Influential market factors include trade policy, interest rates, earnings growth, Federal Reserve policy, and geopolitical uncertainty.

July 2, 2018

Each quarter, the Raymond James Investment Strategy Committee completes a detailed survey sharing their views on the investment environment, and their responses are the basis for a discussion of key themes and investment implications covered in this quarter’s Investment Strategy Quarterly. Read an overview of the key themes below, or download the entire publication for a more thorough view of the markets and the economy.

U.S. Economy

  • “We began the year with two key themes: strong momentum at the start of the year, and greater uncertainty in the second half. Growth is still trending beyond a sustainable rate over the long term. We know that because the unem­ployment rate is falling.”
  • “The Fed is trying for a soft landing, a task that has been difficult to achieve in the past. The Fed believes if they don’t act soon enough, there will be more work to do later on. They are likely to raise rates until the economy shows definitive signs of slowing to a more sustainable pace.”
  • “For market participants, trade policy concerns are expected to continue. Increased tariffs raise costs for U.S. consumers and businesses, disrupt supply chains, invite retaliatory tariffs, and undermine global fixed investment.”

– Scott Brown, Ph.D., Chief Economist, Equity Research

  • “We’ve had a pretty active month here in D.C., as Congress finally passed (and the president signed into law) the bank deregulatory bill. Following that, we’ve had trade noise. We continue to believe that this is more in the negotiating tactics, but it is absolutely going to add to volatility.”
  • “We are also watching the potential investment restrictions on China. Those are set to go into effect or be announced on June 30. They’re holding this over China, saying, ‘Hey, cut a deal, or we’re really going to get pretty nasty.’ The car tariffs and steel and aluminum tariffs on Canada and Mexico are all about jump starting NAFTA.”

– Ed Mills, Washington Policy Analyst, Equity Research

U.S. Equity

  • “This is a market for active management. You can’t just buy anything and expect it to do well. You have to do a little extra research.”
  • “There’s a lot that could go wrong, but, all things considered, the U.S. stock market seems to be hanging in there about as well as we can hope for. There’s still a lot going right.”
  • “Investors seem to be looking in very growth-oriented areas and less so in more interest-rate sensitive and defensive areas of the market, as you would expect with rising rates.”
  • “We’re in a sideways pattern. I think it’s the result of what’s happening in Washington with protectionism as the admin­istration flip-flops one day to the next as they negotiate.”

– Andrew Adams, CFA, CMT, Senior Research Associate, Equity Research

  • “There is plenty of room to expand CAPEX with cash flow strong and companies liquid with repatriated cash. Project­ed CAPEX spending plans have increased markedly this year, but, in general, spending has been tepid during the current economic expansion. The lack of investment may not bode well for earnings further down the road given that spending today fuels the earnings of tomorrow.”
  • “The underpinnings of this bull market appear fine. The global economy is growing. Earnings are advancing at a healthy clip. Technically, small caps are at a new high, and semi-conductors and transports are trading well. Despite solid underpinnings, I feel the S&P 500 is likely stuck in a trading range until the trade battle plays out. Unfortunately, the battle may continue for several more months.”

Michael Gibbs, Managing Director, Equity Portfolio & Technical Strategy

  • “Reform is the key in Europe and in the rest of the world, too. And last year it was all about positive reform surprise: Brexit wasn’t as bad as people thought and the election of Macron in France seemed to be a good sign that progress would continue. We’ve seen a bit of a reversal in the last few months with the Italian elections resulting in a surprise coalition between a populist party and a slightly nationalistic party – traditionally on different sides of the political spectrum. It shows uncertainty and that people want change. Otherwise, the European Union as we know it will slowly fall apart.”
  • “While I still see huge European potential, I also see mas­sive skepticism, both within Europe and in the international community. Meanwhile, thinking about global trade, the view from Europe is that ultimately a deal needs to be made. Both China and the U.S. have too much to lose from blowing up the world’s trade group and it’s the same for Europe.”
  • “Earnings growth this quarter was stellar by all accounts: 9.5% sales growth and 25% earnings growth. Yet, all people want to talk about is peak earnings. Late cycle, it is highly unlikely we will get stronger earnings growth than this, but ‘peak earnings growth’ should not be confused with ‘peak earnings.’ Fundamental momentum is attractive, and earn­ings growth next year is expected to be ~10% (which would be better than the 2012-2016 period).”
  • “Given the monetary policy environment, financial engineer­ing has been common throughout this bull market instead of investing in CAPEX and growing organically. So, what you’re seeing this year on the heels of tax reform is a pretty sharp increase in CAPEX.”

