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Posted by Jeffrey J. Roach, PhD, Chief Economist

Wednesday, November 15, 2023

Key Takeaways:

• Investor risk appetite could increase in the near-term after the October inflation report, similar to the market reaction after the jobs report from a few weeks ago.
• Headline consumer prices in October were unchanged month over month, pulling the annual rate of inflation down to 3.2% from 3.7% last month.
• Core inflation rose 0.2% from a month ago as housing costs, insurance, and medical care increased in October.
• Hotel prices fell in October, likely on the heels of declining demand for travel.
• Air fares fell in October as fuel costs declined and competition among airlines put downward pressure on tickets.
• Bottom Line: The annual rate of core inflation decelerated to 4%, the smallest rate since mid-2021 and should keep the Federal Reserve (Fed) from raising interest rates at next month’s meeting. Despite the deceleration, the Fed will likely continue to speak hawkishly and will keep warning investors not to be complacent about the Fed’s resolve to get inflation down to its long-run 2% target.

No Inflation in October

The October Consumer Price Index (CPI) showed inflation was unchanged from the previous month, indicating markets may finally get a reprieve from the nagging pressures of inflation. In October, CPI increased by 3.2% from a year ago, a decent deceleration from the 3.7% annual rate registered in September. Following the release, both equity and bond markets responded favorably as the official metrics showed some improvement with inflation.

Digging a Bit Deeper

Energy prices fell 2.5% and was the biggest contributor to the unchanged headline stat. Gas prices fell 5%, the biggest monthly decline since May. Falling energy prices will provide a bit of a reprieve for consumers, especially lower income families more sensitive to gas prices. Other categories are also showing some encouraging signs. Both new and used vehicle prices declined in October. Used vehicle prices have declined now for five consecutive months, although used vehicle prices are up over 30% since the onset of the pandemic.

Airfares also declined in October. In fact, the price index for airline tickets is below 2019 levels and could indicate a cooling off in demand for travel.

Too Early to Declare Victory

The Fed will by no means declare victory since the annual core inflation rate in October was 4.0%, double the long-run target rate set by the Fed. However, the trajectory is encouraging.

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As shown in the chart above, the annual rate of headline inflation is 3.24% 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, we saw an increase in risk appetite after this report and we could see some encouraging moves in the near-term. Overall, the Strategic and Tactical Asset Allocation Committee (STAAC) remains neutral on equities, maintains a positive bias towards growth stocks, and favors large caps over small caps. High valuations, tight financial conditions, and the potential for a recession (albeit mild) make the STAAC wary of taking on additional risk as investors prepare to enter the New Year. 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 Lawrence Gillum, CFA, Chief Fixed Income Strategist

Tuesday, November 14, 2023

Late Friday afternoon, rating agency Moody’s announced that it had downgraded is credit rating outlook on U.S. government debt from stable to negative. Moody’s cited wide budget deficits and political polarization as reasons for the downgraded view. Further, Moody’s noted amid higher interest rates, without measures to reduce spending or boost revenue, fiscal deficits will likely “remain very large, significantly weakening debt affordability”.

Moody’s is the last of the three main rating agencies with a top rating on the U.S. debt after Fitch downgraded the U.S. government in August following the latest debt-ceiling battle. S&P Global Ratings was the first to cut the rating for the U.S. in 2011 amid that year’s debt-limit crisis. Since the announcement though, Treasury yields are generally lower (prices higher) across the curve.

In our view, the bond market’s collective shrug for the outlook change affirms that rating agencies are only catching up to the fiscal policy challenges that the bond market has been pricing in for several quarters. In fact, until recently, the market has been trading primarily on the expected increase in Treasury supply to fund budget deficits expected over the next several years. Per the Congressional Budget Office, the U.S. government is expected to run sizable deficits over the next decade in the tune of 5%-7% of GDP each year, which means a lot of Treasury issuance is coming to market.

That is obviously a lot of supply that needs to find demand. However, since we know the U.S. rarely (if ever?) actually pays its debts off, there is also a lot of existing debt that needs to be rolled over as well. Over the next 13 months, the U.S. will need to refinance over $9 trillion of debt with over $3 trillion due this year. The additional supply comes at a time when price-insensitive buyers are stepping back from the Treasury market. The supply/demand imbalance will likely mean interest rates are going to be higher than they otherwise would be absent sizeable deficits.

