The prospect of Western military intervention in Syria has rattled the markets, sending oil and gold prices higher, driving down the value of emerging-market currencies and stocks and unsettling the stock and bond markets in the United States.
In Washington, the fiscal clock is ticking toward two irksome deadlines. At the end of September, the federal government will run out of money unless Congress takes action, and even if it does, the government will hit its debt ceiling in mid-October, the Treasury says. At that point, unless there is a meeting of the minds in Congress and the White House, the United States won't be able to pay all of its bills, and it could default on its debt.
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And in mid-September, the Federal Reserve is widely expected to begin reducing its $85 billion monthly purchases of fixed-income securities, in a move known as "the taper." Longer-term interest rates have already begun to rise in anticipation.
The prospect of Fed action has sporadically unsettled the markets, playing a role in the sell-off of emerging-market debt and raising fears of a vicious feedback loop, in which bond prices, currencies and the real economies in countries like India, Turkey and Indonesia plummet and threaten to spread contagion elsewhere around the world.
This is not a pretty picture, and Mr. Kelly doesn't claim that it is. "We could have some very difficult moments," he said. "The one thing you can expect is volatility."
But in a trenchant summary of the prospects for investing under current conditions, Mr. Kelly said last week that the global economy had improved considerably since the collapse of Lehman Brothers five years ago. The economy is "more balanced" today, he said, with developed countries like the United States regaining strength and the world no longer needing to rely so heavily on growth in countries like China, India, Indonesia and Turkey.
(Read more: Cashin: These Fed comments hit me 'like a 2-by-4')
Most important, relatively low interest rates have made stocks, as an asset class, more attractive than bonds. And he says "this should remain the case" even if interest rates rise over the next few years, as expected.
To be sure, people holding long-term Treasury bonds should expect to bear some losses if interest rates rise. (As I've noted recently, rates and bond prices move in opposite directions.) Ben S. Bernanke, the Fed chairman, has said that rates are likely to rise; that's another way of saying that bond prices are likely to fall further, so investors should consider themselves forewarned.
But Mr. Kelly says that most investors shouldn't be holding only long-term Treasuries — or only domestic stocks, or only cash, for that matter. "If you perceive that risk is rising, then you need to be extremely well-diversified, because no one can predict which asset will rise and which will fall in any given time," he said in a conversation last week.
He advocates investing based primarily on valuation, buying assets that are cheaply priced and are likely to rise, rather than on momentum, buying assets whose prices are already rising. Momentum works for a while — until the momentum shifts, which could happen at any time, leaving investors with overvalued assets that they may have to sell in a market rout. "That's not a very attractive strategy," he said.
Current valuations suggest that developed-market equities are a better buy than developed-market bonds, Mr. Kelly said, and will remain so for several years even if interest rates rise. One valuation measure points this out: the difference between the yield on 10-year sovereign bonds, like United States Treasuries or German Bunds, and the earnings yield on equities. (The earnings yield is earnings per share divided by the current share price; it is the inverse of the price-to-earnings ratio, or P/E.)