The great American road trip

Raymond James CIO Larry Adam notes that even as unexpected detours occur, investors can't lose sight of their long-term goals.

For more insights, see the Investment Strategy Quarterly publication linked below.

With fall in the air, it’s a great time for a road trip! There’s something exciting about the American tradition of hitting the road with friends and family in tow. “It’s not the destination, it’s the journey,” Ralph Waldo Emerson said, but he never had to manage portfolios – both are critically important. Why? Because similar to road trips, even as unexpected detours occur, investors cannot lose sight of their long-term goals. Case in point: as we look at today’s economy and financial markets, we are at a crossroads: Will it be a long straight highway to a soft landing, or will it be a bumpy road to recession? Will November’s election results provide a fork in the road on taxes and tariffs? And what road signs should we follow in positioning portfolios? So, fill up the tank, fire up your playlist, grab snacks, and let’s go on a trip to find these answers!

We begin at Raymond James headquarters in sunny St. Petersburg, Florida. Florida is known as the ‘sunshine state’ – and the economy has been shining brightly over the last four years as it recovered from COVID. Admittedly, a slowdown has been anticipated for a while. But each time consumer, business and government spending proved resilient, our economic GPS said: ‘recalculating.’ Even the most aggressive Federal Reserve (Fed) tightening in 40 years, a spike in inflation, and slowing consumer spending have yet to cloud economic vitality.

But as our journey heads north along the Blue Ridge Parkway through the great Appalachian Mountains, we encounter SLOW AHEAD and FALLING ROCKS signs that speak to our economic forecasts. We expect GDP of 2.6% in 2024 and 2.0% in 2025. The important point is that while the economy is slowing and on a narrow path to a soft landing, it is not expected to crash into a recession. Remember, a slower, more consistent speed is better for gas mileage efficiency. Slowing, but not negative, job growth, healthy business spending, and a continuation in government spending – 80% of the Inflation Reduction Act has yet to be spent – to re-industrialize the U.S. should help the economy avert a recession. The ‘falling rocks’ that could jeopardize our outlook are a precipitous decline in consumer spending – either by buyers’ choice or by crushingly high interest rates – dynamics the Fed understands well.

That is why our next stop is Washington, DC, the home of the Fed. Maybe the Fed isn’t a top destination for most road trippers, but it’s certainly the most-watched institution for markets as the long-awaited easing cycle has begun. After cutting 50 basis points at its September meeting, the Fed has more cuts in the tank – at least 50 basis points (bps) more in 2024, and at least 100 bps more in 2025. Fed Chair Powell can answer the question “Are we there yet?” with a resounding “yes!” regarding lower inflation and can now focus on sustaining the health of the economy and employment conditions. Lower interest rates are a significant driver of our hoped-for economic reacceleration in 2025.

Next up: a leisurely drive through Pennsylvania, Michigan and Wisconsin – the proverbial ‘Blue Wall’ that may decide our next president. In these states, the Great Lakes generate uncertain ‘lake effect’ weather—but it might be easier to forecast these surprise storms than the upcoming election results (let alone how each would govern versus how they have campaigned). We expect the race between Vice President Harris and former President Trump will be a nail-biter. In Congress, our base case is that the Senate flips Republican and that the House flips Democratic. The election outcome will likely impact tariffs, taxes, regulation and fiscal spending priorities. However, we advocate that the economy, the Fed, fundamentals and sentiment have more profound impacts on the markets than politics.

Now we head west – into the ‘breadbasket’ states of Iowa, Nebraska and Kansas, passing oceans of waving grains. Just as the agricultural production of these states helps sustain our economy, fixed income is a staple part of a portfolio. Like a steady supply of foodstuffs, bonds (particularly high-quality bonds) provide stability and consistent income. And, in times of uncertainty, bonds help dampen volatility. The good news is that the runup in yields from pandemic lows has provided a frugal feast for fixed-income investors starved for higher yields. We forecast bond yields will likely stay relatively stable over the next 12 months, with the 10-year Treasury yield staying in a tight range around 4%. Good farmers know that patience and crop rotation are important. As the Fed continues to cut interest rates, investors should slowly transition their cash holdings to longer-duration bonds. Our favored parts of the fixed-income market are investment-grade bonds, particularly short term, and municipal bonds.

Turning southwest, the grandeur of the Texas oil rigs towers over our vehicle. Interestingly, while Texas is still the largest oil-producing state, we must drive further to find the largest oil-producing county. It’s New Mexico’s Lea County, which sits atop the Permian Basin. Currently, U.S. oil production continues to notch record highs on the back of new technologies and better efficiency, while weak demand from China keeps oil prices low. This supply-demand imbalance causes us to adjust our 12-month target to $75/ bbl. Surprisingly, even recent geopolitical skirmishes in the Middle East have not lifted oil prices.

Reaching the West Coast, we cruise along the beautiful Pacific Coast Highway out of San Diego. San Diego’s near-perfect weather conditions (not too hot, not too cold) remind us of the equity market. If everything goes ‘just right,’ we expect a soft landing, more Fed rate cuts, positive earnings growth, and a record amount of cash on the sidelines to support the bull market that we believe has a long road ahead. Our 12-month target for the S&P 500 is 5,850. But our optimism isn’t on autopilot. As Southern California drivers can testify, accidents and traffic jams can occur anytime: election uncertainty, the potential for an economic ‘growth scare,’ and investor over-optimism could be temporary challenges. As we expect small-cap earnings to trough this quarter, it may be time to take the top off the convertible as small-cap equities should enjoy the tailwinds of Fed cuts and the reacceleration in economic momentum over the next 12 months.

Our favorite sectors are still Health Care, Industrials, and Technology. As we pass through the epicenter of tech innovation, Silicon Valley, our technology preference remains steadfast because of its healthy earnings growth, robust buybacks, increased dividends, and still strong competitive advantages. Thematically, with the AI story likely in its early stages, U.S. exposure to tech-related stocks (which is ~42% of the S&P 500) is a key reason behind our preference for the U.S. over other developed markets in the long term. Areas within emerging markets that have some technology exposure, like India, remain on our radar screen.

In our final stretch, we cross over the most photographed bridge in the world – the Golden Gate. It reminds us that our asset allocation goal is to build a bridge from your investments today to a sustainable future. Creating pillars of strength and a suspension system to weather various market conditions maximizes the probability of reaching your investment destination safely. Our trip ends at the iconic Space Needle in Seattle. Like a solid portfolio, it was built to last. From its observation deck, you can see 20 miles into the distance – from the mountains to the water to the city itself. That is the kind of broad perspective you need when managing a portfolio. With your financial advisor riding shotgun, take the long view when it comes to investment decisions; don’t be distracted by the day-to-day headline noise. No matter what the road ahead brings, we are revving our engines and ready to meet it.

Where to next? We’ll see you there. Bring road snacks.

Read the full
Investment Strategy Quarterly

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