How to Lose Reserve Currency Status

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

March 10, 2023

History is full of economic and societal collapses. The Incan and Roman societies disappeared, the Ottoman Empire fell apart, the United Kingdom saw the pound lose its reserve currency status. So, anyone who says the US, and the dollar, couldn’t face the same fate doesn’t pay attention to history.

The question is: will it? Russia, China, Brazil, and others, including Saudi Arabia, all seem to think they can find a way to replace the dollar and undermine US dominance on the world economic stage.

They may try. And they may cause many to fret, but we highly doubt these countries will succeed. In order to understand why we think this, it is important to understand the ascendance of America. In the late 1700s, the US was a patchwork of colonies barely clinging to the Atlantic Seaboard.

But it wasn’t victory in the revolutionary war that made America strong, it was the writing of the Constitution and the culture that created that Constitution. The rule of law, private property rights (especially to inventors through patents), democracy (and free elections) made America different and ushered in two centuries of supercharged human progress.

While the US ran up large debts to fight wars, it managed to grow its way out. At the same time, our monetary system kept the value of the dollar fairly strong and stable relative to other currencies. The combination of all of this led to deep and robust capital markets, and a dominant 60% representation by the dollar in foreign currency reserves and nearly 90% of global financial transactions.

If the US reverses course, printing too many dollars, undermining entrepreneurship with high taxes and regulations and growing government too much, then the dollar’s standing will diminish. Clearly, we are on that path today. Federal government spending has reached an all-time high of 25% of GDP in the past three years, state and local spending is near 20%...so, combined, government controls 45% of US output.

As Milton Friedman said, the more the government is involved, the higher the price of things and the lower the quality. More importantly, for the dollar, the Federal Reserve has embarked on an experimental “abundant reserve” monetary policy that has flooded the financial system with more liquidity relative to GDP than at any time in US history. In 2007, the Fed’s balance sheet was 5% of GDP, today it is more than 30%.

Massive government involvement in the economy, combined with excessive money creation is a perfect recipe for the decline of a currency. But, before you become convinced that this will happen to the US anytime soon, think about what might replace the dollar. It would have to be a currency managed by a country that had better policies.

What made America strong is not its natural resources (which it definitely has), but its human resources and freedom. China, Saudi Arabia, and Russia may have resources, but they are not free. It will not be any of these countries that replaces the dollar and it is highly unlikely to happen in our lifetimes. However, that’s not to say it won’t happen in our children’s lifetimes. Bad policies beget bad outcomes. King Dollar will only stay that way if the US keeps its fiscal and monetary house in order. Limiting government spending, keeping tax rates low, and returning to a “scarce reserve” monetary policy are our suggestions.

The problem we see is that politicians have used the last two “crisis” periods to expand the size and scope of government, not shrink it. With government so big, we are likely to face another crisis. It’s past due time to head that off.

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

Still Bearish

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

April 3, 2023

If you were bullish for 2023…congratulations! The S&P 500 rose 7.0% in the first quarter and, although we still have more data to analyze before we finalize our prediction, it looks like real GDP grew at about a 2.0% annual rate in Q1. No drop in stocks, no recession. At least not yet.

While we wish we hadn’t been bearish when this year began, our forecast for a drop in stocks and a recession hasn’t changed. Using corporate profits for the fourth quarter and the current 3.5% yield on the 10-year Treasury Note, our Capitalized Profits Model suggests a fair value for the S&P 500 of 3,891, which is lower than where stocks are today.

The economy is still absorbing and responding to the 40% surge in the M2 measure of the money supply during COVID. Think of that enormous surge in the money supply as installing a furnace built for a 10,000 square foot mansion into a home that’s only 2,000 square feet, and then running it full blast.

Even when you have finally turned the furnace off – like the Federal Reserve did with the money supply in the past year, with the largest drop since the Great Depression – that 2,000 square foot home doesn’t immediately get cold. It takes time for the home to gradually cool off and eventually get cold. Given the drop in the money supply, we are headed for a much colder economy; we’re just not there yet.

And when the US economy cools off, we expect profits, which were artificially boosted by easy money and government handouts, to fall. This means our model will eventually move stocks’ fair value lower, too. The only thing that could change that forecast is if interest rates fall at the same time profits do.

At present, the stock market seems priced for both multiple expansion (the price-to-earnings ratio moving up) as well as higher profits. This is unlikely. The Fed and federal banking regulators have ring-fenced the banking system to prevent losses for depositors. In turn, because the Fed feels like rate hikes won’t break things, future rate hikes will likely exceed current expectations and long-term interest rates will move higher, too.

No one knows for sure. COVID policies were unprecedented. Of prime importance to us is the historical increase in the money supply, which is the best explanation for 40-year highs in inflation. Equally important is the sudden decline in the M2 measure of money. If we are correct, this will hit the economy soon…and just like so many times in history, the drop in activity will take many businesses and investors by surprise. That means more layoffs, lower profits, and lower stock prices.

COVID-related shutdowns were a catastrophe for the US economy, more man-made than anything else. The policy measures taken to ease the pain of the shutdowns were unprecedented, too. Now those policies are wearing off and we expect a period of economic and financial pain. Given the unprecedented nature of the problems, it’s the timing of the pain that’s tough to forecast, not predicting that the pain will eventually come. Clearly the market is having a hard time digesting or believing that in 2023.

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance.

The Fed Waffles

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

March 27, 2023

The Federal Reserve raised short-term interest rates by another quarter point on Wednesday. That, by itself, was clear, with the Fed now targeting a range for short-term rates between 4.75% and 5.00%. The problem was that the Fed continues to ignore the most important issue in monetary policy.

