All of us would like to know what the future holds. Unfortunately, predicting the future is not something most investors are very good at, at least in the short term. The share market is supposed to be a rational market mechanism. And it does function that way, most of the time. But, as the old saying goes, 'markets can remain irrational longer than you can remain solvent'. Hence why making short-term bets usually doesn't work out that well. But there are some investors out there that are usually worth listening to when it comes to what the economy and share market have in store all the same. Warren Buffett is one, Ray Dalio is another. And Jamie Dimon is a third.
Mr Dimon is head of JPMorgan Chase & Co (NYSE: JPM), one of the largest banks in the United States, and the world for that matter. Mr Dimon has amassed a reputation as a stellar leader, CEO and investor over the years. And that's why his latest letter to the shareholders of JPMorgan is well worth a read.
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Dimon: US economy looks set to boom
In this letter, Mr Dimon lays out why he thinks the US economy is set for some good days ahead. Here's some of what he had to say:
I have little doubt that with excess savings, new stimulus savings, huge deficit spending, more QE, a new potential infrastructure bill, a successful vaccine and euphoria around the end of the pandemic, the U.S. economy will likely boom. This boom could easily run into 2023 because all the spending could extend well into 2023.
A booming US economy will of course be great news for Australia and the rest of the global economy. As the largest economy in the world, what happens in the US tends to spill over into other markets.
Inflation and rates
But if you think a booming US economy might be good news for ASX shares, Mr Dimon threw in a caveat:
Conversely, in this boom scenario, it's hard to justify the price of U.S. debt… the increase in inflation may not be temporary and may not be slow, forcing the Fed to raise rates sooner and faster than people expect…. Also in this case, the cost of interest on U.S. debt could go up fairly dramatically making things a little worse.
So he's telling investors that all will go well unless the US Federal Reserve is forced to raise interest rates earlier and more rapidly than is currently expected. Not only will rising rates have the potential to derail an economic boom, but they will also almost certainly result in lower US stock prices. And if US rates rise, you can probably bet our own Reserve Bank of Australia (RBA) will have to follow suit.
However, Mr Dimon argues that that is not necessarily a given. Here's his outlook for US shares:
While equity valuations are quite high (by almost all measures, except against interest rates), historically, a multi-year booming economy could justify their current price. Equity markets look ahead, and they may very well be pricing in not only a booming economy but also the technical factor that lots of the excess liquidity will find its way into stocks.
Whatever happens, it certainly looks like we ASX investors are in for an interesting couple of years ahead.