– Joey Madere, Senior Portfolio Strategist, Equity Portfolio & Technical Strategy

International Equity

  • “Reform is the key in Europe and in the rest of the world, too. And last year it was all about positive reform surprise: Brexit wasn’t as bad as people thought and the election of Macron in France seemed to be a good sign that progress would continue. We’ve seen a bit of a reversal in the last few months with the Italian elections resulting in a surprise coalition between a populist party and a slightly nationalistic party – traditionally on different sides of the political spectrum. It shows uncertainty and that people want change. Otherwise, the European Union as we know it will slowly fall apart.”
  • “While I still see huge European potential, I also see mas­sive skepticism, both within Europe and in the international community. Meanwhile, thinking about global trade, the view from Europe is that ultimately a deal needs to be made. Both China and the U.S. have too much to lose from blowing up the world’s trade group and it’s the same for Europe.”

– Chris Bailey, European Strategist, Raymond James Euro Equities*

U.S. Fixed Income

  • “Credit is definitely extended in my opinion. Corporate bond spreads are at all-time lows if you take into account that roughly 70% of the investment-grade universe is now triple B rated. So, when we look at the income and yield space, I still favor agnostic capital structure approaches for income investment from a product design standpoint.”
  • “Short to intermediate bonds, including Treasuries, now yield more than the broad equity market. These are the best options in pure fixed income investment.”
  • “On the pure bond side, you can dial up duration, or dial down credit, neither one of which I care to do right now.”

– James Camp, CFA, Managing Director of Fixed Income, Eagle Asset Management*

  • “We still have this interesting phenomenon where the Fed is moving in the opposite direction of most central banks around the world. It’s also moving in the opposite direction of the administration, which is doing everything it can to promote growth, while you have the Fed calming growth with steady rate hikes.”

– Doug Drabik, Senior Strategist, Fixed Income

  • “As long as we have strong demand for our Treasury bonds and global rate disparity continues, we expect long-term rates to stay range bound – maybe creep up – but at a very slow pace.”
  • “Demographics also place pressure on rates. The baby boom generation is massive. If we can get to 4% or 5% tax free, those buyers have a lot of money to pour into those markets to meet their retirement income goals. Right now, a lot of that money’s being put in other places.”– Nick Goetze, Managing Director, Fixed Income
  • “The muni market is going through a significant transition this year as a result of tax reform, and supply being down in the early part of the year. For the summer, it’s likely that we’ll see municipals strengthen relative to Treasuries.”

– Ted Ruddock, Head of High Net Worth, Fixed Income Services

Energy and Oil

  • “There has been pushback recently, both social and political, to rising fuel prices. More seriously, the major strike in Brazil essentially brought the country to a halt because truckers were protesting high diesel prices. Similar social protests are occurring in India, the Philippines, even Russia.”
  • “With Brent Crude close to $80 a barrel (levels not seen since late 2014), we have to increasingly pay attention on the demand side since this will create headwinds to other sectors of the economy – aviation, trucking, plastics, and other types of relatively energy-intensive manufacturing.”
  • “This administration is on the cusp of creating an unprece­dented rule that will require uneconomic, high-cost electric generation plants (coal and nuclear) to effectively be bailed out through higher prices paid by the consumer. It’s very unpopular, as you can imagine, for the natural gas, wind, and solar industries. If this type of regulation is executed, it will raise electricity prices across the United States.”

– Pavel Molchanov, Energy Analyst, Equity Research

 

Read the full July 2018 Investment Strategy Quarterly
Read the full July 2018 Investment Strategy Quarterly

*An affiliate of Raymond James & Associates and Raymond James Financial Services.

All expressions of opinion reflect the judgment of Raymond James & Associates, Inc., and are subject to change. There is no assurance any of the trends mentioned will continue or that any of the forecasts mentioned will occur. Economic and market conditions are subject to change. Investing involves risk including the possible loss of capital. International investing involves additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets. Past performance may not be indicative of future results. Asset allocation and diversification do not guarantee a profit nor protect against loss. Companies engaged in business related to a specific sector are subject to fierce competition and their products and services may be subject to rapid obsolescence. Changes in tax laws or regulations may occur at any time and could substantially impact your situation. You should discuss any tax or legal matters with the appropriate professional. The S&P 500 is an unmanaged index of 500 widely held stocks. It is not possible to invest directly in an index. Capital expenditure (CAPEX) are funds are funds used by a company to acquire, upgrade, and maintain physical assets such as property, industrial buildings, or equipment in order to increase capacity or efficiency. Debt securities are subject to credit risk. A downgrade in an issuer’s credit rating or other adverse news about an issuer can reduce the market value of that issuer’s securities. When interest rates rise, the market value of these bonds will decline, and vice versa. Legislative and regulatory agendas are subject to change at the discretion of leadership or as dictated by events.

By | 2018-07-02T16:00:53+00:00 July 2nd, 2018|Investment Strategy, Latest Articles|