That most important issue is the money supply, which surged by 40% in the first two years of COVID, the fastest since the 1940s, and has since dropped by the most since the Great Depression. You would think a central bank would pay attention to the amount of money its policy measures create, but apparently that’s still not a priority for the Fed or the Washington, DC Press Pundits that cover the Fed.

Neither the Fed’s statement on monetary policy nor Fed Chairman Jerome Powell’s post-meeting press conference mentioned the money supply. Nor did anyone in the press ask him one question about it. Which is weird because it’s the most obvious explanation for what happened with inflation the last few years.

If low short-term interest rates, all by themselves, caused high inflation we would have had very high inflation in the aftermath of the Great Recession and Financial Panic of 2008- 09, back when short-term rates were kept lower for even longer than during COVID. If “supply-chain disruptions” were the key reason for high inflation then why has inflation remained so high even as the number of ships waiting at ports is back to normal and inventories have recovered?

By contrast, if you follow the M2 measure of money you would have seen the inflation surge coming.

Instead, the Fed continues to dwell on its target for short-term rates and where it might be headed in the next few years. The new “dot plot” from the Fed suggests one more quarter-point rate hike this year, although seven of eighteen policymakers thought rates would peak even higher.

Keep in mind that between now and the next meeting in early May the Fed will not see much key new information on the path of the economy. We think the Fed pays the most attention to the employment report and the CPI report and we only get one of each between now and that meeting. Yes, we get a GDP report for Q1 but that’s based on data that’s mostly behind us.

Meanwhile, it looks like the federal government has “ringfenced” the financial system against a run on the banks anytime in the near future. Treasury Secretary Yellen may suggest otherwise, but we think it’s highly unlikely they’d let a bank fail if they think it would generate a massive flight of deposits to the largest banks or into money market funds. Instead, policymakers are content to let problem banks keep operating, like they did in Japan in the 1990s.

In addition, it’s important to recognize that current financial problems are very different from those of 2008-09. Back then, the main issue was credit risk (primarily regarding residential real estate loans and securities) and how markets were pricing that risk. Today the primary issue is interest-rate risk (or duration risk) on high-quality bonds. But the Fed has set up a new facility for banks that lets them, in effect, offload those securities to the Fed for a small fee, papering over balance sheet problems for banks able to take a small hit to earnings.

The oddest part of the Fed’s actions on Wednesday was issuing an economic forecast that included a recession starting later this year but not talking about it. That’s right, the Fed is now forecasting a recession that starts later this year.

How do we know this? Because the Fed is forecasting 0.4% growth in 2023 even as the Atlanta Fed’s GDP Now model projects a 3.2% real GDP growth rate in Q1. Even if you plug in 2.0% for Q1, the only way to get 0.4% for 2023 with 2.0% in Q1 is if the level of real GDP is lower in the fourth quarter than it is in the first quarter. Factor in the Fed forecast that unemployment averages 4.5% in Q4 (versus 3.6% in February) and it looks like a recession forecast.

The Fed could do a better job by refocusing on M2 and being clear about its forecast. But don’t get your hopes up. The bottom line is that we think the Fed is right about a recession, which means earnings will take a hit and investors should remain wary.

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

All Mixed Up

First Trust Economic Research Report

Brain S. Wesbury - Chief Economist

Robert Stein, CFA - Dep. Chief Economist

March 22, 2023

The Fed raised short-term rates by another 25 basis points (bp) today and made no changes to the expected peak for short-term rates later this year. That peak is still 5.125% – 25 bp higher than they are today – just like the forecast back in December.

However, there were other significant changes, both explicit and otherwise, to the Federal Reserve’s statement and outlook on monetary policy, as well as the economy. In particular, the economic forecast from the Fed shows real GDP growing 0.4% this year. What’s odd about that forecast is that the Atlanta Fed’s GDP Now model currently projects growth at a 3.2% annual rate in the first quarter while we are estimating growth at a roughly 2.0% rate. Even if you take our slower growth rate for Q1, the only way you’d get to a 0.4% growth rate for 2023 as a whole would be for real GDP to be lower in the fourth quarter than it is likely to be in Q1.

In other words, the Fed is likely now forecasting a recession starting later this year even as it continues to say it will not cut rates later this year. Meanwhile, the Fed ticked up the median dot for the end of 2024, suggesting short-term rates will end next year at 4.3% versus a December forecast of 4.1%. Put it all together and we have a Fed prepared to not reduce rates as rapidly during the next recession as it did in 2020 or 2008-09.

Although the Fed noted recent problems in the banking system and that these problems might impact the economy and inflation, the Fed went out of its way to end that portion of the statement with language that it “remains highly attentive to inflation risks.” Notice the emphasis on inflation risks, not downside risk to the economy, which seems like is already built into its forecast.

However, the Fed also opened the door to dovishness if banking problems intensify. Previously, the Fed had said that “ongoing increases in the target range will be appropriate…” That was replaced by “some additional policy firming may be appropriate...” Notice the “ongoing” replaced by “some additional” and “will” replaced by “may.” We interpret that to mean the Fed will be in no rush to raise rates at the next meeting and will instead sit back and watch how events in the economy and banking system unfold before May 3.

Ultimately, we believe investors need to focus on the M2 measure of the money supply, not the target level of short-term rates. It is M2 that will tell us what the net effects of all the Fed’s policies and the banking situation are. The Fed and other policy authorities in Washington, DC have, at least temporarily, ring-fenced traditional banks, guaranteeing all deposits in FDIC-insured accounts, no matter how high. This will prevent a bank run, kicking the can down the road for future policymakers to deal with the problem.

