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Adam Turnquist | Chief Technical Strategist

Additional content provided by Colby Hesson, Analyst.

Yesterday marked the end of the historically strong seasonal period called the Santa Claus Rally, technically classified as the last five trading days of the year plus the first two trading days of the new year. Since 1950, the S&P 500 has generated an above-average 1.3% return during this short seven-day window, but this time the S&P 500 fell -1.1%. This is the 16th time since 1950 that the S&P 500 closed lower during this period, snapping a seven-year streak of positive returns during the Santa Claus Rally. Now that the streak is over, the market is on the naughty list, with the S&P 500 historically generating an average annual return of only 4.1% when Santa doesn’t show up.

Returns during the Santa Claus Rally period have historically correlated well with January and subsequent year returns, which may not bode well for investors this year. According to the data below, when Santa is a no show, the S&P 500 slightly underperforms in January, on average, and ends the month in the red 60% of the time. Furthermore, full-year returns have been underwhelming when considering the S&P 500’s average annual return since 1950 is 9.3%.

Santa No Shows

Source: LPL Research, Bloomberg 01/03/24
Disclosures: Past performance is no guarantee of future results. All indexes are unmanaged and can’t be invested in directly.
The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1950 incorporates the performance of the predecessor index, the S&P 90.

Santa does make mistakes from time to time, and the market can still wind up with an attractive return over the following year. For example, 20% of the positive returns in January following a negative Santa Claus Rally were greater than 5%, while 20% of the positive returns by year end were also greater than 20%. While we may not be in for another 20% plus year like 2023, momentum into the new year does suggest we could experience another solid year. Historically, when the S&P 500 returns 20% or more during a calendar year, the index gains an average of 9.6% the following year. There is still a long 12 months ahead for the equity market to go in either direction.

Conclusion

While negative Santa Claus rally periods have traditionally signaled poor market performance the following year, LPL Research believes there are plenty of catalysts for the market to offset potentially weak seasonality. In 2024, equities should benefit from falling inflation and interest rates, the conclusion of the Federal Reserve’s rate-hiking campaign and improved corporate profitability. We remain neutral on equities, sourcing the slight fixed income overweight from cash relative to appropriate benchmarks.

Finally, the Santa Claus Rally period is only one piece of the seasonality puzzle, so watch for additional updates from LPL Research on the first five days of January indicator and the January Barometer as we progress through the month.

For more details on LPL Research’s outlook for the markets and economy in 2024, please refer to Outlook 2024: A Turning Point.

IMPORTANT DISCLOSURES

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk.

Indexes are unmanaged and cannot be invested into directly. Index performance is not indicative of the performance of any investment and does not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

This material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.

Unless otherwise stated LPL Financial and the third party persons and firms mentioned are not affiliates of each other and make no representation with respect to each other. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services.

Asset Class Disclosures –

International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.

Bonds are subject to market and interest rate risk if sold prior to maturity.

Municipal bonds are subject and market and interest rate risk and potentially capital gains tax if sold prior to maturity. Interest income may be subject to the alternative minimum tax. Municipal bonds are federally tax-free but other state and local taxes may apply.

Preferred stock dividends are paid at the discretion of the issuing company. Preferred stocks are subject to interest rate and credit risk. They may be subject to a call features.

Alternative investments may not be suitable for all investors and involve special risks such as leveraging the investment, potential adverse market forces, regulatory changes and potentially illiquidity. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses.

Mortgage backed securities are subject to credit, default, prepayment, extension, market and interest rate risk.

High yield/junk bonds (grade BB or below) are below investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors.

Precious metal investing involves greater fluctuation and potential for losses.

The fast price swings of commodities will result in significant volatility in an investor’s holdings.

Securities and advisory services offered through LPL Financial, a registered investment advisor and broker-dealer. Member FINRA/SIPC.

Not Insured by FDIC/NCUA or Any Other Government Agency | Not Bank/Credit Union Deposits or Obligations | Not Bank/Credit Union Guaranteed | May Lose Value

Adam Turnquist | Chief Technical Strategist

Key Takeaways:

• This year will likely be remembered as the year of the Magnificent Seven. While these stocks have done most of the heavy lifting for the S&P 500, it has not been a zero-sum game, as several offensive-tilted sector stocks are also beating the market this year.
• While periods of narrow leadership present concentration risk and a lack of participation from other important sectors, they have historically not been a precursor to a market top. For example, S&P 500 annual returns following its 10 most top-heavy years averaged 14.1%, with 80% of occurrences finishing in positive territory.
• Following year index returns after the 10 most top-heavy S&P 500 years have averaged 14.1%, with 80% of occurrences finishing in positive territory.
• LPL Research believes the large cap growth narrative will remain intact in 2024 and expects a continuation of offensive sector leadership.

