Quarterly Coordinates Q4 2023 Sailing on Strange Seas

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

Investors have experienced mostly smooth sailing with the economy remaining resilient, the equity market soaring double digits, and volatility remaining subdued. But as we extend our voyage into unknown seas, we will need to maintain a steady hand on the tiller. Will Fed ‘Captain’ Jerome Powell steer the economy to safe shores? Will earnings find strength in tough times like Popeye after a can of spinach? Will it take as long as Marco Polo’s trip to China for lower interest rates to return?

Introduction │ Setting Our Sights on The Future, Not Looking Back}

INSIGHT:
Experienced sailors know that you cannot look backwards to determine where you are going. Instead, they have to use the tools at their disposal to determine what lies ahead.

BOTTOM LINE:
After record fiscal stimulus, low interest rates and a solid job market, the winds are shifting for the economy and asset classes. Determining the future will be key for portfolio performance.

Economy │ Navigating by the Stars Under Cloudy Skies as We Approach a Recession

INSIGHT:
The strength of the consumer has kept the economy afloat to this point. However, cracks are beginning to form as excess savings are depleted and fixed costs surge as a result of rising interest rates.

BOTTOMLINE:
Depleted excess savings, combined with credit tightening and job growth slowing, suggests the economy will slide into a mild recession beginning in 1Q24. Despite the slowdown, we expect 2024 GDP to rise 0.4% on an annual basis.

Monetary Policy │ “Oh Captain My Nearing the End of the Tightening Cycle

INSIGHT:
The Fed continues on the path of tightening monetary policy. However moderating inflation and cooling economic activity should allow the Fed to end its tightening cycle in the fourth quarter.

BOTTOM LINE:
We expect inflation to continue to moderate and the US economy to enter a recession in 1Q24. Additionally, we expect one more 25 BP rate hike in November and the Fed to begin cutting rates in mid-2024.

Politics │ Guiding the Path to 2024

INSIGHT:
The 2024 presidential election is a little more than a year away. With two unpopular candidates in the lead, the economy will be a driving factor in choosing the eventual winner.

BOTTOM LINE:
A lot can change between now and November 2024; however, history has shown that a recession in the 24 months leading up to the election has been a headwind for the incumbent.

Fixed Income │ Marco Polo as Lower Interest Rates Remain Elusive

INSIGHT:
Like Marco Polo, calls for lower interest rates have remained elusive to this point. However, moderating inflation, a mild recession and the end of the Fed’s tightening cycle should push yields lower.

BOTTOM LINE:
We expect 10-year Treasury yields to decline to 3.50% over the next 12 months. In an environment where growth will be challenged, we prefer to focus on high quality bonds, such as Treasury's and investment grade corporate bonds.

Equities │ Earnings the ‘Spinach’ Needed to Fuel the Market Higher

INSIGHT:
Throughout the current bull market, P/E expansion has been the driver of equity market returns. However, at this stage, earnings will be needed to propel the market higher.

BOTTOM LINE:
We expect earnings to be challenged in the face of a mild recession. As a result, we forecast subdued equity returns over the next 12 months. We continue to favor the Tech, Health Care, Energy and Financials sectors.

Asset Allocation │ Lessons Learned from Jimmy Buffett

INSIGHT:
Similar to Jimmy Buffett’s famous songs, visiting ‘Margaritaville’ and ‘Enjoying a Cheeseburger in Paradise’ is the goal of every long-term investor.

BOTTOM LINE:
A balanced, well rounded, and consistent long term focused strategy is essential. Focus on diversification and asset allocation to help get you across your finish line.