Golden laurel wreath with a medal stand, Eiffel Tower and rings in the center of the wreath

City of lights, market of opportunities

With a nod to the Summer Olympics, Raymond James CIO Larry Adam highlights his team's quarterly outlook.

To read the full article, see the Investment Strategy Quarterly publication linked below.

We’re borrowing from the upcoming Paris Summer Olympics for our quarterly theme – with a twist. Instead of using the most popular events (like gymnastics, swimming, and track & field) to express our views, we’ll go beyond the spotlight. The reason: we advocate looking past the obvious and strive to find value in diverse market areas – because that’s how you can add value to a portfolio over time. Just as the market has had its share of surprises recently, the Games will have a few as well.

Surfing has only been part of the Olympics since 2020 and will take place ~10,000 miles from Paris in Tahiti (an island in French Polynesia). Like a surfer itching to catch a big wave, the extraordinary pent-up demand during COVID amped the U.S. economy. But spending is slowing, especially among lower-income consumers as the labor market softens and the impact of inflation takes its toll. The Federal Reserve (Fed) has been riding the wave of a healthy economy despite the most aggressive tightening in 40 years. There is an opening to keep the surf up if the Fed cuts rates twice by year end and then more next year.

Beach volleyball requires seamless cooperation between the two teammates. Similarly, the bond market has twin dynamics, dictated by the economy and inflation. With both set to cool gradually the remainder of this year, interest rates should tip lower by year-end (10-year Treasury yield target: 4.0%) and the next 12 months (target: 3.75%). That will serve bond market returns’ modest capital appreciation. Like a beach volleyball team, investors must read and anticipate market moves quickly. For example, cash investments have scored with yields above 5%, but that will likely not last long. So, as the Fed approaches its easing cycle, transitioning to longer-dated bonds seems prudent. Areas to consider: intermediate-maturity Treasurys, high-quality corporate bonds, and longer-maturity municipal bonds.

Like sport climbing, equities have climbed a wall – a wall of worry about recessions, higher interest rates, elevated valuations, and geopolitics. Thus far, the path higher has been relatively uninterrupted as the S&P 500 has had only one 5%+ slip this year and only one 10% tumble since the bull market started 21 months ago. In sport climbing, the courses get progressively more difficult. The quest for the market to move higher is getting more challenging, especially with valuations at the highest level since January 2022. In the near term, it may be harder for equities to find a handhold if volatility increases because of growing economic, earnings, and election uncertainty. Still, in the longer term, the equity market rally is likely nowhere near the top. It should get support from Fed easing, lower interest rates, and some of the ~$6 trillion in money market mutual funds transitioning into the equity markets.

Breakdancing, or breaking, will be in the 2024 Summer Olympics for the first time! Like breakdancing, AI used to be more ‘underground,’ but it has now emerged onto the brightly lit stage. Since computing capabilities have only recently supported advanced AI at scale, we are in the early stages of this cycle. AI-driven earnings growth should remain robust for semiconductors and cloud computing as well as software and hardware. AI’s challenge is a throwdown to ‘business as usual.’ It’s likely to continue to receive a standing ovation in the financial markets.

Speaking of ovations, the exploding popularity of women’s basketball demonstrates that the U.S. has the infrastructure to develop the most skilled and talented players. The team has been dominant, with no Olympic losses since 1992. It holds the record for the most consecutive team victories in all Olympic sports. The U.S. equity market has similarly jumped above the global competition, outperforming developed market equities for eight of the last ten years by a cumulative 170%! The reasons are familiar: the U.S. has the strongest economy (infrastructure) and the most fundamentally sound and profitable companies. The Dream Team of tech-related companies should earn the U.S. another gold medal. This isn’t a slam dunk, as the difference between the U.S. and the rest of the world on both the court and in the equity market has narrowed. Both teams will have to play their best to win.

In politics, President Biden and former President Trump have already begun wrestling – one of the oldest sports in the Olympics. The candidates are locked in and trying to score a takedown. The U.S. election outcome in November could dramatically impact trade, immigration, tax policy, and industry regulation. As a result, expect increased market volatility over the summer and early fall. While polls show neither candidate in danger of being pinned yet, the match will most likely be determined in the six major swing states. Our base case is that the House and Senate shift power and result in a divided government. But we caution that the market is underestimating sweep scenarios that could lead to more significant policy shifts.

Asset allocation is more important than ever to investors’ portfolios. It’s like artistic swimming – above water, it is beautifully synchronized, but underwater, team members must do their part under pressure, using incredible strength and attention to detail – while holding their breath. That’s our goal – to provide a well-designed asset allocation strategy without burdening you with all the complicated analysis our top athlete analysts do behind the scenes. Our goal is aligned with yours: podium-worthy performance for you. A skilled coach – your advisor – can help keep you in sound financial shape in both good times (like recently) and challenging times.


  Golden laurel wreath with a medal stand, Eiffel Tower and rings in the center of the wreath 
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Investment Strategy Quarterly

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