Narrow leadership has been one of the major themes throughout 2023. The so-called Magnificent Seven mega-caps — Alphabet, Amazon, Apple, Meta, Microsoft, NVIDIA, and Tesla — have contributed to 60% of the S&P 500’s 26.5% total year-to-date return (as of December 27). Given this top-heavy concentration and a lack of participation from the financial sector for most of the year (the sector with the second-highest number of S&P 500 stocks), only around 29% of S&P 500 constituents are beating the index on a total return basis this year. The chart below highlights that 2023 will likely have one of the lowest percentages of stocks outperforming the market over the last 40 years.

One of the Narrowest Leadership Years in 40 Years 

Percentage of S&P 500 Outperformers by Year

Source: LPL Research, Bloomberg 12/27/23
Disclosures: Past performance is no guarantee of future results.
All indexes are unmanaged and can’t be invested in directly. 

Not a Zero-Sum Game

This year’s outsized gains and contributions from the Magnificent Seven have largely overshadowed pockets of relative strength across several S&P 500 sectors. As illustrated in the table below, it is not a zero-sum game as roughly two-thirds of technology sector stocks are beating the tape this year, while around 40% of communication services, consumer discretionary, and industrial stocks are also outperforming. Collectively, these three sectors and technology represent around a 57% weighting within the S&P 500.

Percentage of Sector Stocks Outperforming This Year 

Source: LPL Research, Bloomberg 12/27/23
Disclosures: Past performance is no guarantee of future results.
All indexes are unmanaged and can’t be invested in directly. 

While 2023 will likely have one of the lowest percentages of stocks beating the market in 40 years, history suggests top-heavy years don’t translate into market tops over the following year. As illustrated in the table below, S&P 500 annual returns following its 10 most top-heavy years averaged 14.1%, with 80% of occurrences finishing in positive territory. For those expecting a small cap catch-up rally next year, we also included the following year’s returns for the small cap Russell 2000 Index. While small caps outperformed the S&P 500 60% of the time over the next year, both the average and median Russell 2000 returns were underwhelming relative to the S&P 500.

Top-Heavy Doesn’t Mean Market Top

Ten Most Top-Heavy S&P 500 Years

Source: LPL Research, Bloomberg 12/27/23
Disclosures: Past performance is no guarantee of future results.
All indexes are unmanaged and can’t be invested in directly. 

Summary

The narrow leadership theme of 2023 has gained a lot of attention due to the historically outsized contributions from the Magnificent Seven stocks. While periods of narrow leadership present concentration risk and a lack of participation from other important sectors, they have not historically been a precursor to a market top. In addition, there is still a sizable percentage of offensive sector stocks beating the market this year, a largely overlooked storyline. Looking ahead to 2024, LPL Research’s Strategic and Tactical Asset Allocation Committee (STAAC) believes the large cap growth narrative will remain intact and is tactically overweight growth-style equities relative to value. The STAAC also expects a continuation of offensive sector leadership, including overlooked sectors like financials, as they finally start to participate in this bull market.

IMPORTANT DISCLOSURES

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk.

Indexes are unmanaged and cannot be invested into directly. Index performance is not indicative of the performance of any investment and does not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

This material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.

Unless otherwise stated LPL Financial and the third party persons and firms mentioned are not affiliates of each other and make no representation with respect to each other. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services.

Asset Class Disclosures –

International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.

Bonds are subject to market and interest rate risk if sold prior to maturity.

Municipal bonds are subject and market and interest rate risk and potentially capital gains tax if sold prior to maturity. Interest income may be subject to the alternative minimum tax. Municipal bonds are federally tax-free but other state and local taxes may apply.

Preferred stock dividends are paid at the discretion of the issuing company. Preferred stocks are subject to interest rate and credit risk. They may be subject to a call features.

Alternative investments may not be suitable for all investors and involve special risks such as leveraging the investment, potential adverse market forces, regulatory changes and potentially illiquidity. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses.

Mortgage backed securities are subject to credit, default, prepayment, extension, market and interest rate risk.

High yield/junk bonds (grade BB or below) are below investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors.

Precious metal investing involves greater fluctuation and potential for losses.

The fast price swings of commodities will result in significant volatility in an investor’s holdings.

Securities and advisory services offered through LPL Financial, a registered investment advisor and broker-dealer. Member FINRA/SIPC.

