City of lights, market of opportunities

With a nod to the Summer Olympics, Raymond James CIO Larry Adam highlights his team's quarterly outlook.

To read the full article, see the Investment Strategy Quarterly publication linked below.

We’re borrowing from the upcoming Paris Summer Olympics for our quarterly theme – with a twist. Instead of using the most popular events (like gymnastics, swimming, and track & field) to express our views, we’ll go beyond the spotlight. The reason: we advocate looking past the obvious and strive to find value in diverse market areas – because that’s how you can add value to a portfolio over time. Just as the market has had its share of surprises recently, the Games will have a few as well.

Surfing has only been part of the Olympics since 2020 and will take place ~10,000 miles from Paris in Tahiti (an island in French Polynesia). Like a surfer itching to catch a big wave, the extraordinary pent-up demand during COVID amped the U.S. economy. But spending is slowing, especially among lower-income consumers as the labor market softens and the impact of inflation takes its toll. The Federal Reserve (Fed) has been riding the wave of a healthy economy despite the most aggressive tightening in 40 years. There is an opening to keep the surf up if the Fed cuts rates twice by year end and then more next year.

Beach volleyball requires seamless cooperation between the two teammates. Similarly, the bond market has twin dynamics, dictated by the economy and inflation. With both set to cool gradually the remainder of this year, interest rates should tip lower by year-end (10-year Treasury yield target: 4.0%) and the next 12 months (target: 3.75%). That will serve bond market returns’ modest capital appreciation. Like a beach volleyball team, investors must read and anticipate market moves quickly. For example, cash investments have scored with yields above 5%, but that will likely not last long. So, as the Fed approaches its easing cycle, transitioning to longer-dated bonds seems prudent. Areas to consider: intermediate-maturity Treasurys, high-quality corporate bonds, and longer-maturity municipal bonds.

Like sport climbing, equities have climbed a wall – a wall of worry about recessions, higher interest rates, elevated valuations, and geopolitics. Thus far, the path higher has been relatively uninterrupted as the S&P 500 has had only one 5%+ slip this year and only one 10% tumble since the bull market started 21 months ago. In sport climbing, the courses get progressively more difficult. The quest for the market to move higher is getting more challenging, especially with valuations at the highest level since January 2022. In the near term, it may be harder for equities to find a handhold if volatility increases because of growing economic, earnings, and election uncertainty. Still, in the longer term, the equity market rally is likely nowhere near the top. It should get support from Fed easing, lower interest rates, and some of the ~$6 trillion in money market mutual funds transitioning into the equity markets.

Breakdancing, or breaking, will be in the 2024 Summer Olympics for the first time! Like breakdancing, AI used to be more ‘underground,’ but it has now emerged onto the brightly lit stage. Since computing capabilities have only recently supported advanced AI at scale, we are in the early stages of this cycle. AI-driven earnings growth should remain robust for semiconductors and cloud computing as well as software and hardware. AI’s challenge is a throwdown to ‘business as usual.’ It’s likely to continue to receive a standing ovation in the financial markets.

Speaking of ovations, the exploding popularity of women’s basketball demonstrates that the U.S. has the infrastructure to develop the most skilled and talented players. The team has been dominant, with no Olympic losses since 1992. It holds the record for the most consecutive team victories in all Olympic sports. The U.S. equity market has similarly jumped above the global competition, outperforming developed market equities for eight of the last ten years by a cumulative 170%! The reasons are familiar: the U.S. has the strongest economy (infrastructure) and the most fundamentally sound and profitable companies. The Dream Team of tech-related companies should earn the U.S. another gold medal. This isn’t a slam dunk, as the difference between the U.S. and the rest of the world on both the court and in the equity market has narrowed. Both teams will have to play their best to win.

In politics, President Biden and former President Trump have already begun wrestling – one of the oldest sports in the Olympics. The candidates are locked in and trying to score a takedown. The U.S. election outcome in November could dramatically impact trade, immigration, tax policy, and industry regulation. As a result, expect increased market volatility over the summer and early fall. While polls show neither candidate in danger of being pinned yet, the match will most likely be determined in the six major swing states. Our base case is that the House and Senate shift power and result in a divided government. But we caution that the market is underestimating sweep scenarios that could lead to more significant policy shifts.

Asset allocation is more important than ever to investors’ portfolios. It’s like artistic swimming – above water, it is beautifully synchronized, but underwater, team members must do their part under pressure, using incredible strength and attention to detail – while holding their breath. That’s our goal – to provide a well-designed asset allocation strategy without burdening you with all the complicated analysis our top athlete analysts do behind the scenes. Our goal is aligned with yours: podium-worthy performance for you. A skilled coach – your advisor – can help keep you in sound financial shape in both good times (like recently) and challenging times.

   
Read the full
Investment Strategy Quarterly

Read the full
Investment Strategy Quarterly

All expressions of opinion reflect the judgment of the Chief Investment Office, and are subject to change. This information should not be construed as a recommendation. The foregoing content is subject to change at any time without notice. Content provided herein is for informational purposes only. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Asset allocation and diversification do not guarantee a profit nor protect against loss. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary. Investing in small cap stocks generally involves greater risks, and therefore, may not be appropriate for every investor. International investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility. Investing in emerging markets can be riskier than investing in well-established foreign markets. Investing in the energy sector involves special risks, including the potential adverse effects of state and federal regulation and may not be suitable for all investors.

There is an inverse relationship between interest rate movements and fixed income prices. Generally, when interest rates rise, fixed income prices fall and when interest rates fall, fixed income prices rise. If bonds are sold prior to maturity, the proceeds may be more or less than original cost. A credit rating of a security is not a recommendation to buy, sell or hold securities and may be subject to review, revisions, suspension, reduction or withdrawal at any time by the assigning rating agency. Investing in REITs can be subject to declines in the value of real estate. Economic conditions, property taxes, tax laws and interest rates all present potential risks to real estate investments. The 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.

CFA® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute.

Investments & Wealth Institute™ (The Institute) is the owner of the certification marks “CIMA” and “Certified Investment Management Analyst.” Use of CIMA and/or Certified Investment Management Analyst signifies that the user has successfully completed The Institute’s initial and ongoing credentialing requirements for investment management professionals.

Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, Certified Financial Planner™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.