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INVESTMENT STRATEGY QUARTERLY

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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