For investors, all of this suggests the potential for volatility in the short run. However, it is also important to think about the economic environment over the next few years. This will be an environment of fading fiscal stimulus hurting consumption, higher mortgage rates clobbering housing, slow profit growth inhibiting investment and a high dollar and overseas weakness hurting exports.
This will very likely mean slow economic growth and sliding inflation and, when the public becomes more fearful of recession than inflation, the Fed will likely slowly return to the more accommodative policy which it maintained in the decade following the Great Financial Crisis. This should provide a positive backdrop for both stocks and bonds. However, any surge in volatility between now and then could lead to an even greater investor focus on defensive positioning and valuations which could favor long-duration bonds, value stocks and income-generating alternatives over more aggressive investments.
David Kelly is chief global strategist at JPMorgan Funds.