Quarterly Coordinates
By: Cameron Diehl, CFP®
Friends – Raymond James Chief Investment Officer Larry Adam recently hosted the firm’s “Quarterly Coordinates” webinar where he shared an update on markets as we continue to emerge from the pandemic. In his presentation titled “Resilience is in our DNA – and in the Markets” he covered a number of topics ranging from the economy, equity markets, interest rates, inflation and overall recommendations for clients.
I’ve summarized some of his key points below. You can also view a replay of the full presentation by clicking here.
- Introduction: COVID-19 Update – The world has grappled with the COVID-19 pandemic for more than a year, but the dissemination of multiple, effective vaccines is mitigating the health crisis. In the US, the rate of inoculation has vastly improved from the start of the year, and in light of improving trends, many states have gradually started to rollback restrictions.
Bottom Line: The improvement in the COVID-19 situation throughout many parts of the world has expedited expectations for the global economic recovery and a sustainable reopening. - Economic Recovery: A Policymaker Experiment – Governments and central banks acted quickly to avoid the worst case scenario for economic fallout as a result of the outbreak. In response to the shortest, steepest recession in US history, both the Federal Reserve and Congress undertook unprecedented action and injected record levels of stimulus into the economy.
Bottom Line: With ample fiscal stimulus in support of consumer spending, an accommodative Federal Reserve, and the ongoing improvement in vaccine dissemination, the US economy is poised for better economic activity than previously expected and could post the best year of economic growth since 1984. - Fixed Income: Catalysts Repelling Yields From Moving Higher – Expectations of a supercharged economy and a modest uptick in inflation have led Treasury yields to rise back to pre-pandemic levels. However, the upside will be limited due to ongoing Fed purchases, healthy demand from foreign investors, and the interest rate sensitivity of the economy.
Bottom Line: The return profile of fixed income will remain challenging in a rising rate environment, therefore we maintain our preference for quality and keep our bias toward investment grade over high-yield bonds. Dollar-denominated emerging market bonds may also benefit from our expectation of a weaker dollar. - Equities: Earnings Under the Microscope – Multiple expansion due to optimism surrounding the economic recovery has led most major indices to record high levels. Moving forward, a substantially better earnings environment should lead the equity market higher over the next 12 months. Near-term volatility will be driven by inflationary fears, but history suggests inflation within our base case range will not halt the market’s momentum.
Bottom Line: Fundamental analysis remains critical, and our favored sectors – Info Tech, Communication Services, Financials, Industrials, and Consumer Discretionary remain attractive due to visible earnings growth and attractive valuations on a relative basis. Beyond the short term recovery run, these sectors have long-term secular growth trends intact. - International: Testing Our Theory of Relativity – Given its superior vaccination progress, state of reopening, and aggressive policy stimulus, the US economy is experiencing the highest upward revisions to GDP forecasts amongst the world’s ten largest economies.
Bottom Line: While we maintain our bias toward domestic equities, Asian emerging markets are the least expensive region on a relative basis, and a substantial economic rebound in both China and India should drive those markets as well. - Commodities: Supply & Demand on the Same Wavelength – Global oil demand has gradually improved due to the reopenings across the globe, with oil prices finally returning to pre-pandemic levels this year. However, now that oil prices are higher, it incentivizes producers in the US, OPEC, and Russia to increase production from the levels that have been on hold.
Bottom Line: The demand driven price momentum is likely to be tempered by rising supply, therefore oil prices should only modestly increase from current levels. - Asset Allocation: Chemistry as a Foundation –Market volatility is likely to be more palatable in the year ahead in comparison to last year, but pullbacks remain a healthy occurrence in the equity market. Inflation fears, investor exuberance, partisan politics, geopolitical tensions, and vaccine-evasive variant strains are likely catalysts for near-term volatility in the months ahead.
Bottom Line: Adherence to asset allocation parameters, fundamental analysis, and selectivity at the sector, industry, and individual stock level are critical as we begin the second year of this bull market.
If you have any questions about this presentation or how to apply Larry’s insights to your personal planning and investing, please don’t hesitate to reach out. I’m always happy to help.
Disclosures: All expressions of opinion reflect the judgment of Raymond James & Associates, Inc., and are subject to change. Information has been obtained from sources considered reliable, but we do not guarantee that the material presented is accurate or that it provides a complete description of the securities, markets or developments mentioned. There is no assurance any of the trends mentioned will continue or that any of the forecasts mentioned will occur. Economic and market conditions are subject to change. Investing involves risk including the possible loss of capital. International investing involves additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets. Companies engaged in business related to a specific sector are subject to fierce competition and their products and services may be subject to rapid obsolescence. Past performance may not be indicative of future results.
