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INVESTMENT STRATEGY QUARTERLY

Letter from the Chief Investment Officer

On the Road to Recovery

This October marks 80 years since the opening of the Pennsylvania Turnpike, America’s first highway. High-
ways have been a critical driver of economic growth due to the connectivity, speed, and efficiency they provide.
As Confucius so appropriately stated, “roads were made for journeys, not destinations.”

The last six months have undoubtedly been a challenging remain elevated, with much of the lost wages occurring in the
journey as the world grapples with the COVID-19 outbreak. lower income brackets. However, the recent bounce in eco-
While we wish we could have bypassed the pandemic and its nomic data combined with Congressional leaders’ continuing
accompanying twists and turns, investors have learned that it is resolution to fund the government through December 11 has
critical to focus on the road ahead rather than the rear-view resulted in a roadblock in negotiations, likely postponing a deal
mirror. The virus understandably caused us to reroute our orig- until after the election. In contrast, the Federal Reserve has per-
inal 2020 outlook, but we are confident there is light at the end formed ongoing maintenance to its already accommodating
of this unwelcome COVID-19 tunnel. We may not have hit the monetary policy in order to support Main Street, which includes
last bump in the road just yet, so adhering to a disciplined holding short-term interest rates at zero through at least 2023.
investment strategy will be of the utmost importance if you The economic recovery may help the 10-year Treasury yield
wish to arrive at your destination, achieving all your goals and drift higher to ~1% by year end and 1.40% over the next 12
objectives.
months, but upside movement will likely be constrained. With
The road to recovery has been under construction since our low inflation, central bank buying, and strong foreign demand,
real-time activity metrics bottomed in April, and the US Treasury yields have no license to move significantly higher. In
economy has improved from the severely depressed levels this low yield environment, we see a caution sign on the high-
experienced during the shutdowns. Now, with the fastest and yield bond sector due to rising default risk and sector exposure,
most economically destructive recession in modern history and instead encourage investors to follow the Fed’s path of
behind us, third quarter GDP is revving up to grow 25-30%—the purchasing investment-grade debt and municipal bonds.
best quarter of growth on record. Despite this, there are still Emerging market bonds are becoming increasingly attractive
many miles to go before the size of the economy returns to pre- as well, and our bias toward this sector is complemented by our
COVID GDP levels (forecast of approximately -3% GDP for 2020, expectation of further weakness in the dollar.
accelerating to about 2.7% in 2021). The recovery is unfolding For equity investors, elevated valuations and a bifurcated
in a ‘K-shaped’ pattern, where different parts of the economy market have led to questions regarding the vitality of the
recover at dissimilar paces and magnitudes. This expectation is second strongest bull market in US stock market history. How-
cemented by our assessment that the pandemic inherently ever, valuations are attractive on a relative basis, and the equity
favours certain sectors and industries more so than others, market is supported by the ongoing economic recovery, low
allowing certain companies (e.g., e-commerce, medicine, air interest rates, optimism about the development of a vaccine
freight) to enter the express lanes while forcing others (e.g., and additional therapeutics, and a rebound in earnings growth
airlines, hospitality, leisure) to wait until the COVID-19 gridlock in 2021. Despite their stark outperformance year-to-date, we
clears. Ultimately, a vaccine could alleviate this congestion and prefer large-cap, growth-oriented sectors such as Technology,
the lingering psychological impact of the virus, but even if a Consumer Discretionary, Communication Services, and Health
safe, effective candidate is approved by year end (80% - 90% Care. In fact, the (value-oriented sectors) road less travelled
probability) it would likely only be available for certain subsets may be for a reason, as our preferred sectors have superior vis-
of the population (e.g., medical professionals), with widespread ibility for earnings growth. Case in point, Technology sector
distribution not occurring until mid-2021.
earnings will benefit from the building of the 5G highway, artifi-
The pandemic’s prolonged impact makes it increasingly impor- cial intelligence, driverless cars, and a continuation of the
tant for the US Congress to pass a Phase 4 fiscal stimulus deal work-from-home trend.
that bridges our economy to more normal times. Jobless claims

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 10/1/2020. Material
prepared by Raymond James as a resource for its financial advisors.

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