kelly said. “If the U.S. dollar looks too high, people should have an international portfolio.”
Finally, JPMAM believes in alternatives. The ETF industry is expanding, and alternatives are also expanding, according to Kelly. Alternatives can be used in the current environment to increase returns, generate more yield, and enhance portfolio diversification.
The evolution of sophisticated, active ETF solutions allow investors to invest in a tax-efficient, low-cost, and transparent way, according to Kelly.
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