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INVESTMENT STRATEGY QUARTERLY

Letter from the Chief Investment Officer

Deciphering the Market’s Difficult Message

More than 200 years ago, a French military officer stumbled across the Rosetta Stone, a 2000-year-old carving with
clues to deciphering the Egyptian hieroglyphs that had puzzled the world for centuries. We don’t exactly have a Rosetta
Stone for our perplexing market’s future – no one does. But just as the Rosetta Stone opened a window into Egypt’s
mysterious past, we have some clues that might help investors crack the code in the coming months.

Back then, the discovery of the Rosetta Stone was unexpected – towering oil prices. With gasoline prices near $5 per gallon,
just like the duration of the Ukraine crisis, China’s zero-tolerance drivers dread the fuel pump hieroglyph on their dashboard; on
COVID policy, and elevated inflation are today. As 2021 came to average, per driver, it could represent $600-$850 in additional
a close, few analysts (including us) would have predicted the costs annually. A similar fate awaits motorists in the UK
worst start to a year in decades for both equity and fixed income and Europe too. (Add to this the potential of higher heating
investors. Then, the world’s developed economies appeared costs this winter.) The price of gasoline has a strong inverse
easy to read. Whether you read it from right to left or top to bottom, correlation with consumer confidence, so the more it costs, the
the consumer was well positioned due to strong job growth, lower confidence trends. If consumer and business confidence
wage gains, and abundant savings. The only question was how sink simultaneously, spending could retreat and create a self-
quickly consumers would transition their spending from goods fulfilling prophecy of recession. Controlling energy pricing
to services. pressures may seem like a riddle from the Sphinx. It remains
Now, a picture is worth a thousand words as data from airlines, to be seen how, in particular, the Biden administration will
restaurants, and holiday destinations sketch the speed and engineer an exodus from these price pressures to dodge a
magnitude of that shift. Unfortunately, uncomfortably high recession and float the US president’s approval rating higher.
inflation clouds the picture. Yet from our vantage point, that While increased production by the US and OPEC might drive oil
should clear up soon since retail inventory levels remain high, prices modestly lower by year end (Target: $105), peace in the
transportation prices are falling, and discounting is becoming Ukraine will likely be needed to sustainably sink oil below $100
more prevalent. If that anecdotal evidence isn’t enough, the per barrel.
message being delivered by the most important of the world’s With elevated inflation and expectations for Fed tightening
central banks cannot be lost in translation: inflation will be flooding the bond market like the Nile River’s annual rise, we
their singular focus as they aggressively raise rates to slow have lifted our near-term outlook for the 10-year Treasury
demand. We believe the Federal Reserve, the world’s pre- yield. But unlike the Nile, the world’s longest river, the increase
eminent central bank, will raise rates to as high as 3.5%, with in yields will be short. The Egyptians still celebrate the river’s
most of the rate hikes by year end. Of course, there are risks high-water mark; we’ll celebrate as soon as the eventual easing
to the interest-rate-sensitive US economy (particularly for the of inflationary pressures causes interest rates to recede. Our
housing market) and the possibility of a recession next year is year-end and 12-month targets for the US 10-year yield are
growing. But we hope the Fed can construct the eighth wonder 2.85% and 2.65%, respectively. After a year-long drought of
of the world: a front-loaded tightening cycle that doesn’t tip attractive options for fixed income investors, the 10-year yield
the economy into the ruins of a recession. Our base case sees recently approached 3.4%, making Treasury bonds appealing,
2022 GDP of approximately 2%. and for globally diversified international portfolios, too, so long
The one straw that could break the global economy’s back is as the US dollar retains its year-long strength. So too is the
approximately 5% yield for high-quality, investment-grade debt.

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 7/1/2022. Material prepared by Raymond
James as a resource for its financial advisors.

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