Not Insured by FDIC/NCUA or Any Other Government Agency | Not Bank/Credit Union Deposits or Obligations | Not Bank/Credit Union Guaranteed | May Lose Value

George Smith | Portfolio Strategist

Last week, the American Association of Individual Investors (AAII) released their weekly sentiment survey data, which showed that individual investors have experienced a large amount of holiday cheer due to the stock market rally in December. The percentage of individual investors who are bullish about short-term market expectations rose to around 53%, while the percentage of investors who are bearish is 21%. This puts the spread between the bulls and the bears at 32% versus a long-term average of around 2%.

Investors have become their most bullish since April 2021, according to the AAII survey. The weekly reading is the seventh highest in the past 10 years, largely due to the recent stock market rally, expectations of interest rate stability, and lower inflation data.

The bull-bear spread at 32%, is the 11th highest weekly reading in the last 10 years and has jumped 58% from minus 26% only six weeks ago. This increase is extreme at almost +3 standard deviations above the average six-week move, and it is the seventh-highest six-week jump since the survey started in 1988. While the bull-bear spread itself is high compared to recent history, it is not extreme — yet. 

As illustrated in the chart below, investor sentiment, as measured by the spread between bulls and bears in the AAII survey data, is approaching, but not yet at, extreme bullishness, as defined by being more than two standard deviations above the long-term average. The last time this statistic reached the extreme bullishness threshold was in April 2021. 

Individual Investors Approaching Extreme Bullishness

Bull-Bear Spread Has Jumped 58 Points in Six Weeks

Source: LPL Research, AAII, Bloomberg, 12/22/23
Disclosures: All indexes are unmanaged and cannot be invested into directly. Past performance is no guarantee of future results.

We generally consider investor sentiment from a contrarian perspective, so the fact that this indicator is near bullish extremes has tended to be a detractor for stock price returns. Historically, when the bull-bear spread has been at comparable levels (between one and two standard deviations above average), S&P 500 returns have been slightly below average (but still positive). Where the data gets more concerning for stock market investors is when sentiment gets to extreme bullishness, above two standard deviations from the mean, as this has historically led to negative returns both six months and a year out. 

Bullish Investor Sentiment Tends to Precede Slightly Below-Average (but Positive) Returns

Average S&P 500 Returns

Source: LPL Research, Bloomberg, AAII as of 12/22/23
Disclosures: AAII Bull-Bear spread brackets based on 10-year rolling average and one or two standard deviations above/below.
All indexes are unmanaged and cannot be invested into directly.
Past performance is no guarantee of future results.

Summary

After the recent run up in stocks, there are now many investors who head into 2024 in a bullish mood. This stretched sentiment supports our thesis that stocks will likely be up in 2024, but returns may be somewhat muted. We still expect a mild recession to occur, which may usher in some interest rate decreases from the Federal Reserve to offset some of the economic and market impact. We maintain a neutral allocation to equities and are overweight fixed income (as valuations are still attractive relative to equities amid higher yields), funded from cash (where the return profiles of short-term products are attractive, but reinvestment risk remains). 

IMPORTANT DISCLOSURES

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk.

Indexes are unmanaged and cannot be invested into directly. Index performance is not indicative of the performance of any investment and does not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

This material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.

Unless otherwise stated LPL Financial and the third party persons and firms mentioned are not affiliates of each other and make no representation with respect to each other. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services.

Asset Class Disclosures –

International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.

Bonds are subject to market and interest rate risk if sold prior to maturity.

Municipal bonds are subject and market and interest rate risk and potentially capital gains tax if sold prior to maturity. Interest income may be subject to the alternative minimum tax. Municipal bonds are federally tax-free but other state and local taxes may apply.

Preferred stock dividends are paid at the discretion of the issuing company. Preferred stocks are subject to interest rate and credit risk. They may be subject to a call features.

Alternative investments may not be suitable for all investors and involve special risks such as leveraging the investment, potential adverse market forces, regulatory changes and potentially illiquidity. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses.

Mortgage backed securities are subject to credit, default, prepayment, extension, market and interest rate risk.

High yield/junk bonds (grade BB or below) are below investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors.

Precious metal investing involves greater fluctuation and potential for losses.

The fast price swings of commodities will result in significant volatility in an investor’s holdings.

Securities and advisory services offered through LPL Financial, a registered investment advisor and broker-dealer. Member FINRA/SIPC.

Not Insured by FDIC/NCUA or Any Other Government Agency | Not Bank/Credit Union Deposits or Obligations | Not Bank/Credit Union Guaranteed | May Lose Value

Adam Turnquist | Chief Technical Strategist

Key Takeaways  

• ‘Tis the season for the Santa Claus Rally! This historically strong seasonal period officially kicks off today and ends on the second trading day of January.
• While the Santa Claus Rally period has usually generated above-average returns during its short seven-day time window, it also correlates closely to January and following-year returns.
• When investors are on the ‘nice’ list, and Santa delivers a positive Santa Claus Rally return, the S&P 500 has generated an average forward annual return of 10.4%.
• However, when investors are on the ‘naughty’ list, and Santa delivers a negative Santa Claus Rally return, the S&P 500 has generated an average forward annual return of only 4.1%.

