Page 2 - April ISQ 2021

INVESTMENT STRATEGY QUARTERLY

Letter from the Chief Investment Officer

Resilience is in our DNA – And in the Markets

Sixty years ago, Marshall Nirenberg and Henrich Matthaei began the process of cracking the genetic code. Thanks
to their persistence and resilience, today’s scientists developed effective mRNA-based vaccines in record time –
saving millions of lives from COVID-19. With the darkest days of the pandemic behind us, investors can also
appreciate the resilience of the economy and financial markets and the hopeful prospect of brighter days ahead.

As a backdrop, we’ll bring a bit of scientific language to our expect the supercharged economy (the best growth since 1984)
analysis this quarter as we celebrate the amazing feats of our to push both inflation and Treasury yields modestly higher.
scientific brothers and sisters. After all, as Carl Sagan said, We’re forecasting the 10-year Treasury yield at 2% by year end,
“Science is more than a body of knowledge. It is a way of up from our original 1.5% estimate. We hypothesise continued
thinking.” We’ll look at the physics of the economic momentum Fed purchases, healthy demand from foreign investors, and the
created by government stimulus; dissect the anatomy of our economy’s interest-rate sensitivity to keep the rate beaker from
outlook for major asset classes; examine the quantum leap in boiling over beyond the 2% level and ruining the experiment. Since
the equity markets; and peer through our telescope at a the return profile of fixed income will be challenged in a rising rate
higher S&P 500 earnings forecast. environment, we continue to prefer investment-grade bonds over
high-yield bonds. Dollar-denominated emerging market bonds
We begin with Isaac Newton’s Law of Motion, Force = Mass x
Acceleration. Over the last year, we witnessed policymakers may also be attractive, boosted by our expectation of a weakening
experiment with ways to force the economy out of its steepest dollar.
dive since the Great Depression, applying massive fiscal and The astronomical amount of fiscal and monetary stimulus has
monetary stimulus at light speed. propelled the Dow, S&P 500, Nasdaq and Russell 2000 to out of
this world record levels. Despite the quantum leap, we expect
In the United States, The Fed used the power of its record-set-
ting $7.6 trillion (and growing) balance sheet while Congress earnings will still be under the microscope. The good news is
voted $5.5 trillion of fiscal stimulus to fill the black hole COVID- that the kinetic energy of the economy requires aiming the
19-induced lockdowns created. And the experiment’s not over forecasting telescope ever higher in this strong earnings envi-
yet. Chair Powell has said the Fed is “not even thinking of ronment. As a result, we have lifted our 2021 S&P 500 earnings
thinking about raising interest rates” as it downplays the risk forecast to $190 (from $175), which correlates to a year-end
of sustained, elevated inflation. Meanwhile, Congress is in target of 4,180 (up from 4,025). As long as earnings growth
the midst of early negotiations for a multi-year ‘social’ and remains robust, we expect the bull market to remain healthy.
‘physical’ infrastructure recovery package for later this year. Investors should appreciate the higher mathematics of funda-
With at least $2 trillion in excess disposable income and con- mental analysis. Our favoured sectors include Information
fidence growing, pent-up consumer demand should lead to a Technology, Communication Services, Financials, Industrials,
summer surge in economic activity. Given that consumer and Consumer Discretionary because of hefty visible earnings
spending accounts for 70% of GDP, the demand for goods and growth and attractive valuations. Not only are these sectors
services is the electromagnetic force that drives our economy. leveraged to the economy in the short run, but they also have
had long-term secular growth trends accelerated by the pan-
Of course, the biggest catalyst comes directly from medical
science: enhanced COVID-19 vaccine availability and the related demic (e.g., e-commerce, streaming, advertising, broadband
drop in cases, hospitalisations, and deaths are paving the way expansion, and fintech). Don’t be distracted by the chaos of hot
to a rapid, sustainable reopening of the economy. The stronger- momentum trades, day traders, or all-or-nothing thematic calls
than-expected force of these dynamics leads our economist to (i.e., reopening trade vs. stay-at-home).
lift his expected 2021 GDP growth forecast to well over 5% from To elaborate, we’re cautious about some of the reopening
4%. beneficiaries (i.e., hotels, airlines, leisure facilities, etc.)
as their strong rallies appear to be defying gravity given
Dissecting our growth forecast into major asset classes, we

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 financial adviser to discuss the content of this publication in the context of your own unique circumstances. Published 07/04/2021.
Material prepared by Raymond James as a resource for its financial advisers.

2