Quarterly Coordinates Q3 2022 - DECIPHERING THE MARKET'S DIFFICULT MESSAGE

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Featuring: Lawrence V. Adam III, CFA, CIMA^®, CFP^® Chief Investment Officer Raymond James Chief Investment Officer

Larry Adam borrows from ancient Egyptian history to explain why the Fed can avoid economic ruin, how oil prices could be the straw that breaks the global economy’s back, why dry times bring us back to the basics for our equity view, and why investors should view their portfolio through the Eye of Horus.

1. INTRODUCTION │DECIPHERING THE MARKET’S DIFFICULT MESSAGE

INSIGHT: The Ukraine crisis, China’s zero-tolerance COVID policy, and persistent elevated inflation were unexpected, and have contributed to the worst start to a year in decades for both equities and bonds.

BOTTOM LINE: While volatility will likely persist in the near term, there is still potential upside for the economy and equity market as we enter the second half of the year.

2. ECONOMY │THE FED CAN AVOID ECONOMIC RUIN

INSIGHT: The consumer is well positioned due to strong job growth, wage gains, and abundant savings, and it is evident in the real-time activity metrics. However, the Federal Reserve (Fed) has sent a clear message that it will aggressively raise interest rates in order to tame inflation, which has sparked recession fears.

BOTTOM LINE: The front-loaded tightening cycle poses a risk to the interest rate sensitive areas of the economy (e.g., housing) and the probability of a recession is growing. However, we expect inflation pressures will dissipate in the months ahead which could prevent a monetary policy error.

3. COMMODITIES│THE STRAW THAT COULD BREAK THE GLOBAL ECONOMY’S BACK

INSIGHT: Gas prices have been near multi-year highs for most of the year. Given the high inverse correlation between the price of gasoline and consumer confidence, spending could retreat and create a self-fulfilling prophecy recession.

BOTTOM LINE: Controlling energy pricing pressures is a global challenge, but the Biden administration knows it must act ahead of the midterm elections. Increased production by the US and OPEC will help prices moderate; however, peace in Ukraine is needed to bring oil prices back to pre-invasion levels.

4. FIXED INCOME │AGGRESSIVE FED EXPECTATIONS FLOODING THE BOND MARKET

INSIGHT: Elevated inflation and expectations for Fed tightening have caused the 10-year Treasury yield to reach the highest level in over a decade.

BOTTOM LINE: In time, inflationary pressures should ease, and interest rates should recede. The current yields for Treasurys and investment-grade debt are attractive, and strong state finances and favorable supply dynamics make municipal bonds compelling too.

5. EQUITIES │DRY TIMES BRING US BACK TO THE BASICS

INSIGHT: Recession fears are lingering, but even if the economic expansion ceases, the equity market has already discounted the pullback historically seen during a mild recession.

BOTTOM LINE: Historically, investing in the equity market following a selloff of this magnitude has benefitted long-term investors. Attractive valuations, still strong earnings growth, increased dividends, and robust buyback activity indicate that there is upside potential for equities.

6. INTERNATIONAL│EXTENDING THE REIGN OF US EQUITIES

INSIGHT: The Russia/Ukraine crisis has disproportionately impacted Europe’s economy, as it is particularly dependent on Russia for energy imports.

BOTTOM LINE: As Europe grapples with slower job growth and higher energy costs, the US boasts stronger earnings growth and is a lower beta region on a relative basis. While we continue to favor US equities, attractive valuations and a moderation in the dollar should benefit Asian emerging markets.

7. ASSET ALLOCATION│VIEWING YOUR PORTFOLIO THROUGH THE ‘EYE OF HORUS

INSIGHT: Until inflation abates and the Fed clarifies its policy path, market volatility will continue. Incessant headlines are likely to cause investors to make ill-timed portfolio decisions.

BOTTOM LINE: Diversification, asset allocation, and a long-term approach remain timeless investing principles. An advisor who understands your investment goals and objectives can be greatly beneficial during periods of economic and financial market uncertainty.