Today marks the first day of the Santa Claus Rally period. Yale Hirsch first discovered this unique seasonal pattern in 1972. Hirsch, creator of the Stock Trader’s Almanac, officially defined the period as the last five trading days of the year plus the first two trading days of the new year.

The Santa Claus Rally usually generates a lot of attention due to its historically strong market returns during such a short time frame. As highlighted in the chart below, the S&P 500 has generated average and median returns of 1.3% during the Santa Claus Rally period, compared to only 0.2% and 0.4% average and median returns for all rolling seven-day returns, respectively.

The Santa Claus Rally Historically Delivers Above-Average Gains 

S&P 500 Santa Claus Rally Returns (1950–2022) 

Source: LPL Research, Bloomberg 12/22/23
Disclosures: Past performance is no guarantee of future results. All indexes are unmanaged and can’t be invested in directly. The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1950 incorporates the performance of the predecessor index, the S&P 90. 

Santa is on a Hot Streak 

If the S&P 500 finishes higher during this year’s Santa Claus Rally, it will mark the eighth consecutive period of positive returns. The longest streak was 10 back in the mid-1960s. However, as highlighted in the table below, positive returns during the Santa Claus Rally are relatively common, as the market has advanced 80% of the time during this period. For additional context, all rolling seven-day returns for the S&P 500 since 1950 have a positivity rate of only 58%.

S&P 500 Santa Claus Rally Returns by Year (1950–2022)

Source: LPL Research, Bloomberg 12/22/23
Disclosures: Past performance is no guarantee of future results. All indexes are unmanaged and can’t be invested in directly. The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1950 incorporates the performance of the predecessor index, the S&P 90.

The Naughty or Nice List

One of the other primary aspects of the Santa Claus Rally seasonal period is that returns during this time frame have historically correlated closely to January and subsequent year returns. As Yale Hirsch stated, “If Santa Claus should fail to call, bears may come to Broad and Wall.” As illustrated below, historical returns give merit to his maxim, as the S&P 500 has notably outperformed in January and over the following year when investors make the ‘nice’ list, with Santa delivering a positive Santa Claus Rally return.

How Stocks Perform With or Without Santa Showing Up

Source: LPL Research, Bloomberg 12/22/23
Disclosures: Past performance is no guarantee of future results. All indexes are unmanaged and can’t be invested in directly. The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1950 incorporates the performance of the predecessor index, the S&P 90.

Summary

The market is entering a unique seasonal period with strong momentum coming into year-end. Based on history, a positive Santa Claus Rally this year would be a good sign for a strong January and 2024. While negative Santa Claus Rally periods have historically been associated with underwhelming market performance over the following year, LPL Research believes there are plenty of catalysts for the market to offset potentially weak seasonality. As outlined in our Outlook 2024: A Turning Point, interest rate stability, the end of the Federal Reserve’s rate-hiking campaign, falling inflation, and improving corporate profits should support equities in 2024.  

IMPORTANT DISCLOSURES

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk.

Indexes are unmanaged and cannot be invested into directly. Index performance is not indicative of the performance of any investment and does not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

This material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.

Unless otherwise stated LPL Financial and the third party persons and firms mentioned are not affiliates of each other and make no representation with respect to each other. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services.

Asset Class Disclosures –

International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.

Bonds are subject to market and interest rate risk if sold prior to maturity.

Municipal bonds are subject and market and interest rate risk and potentially capital gains tax if sold prior to maturity. Interest income may be subject to the alternative minimum tax. Municipal bonds are federally tax-free but other state and local taxes may apply.

Preferred stock dividends are paid at the discretion of the issuing company. Preferred stocks are subject to interest rate and credit risk. They may be subject to a call features.

Alternative investments may not be suitable for all investors and involve special risks such as leveraging the investment, potential adverse market forces, regulatory changes and potentially illiquidity. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses.

Mortgage backed securities are subject to credit, default, prepayment, extension, market and interest rate risk.

High yield/junk bonds (grade BB or below) are below investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors.

Precious metal investing involves greater fluctuation and potential for losses.

The fast price swings of commodities will result in significant volatility in an investor’s holdings.

Securities and advisory services offered through LPL Financial, a registered investment advisor and broker-dealer. Member FINRA/SIPC.