Meanwhile, a new bank term funding program will allow banks access to potentially huge injections of capital from the Fed while the banks pay very small fees to the Fed for the service. And yet, while expanding its balance sheet this way, the Fed will simultaneously continue its passive version of Quantitative Tightening, letting a portion of its balance sheet decline as some securities mature. This is like a car with two steering wheels with the driver turning them in opposite directions at the same time. The Fed is all mixed up. The reason it’s mixed up is because in the 2008-09 crisis it abandoned its long tradition of implementing monetary policy through scarce reserves and imposed a new policy based on abundant reserves. They didn’t know where it was heading at the time; now we’re finding out. The turmoil in the markets isn’t over. We remain cautious on equities and think a recession is on the way.

Brian S. Wesbury, Chief Economist

Robert Stein, Deputy Chief Economist

Text of the Federal Reserve's Statement:

Recent indicators point to modest growth in spending and production. Job gains have picked up in recent months and are running at a robust pace; the unemployment rate has remained low. Inflation remains elevated.

The U.S. banking system is sound and resilient. Recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation. The extent of these effects is uncertain. The Committee remains highly attentive to inflation risks.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 4-3/4 to 5 percent. The Committee will closely monitor incoming information and assess the implications for monetary policy. The Committee anticipates that some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time. In determining the extent of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. The Committee is strongly committed to returning inflation to its 2 percent objective.

In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michael S. Barr; Michelle W. Bowman; Lisa D. Cook; Austan D. Goolsbee; Patrick Harker; Philip N. Jefferson; Neel Kashkari; Lorie K. Logan; and Christopher J. Waller.

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

Heading Toward a National Bank?

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

Robert Stein, CFA - Dep. Chief Economist

March 20, 2023

The late great Supreme Court Justice Antonin Scalia was often in dissent in key legal cases during his long career. Almost thirty years ago, he wrote that “Day by day, case by case, the Supreme Court is busy designing a Constitution for a country I do not recognize.” This quote comes to mind because it seems that crisis by crisis – the Federal Reserve, lawmakers, and regulators – are busy designing a financial system that looks a great deal like a national bank.

We aren’t calling this a hidden political conspiracy, nor do we believe there are some sort of puppet-masters pulling the strings behind the scenes. We are not wearing tin foil hats. What we are asserting is that the more the government tries to take risk out of the financial system, the more they are moving the country in the direction of a national bank, whether intentionally or not.

After the absolutely awful monetary policy of the 1970s, and the Fed’s fight against the inflation that it caused, S&L’s and banks failed across the country. One regulatory response to this mess was risk-based capital rules. Different loans or bonds had different capital requirements based on “riskiness.” Included with this was a much lower capital requirement on Treasury debt. This worked fine as long as interest rates were falling, but clearly doesn’t make sense when rates are rising. Banks had an incentive to hold more Treasury debt, which subsidized government borrowing and encouraged more spending.

Then came the bailout of Long-Term Capital Management (LTCM) in the late 1990s, which showed that policymakers considered some financial firms, whether regulated or not, too big or too intertwined with other institutions to be allowed to fail without government intervention.

Then the Financial Panic of 2008 caused massive changes in our monetary and banking system. These changes included a huge increase in the size of the Fed, the Fed paying banks interest on reserves, extremely low short-term interest rates for an extraordinary period of time, and even more stringent regulations on banks.

Few people talk about the extent of these changes, or even focus on them. But, before the Panic of 2008 the Fed had total assets of about $875 billion; that’s “billion”, with a “B.” As of Wednesday last week, its assets were around $8.6 trillion; that’s “trillion,” with a “T.” The Fed increased its balance sheet by buying Treasury debt, which allowed government spending to soar. The Fed also held interest rates artificially low, making that increased spending cost less.

Meanwhile, the Fed started paying banks interest on reserves. At first, this policy didn’t mean much; after all, banks were only earning 0.25% per year on the reserves. But now that banks are earnings 4.65%, it’s a much bigger deal. In fact, given the increase in short-term rates in the past fifteen months, the Fed is now paying banks more in interest than it earns on its bonds.

Banks own about $3 trillion in reserves on which the Fed pays interest. So, if short-term rates reach 5%, banks could earn about $150 billion per year. And what do the banks have to do to earn that money? Nothing; literally, nothing. Just sit around, keep the reserves on their books, and collect “rent.” Think how the public and lawmakers will react when that becomes more widely understood.

And now think about the implications of the recent failures and rescues of Silicon Valley Bank, Signature, and First Republic. In spite of all the new bank regulations, and a massive Fed balance sheet that supposedly protects the system, banks are failing.

Now the government has stepped in and, in effect, guaranteed all FDIC-insured deposit accounts no matter the size. Adding to the perverse incentives, the Fed is valuing government sector debt at par value for collateral, even when that debt is trading at a discount. The same treatment is not being extended to private debt, another special for public sector entities. And as depositors now know they’re protected, they will seek the highest deposit rates no matter the riskiness of their bank, while the banks’ managers generate outsized earnings until they go bust, at which time they’ll get rescued if they play the political game of supporting the right causes. And if banks instead remain unsafe, deposits will flee to the very largest institutions, deemed “too big to fail.”

But that system is not sustainable. If taxpayers are losing money, many of them will want the government to have more control, not less. And if capital is already being allocated for political reasons, there will be calls to just cut out the “private sector” middlemen.

