The U.S. economy is in the seventh year of economic expansion, but it is the slowest expansion since the 1950s, J.P. Morgan Funds' chief market strategist David Kelly said.
Kelly, who lives in Boston, compared the economy to a basebell game between the New York Yankees and Boston Red Sox.
"It's very long because it is very slow," he told more than 2,000 investors and financial advisors at Morningstar Investment Conference in Chicago Thursday.
Corporate profits are being suppressed by a high U.S. dollar and cheap oil, Kelly said. The dollar is overvalued because the U.S. economy has a trade deficit while Europe, Japan and emerging markets collectively have surpluses.
"There is a global currency war going on, and we are pacifists," Kelly said. He expects the trend to limit further dollar gains, even when the Fed raises rates.
Oil prices will gradually move up as production falls and consumption rises, Kelly said.
"We are genetically evolved to waste gasoline, this is what we want to do as a people," he said. "And when the prices gets low enough, we will do that. But you can't do much of that immediately."
For the first five months of this year, more than 55 percent of the light vehicles sold in the U.S. sales were minivans, light trucks or SUVs, the highest it has been in a decade, Kelly noted. Meanwhile, oil companies have scaled back their production.
If the dollar stops rising, labor market tighten and oil prices move up, Kelly expects core inflation to increase gradually. He sees the Fed as more hawkish on raising rates than the market expects.
The Fed's Open Market Committee will have a "half-fast monetary tightening," he said, raising rates at two out of the four meetings this year and at four of the eight meetings next year. But rising rates will not explode the deficit nor have a predictable impact on the dollar, he said.
Kelly expects the U.S. economy only to grow about 1.5 percent over the long run. He said we are not in a Goldilocks market, but a "Goldilocks' grandmother's" market ... "not too hot, not too cold, not too fast."
Bear market conditions are not in place, Kelly said. None of the four triggers he looks for are happening now: There is not a recession, a huge spike in commodity prices, aggressive monetary tightening by central banks or extreme market valuations.
But in the next two years, the U.S. economy will run out of growth, Kelly said. He doesn't expect the next five years of returns to be as good as the past five years.
Where does that leave investors? "When cash pays you nothing, get invested in something," Kelly said.
But investors have to be "very careful" where they put their money, Kelly warned. He sees opportunities in emerging market stocks as well as stocks in sectors of the economy that are helped or at least not hurt by rising rates, such as technology and finance. For bonds, he recommends investors diversify across fixed income markets, including bonds in Europe and emerging markets.
"In the middle of a bear market, really all you need is the courage [to invest]," Kelly said. "When markets are high, lots of people have the courage, but it is the brains that are needed."