Not Insured by FDIC/NCUA or Any Other Government Agency | Not Bank/Credit Union Deposits or Obligations | Not Bank/Credit Union Guaranteed | May Lose Value

Dr. Jeffrey Roach | Chief Economist

Market pundits often shy away from the admission that “this time is different.” But why should we be afraid of that? Markets and the economy are still adjusting to an era of higher rates, a remote labor force, and a global economy filled with political uncertainty. There are a few things that are different, and it’s important to remember investors can find opportunities amid the flux.  

This LPL Research blog will share a few charts, but for more, check out the Econ Market Minute about the diverging paths among retailers.

E-commerce is Gaining Greater Wallet Share

One thing different right now is post-pandemic shopping behavior. As noted in the chart below, the pandemic accelerated the use of e-commerce. Consumers shifted to online shopping, and so far, that habit seems to have stuck. Consumers are shunning department stores, instead choosing to shop online and hunt for bargains and prefer the convenience of e-commerce. This shift has ramifications for retailers working to gain wallet share.

Business Shutdowns Accelerated the Use of E-commerce — the Shift to Online Sales is Sticking

Source: LPL Research, U.S. Census Bureau 12/15/23
Disclosures: Past performance is no guarantee of future results.

GDP Overstates Growth

Another part of the economy that’s different this time around is Gross Domestic Income (GDI). The last time we had such a gap between these GDI and Gross Domestic Product (GDP) measures was 2007, when the economy was about to experience a recession. GDP and GDI are corresponding measures of the economy but should match. GDP is all the spending by businesses, consumers, and the government, whereas GDI is the aggregate wages, salaries, corporate profits, and other incomes generated by economic activity.

The Economy is Not as Strong as it Seems — as GDI Indicates

Source: LPL Research, U.S. Bureau of Economic Analysis 12/20/23
Disclosures: Past performance is no guarantee of future results.

As investors set expectations for the new year, it’s important to take note of the opportunities available.

A Catalyst for Homebuilders

I mentioned a relatively large percentage of remote workers. This new regime has ramifications for the housing market. Typically, investors would think the residential real estate market is one of the most interest rate sensitive areas of the economy. But when households are less constrained by the job market, when homebuilders can buy down rates for prospective buyers, and when inventories of existing homes are at near-cycle lows, investors will likely witness a catalyst for homebuilders. 

The low inventory of existing homes for sale was a catalyst for homebuilders in recent months. Housing starts in November were much higher than in 2019 as homebuilders got creative with buying down mortgage rates for buyers. We are noticing strength in both single-family and multi-family activity as homebuilders take advantage of the low supply of existing homes on the market. Most of the housing starts were in the South as hybrid work continues to be a boon for households seeking a lower cost of living. Investors have clearly rewarded homebuilders, as low inventory of existing homes on the market has created an opportunity for new construction. Falling mortgage rates also helped ignite demand. 

Summary

Investors should expect to find opportunities despite the uncertainty about the upcoming year. Political tensions remain elevated around the globe, consumers still have rising debt burdens, and governments are saddled with debt. Yet, opportunities remain, and savvy investors will find them.

IMPORTANT DISCLOSURES

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk.

Indexes are unmanaged and cannot be invested into directly. Index performance is not indicative of the performance of any investment and does not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

This material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.

Unless otherwise stated LPL Financial and the third party persons and firms mentioned are not affiliates of each other and make no representation with respect to each other. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services.

Asset Class Disclosures –

International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.

Bonds are subject to market and interest rate risk if sold prior to maturity.

Municipal bonds are subject and market and interest rate risk and potentially capital gains tax if sold prior to maturity. Interest income may be subject to the alternative minimum tax. Municipal bonds are federally tax-free but other state and local taxes may apply.

Preferred stock dividends are paid at the discretion of the issuing company. Preferred stocks are subject to interest rate and credit risk. They may be subject to a call features.

Alternative investments may not be suitable for all investors and involve special risks such as leveraging the investment, potential adverse market forces, regulatory changes and potentially illiquidity. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses.

Mortgage backed securities are subject to credit, default, prepayment, extension, market and interest rate risk.

High yield/junk bonds (grade BB or below) are below investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors.

Precious metal investing involves greater fluctuation and potential for losses.

The fast price swings of commodities will result in significant volatility in an investor’s holdings.

Securities and advisory services offered through LPL Financial, a registered investment advisor and broker-dealer. Member FINRA/SIPC.