There is time to short-circuit this process and change direction. But, if there’s one thing true about government, they never let a crisis go to waste. Unfortunately, with each new crisis, the window of opportunity to act grows narrower.

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

The Soundness of the Banking System

Raymond James Thoughts on the Market

Larry Adam, CFA, CIMA®, CFP®, Chief Investment Officer

March 13, 2023

It is often said that the Federal Reserve (Fed) tightens until something breaks. In fact, history is peppered with examples of financial accidents caused by past Fed tightening cycles— Orange County’s default (1994), the collapse of Long Term Capital (1998), the bursting tech bubble (2000) and the housing crash (2008). That is why the market has been concerned about the Fed, particularly as the it has raised interest rates at the fastest pace in over 40 years and the full impact—which occurs with a lag—has yet to be seen. Last week’s sudden collapse of Silvergate Capital and Friday’s failure of Silicon Valley Bank sent shockwaves through the markets, driving the S&P 500 down -4.5%, sending US Treasury yields sharply lower, and wiping out nearly $300 billion market capitalization in the S&P 500 financial sector. The biggest question for investors: are the recent failures manageable events or is there a significant risk of financial contagion that could have downside economic implications?

Before we delve into these questions, let’s review what led to demise of Silvergate Capital and SVB Financial, the parent of Silicon Valley Bank. The two banks had a lot in common:

• Niche Banks | Both banks were niche players that benefited enormously from areas of the market that flourished during the pandemic tech boom. Silicon Valley Bank catered to venture capital firms and tech start-ups. Silvergate Capital was a major banking partner for the crypto industry.

• Concentration Risk | The lack of diverse deposit bases and their concentrated loan books left both banks in a vulnerable position. Once venture capital funds started to struggle to raise capital, liquidity tightened as new deposit flow slowed dramatically. In fact, the bank’s clientele started to draw down their deposits at an accelerating pace while they waited for the venture market to recover. The banks were unprepared for this. In addition, with so many companies having large deposits at the bank in excess of $250,000, the vast majority of the deposits were uninsured.

• The Pace of Interest Rate Moves | The speed of the Fed’s rate hikes over the last year caught the banks by surprise. This exposed a huge mismatch between their assets (investments) and liabilities (deposits), and they were negatively impacted on both fronts. Deposits were getting more expensive to attract as short-term interest rates rose. Meanwhile, as their assets were invested in safe, liquid, high quality Treasurys and mortgages, these long duration bonds were sitting on huge markto-market losses due to the sharp rate increases over the last year. For reference, the 10-year Treasury yield increased 237 basis points over the last year alone. When the banks needed to raise cash to meet client deposit withdrawals, they were forced to sell these long duration securities at a loss that reduced their capital base. To be clear, this was not like the Great Financial Crisis where lax lending standards and leverage exacerbated losses. This was a mismatch of asset and liabilities where interest rate moves caught them off guard.

• Social Media Mania | The proliferation of social media likely accelerated the failure of Silicon Valley Bank and Silvergate Capital. The speed at which they collapsed felt much like the meme stock mania of late, where investor psychology and rapid-response money flows drive the fate of the company. The hysteria-induced bank run caused clients to withdraw a staggering $42 billion of deposits from Silicon Valley last Thursday, sealing its fate the next morning.

Where Do We Stand Today?

Silicon Valley Bank was taken over by the FDIC on Friday, leaving many tech companies and start-ups scrambling to make payroll and wondering about the fate of their uninsured deposits (above the FDIC’s $250,000 threshold) over the weekend. In addition, the third bank in a week, Signature Bank, failed yesterday.

The Government Reaction to Stabilize Markets:

• New Facility | To prevent further financial contagion and to ensure public confidence in the banking system, the Fed, Treasury and FDIC introduced a new loan facility—the Bank Term Lending Program (BTLP)—on Sunday evening. This emergency facility will provide loans up to a period of 12 months to help banking institutions access capital when needed. One important dynamic of this facility is that banks can pledge their bonds (that are enduring unrealized losses) as collateral March 13, 2023 THOUGHTS ON THE MARKET 1 The Soundness of the Banking System and receive the par value of those investments as a loan. This helps avoid banks selling their investments at depressed levels.

• Full Depositor Access | The Fed, Treasury and FDIC announced they will be making the depositors of Silicon Valley Bank and Signature Bank whole as they will be able to access their full deposits as of today.

• Restoring Confidence in Banking | These swift actions should arrest concerns that there may be other banks lurking in the shadows with similar hidden risks. At a minimum, it should help reduce the potential of significant outflows of bank deposits at some institutions.

Implications for the Fed and the Economy?

The failure of SVB is a true game changer for the Fed and could change not only the narrative from the central bank but has the potential for changing the path as well as the direction of interest rates, depending on how these events play out in the coming days, weeks, and months. For now, the probability of a March increase in the federal funds rate is less certain than it was last week and the end result will depend on the evolution of this crisis up until the Federal Open Market Committee (FOMC) meeting on March 21-22. Despite current uncertainty, we still believe that the Fed will raise rates by 25bps next week as bringing down inflationary pressures remain a priority.

Although the characteristics of the failed banks are highly particular to their niche markets as we mentioned above and should not create systemwide contagion, bank runs are unpredictable. However, the central bank, that is, the Fed, remains as the “lender of last resort” and will be ready to backstop any potential run against the banking system. The Fed has already created the BTLP program to inject liquidity for banks that need it and will continue to assess the risks to the system and provide resources as the system needs them.

