The Next Level Up

To view the full article: Click Here

To watch the replay: Click here

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

Investors, it’s time to power up! This quarter, we are taking a trip down memory lane to look back at classic video games like Tetris and Pac-Man to explain our views on the economy and financial markets.

Driven in part by artificial intelligence, large cap tech stocks continue to grow. However, like in a video game, the higher the level, the greater the upcoming challenge! Meanwhile the US Federal Reserve is balancing fighting inflation with limiting a potential slowdown in economic activity. Presidential contenders Biden and Trump are hurling campaign rhetoric at each other ahead of the 2024 election, and oil prices are bouncing between the forces of supply and demand.

Whether you are in a fantasy gaming world or the real-life investment world, you need to be prepared and ready for any challenges that come your way. In our latest Quarterly Coordinates webinar, we go to The Next Level Up!

1. Economy │Avoiding the Obstacles Similar to Frogger

INSIGHT:
Like Frogger, the US economy has avoided a multitude of obstacles skirting a recession. Ultimately, we expect the economy to have the first soft landing in 30 years.

BOTTOM LINE:
The resilience of the consumer, continued fiscal spending and few excesses in the economy should help it continue to avoid a recession. However, we expect growth to slow to 2.1% in 2024 and 1.9% in 2025.

2. Monetary Policy │Building Blocks for a Soft Landing

INSIGHT:
The recent uptick in inflation and improvement in economic activity have lessened expectations for 2024 Fed rate cuts. Ultimately, we expect the Fed to cut rates three times in 2024.

BOTTOM LINE:
As we expect inflation to continue on a downward path and the labor market to ease, we expect the Fed to begin its easing cycle in June. Given that we expect only three 2024 cuts, cash remains a suitable investment.

3. Politics│Election Season Underway

INSIGHT:
The 2024 presidential election is almost six months away. With two unpopular candidates, the economy will be a driving factor in choosing the eventual winner.

BOTTOM LINE:
While the economy remains on solid footing, voters have not felt the strength up until this point. Gridlock remains the most likely scenario, but the threat of a recession and near- term equity performance will be important in determining the eventual winner.

4. Fixed Income │Gobbling Up Coupons Like Ms. Pac-Man

INSIGHT:
Interest rates up until this point have remained stubbornly high. However, this has provided an opportunity for investors to gobble up coupons. The health of corporate America should lead to an attractive opportunity for investment grade credit.

BOTTOM LINE:
We expect the 10-year Treasury yield to decline to 3.75% over the next 12 months. In an environment in which growth will slow, we prefer to focus on high quality bonds, such as Treasurys and investment grade corporate bonds.

5. Equities │Powered Up Equity Returns Year-to-Date

INSIGHT:
The US equity market has gotten off to a strong start to the year, up over 10%. The resilience of the US economy has helped to support corporate fundamentals and thereby earnings growth.

BOTTOM LINE:
While we remain optimistic longer term due to the health of corporate earnings, volatility will likely be elevated in the near term due to stretched valuations. We continue to favor the Tech, Health Care and Industrials sectors.

6. International │Follow the Developers

INSIGHT:
When looking at the global equity markets, US equities are still our ‘favorite developer’ choice, but we continue to see opportunities in Japan and select emerging markets, particularly in India and Mexico.

BOTTOM LINE:
Europe remains weak but selectivity in emerging markets may yield flavorful results for investors.

7. Commodities │A Real Life Game of Pong

INSIGHT:
Investors are watching oil prices bounce back and forth between supply and demand dynamic paddles. Expect the range to continue with a modest move higher by year end.

BOTTOM LINE:
Demand is likely to rise as a global easing cycle gets underway and weakness in the worldwide economy recedes. We reiterate our year-end target of ~ $85 a barrel.

8. Asset Allocation │The Similarities Between Vintage Video Games and Asset Allocation

INSIGHT:
Similar to vintage video games, determining your risk/return profile and time horizon, setting an asset allocation and choosing your favorite ‘players’ is critical in achieving extended play.

BOTTOM LINE:
A balanced, well-rounded, and consistent long-term focused strategy is essential. Focus on diversification and asset allocation to help get you to the final stages of the game—your investing time horizon!