Not Insured by FDIC/NCUA or Any Other Government Agency | Not Bank/Credit Union Deposits or Obligations | Not Bank/Credit Union Guaranteed | May Lose Value

For Public Use – Tracking: 519258

Posted by Adam Turnquist, CMT, VP Chief Technical Strategist

Friday, December 15, 2023

Key Takeaways:

• The Dow Jones Industrial Average (INDU) has gone from correction to record highs in only 32 trading days. Broadening participation predicated on falling interest rates and signs of a soft-landing scenario have underpinned the recovery.
• What happens after a record high? Over the last 100 years, and filtering for record highs occurring at least three months apart, upside momentum has historically continued. The INDU has generated an average 12-month forward return of 11.1% after posting a new record high, with 71% of occurrences producing positive results.
• And with the INDU already at record highs, all eyes are now on the Dow Jones Transportation Average (TRAN) to confirm the breakout, per Dow Theory.
• LPL Research views the INDU’s recent record-high rally as another piece of evidence supporting the health and sustainability of the current bull market.

It only took 489 trading days, but the INDU climbed back into record-high territory this week. Broadening participation in the equity market recovery has lifted the index 15% above its recent October low and above the prior January 4, 2022 record high of 36,800.

View enlarged chart

While the INDU has become obsolete as a benchmark for portfolio managers due to its price-weighted methodology, its long history and blue-chip components still make it a relevant index to watch. Furthermore, the INDU is a little more balanced with sector weights than the tech-heavy S&P 500, as financials, health care, technology, and industrials each hold around a 15–20% weight within the index.

The INDU is also a key component of Dow Theory — a technical framework dating back to the early 1900s that is generally used to define market trends. Charles Dow, co-founder and editor of the Wall Street Journal, is credited with the original theory.

One of the tenets of Dow Theory is that the averages must confirm each other, simply meaning breakouts and breakdowns in the INDU and TRAN should happen in concert. Conceptually, Charles Dow observed in the late 1800s that raw materials would need to be transported via railroads before economic expansion could begin. Subsequently, robust rail activity would typically portend favorable economic conditions for industrial companies.

With the INDU already at record highs, all eyes are now on the TRAN to check the box for a Dow Theory buy signal (the averages must confirm each other).

View enlarged chart

What Happens After a Record High?

While record highs are great, the next question, of course, is what happens next, especially for those investors who may have missed the rally. Using history as a guide, we found that over the last 100 years, upside momentum continued after the INDU registered a meaningful record high, defined by record highs occurring at least three months apart. As illustrated in the table below, the INDU has generated an average 12-month forward return of 11.1% after posting a new record high, with 71% of occurrences yielding positive results.

View enlarged chart

Summary

While the INDU’s price-weighting methodology limits its use as a portfolio benchmark, the index’s long history and blue-chip components still make it a relevant benchmark to watch. LPL Research views the INDU’s recent record-high rally as another piece of evidence supporting the health and sustainability of the current bull market. A breakout on the TRAN index would further support the bull case and check the box for a Dow Theory buy signal. Finally, history suggests that record highs are typically followed by continued upward momentum. Or as veteran technician Stan Weinstein said, “Whenever a breakout occurs with a stock moving into virgin territory (it’s never traded there before), this is the most bullish situation you can buy. Think about it. There isn’t one person who is long and has a loss.”

IMPORTANT DISCLOSURES

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. For more information on the risks associated with the strategies and product types discussed please visit https://lplresearch.com/Risks  

References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

Unless otherwise stated LPL Financial and the third party persons and firms mentioned are not affiliates of each other and make no representation with respect to each other. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services.

All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

Securities and advisory services offered through LPL Financial, a registered investment advisor and broker-dealer. Member FINRA/SIPC.

Not Insured by FDIC/NCUA or Any Other Government Agency | Not Bank/Credit Union Deposits or Obligations | Not Bank/Credit Union Guaranteed | May Lose Value

Posted by George Smith, CFA, CAIA, CIPM, Portfolio Strategist

Thursday, December 14, 2023

Additional content provided by Kent Cullinane, Analyst

With November behind us, we decided to conduct a deeper dive into fund flows, also known as asset flows or simply “flows,” over the month. Flows measure the net movement of cash into and out of investment vehicles, such as mutual funds and exchange-traded funds (ETF). Investors analyze flows to gain insight on investor demand and sentiment surrounding asset classes, sectors, and other classifications of markets.

In today’s analysis, we will be examining the flows across various asset classes, followed by a closer examination of individual Morningstar categories. Additionally, we will explore the disparities in flows between active and passive investments.

Asset Class Flows

During the one-month period ending on November 30, 2023, U.S. equities experienced the highest net inflow among asset classes, with a flow of approximately $21.6 billion (represented by the light blue line). However, you’ll notice that the inflow into U.S. equity ETFs (orange) outweighed the outflow out of U.S. equity mutual funds (dark blue), highlighting investor appetite for passive U.S. equity investments. Not far behind U.S. equities are taxable bonds, which saw a $21.3 billion net flow, again showing ETF inflows meaningfully outweighing mutual fund outflows. It is worth noting that money market products were excluded from the below chart. If money market flows were included, it would significantly outpace all other asset classes in terms of flows, with a net $184.6 billion monthly inflow—not surprising given the yields on short-term interest rates.

