Translating market moves in challenging times

Where can investors turn when the markets are a riddle? Raymond James CIO Larry Adam seeks advice from antiquity.

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

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 for the coming months.

The discovery of the Rosetta Stone was unexpected – just like the duration of the Ukraine crisis, China’s zero-tolerance COVID policy, and elevated inflation are today. As 2021 came to a close, few analysts (including us) would have predicted the worst start to a year in decades for both equity and fixed income investors. Then, the economy appeared easy to read. Whether you read it from right to left or top to bottom, the consumer was well positioned due to strong job growth, wage gains, and abundant savings. The only question was how quickly consumers would transition their spending from goods to services.

Inflation clouds the picture, but Fed's message is clear

Data from airlines, restaurants, and vacation destinations sketch the speed and magnitude of that shift, but uncomfortably high inflation clouds the picture. Yet from our vantage point, that should clear up soon since retail inventory levels remain high, transportation prices are falling, and discounting is becoming more prevalent. If that anecdotal evidence isn’t enough, the Federal Reserve’s (Fed) message cannot be lost in translation: Inflation will be its singular focus as it aggressively raises rates to slow demand. We believe the Fed will raise rates to as high as 3.5%, with most of the rate hikes by year end. Of course, there are risks to our interest-rate-sensitive economy (particularly for the housing market) and the possibility of a recession next year is growing. But we hope the Fed can construct the eighth wonder of the world: a front-loaded tightening cycle that doesn’t tip the economy into the ruins of a recession. Our base case sees 2022 GDP of approximately 2%.