Raymond James: Investment Strategy Quarterly

Where do interest rates go from here, and what does it mean for investors?

Excerpts from the Raymond James October 2013 report


Of the major macro factors affecting investors in the next 12 months, Federal Reserve policy was at the top of the list for most Committee members followed by fiscal policy. Following the temporary resolution of the government shutdown and debt ceiling crisis, all eyes will be focused on Washington, D.C., to inform the outlook for investment decisions over the coming year.

Download the complete report (PDF) here

J. Michael Gibbs, co-head of the Equity AdvisoryGroup, agrees the key theme investors should be paying attention to is “central bank action, particularly the Federal Reserve. The key to investing has been central bank action since the bottom of the market in 2009. Now is the time for the economy and markets to transition away from dependency on the central bank.” (For more on the Committee’s perspective on the Federal Reserve and the future of interest rates see page six).

The Committee’s outlook for the U.S. economy over the next 12 months is in line with the industry consensus of 2.75% growth with opinions expressed equally on both sides of slight optimism and slight pessimism by Committee members (see figure one, page two as well as the Economic Snapshot on page five). Despite this neutral outlook on the economy, Committee members were generally bullish on the U.S. equity market (figure two, page two), and we have highlighted two fundamental factors that are contributing to economic improvements – the improving outlook for American manufacturing (page eight) and the rebound in the U.S. housing market (page ten).

Perhaps even more of an expression of general bullishness was the Committee’s rating
of the possibility of a 20% pullback in the equity market as fairly low (see figure three, page two).
Asset Allocation Guidance: At the broadest level of asset allocation, the Committee favored the risk-return tradeoff of equities relative to fixed income. Seventy percent of members recommended a slight overweight or full overweight to equities relative to investors’ long-term targets.

It is a mistake to get too bearish here. I think earnings are going to continue to come in better than people think

Jeffrey Saut, Chief Investment Strategist, Equity Research, made a strong case for the U.S. equity market saying, “It is a mistake to get too bearish here. I think earnings are going to continue to come in better than people think. I think our Chief Economist would tell you he thinks GDP growth is going to be a little better in 2014. Now we have a temporary fix to the shutdown/debt ceiling issue as we anticipated, and I think the market will revert to looking at improving economic numbers, a China that’s not going to fall off the cliff, earnings that are going to continue to come in better than expected and an institutional, endowment and U.S. retail investor profoundly underinvested in U.S. equities.”

Investment strategy committee meeting re-cap

Committee expresses concerns about rising rates over intermediate term and bullish sentiment for equities. This quarter’s Investment Strategy Committee meeting was held October 1, 2013, and brought together investment professionals from across Raymond James each with their own particular expertise and perspective. The collective views of the diverse investment professionals are shared in this redesigned publication to support conversations between Raymond James financial advisors and their clients.

Major factors affecting investors over the
next 12 months according to our Committee survey

  1. Federal Reserve policy
  2. Fiscal policy
  3. U.S. labor market
  4. U.S. housing market


At the same time, 80% of Committee members called for a slight underweight or full underweight to fixed income given concerns about rising interest rates. This is in line with 80% of Committee members who believe that yields on the benchmark 10-year Treasury will be moderately higher 12 months from
now. The Committee shares the view of Scott Stolz, Senior Vice President, PCG Investment Products, that “generally rising interest rates will continue to put downward pressure on fixed income prices,” but fixed income still has an important role in investor portfolios. Kevin Giddis, Senior Managing
Director, Fixed Income, cautioned investors that they should be looking to shorten the duration of their fixed income portfolios to mitigate interest rate risks, but not to get too underweight fixed income until there are more signs of economic improvement. For a full review of Raymond James strategic asset allocation models and current tactical weightings refer to page twelve.