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INVESTMENT STRATEGY QUARTERLY

Letter from the Chief Investment Officer

Come Together

It has been 60 years since the Beatles signed their first record deal. The rock group from Liverpool dominated the
industry for nearly a decade – and long after that as individual performers. John Lennon, Paul McCartney, George
Harrison, and Ringo Starr created timeless tunes and memorable messages that we can borrow today to portray our
economic and financial market outlook.

Here comes the sun, or so we thought. As Omicron subsided, year-end inflation targets are higher than we originally thought,
there were smiles returning to the faces that are now mask-free. it won’t be long before inflation decelerates from its recent pace.
But as the unprovoked Russian invasion of Ukraine escalated, Our expectation is that the Fed and the Bank of England will
surging commodity prices pushed inflation even higher – with be less aggressive than the market anticipated, raising interest
few consumers saying “it’s all right” as they eyed higher prices in rates slowly and steadily through year end to maintain maximum
shops and at petrol stations. While we still hope that Russia will flexibility in an economy that is incredibly interest rate sensitive.
give peace a chance, we believe Western nations will continue to The Fed will also often stop and think about the yield curve (as
come together to punish Putin’s actions. But despite geopolitical an inversion often serves as a precursor to a recession), and will
hotspots, rising interest rates, higher commodity prices, and an reduce its balance sheet as another means to unwind its ultra-
uptick in volatility we still think there will be something in the way accommodative policy this summer.
the economy and financial markets move in the months ahead. The 10-year US Treasury yield will struggle to get back, get back
It does not take an avid fan to recognise the Abbey Road cover to where it once belonged, as history shows it trends lower after
art, with the Fab Four striding along a zebra crossing outside each successive tightening cycle. Inflationary pressures and
their recording studio. Even non-economists worry the Federal the repricing of rate hike expectations could lift it temporarily
Reserve’s (Fed’s) and Bank of England’s tightening cycle and above 2.50% in the US, but it won’t stay there for long before
fuel prices could cause the economy to cross into contraction, it eases back to the 2.25% level by year end. The high interest
but our Fab Four metrics suggest it is not on Recession Road. rate sensitivity of both the US and UK economies and the
Resilient labour market conditions, healthy manufacturing, attractiveness of yield-producing assets should limit how
still-attractive lending standards, and advancing real-time high interest rates can go. From a sector perspective, credit
activity metrics (i.e., air traffic, driving, and restaurant activity) spreads have widened due to economic concerns rather than
point to above-trend economic growth, particularly in the US of a deterioration in credit fundamentals or rising default rates.
~2.5% for 2022. The sustained reopening and pent-up demand Since the US economy in particular is still on solid ground this
(particularly for services) should also keep us off a long and recent move may be exaggerated. But are corporate bonds and
winding road. While the psychological impact of lingering fuel municipals still potential opportunities for income focused
prices poses the greatest downside risk, we do not think it will investors? Yeah, yeah, yeah.
outweigh these positive catalysts and cause the economy to lose Since we disagree with the calls for a recession, US equities
its stride. still have the ticket to ride higher as do UK Equities. A robust
Count on Chairman Powell to speak words of wisdom as inflation macroeconomic backdrop, resilient earnings, attractive
is at the highest level in 40 years and neither the Fed nor the valuations, and positive shareholder activity should guide the
Bank of England can no longer let it be. The Russia-Ukraine crisis S&P 500 to our year-end price target of 4,725. The Fed’s and the
and climbing COVID cases in China have both worsened times Bank of England’s tightening cycle may cause further volatility,
of inflation trouble, leading the market to price in an additional but historically, life goes on, as the bull market tends to last an
eight-plus Fed rate hikes this year and more in the UK. While our additional 3.6 years and rally an additional ~100% after the first

Investment Strategy Quarterly is intended to communicate current economic and capital market information along with the informed perspectives of our investment
professionals. You may contact your wealth manager to discuss the content of this publication in the context of your own unique circumstances. Published 07/04/2022.
Material prepared by Raymond James as a resource for its wealth managers.

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