Quarterly Coordinates Q4 2022 - A Time For Finesse

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

For the five billion spectators awaiting the start of the 2022 World Cup in Qatar this November, the sport is the epitome of speed and agility. Like soccer fans following their favorite players, investors have no small amount of angst over every move central banks are making on the global economic playing field. In this intense time of soaring inflation and interest rates, what is the Federal Reserve's game plan?

1. Introduction │Heightened Awareness & Anticipation

INSIGHT: As the risk of a global economic slowdown increases, investors are awaiting every move central banks make. The markets continue to recalibrate how aggressive policy will need to be and whether too much intervention could lead to a recession.

BOTTOM LINE:Until inflation abates and Fed policy clarifies, market volatility is likely to continue. The investment landscape is much less accommodative than in the year prior, which has led to challenges for most asset classes.

2. Economy │The Fed May Win the ‘Golden Boot’, But the Economy May Lose the Match

INSIGHT: Consecutive, substantial interest rate hikes may be necessary to tame inflation, but the raising of rates well into restrictive territory may cause the economic expansion to come to an end.

BOTTOM LINE: The front-loaded tightening cycle poses a risk to the interest rate sensitive areas of the economy (e.g., housing). When combined with weak consumer sentiment and elevated energy (electricity) prices, a mild recession in early 2023 is now our base case.

3. Fixed Income│The Importance Of A Balanced Defense

INSIGHT: With the correlation of bonds to equities at the highest level in nearly 25 years, fixed income has not provided investors with a reprieve from the volatility experienced this year. But at the same time, yields are attractive for the first time in years.

BOTTOM LINE: Going forward, the correlation should normalize and should rates fall amid a struggling economy, bonds may once again provide a buffer to portfolio losses. With higher yields now available, high quality Treasury securities and municipals are compelling; however, the inverted yield curve and recession risk could challenge high yield and emerging market bonds.

4. Politics │Gridlock To Make The Presidential Term A Game Of Two Halves

INSIGHT: Conventional wisdom suggests that the Republicans could gain control of both the House and the Senate after the mid-term elections, but current polls suggest gridlock will be the outcome.

BOTTOM LINE: If Congress is split, political policy risks (specifically the potential for increased taxes) will be reduced until the next election cycle.

5. Equities │Equity Market Healing From Nagging Injuries

INSIGHT: Rising inflation, higher interest rates, a stronger dollar, and falling earnings growth revisions caused the equity market to succumb to a bear market (a decline of 20% or more).

BOTTOM LINE: The upward trajectory for equities could commence if the third quarter earnings season is better-than-feared and inflation decelerates. The end of the midterm election cycle has also historically been a positive catalyst. Since the equity market is forward-looking, the 2023 recession fears are already priced into the market.

6. International│World Cup Odds Don’t Mask Europe’s Precarious Economic Conditions

INSIGHT: The Russia-Ukraine war disproportionately impacted Europe’s economy, with the region now facing an energy crisis as the coldest months approach. Policymakers are grappling with how to balance the need for fiscal stimulus for consumers while still taming the inflationary surge.

BOTTOM LINE: Due to the precarious economic conditions, we still favor domestic equities. The US economy is stronger on a relative basis, and the region has stronger earnings growth potential, higher margins, greater efficiency, and a lower beta.

7. Commodities│Oil Prices Won’t Run Out Of Bounds

INSIGHT: After reaching multi-year highs earlier this year, crude oil prices have fallen substantially from the recent peak. The potential for an Iranian nuclear deal, fears of a global economic slowdown, and a stronger dollar have all contributed to oil, and subsequently gas prices, declining.

BOTTOM LINE: The strategic petroleum reserve release will conclude, and the reserve will need to be refilled. The easing of COVID lockdowns in China will fuel demand, and sanctions against Russia will continue to restrict supply. As a result, oil prices are more likely to move higher from current levels.

8. Asset Allocation│Don’t Watch from the Sidelines

INSIGHT: Incessant headlines are likely to cause investors to make ill-timed portfolio decisions, especially if recession fears cause an exit from the markets.

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.