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       Letter from the Chief Investment Officer

        Time Is On Our Side

        Start me up! Why would this iconic Rolling Stones song keep racing through my mind? Because it seems like the
        drivers of this turbulent market—Federal Reserve tightening, inflation, recession worries and geopolitical fears—
        feel like they will never stop. They seem to have more staying power than lead singer Mick Jagger (who turns 80 in
        July). As we dig deeper into our more optimistic market and economic views, we’ll unearth relevant lyrics from
        some of the Stones’ impressive 422-song portfolio to make our case. With equities struggling and interest rates
        moving higher, investors could be seeking some emotional rescue. But time is on my side, yes, it is, for two reasons.
        First, we believe we are closing in on the end of the equity bear market, peak yields, and Fed hawkishness. Second,
        we expect investors to be rewarded for enduring the current volatility as it should lead to robust performance for
        most asset classes in the long term.

        The US economy remains resilient, driven by the wild horses of   In bonds, investors have complained for decades that you can’t
        consumer spending. While consumers are shifting spending from   always get what you want when it comes to higher interest rates
        goods to services, overall spending continues at a healthy clip.   and meaningful income. But wait... now you can… with interest
        But three factors—dwindling excess savings, higher interest rates   rates soaring to levels not seen since 2008. The rate reset has
        and softening job creation—should curb growth soon. Despite the   flipped the script to focusing on attractive yields rather than
        outsized job gains in January and February, economic undertones   stretching for yield in lower-quality bonds. Indeed, this is not
        suggest employment gains are already slowing. Withholding   simply a feature limited to the US as yields have risen across
        taxes’ growth has slid lower on a year-over-year basis, companies   developed economy sovereign bond markets. In addition,
        have begun to lay off employees (particularly in tech-related busi-  improved yields afford investors the ability to balance their port-
        nesses), and both online and professional recruiters have   folios better. But the higher interest rate opportunity probably
        lamented slackened hiring. Indeed, the unemployment rate could   won’t last long. We are still forecasting the 10-year Treasury
        climb near 5% from its current level of 3.6% by year end. Weak-  yield to head lower toward 3.00%. Lower rates will enhance the
        ened consumer consumption is one reason our economist expects   returns of the sectors we favour, including Treasurys, municipal,
        a mild recession in the second half of this year.   investment grade, and emerging market bonds. We still shy
                                                            away from lower-quality high yield bonds; their yields aren’t
        Another recession reason: The Federal Reserve (Fed) kept raising
        interest rates because it can’t get no satisfaction with inflation until   compensating investors for the threat of a recession.
        recently. Look for possibly another rate hike in the fed funds rate to   Equity markets want the Fed and inflation to get off of their
        5.25% at the May meeting. The problem is this: Monetary policy   cloud. Why? Because equities tend to rally when the Fed ends
        acts with a lag of approximately one year. So, much of the economy   its tightening cycle, inflation decelerates, and interest rates
        is just starting to feel the impact of the first interest rate increases   fall. Assuming the Fed doesn’t overtighten and take the
        from about a year ago. As we progress further into the year, the   economy into a severe recession, S&P 500 earnings should
        accumulation of these rate boosts will crimp both capital spending   remain solid around $215. If anything, the economy’s bet-
        and consumer spending. We’ve already seen a bit of this beast of   ter-than-expected start this year gives us more confidence in
        burden in the Silicon Valley Bank failure. While we believe the SVB   the upside potential of those numbers. A weaker dollar, quickly
        fallout will be contained before things go all the way down, it’s an   improving supply chains, and easing commodity and labour
        example of the Fed squeezing... until things break. This year, there   costs should help support margins. The current decline in equi-
        will be little, if any, help from Washington as lawmakers focus on   ties has likely already priced in a mild recession. When we
        the battle to avoid a government shutdown over the debt ceiling.   finally get to the recession, sentiment should turn more posi-
        We believe they’ll avert a shutdown at the eleventh hour—as usual.  tive—as markets anticipate coming out of it. As these factors

        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 advisor to discuss the content of this publication in the context of your own unique circumstances. Published 5/4/2023. Material prepared by Raymond
        James as a resource for its wealth managers.

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