For the US economy, the potential effects are less clear, as they will depend on how the current crisis evolves over time and what the Fed decides to do with interest rates. We will continue to monitor the events and make the necessary changes to our forecast.

Implications for the Fixed Income Market?

The collapse of Silicon Valley Bank and the new Bank Term Lending program are game changers. The creation of the Bank Term Lending Program should relax concerns about broader financial contagion. However, it also shows that the Fed is becoming increasingly concerned about financial stability risks in the wake of the three bank failures over the last week.

While Chairman Powell opened the door for a potential 50 basis point rate hike during his testimony to Congress last week, the recent strains in the financial sector have taken this off the table for now. Market expectations for the peak fed funds rate continue to whip around—climbing to a cycle high of 5.7% after Powell’s hawkish testimony early last week to ~5.1% as of this morning. Rate cuts by year end are once again a possibility. While past crises have historically led to easier monetary policy, the Fed does not have the same flexibility today with inflation remaining elevated. But it does tell you that the Fed will need to tread carefully from here.

Meanwhile, the SVB crisis sparked a huge flight to quality across the entire yield curve, sending the 2-year Treasury yield down ~90 basis points from a peak above 5% last week and the 10-year to 2-year spread reversing some of its extreme inversion. These moves highly suggest that the market thinks the Fed may be done and a recession could be nearing. This does not bode well for lower-quality credits like high yield bonds. Our preference remains for higher quality bonds. It also suggests that the cyclical peak for yields is likely in.

Implications for the Equity Market?

Patience remains a virtue as we reiterate our 4,400 2023 yearend target on the S&P 500 that has held through multiple narrative shifts in the first quarter. The year started with a soft-landing narrative with the Fed pausing and eventually cutting, then to a no landing with heightened inflation and higher rates and now to a banking crisis. While we’ve held steady with our 4,400 target, this most recent narrative shift does not cause us to change our long-term optimistic view on the equity market. Why?

• Don’t Fight the Fed | This banking crisis has likely caused the Fed to rethink the aggressiveness of further interest rate hikes moving forward. For example, rather than the debate of 0.50% or 0.25% at the March 21-22 meeting, the debate will be staying on hold versus 0.25%. The increase in potential financial market instability should cause the Fed to modify their views moving forward. Historically, the end of a tightening cycle is a positive catalyst for the equity market.

• Lower Interest Rates | Lower short-term interest rates (as the Fed ends its tightening cycle soon) and lower long-term interest rates (as we believe the 10-year 2 Treasury yield has peaked) should be positive for the equity market. This is positive for equities for many reasons, including lower funding costs and higher potential multiples. In addition, these lower rates should provide a boost for growth stocks.

• Contagion Risk Limited, But Not Zero | Outside of the Financials sector we expect the impact of this crisis to be minimal given the backstop of uninsured depositors. Within Financials we favor larger higher quality institutions over smaller regional banks. There remains the risk that some smaller regional banks could struggle from potential deposit outflows. This crisis also highlighted the need for continued competitive deposit rates that may strain profitability in the sector. More regulation and increased oversight will also potentially hamper earnings growth for these regional banks.

• Restate $215 Earnings Forecast | Assuming no contagion, our 2023 earnings forecast for the S&P 500 remains unchanged. If anything, the early year strength of the economy, the weakening dollar and cost cutting of companies leads to upside risk to that forecast. The equity market is likely to be volatile in the near term as the market sifts through the potential impact of this recent banking crisis. But for long-term investors, prudence and keeping a long-term perspective are paramount in avoiding emotionally driven portfolio changes.

Bottom Line

The recent failure of three banks is an unfortunate result of the rapid rise in interest rates to combat the unprecedented rise we have seen in inflation. The quick response from regulators and the creation of a lending facility should limit the contagion fall-out to the broader economy and financial markets. The silver lining may be that the Fed moves more slowly in raising interest rates and may potentially end its tightening cycle earlier which should be a positive for the economy and both the fixed income and equity markets. As this is a very fluid situation, we will continue to provide necessary updates as needed.

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Ignore the Crazy

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

March 13, 2023

While many investors are focused on the financial troubles affecting Silicon Valley Bank (SVB) and whether those troubles will spread, there were two other major issues that hit the markets last week: the Biden budget and Fed Chief Powell hinting at raising rates by a half a percentage point rather than a quarter.

It shouldn’t be any wonder why investors are worried about the Biden budget proposal, which includes a murderer’s row of growth-destroying tax hikes. The top tax rate on capital gains and dividends would go to 44.6% versus a current 23.8% (almost double!), the top tax rate on regular income would go to 44.0%. Taxes would go up on S Corporations, small business income, and interest income. The corporate tax rate would jump to 28%; the stock buyback tax would go to 4% versus 1%.

If this proposal were passed by Congress, it would hammer the economy and the stock market. Thankfully, we believe the odds of these proposals making it into law are very slim to none.

Think about it. Nothing was stopping President Biden from making these proposals last year or the year before. Why didn’t he? Because he knew some Democrats would object, making them impossible to pass and undermining party unity. But now that Republicans control the House the Administration can pursue extreme tax hikes secure in the knowledge the plan won’t pass (and cause economic damage) while the House majority party takes the lead opposing the proposals.

As for the prospects of the Federal Reserve raising rates by half a percentage point next week, we think Powell would only open the door to that possibility if it were his intention to go through that door. However, the news about SVB, news that Powell didn’t have before his testimony last week, now makes a 50 basis point hike unlikely.

