Page 2 - ISQ UK_October 2021
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       Letter from the Chief Investment Officer

        The U.S. View From The Mountaintop

        As we sit atop our prosperous peak, admiring the views of the fastest economic growth since 1984, the best start to
        a bull market, and the record-breaking quarter of earnings growth, it’s wise to remember that not too long ago we
        began our uphill journey from the depths of the COVID-19 ravine. Often, the best views come after the hardest climbs.
        So now it’s time to catch our breath and peer over the horizon at what’s to come as we begin our descent from this
        peak. However, just as the summit of one mountain can become the base of another, the investment landscape goes
        on indefinitely, which makes adhering to a disciplined investment strategy of the utmost importance.

       Akin to a stout rope extended to a slipping climber, a record   monetary policy. As a result, the Fed’s first step this quarter will be
       amount of fiscal stimulus restrained the unprecedented tumble   dialling back the emergency-induced bond purchasing program.
       in economic growth. Now, as seasoned hikers, we’ve headed   But until the Fed’s balance sheet plateaus mid next year, we’re in
       back to stadiums, theatres, schools, and restaurants, moving the   the camp that believes there are many miles to go before it tightens
       economy onward and upward—despite the new variants lurking   policy and raises interest rates (not until 2023). The expected
       along the trail. But the days of soaring fiscal aid are ending. Even   decrease in Fed bond purchases has many analysts concluding
       as Congress debates over as much as $4.5 trillion of ‘physical’ and   interest rates will spike, but we don’t follow that path. The reason:
       ‘human’ stimulus, a compromise will likely yield half that amount,   our  government  will  issue  significantly  less  debt  next  year.  As  a
       with the distribution spread over a ten-year period. With excess dis-  result of healthy economic growth, the 10-year Treasury yield will
       posable income already descending ~$1 trillion from its $2 trillion   scale gradually higher to 1.75% over the next 12 months. However,
       peak, an unavoidable fiscal cliff looms next year. Fortunately, four   the upward climb will be limited due to solid demand from foreign
       factors should cushion the economy from a hard fall: 1) gradually   buyers, pension funds, and retirees acting as a rappelling force.
       filling the record 10+ million job openings; 2) increasing wages; 3)   While low yields can be discouraging, investors should view bonds
       rebuilding depleted inventories; and 4) boosting business capital   as a safety harness for their portfolio. Bonds may not seem nec-
       expenditures. Indeed, the economy should keep climbing at an   essary during the less challenging legs of a journey, but they will
       above-trend economic pace through at least 2022 (2022 GDP Fore-  be appreciated when the trip gets tough. With rates likely to move
       cast: 3.3%).                                         slightly higher, we favour short to intermediate bonds over longer-
                                                            dated maturities. Historically tight credit spreads limit the upside
       The eruption in economic growth over the last year has packed siz-
       able returns in commodities’ backpacks, particularly for oil. Higher   potential  for  investment  grade  and  high yield  bonds, but  both
       crude oil prices have reached a scenic overhang, soaking in views   sectors should earn more than Treasurys.  We also expect supply
       of increased production (a positive for GDP) and further incentives   dynamics to remain supportive for municipal bonds.
       for developing alternative energy sources (e.g., solar, wind, nuclear,   The equity bull market keeps ascending to higher altitudes. With
       etc.). With supply and demand approaching equilibrium, our fore-  a secure macroeconomic backdrop, above-trend earnings growth,
       cast calls for tempered moves in oil prices—peaking slightly higher   rising  dividends,  and  low  interest  rates,  this  rally should  have
       in the first quarter of 2022 before subsiding in the mid $70s by this   endurance. Impressive earnings have been the bedrock, and CEOs
       time next year. However, be on  the lookout for oil prices sustain-  are signalling that supply chain shortages, pricing pressures, and
       ably above our target. As miles driven in the US approach a record,   labour misalignments will resolve soon. Therefore, our S&P 500
       rising gasoline prices could pose a risk to our economic outlook. In   2022 earnings estimate of $230 translates into a 4,XXX price target
       fact, soaring gas prices were one of the root causes of recessions in   by the end of next year. While our bias is to the upside, the proposed
       1981, 1990, 2001, and 2008.                          corporate tax hike could result in a 3-5% reduction to our earnings
       The economy trekking upward at a sustainable pace eases pressure   forecast. However, given the history of previous tax increases and
       on the Federal Reserve (Fed) to maintain an ultra-accommodative   the resiliency of corporate America, it should not cause a cre-

        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 05/10/2021. Material prepared by
        Raymond James as a resource for its wealth managers.

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