Policy Fog Could Threaten Market Outlook, Economist Warns

Despite two strong years for markets, investors are flying into 2025 with reduced visibility. 

Speaking at the Exchange conference in Las Vegas, Dr. David Kelly, chief global market strategist at J.P. Morgan Asset Management, warned that a confluence of political and economic uncertainties could weigh on growth in the months ahead.

“We have now entered a period of extraordinary policy uncertainty,” Kelly said. “The election last November, particularly because Republicans swept the House and the Senate and the White House—they are in control and able to make big changes in policy.”

Kelly made clear that his comments were not political but economic. “It is not our job to tell people what to think about politics. It is our job to try and help people make the best decisions. But part of that is understanding the fog of policy right now and how some of these policies could change the environment.”

Economy Holding Steady—for Now

Kelly said the U.S. economy is on relatively solid footing despite the policy headwinds.

“We had 2.5% [real GDP] growth [in 2024], we had zero recessions, [and] inflation came down to about 2.5% year over year,” he said. “Unemployment ended up at about 4.1%, so a little hotter than we expected but pretty much on track.”

Kelly argued that inflation has cooled not because of the Federal Reserve’s aggressive rate hikes but because the U.S. is “fundamentally not an inflation-prone economy.”

“This economy does not respond very much to interest rates at all,” he added. “So what happened was the Federal Reserve raised interest rates—they didn’t kill the economy, but inflation died anyway.”

Consumers and Immigration Prop Up Growth

Kelly emphasized the strength of the American consumer, saying, “American consumers are extraordinary. They do not stop at the limits of income. They do not stop at the limits of credit. You have to take the credit card away—or else they’ll just [keep spending].”

Real wage gains, he said, have helped bolster consumption. “We have now had 22 consecutive months [where] the year-over-year growth in average hourly earnings has been higher than the year-over-year growth in CPI.”

Kelly said immigration has been another growth engine. “Back in March of 2022, there were 12 million job openings in this country,” he said, and people were asking, “Where are we going to find the workers?”

“Then [we got] this surge of immigration over the southern border, and that gave us the extra workers. Most of the job growth we’ve seen in the last four years has been filled by people who were not born in the United States.”

But that dynamic is changing. 

“Unauthorized immigrants coming over the southern border [have] collapsed,” Kelly said, pointing to recent border enforcement efforts. “If you net out deportations and cut legal immigration, you’ve got a shrinking working-age population—and that will tend to crimp growth.”

Tariffs, Cuts and Slowing Growth

Kelly also expressed deep concern about rising tariffs, pointing out that, as an economist, he doesn’t believe in tariffs. 

“Tariffs raise unemployment, they reduce output, they raise inflation, they reduce productivity, they reduce corporate profits, they increase inequality and they cause global tensions. I mean, apart from that, they’re fine,” he said.

The average U.S. tariff rate, he noted, has risen to 6.2% this year from around 2.5% under Biden, and likely will go higher after new retaliatory measures kick in.

On the fiscal side, Kelly cited aggressive workforce reductions at the federal level: “They’re going to cut about 300,000 jobs this year out of 3 million. That is a huge drop.”

Taken together, these factors could produce a downturn in the first half of the year. “I believe that we could still get a negative number for GDP for the first quarter. I think we get a small [positive number] for the second quarter,” Kelly said. “[Then] growth will probably pick up in the second half of the year—if these policy changes settle down.”

Fed Will Move Slowly

Kelly said the Federal Reserve is in a tough position as it waits for policy clarity.

“The Fed is terrified of cutting rates and then watching us put too much sugar into the economy going into 2026, reigniting inflation,” he said. “They’re going to take their sweet time—even in a weak economy—to cut rates.”

He added, “Personally, I think they won’t cut before June unless the economy really deteriorates. And if the economy looks like it’s going to muddle through and you have a big stimulus bill coming in Congress, they may only cut one time—or not at all—this year.”

What It Means for Investors

Kelly encouraged investors to stay invested—but to be selective and intentional.

“There’s nothing wrong with fixed income in this environment,” he said. “I don’t think these yields are much too low. I don’t think they’re much too high. But I would be active within fixed income.”

As for equities, Kelly pointed to high valuations among large-cap tech names as a source of risk.

“The risk is not in the market overall. It’s in the concentration of the market,” he said. “Remember the movie 'The Magnificent Seven'? Only three of them were alive at the end."

Kelly also reiterated the case for global diversification. “The U.S. is still 66% of global stock market capitalization. How many [investors] are overweight international? Not many.”

Brains Over Bravery

In closing, Kelly offered some investing wisdom:

“When the markets are high, that’s when you need brains. I still think it’s a good time to invest—but it’s a time to invest thoughtfully. The markets are high. The economy's been good. People aren't as scared perhaps as maybe they should be. 

"But I've always believed that in investing, you need two things: You need courage and you need brains—but you need them in different contexts at different times.

“When you're in the depths of a bear market, all you need is courage. This is a no-brainer: The economy is going to come back, and the markets will come back with it. When the markets are high, that's when you need brains.

“And that’s why I think everything that’s going on in this industry—in terms of the evolution of sophisticated, active ETF solutions to allow investors to invest in a tax-efficient way, in a transparent way, in a way that is lower fee, lower cost, flexible—all these things are great in helping people be more thoughtful about how to invest.”