The bottom line is that in spite of investors and markets obsessing about rate hikes they need to focus on the money supply. The supply of money exploded in 2020-21 but peaked in early 2022 and has since declined at the fastest pace since the 1930s. It’s the growth in the money supply, or continued lack thereof, that will determine what happens to economic growth and inflation in the next couple of years. Obsessing about the short-term interest rates targeted by the Fed, when there is no real market for federal funds traded among banks anymore, is barking up the wrong monetary tree.

Financial markets are on tenterhooks right now. But SVB is not a systematically important bank that will, through counterparty risk, tear down the whole financial system. Instead, it’s symptomatically important, showing what happens when the Fed ignores Milton Friedman and the money supply and then claims inflation is transient when it isn’t. SVB’s managers made a huge mistake by not hedging its assets’ interest-rate risk. But it's a mistake they were seduced into making by bad monetary policy that was too loose for too long.

Expect more trouble ahead, that’s why we have been bearish on equities and the economy. But, without strict markto-market accounting in place, don’t expect a meltdown like 2008-09.

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

What Happened to the Recession?

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

March 6, 2023

In multiple ways, this is the most difficult time we have ever seen to make a forecast. “Unprecedented” actions by government – locking down the economy, printing, borrowing, and spending trillions of extra dollars – artificially boosted economic activity. Like giving morphine to an accident victim, printing and borrowing masked the pain of lockdown injuries. As these artificial actions wear off, we expect a recession to appear.

And in the fourth quarter, retail sales, industrial production and other data suggested that the economy was hitting a wall.

Then…January happened. Nonfarm payrolls, retail sales, and manufacturing production all surged.

But we think these reports overstated economic activity. The US had unusually warm January weather. In addition, seasonal adjustment factors played a key role in making the economy look better than usual, as well.

In January, the national average temperature in the “Lower 48” states was 35.2 degrees, the fourth highest for any January in the past thirty years. New home foundations could be dug, fewer plants closed due to weather, and more people could comfortably be out and about.

Normal seasonal adjustment factors also played a role. Before seasonal adjustments, nonfarm payrolls fell 2.5 million in January. After adjusting, they were reported up 517,000 for the month. Before adjusting, retail sales fell 16.2%, but after the government applied normal seasonal factors, sales were reported up 3.0%, the largest gain for any month in almost two years.

In other words, the reason the government reported that jobs and retail sales were up wasn’t that they actually rose in January relative to December, but that they fell less than they normally do.

No one is manipulating the data, nor are we trying to imply that there is anything illegitimate about seasonally adjusting economic activity. Seasonal adjustments are important. For example, agriculture follows weather patterns and holiday shopping is seasonal. If we didn’t adjust for these patterns, the economy would shrink every year in the first quarter – going back pretty much forever – with a big rebound in the second quarter every year and another surge in the fourth quarter.

And now, because of COVID, government shutdowns, and the fiscal and monetary policy response, the normal seasonal patterns of economic activity have been distorted even more. That means we are probably going to experience some months, like November and December, where activity appears unusually weak, and others, like January, where activity appears unusually strong. The best rule of thumb is to wait for at least a few months in a row of unusual strength or weakness to draw any conclusions.

The bottom line is that a yield curve this deeply inverted is a negative sign for future economic growth. Meanwhile, the M2 measure of money has slowed sharply. The growth of the M2 measure of the money supply was unusually fast through January 2022. In the past year, it is reported as falling for the first time since the 1940s, and at the fastest pace since the Great Depression. If M2 affects “real” (inflation-adjusted) economic output with a lag of a year (give or take) then that support for activity likely peaked very early this year and should dwindle sharply by year end.

We obviously hope there is no recession on the way. It’s pretty obvious that the stock market isn’t worried. But January’s economic data aren’t as clear as many might think.

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

Hard Landing, Soft Landing, or No Landing

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

January 27, 2023

In the past few weeks, a growing chorus of economists and investors have decided that the pessimistic narrative had it wrong all along, that the US isn’t headed for a hard landing, which would mean a recession, it isn’t even headed for a soft landing, which would mean a prolonged period of low economic growth.

What they think we’re going to get is no landing at all, that the US economy reaccelerates from here and does just fine. No fuss, no muss. In turn, that means the bottom for the S&P 500 back on October 12 at 3577 was the bottom for the bear market, which is already likely over.

We wish.

Instead, we think that’s a very rosy interpretation of recent economic reports. Yes, consumer spending was reported very strong for January, even when adjusted for inflation. But this is something we predicted based on unusually warm winter weather and how the policy response to COVID, including massive fiscal stimulus, has wreaked havoc with traditional seasonal adjustments, making November and December look worse by comparison and January look better.

The problem for the “No Landing” theory is that inflation remains a major problem. The Consumer Price Index is up 6.4% from a year ago, not that much of a decline versus 7.5% in the year ending in January 2022.

The Federal Reserve is following something called “SuperCore” inflation, which is part of the PCE Deflator. That figure excludes food and energy, like the regular “core,” but also excludes all other goods as well as shelter costs (where some claim that inflation measures are misjudging rents). But SuperCore PCE prices rose at 7.4% annual rate in January, the fastest increase for any month since 2021. SuperCore PCE prices are up 4.6% in the past twelve months, barely lower than the 5.0% increase in the year ending January 2022.

Either way, this is not enough progress on inflation to satisfy the Fed, which means a higher risk of ongoing hikes in short-term interest rates, until there’s more evidence inflation is coming back down toward 2.0%.

