Larry Adam: "Not For Long"

by Larry Adam, Chief Investment Strategist, Raymond James

Key Takeaways

• Stick to the Asset Allocation ‘Game Plan’
• Consumer Spending Should ‘Defend’ Against Recession
• US the ‘Top Draft Pick’ for Regional Equities

Last night, the Chicago Bears hosted the Green Bay Packers as the National Football League (NFL) celebrated the start of its 100th season! Since its founding, the NFL has transformed from a ten team regional league to the highest revenue generating sports league in the US with 32 teams worth a combined $91 billion (larger than 88% of the S&P 500 constituents)! For perspective, the Dow Jones Industrial Average was at a level of 88 in September 1920, whereas today it stands at 26,728 (an average annualized return of ~8%), and the S&P 500 was not even in existence. Many of the NFL’s Hall of Famers have remarked on the life lessons they learned from the game (e.g., perseverance, discipline, team work), but there are some key investment lessons that can be learned from football too:

• Stick to the Game Plan | The best coaches (Don Shula, Vince Lombardi, Bill Walsh, Bill Belichick, etc.) have one thing in common: they provide a game plan that puts their players in the best position to succeed. That is also exactly what successful investors have in common: a well thought out asset allocation that best suits their risk profile. By having a game plan, you should have a well-conceived response when financial markets inevitability do not move as planned. For example, conservative investors should maintain a higher allocation to income-producing investments so that their portfolio generates enough cash flow and is not subject to significant fluctuations during more volatile times. Conversely, investors with higher risk tolerance can maintain higher allocations to more volatile securities (such as equities) because they have a longer time horizon that will allow these ‘players’ to develop. Successful coaches also account for clock management, field position, and momentum when determining their next calculated move. At this juncture (i.e., the longest economic expansion in US history and heightened political and economic risks), now is not the time to be overly aggressive with portfolio allocations. Many investors are ‘ahead’ given the ‘super’ performance of both bonds and equities over the last ten years, and they should remain disciplined with their game plan instead of throwing a ‘Hail Mary!’
• Defense Wins Championships | While offense may win fans, it is defense that wins championships. Historically, many championship teams like the Chicago Bears (Da Bears), Pittsburgh Steelers (Steel Curtain), and Baltimore Ravens (my team!) focused on defense. Heightened economic and trade uncertainty has caused volatility to increase, and downside preservation for portfolios has become more important. In equity portfolios, we prefer the ‘home field advantage’ as our focus remains on US equities over international equities. We favor large-cap equities over small-cap equities based on better earnings prospects and ‘healthier’ balance sheets. In fixed income, we prefer -rade bonds over high-yield bonds.
• When the Crowd Gets Loud | There is a lot of noise coming from the crowd as presidential tweets, China trade, European politics, and Middle East tensions continue to drive the Global Economic Policy Index to near record highs. We encourage investors to ‘keep their head in the game’ and focus on the basic fundamentals of the economy, earnings, and valuations. While economic headwinds are building (e.g., ISM manufacturing in contraction), our expectation is that strong consumer spending, a synchronized global easing cycle, and a president motivated by reelection should help the economy avert a recession over the next 12 months. Given record levels of negative yielding debt overseas, low (but still positive) rates in the US have reduced the upside potential for bonds longer term. In this low rate environment, US equity valuations are attractive, especially if S&P 500 earnings approach the consensus ~$176 estimate for 2020.
• Not For Long | According to the NFL Players Association, the average career length of an NFL player is ~3.3 years. Due to this brevity, many have repurposed the NFL acronym to signify ‘not for long.’ Just as NFL players are only as good as their last play, we recognize that we are only as good as our last investment call. That is why we ‘train’ constantly and employ all the investment tools available to help provide a consistent ‘winning formula.’ Hopefully, our hard work and commitment will allow us to become the George Blanda (Hall of Famer who played a record 26 seasons) of investment strategy! We hope you enjoy the games this ‘kick-off’ weekend!