Salient to Investors:

David Kelly at J.P. Morgan Funds recommends a balanced portfolio because most investors are very conservative, bonds are expensive, and stocks are cheap. Kelly said:

  • Valuations are extreme, which only makes sense if you believe we are on the brink of a financial disaster. All we have to do is avoid the worst consequences of fiscal mismanagement.
  • The chances of a full fiscal cliff are extremely rare.
  • A too rapid drop in reducing the deficit will lead to recession.
  • Consumer discretionary and consumer cyclical sectors will be the biggest beneficiaries of any reduction in the full impact of the fiscal cliff because the effects will be felt first in the U.S. economy. Sectors more tied to the global economy, including industrials, materials and technology, will enjoy less of a boost from fixes to the cliff.

Stocks are too cheap to ignore. The forward P/E ratio of the S&P 500 is 14 versus 27.4 at the peak in December 1999 and the 15-year average of 17.4.

Tim Leach at US Bank Wealth Management expects GDP to grow 2% over the next year, which helps support earnings. Leach says the fiscal cliff comprises 2.5 percent of tax increases and 1 percent of spending cuts, with more give on the tax increase side – Less-than-full fiscal cliff means US equities will fare reasonably well. Leach expects enough active compromise after the election to lessen the full impact of the fiscal cliff.

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