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Flows for the year-to-date period are not too dissimilar from the trailing one-month period, as ETFs continued to gather assets in U.S. equities and taxable bonds. While ETFs recorded a net inflow in U.S. equities, the outflow from U.S. equity mutual funds meaningfully outweighed the ETF inflow, resulting in a net negative flow for U.S. equities for the calendar year. In taxable bonds, mutual funds experienced a net inflow, in addition to the ETF inflow, resulting in taxable bonds seeing the largest net flow across asset classes year to date at $199 billion.

Morningstar Category Flows

When looking at Morningstar categories, large blends experienced the largest net inflow over the trailing one-month period, nearly $23.4 billion. Following large blend was the high-yield bond category, experiencing an inflow of $12.8 billion. The next three categories sequentially—intermediate-core bond, corporate bond, and long government bond—highlight investor sentiment towards longer-duration asset classes, with combined inflows of $16.7 billion. Looking at the other end of the spectrum, ultrashort bonds and short-term bonds saw the largest outflows of $17.9 billion and $15.9 billion, respectively, further emphasizing the move out of short duration assets and into long.

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The year-to-date period appears similar, with intermediate-core bonds gathering the most flows ($110.2 billion) followed by large blend ($95.5 billion) and long government ($51.2 billion). Another notable category was derivative income, which gained $22.4 billion in flows. Derivative income strategies have boomed in popularity given their ability to generate significant income through the utilization of a covered call-writing strategy, while also participating in the markets, albeit at a lower beta.

When comparing the latest LPL Research Strategic and Tactical Asset Allocation Committee (STAAC) views with the November (and year-to-date) flows data, there are a number of similarities. The top asset class by inflows is U.S. equities, with large cap blended equities outpacing their mid and small cap peers. The STAAC maintains an overweight to large cap equities over mid and small-caps, given continued economic uncertainty and positive technical trends in the asset class. Additionally, November flows highlight investor sentiment for higher-duration asset classes. While the STAAC maintains neutral duration, the Committee favors fixed income broadly over cash, as the risk-return trade-off is attractive relative to history.

IMPORTANT DISCLOSURES

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. For more information on the risks associated with the strategies and product types discussed please visit https://lplresearch.com/Risks  

References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

Unless otherwise stated LPL Financial and the third party persons and firms mentioned are not affiliates of each other and make no representation with respect to each other. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services.

All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

Securities and advisory services offered through LPL Financial, a registered investment advisor and broker-dealer. Member FINRA/SIPC.

Not Insured by FDIC/NCUA or Any Other Government Agency | Not Bank/Credit Union Deposits or Obligations | Not Bank/Credit Union Guaranteed | May Lose Value

Posted by Jeffrey J. Roach, PhD, Chief Economist

Wednesday, December 13, 2023

Key Takeaways:

• Since inflation is going in the right direction and the labor market is getting more into balance, the Federal Reserve (Fed) is likely done raising rates. We should expect the committee to prepare investors for a slight pivot in policy.
• The markets expect the Fed’s next action will likely be a cut in rates by mid next year but much of that is predicated on the economy weakening enough to warrant a cut.
• Both equity and bond markets have latched onto the notion that the Fed is done raising rates which has been a catalyst for the recent rally.
• The updated Summary of Economic Projections (SEP) will likely push back on the market’s expectations that the Fed will cut rates by over a full percentage point. But the
  SEP is a poor predictor of future rates.

Favorable Inflation Trajectory

The November annual rate of inflation dipped to 3.1% from 3.2% last month as energy prices continued to plummet. Despite the month-over-month rise in November prices, the Fed is still expected to hold rates unchanged at the final meeting of 2023.  Rising shelter costs, medical care, and car insurance prices were the main drivers in November’s Consumer Price Index (CPI), but the decline in apparel was revealing. Apparel declined by 1.3%, the largest monthly decrease since the onset of the pandemic and could illustrate the growing price-consciousness of the consumer.

The decline in aggregate goods prices could be in response to the bargain hunting at the start of the holiday sales season.

Further, the soft reading from the latest Producer Price Index (PPI) shows the pipeline of inflation is loosening, giving the Fed some leeway with future policy. For now, investors will have to come to grips with the diverging glide paths between goods prices and services prices. As shown in the chart, the annual growth rates between services and goods are getting closer into balance but services disinflation has more room to run.