Meanwhile, the economic morphine of government checks and loose monetary policy is wearing off. The federal government was handing out checks like candy in 2020-21 and the Fed had kept short-term rates below the pace of inflation for most of the last fifteen years.

But after surging in 2020-21, the M2 measure of the money supply hit a wall in early 2022 and declined during the past year by the most for any year since the Great Depression. The yield curve is steeply inverted and likely to get more so in the next few months, which is consistent with risk aversion among investors and in Corporate America. We expect prolonged weakness in business investment in equipment as well as commercial construction. And after surging rapidly last year, the pace of inventory accumulation should cool off, too. Combined, these should pose a big headwind for GDP growth later this year.

While some are heartened by low unemployment and recent rapid job growth, we don’t think these are hurdles to a recession. The labor market is a lagging indicator of economic performance. Meanwhile, job growth and wages are likely to slow, which means tepid gains in consumer purchasing power at the same time low-income households have run out of stimulus-induced savings.

The bottom line is that none of the recent reports has changed our forecast of a recession. Given the Fed’s reaction function and the decline in M2 that’s already happened, if we get more growth than expected in the near-term, that means more pain later on when the recession hits.

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

Monetary Mayhem Clouds Crystal Ball

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

February 21, 2023

You can’t read or watch financial news these days without a heavy dose of speculation about what the Fed is going to do with short-term interest rates, when it’s going to do it, and how long it’s going to do it for.

There’s nothing wrong with paying some attention to this news, but what investors need to realize is that this is not your father’s (or mother’s) monetary policy and they need to focus on the money supply. (Yes, we know we’ve written about this before, but this issue is so important it warrants multiple repetitions. Expect another reminder again sometime in the next few months.)

Prior to the Financial Crisis of 2008-09, the Fed implemented monetary policy by either (a) buying Treasury securities from banks to add reserves to the banking system or (b) selling Treasury securities to banks to drain reserves from the banking system. Adding reserves would loosen monetary policy, draining reserves would tighten monetary policy.

Why would the Fed add or drain reserves? Because banks would actively trade reserves among each other on an overnight basis to meet the reserve requirements. The Fed, by adding or draining reserves, could influence the interest rate banks would charge each other to acquire those reserves and that rate was highly sensitive to Fed decisions. This was a “scarce reserve” model for monetary policy. When it was implemented carefully, it delivered persistently low inflation for multiple decades.

Then along came the Financial Crisis and that scarce reserve model was abandoned and replaced with a model based on “abundant reserves.” The Fed, through multiple rounds of Quantitative Easing, flooded the banking system with more reserves than the banks would ever need. In turn, the Fed made those reserves valuable by paying the banks an interest rate to hold them. No longer would banks scramble to acquire reserves to meet legal requirements based on the amount of deposits they held; now banks would want them only if and when the Fed paid them enough interest on those reserves, like now, when the Fed is paying banks 4.65% per annum and that figure is likely heading higher during the next few months.

What this means is that short-term rates are ultimately decreed by government edict. The market process (banks trading these reserves) no longer exists. It’s our view that investors fixated on these edicts are barking up the wrong tree. What they should be barking at is the money supply.

The M2 measure of the money supply soared in the first two years of COVID, up 40.4% from February 2020 to February 2022. But, in the last ten months of 2022, the M2 measure of money declined 2.3%. Not only have we never experienced a Fed trying to fight an inflation problem under an abundant reserve regime, we’ve never seen M2 grow so fast for so long, or decline so rapidly, at least since the Great Depression.

At present, the futures market appears to be pricing in three more rate hikes this year, 25 basis points each, with one rate cut of 25 basis points very late this year. There is nothing obviously wrong with this forecast, it sounds reasonable. But this is just a guess about how the Fed’s edicts might change. We, on the other hand, will be looking at the January M2 data out next Tuesday, which could tell us if the drop in M2 continued into 2023.

It remains to be seen how shifts in interest rate policy will influence M2 growth in the months ahead. Again, we are in an unprecedented period for policy with abundant reserves, so educated guesses, not definitive answers, are the best anyone can do. One big question is whether the lifting of rates has slowed M2 or is it just that rates are higher. That may sound redundant, but it’s not. Let’s say the Fed stops raising rates at a peak of 5.5% and then pauses rate changes. Will that peak level of rates keep putting downward pressure on M2? Or is it the hiking of rates that matters, so M2 will start growing again once the Fed stops raising rates (even though it doesn’t cut rates, either)?

This is important because monetary policy hits the economy with long and variable lags. We have already seen some weakness in production reports but are not close to feeling the full brunt of the tighter money that started last year. There is a storm headed our way, so please be prepared.

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

January Data Get Hot

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

February 13, 2023

Markets have been volatile, with reports convincing many that the Fed is done hiking rates. But this week, we get data that may change some minds. Why? Because the economic reports for January are likely to come in hot, with inflation, retail sales, industrial production, and housing starts all potentially coming in at the fastest pace in months.

A hot inflation report for January might be a surprise to some investors, but it really shouldn’t be. The M2 measure of the money supply surged more than 40% in the two years ending in February 2022 and part of that surge is still generating extra inflation.

Analysts have been touting a 1.8% annualized rate of increase in consumer prices during the last three months of 2022, but these numbers were revised, now showing that the CPI climbed at a 3.3% annual rate in the fourth quarter. “Core” inflation, which excludes volatile food and energy prices, were previously reported as up at a relatively moderate 3.1% rate in the last three months of the year; now that’s been revised up to a 4.3% pace.

In other words, the recent trend in inflation hasn’t been as soft as some have been saying. And now, the consensus (and First Trust) expects a 0.5% increase in January. Some of this is energy, but “core” should also increase at a faster pace than many expected last year.

