JPMorgan Chase warns: the market is becoming more distorted, investors should reduce risk exposure!

Strong US economic data and the significant rate cut by the Federal Reserve last month have boosted market optimism, but David Kelly, Chief Global Strategist at JPMorgan Asset Management, warns that investors should be cautious about increasing their risk exposure.

Kelly said that hopes for a soft landing have led Americans to flock to higher-risk assets when they should not be taking on more risk.

"While I think this is positive for US stocks, I am increasingly concerned about the ongoing pricing of a soft landing for US stocks," Kelly said.

He noted that as the market prices in a soft landing, valuations rise, which means that any market shock could lead to a sharp drop in asset prices.

"The market has risen significantly and become more distorted. Because they are more distorted and at higher valuations, the risks are greater," he said.

Meanwhile, the wealth of ordinary Americans has surged. According to Federal Reserve data, total household wealth in the US has increased by about $50 trillion over the past five years. Kelly pointed out that this means many middle-income families who could not afford retirement costs a few years ago can now afford them. Therefore, he believes investors should not take on more extra risk than necessary.

"They should reduce risk. If they already have enough money to do what they want to do, there is no need to increase risk," Kelly said.

Kelly is particularly cautious about funds continuing to stay in high-growth stocks. He said, "Just when I think logically investors should slightly reduce some risk, they passively allow risk to accumulate."

Instead, he advises investors to rebalance their portfolios, shifting funds from growth stocks to value stocks, international stocks, and alternative investments.

Kelly said the market has been trending towards a soft landing for a long time, and last Friday's employment report further reinforced this. The report showed that the US unemployment rate dropped from 4.2% to 4.1%, with non-farm payrolls increasing by 254,000, far exceeding the expected 150,000.

This strong report nearly dashed hopes of another significant rate cut by the Federal Reserve next month. According to data from the CME FedWatch tool, investors quickly reduced the likelihood of a 50 basis point rate cut from 33% to less than 1%.

However, Kelly acknowledged that there is room for error in the data, so last month's employment situation may have been weaker than actual, while this month appears stronger than actual.

In any case, he said the report confirms that the US has a healthy and robust labor market, and the economy is heading towards a "very nice soft landing path."

Kelly expects the Fed to cut rates by 50 basis points at the next two meetings and another 100 basis points next year.

Back in August, an unexpected rise in the unemployment rate triggered a massive sell-off in global US stocks. Kelly pointed out that the Fed needs to do more to convey its confidence in the economy.

Now, he says the Fed should continue to show its confidence and demonstrate that it can take its time to cut rates He said, "The more the Federal Reserve appears to be in no hurry to act and not too worried, the more it will help support confidence."