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Too Early to Declare Victory

The Fed will by no means declare victory since the annual core inflation rate (excluding food and energy) in November was 4.0%, double the long-run target rate set by the Fed. However, the trajectory is encouraging.

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As noted in the chart above, the annual rate of headline inflation is 3.1% and will likely decline further from here. Despite inflation running above the Fed’s target, the Fed will likely hold rates steady at the next few meetings as policy makers—and investors too, for that matter—remain concerned about the lagged effects of monetary policy. Given the speed of the past rate hikes, many argue the economy and markets have not yet felt the full impact of the policy tightening.

From an investment standpoint, markets will need to digest the updated Summary of Economic Projections (SEP) which will likely show expectations the Fed will not cut rates as aggressively as markets are anticipating in 2024.

Overall, the Strategic and Tactical Asset Allocation Committee (STAAC) recommends a neutral tactical allocation to equities, with a modest overweight to fixed income funded from cash. The risk-reward trade-off between stocks and bonds looks relatively balanced to us, with core bonds providing a yield advantage over cash. With the Fed likely done hiking rates and yields at attractive levels, bond returns have become increasingly competitive with equities.

IMPORTANT DISCLOSURES

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. For more information on the risks associated with the strategies and product types discussed please visit https://lplresearch.com/Risks  

References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

Unless otherwise stated LPL Financial and the third-party persons and firms mentioned are not affiliates of each other and make no representation with respect to each other. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services.

All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

For a list of descriptions of the indexes and economic terms referenced in this publication, please visit our website at lplresearch.com/definitions.

Securities and advisory services offered through LPL Financial, a registered investment advisor and broker-dealer. Member FINRA/SIPC.

Posted by Jeffrey Buchbinder, CFA, Chief Equity Strategist

Friday, December 8, 2023

Additional content provided by Colby Hesson, Analyst

Market-watchers have been intensely focused on the Federal Reserve (Fed) this year. Recently, they’ve mostly opined on when the first rate cut might be coming and, generally, making the assumption that a rate cut would be good for stocks. It could be good, but our analysis peels back the onion to help make an important point. Once the cut comes, typically the Fed has gone too far and recession is near (or already started). Further, markets tend to get jittery ahead of the cut, suggesting investors right now might be better off rooting for “higher for longer.”

An examination of Fed rate cycles since the 1970s (table below) reveals that investors don’t have much to look forward to when looking at how stocks do during the first six months following the first Fed rate cut. Keep in mind that the sample size is relatively small, with only 9 rate cycles studied. It is also worth noting that the time from the first rate hike to the first rate cut has more than doubled since 1985 as business cycles have generally lengthened.

While average gains don’t look great (2% over the subsequent six months and 5-6% over the next 12), they aren’t bad either. The dispersion is where this gets more interesting. During challenging economic environments such as the early 1980s, early 2000s, and pre-Great Financial Crisis, stocks suffered mightily after the Fed easing cycle began. Simply put, performance varies quite a bit across these periods.

We see the same thing when analyzing the period between the final rate hike and the first rate cut, with mixed returns; in addition, negative returns outnumber positives.

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The Fed will cut rates because it worries monetary policy is too restrictive for a weakening economy. The central bank’s goal remains a soft landing, and their spotty track record in achieving that goal does not mean a hard landing is necessarily in the cards. Some things have already broken, by the way, including Silicon Valley Bank and First Republic Bank. And many think the U.S. economy already experienced a recession with the two straight GDP declines in the first half of 2022 (it was a technical recession, not an official one).

Today, consumer and corporate balance sheets are in great shape, with many corporate executives having already prepared for recession. And don’t forget the cause of the presumed recession, high inflation, has sharply reversed. Bottom line, if a recession comes in 2024, it will likely be too mild to disrupt the market meaningfully.

So now 135 days into the rate pause—assuming no addition hikes are forthcoming—be careful what you wish for. Higher for longer and a “muddle through” economy without cuts might be best for stocks in 2024. More on these topics in our Outlook 2024: A Turning Point, due out on December 12 on lpl.com.

IMPORTANT DISCLOSURES

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. For more information on the risks associated with the strategies and product types discussed please visit https://lplresearch.com/Risks  

References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

Unless otherwise stated LPL Financial and the third party persons and firms mentioned are not affiliates of each other and make no representation with respect to each other. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services.

All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

Securities and advisory services offered through LPL Financial, a registered investment advisor and broker-dealer. Member FINRA/SIPC.

Not Insured by FDIC/NCUA or Any Other Government Agency | Not Bank/Credit Union Deposits or Obligations | Not Bank/Credit Union Guaranteed | May Lose Value