Quarterly Coordinates Q2 2022 - Come Together
Click Here for Full Article
Featuring: Lawrence V. Adam III, CFA, CIMA®, CFP®Chief Investment Officer
The Quarterly Coordinates: Come Together webinar borrows words of wisdom from the Beatles to explain Raymond James CIO Larry Adam’s outlook for markets in the months ahead. In the face of Fed tightening, Russian aggression, and an energy revolution, Adam lays out why he believes equities still have a ticket to ride higher.
1. Introduction │ We Continue To Come Together
INSIGHT: The unprovoked Russian invasion of Ukraine caused uncertainty to the economic outlook and volatility in the equity markets.
BOTTOM LINE: The Western nations continue to come together to punish Putin’s actions. And despite this geopolitical event, rising interest rates, and higher commodity prices, there is still upside potential for the US economy and equity market.
2. Economy │ Not On Recession Road
INSIGHT: Economists and financial market pundits are concerned that the Fed’s tightening cycle and soaring inflation, particularly gas prices, will cause the US economy to enter a recession.
BOTTOM LINE: Our four key indicators (labor market conditions, healthy manufacturing, still -attractive lending standards, and advancing real -time activity metrics) point to strong growth. While inflation is the greatest downside risk, the sustained reopening and pent -up demand should help the economy avoid a recession in the next 12 months.
3. Monetary Policy │ The Fed Will Need To Speak Words Of Wisdom
INSIGHT: The Russia-Ukraine crisis and climbing COVID cases in China have worsened inflation, leading the market to price in aggressive action by the Federal Reserve (Fed) through the remainder of the year.
BOTTOM LINE: Our expectation is that the Fed will raise interest rates slowly and steadily through the year to maintain flexibility in an economy that is incredibly interest rate sensitive. The reduction of the balance sheet will be another means to unwind ultra-accommodative policy.
4. Fixed Income │ Yields Won’t Get Back, Get Back To Where They Once Belonged
INSIGHT: History shows that the 10-year Treasury yield trends lower after each successive tightening cycle, but inflationary pressures and the repricing of rate hike expectations are serving as upward catalysts.
BOTTOM LINE: In time, the high interest rate sensitivity of the economy and the attractiveness of yield-producing assets will limit how high interest rates can go. Exaggerated economic conditions, rather than a deterioration in credit fundamentals, could lead to opportunities in the corporate and high-yield sectors.
5. Commodities │ You Say You Want An Energy Revolution, Well You Know
INSIGHT: The geopolitical tensions, the start of the Federal Reserves’ tightening cycle, and fears of an inflation-induced recession have caused a volatile start to the year.
BOTTOM LINE: Since a recession is not our base case, a robust macroeconomic backdrop, resilient earnings, attractive valuations, and positive shareholder activity should lead to upside potential for the S&P 500. We remain biased toward the cyclical sectors, but attractive valuations have led to our recent upgrade of Health Care.
6. International │ International Equities Need Some Help!
INSIGHT: The Russia-Ukraine crisis has disproportionately impacted Europe’s economy, as it is particularly dependent on Russia for energy imports.
BOTTOM LINE: The crisis has stunted tourism, pushed gas prices to nearly double US levels, put key imports in the crosshairs, and caused the worst European refugee crisis since World War II in a region still grappling with the pandemic. As a result, we continue to favor US equities over the other developed international markets.
7. Equities │ US Equities Still Have The Ticket To Ride Higher
INSIGHT: The US is now much more energy-independent than it was during prior oil crises (e.g.,1970s). Even if the conflict persists in the upcoming months, there are alternative measures to ease the recent volatility in energy prices.
BOTTOM LINE: The release of strategic reserves and increased production by OPEC and the US should help prices moderate by the end of the year. Higher energy prices should also accelerate the global development and adoption of alternative energy sources such as solar and wind.
8. Asset Allocation │ Get By With A Little Help From Your Advisor
INSIGHT: The combination of geopolitical tensions and the start of the Fed’s tightening cycle has led to a volatile start to the year, and caused the S&P 500’s first 10 % pullback since the pandemic began.
BOTTOM LINE: We remain hopeful for a peaceful resolution in Ukraine, which would validate the historical precedent of geopolitical conflicts being short -lived events so long as they do not coincide with a recession. In the meantime, investors should avoid emotionally -driven decisions, as they are typically detrimental to portfolio performance.