Retail sales should also be strong in January, for multiple reasons. First, January was unusually warm, which made it easier for consumers to be out and about. Second, auto sales were very high because of a temporary spike in fleet sales to rental companies, which are counted in retail sales. Third, costof-living adjustments for Social Security happen in January and were very large this year because of high inflation in 2021-22. And last, massive government payments during COVID look like they’ve messed up the normal Christmas seasonal pattern in retail spending, with relatively less spending in December, in turn making January look better by comparison.

We also believe housing starts will come in above consensus expectations in January, due to unusually warm January weather. It’s just easier to break ground on new housing projects when it’s warm out; in a very cold winter month, builders like to focus more on completing homes that are already close to finished. In addition, the sticker shock of higher interest rates is wearing off.

Industrial production could turn out to be an outlier. Warm January weather means households didn’t have to fire up their furnaces as much, which means utility output almost certainly plummeted for the month. However, the relative warmth also means manufacturers lost less time due to weather and so factory output should be strong. That, plus a gain in mining should boost overall industrial production for the month.

Put all these reports together and we have an economic stew that signals that a “data sensitive” Federal Reserve isn’t done hiking rates. In turn, the markets need to recalibrate expected rate hikes upward and this could cause some indigestion. Some see the recent rally in stocks as part of a bull market; we still think it’s a bear market rally and likely to fade.

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

The Game Isn’t Over

First Trust Monday Morning Outlook

Brian S. Wesbury - Chief Economist

February 6, 2023

At the beginning of the season, not many predicted that the Philadelphia Eagles would be in the Super Bowl this year. But, they had a fantastic season and are favored over the Kansas City Chiefs. Predicting this economy is equally hard. Anyone who thinks they know exactly how things will turn out is fooling themselves. COVID policies – lockdowns, massive borrowing, and money printing to pay people not to work – have never been tried before. So, what happens is still up in the air.

It seems like just yesterday that ZeroHedge – with help from the Philadelphia Fed – was trying to convince people that job growth was non-existent in the second quarter of 2022. Never mind the fact that they purposefully conflated two different measures of jobs…it just wasn’t true.

So, it must have come as a shock to those who believed that nonsense that in January, after the equivalent of 17 quarter-point Fed rate hikes, jobs data and hours worked exploded to the upside. Nonfarm payrolls rose 517,000 jobs, while revisions to prior months added an additional 71,000.

Not one economics group came even remotely close to getting this number right. And the print was especially surprising after seeing retail sales fall 4.3% and industrial production fall 5.2%, at three-month annualized rates, through December.

The difficulty of forecasting in this environment is absolutely astounding. On the one hand, the M2 measure of money has contracted in the most recent twelve months (the first time in more than sixty years), after growing over 40% in a two-year timespan. On the other hand, even with the Federal Reserve’s sharp rate hikes, the federal funds rate is still below inflation.

Using M2 growth, alone, and Milton Friedman’s lag of 6-9 months, we should be seeing the economy begin to slow, which is what retail sales, industrial production, housing, and retail auto sales have been pointing to. And so far with 256 out of the S&P 500 companies having reported, profits are down 3.1% from a year ago.

But it’s not just M2…the rebound from COVID lockdowns is over. Stores are back open, airplanes packed, and hotels filled. Now that we are back to “normal”, how much further can things go? We aren’t going to have two packed-stadium Super Bowls this year, just one. And pandemic unemployment checks and PPP loans have run their course. Yes, some state and local governments, and school districts, have money left, but not much. To our way of thinking, we should see a slump now that the drugs of all the borrowing wear off.

So, how then did jobs provide such a large upside surprise!?! Do employers really know what they are doing? Do they see something that is not showing up in the data? Or is this a delayed reaction (after all, employment is a lagging indicator) to issues with hiring during and after the pandemic.

If you couldn’t hire workers, but now they want to work, and you expect a soft landing (or even no recession at all) then you grab all the workers you can, when you can. But if there is a “hard landing” profits could be squeezed even more.

Taking all this into consideration, we don’t think the boom in nonfarm payrolls is a signal worth following. Many companies…Peloton, Bed, Bath & Beyond, Hasbro, and lots of tech stalwarts were winners when services were locked down and people with fresh stimulus funds needed tech. But now they are all in either financial trouble or are laying off workers. The losers during the lockdowns (services) have all reopened, but people aren’t going to double their use of services, especially with interest rates up and money supply down.

So, while one number from one month seemed to change a lot of people’s minds about the economy, we think we’re far from the final whistle of the game. This one isn’t over yet. Unprecedented actions on the scale that we experienced in 2020-2022 will bring unexpected results in 2023. So, while we never want to ignore a number like the January jobs report, we have to question how much is signal and how much is noise.

The economy is still absorbing the money printed during the pandemic. Inflation has not been eradicated, the Fed is highly unlikely to loosen policy anytime soon, and earnings are likely to fall as all the stimulus wears off. That’s not a recipe for a simple forecast or a soft landing. Like the Super Bowl, until the game is played no one knows exactly what will happen. Count us less bullish than conventional wisdom.

The attached information was developed by First Trust, an independent third party. The opinions are of the listed authors at First Trust Advisors L.P, and are independent from and not necessarily those of RJFS or Raymond James. All investments are subject to risk. There is no guarantee that these statements, opinions, or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. Forward looking data is subject to change at any time and there is no assurance that projections will be realized. Any information provided is for informational purposes only and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected.