It may be the film’s quarter-century anniversary, but many “Forrest Gump” themes apply to the current markets, says CIO Larry Adam.
Twenty-five years after the release of “Forrest Gump,” the iconic movie’s themes remain relevant in today’s world. Forrest’s mother’s observation that “Life is like a box of chocolates” is especially true of today’s markets: you never know what volatility-inducing headline you’ll hear next.
President Trump’s tweets, a fickle Federal Reserve (Fed), recessionary fears, and the 2020 U.S. presidential election top the list of domestic uncertainties. Add in geopolitical risks (Brexit, trade policy, Italian debt, elevated tensions with Iran, and the Venezuelan economic crisis), and you have a recipe for heightened volatility. With much of this being headline noise, disciplined investing remains crucial to achieving financial goals.
Forrest’s quote “You’ve got to put the past behind you before you can move on” parallels our economic outlook. We’re broaching the longest economic expansion in U.S. history, and can no longer count on tax cuts, quantitative easing, or early-cycle “bounce back” growth to support the markets. We expect the expansion to continue and don’t foresee a recession in the next 12 months. Our 2019 U.S. GDP growth estimate is 1.9%, backed by the likelihood of two Fed rate cuts, elevated confidence, robust employment, and healthy consumer spending.
The bond market is echoing, “What’s normal anyways?” Past economic expansions and record budget deficits meant higher interest rates. Now, global rates remain depressed with central bank bond purchases leading to over $13 trillion in negative-yielding sovereign debt. Demographics also contribute as retirees seek income, taking our year-end target for the 10-year Treasury to 2.4%.
“Run, Forrest, run!” could easily become “Run, equities, run!” if investors shed the “braces” of negative sentiment. Record earnings could propel prices higher, hence our S&P 500 year-end target of 2946. Trade dispute escalations could reduce this estimate by ~4%. Internationally, if trade progress is made, emerging markets could finally “re-emerge.”
Unlike Forrest and Jenny, oil prices and the U.S. dollar are not like “peas and carrots”; rather, they’re typically negatively correlated. Given projected rate cuts, we forecast a weaker dollar ($1.15 versus the euro before year-end). Increased demand for sweet oil due to the new 2020 sulfur regulations should support oil prices with our WTI crude forecast at $70/barrel before year-end.
Just as Forrest persevered through hard work and good fortune, investors must do the same. Being in the right place at the right time made Forrest part of numerous iconic events in the 20th century, and that’s the objective of our investment strategy views: position your portfolio to maximize your risk/return profile. As the markets become more challenging, we encourage clients to stay the course and regularly review their portfolios with their advisors.
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. Commodities are generally considered speculative because of the significant potential for investment loss. Past performance may not be indicative of future results.