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These refinancings will take place with interest rates among the highest in over a decade. So, with the recent announcement that interest expense on existing debt hit $1 trillion, interest expense is likely only headed higher—concerns that were outlined by Moody’s (and Fitch in August). So, frankly, it’s no surprise that rating agencies, in general, have started to sound the alarms that fiscal risk is rising. Importantly though, in our view, the downgrades do not suggest the U.S. will have trouble paying its debts; we think there is currently a very low probability of default. But, until the U.S. government gets its fiscal house in order, we’re likely going to see additional downgrades and likely higher interest rates in the Treasury 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 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 George Smith, CFA, CAIA, CIPM, Portfolio Strategist

Friday, November 10, 2023

Additional content provided by Kent Cullinane, Analyst

With earnings season winding down, having more than 450 of the 500 S&P constituents (or roughly 90%) reporting earnings by end of week, we take a look at the results thus far, while also highlighting the ‘Magnificent 7’ and how this basket of securities, making up nearly 30% of the S&P by market cap weighting, has driven earnings and performance this year.

As of November 3, 82% of companies in the S&P 500 reported earnings that surpassed expectations, well above the 10-year average of 74%. Results so far point to a 4.4% year-over-year gain, which would mark the first quarter of year-over-year earnings growth since Q3 2022. The consumer discretionary sector has produced the biggest average upside surprise (22%) among sectors, followed by communication services, financials, and tech with average upside surprises of 9-10%.

Earnings from the ‘Magnificent 7’—comprised of Apple/AAPL, Amazon/AMZN, Alphabet/GOOG/GOOGL, Meta/META, Microsoft/MSFT, Nvidia/NVDA, and Tesla/TSLA—were largely positive this quarter, with five of the stocks reporting results that exceeded expectations. TSLA was the lone constituent that reported a negative earnings surprise this quarter, as price cuts across its lineup of cars weighed on results. While NVDA has yet to report (November 21), investors are bullish on NVDA given their blowout earnings report last quarter and position within the budding artificial-intelligence (AI) industry.

Optimism surrounding the ‘Magnificent 7’ may be warranted, given their dominance in megatrends such as AI and cloud-computing. However, from a valuation perspective, these companies are trading at significant price-to-earnings (PE) multiples when compared to the rest of the world. The chart below shows the aggregate PE ratio of the ‘Magnificent 7’ compared to other asset classes.

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You can see in the chart above that when compared to the S&P 500 equal weight index, the ‘Magnificent 7’ is trading at nearly twice the PE multiple. We consider this rich even when considering the double-digit earnings growth this group is generating at a time when earnings for the rest of the market are down slightly. When looking abroad, the PE appears nearly three times larger than the MSCI EAFE Index and the MSCI Emerging Markets (EM) Index, though these markets may be value traps because of weakening earnings outlooks.

We also looked at the free-cash-flow yields of the S&P 500 and split the constituents into quintiles. The free-cash-flow yield is a financial solvency ratio, comparing a company’s free cash flow per share to the market value per share. A high free-cash-flow yield means a company is generating cash that can be quickly used to service its debt and other obligations, or can be returned to shareholders as dividends or share buybacks. The chart below shows the free-cash-flow yields of the S&P 500.

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You’ll notice the dispersion between the top quintile (blue) and bottom quintile (orange), when compared to the median (gray). While the ‘Magnificent 7’ appears to generate significant free cash flow, when considering the free-cash-flow yield, nearly all constituents of the ‘Magnificent 7’ fall into the bottom quintile, again highlighting the potential overvaluation of these stocks.

Given the growth characteristics of these companies in a year in which growth stocks have outpaced value stocks by a significant margin, it’s no surprise they have outperformed the broader market this year.

From an asset allocation perspective, the Strategic and Tactical Asset Allocation Committee (STAAC) remains neutral on style, with a positive bias towards growth stocks. Strong earnings thus far, coupled with attractive technical trends, position growth well in the near and medium-term. However, high valuations, tight financial conditions, and the potential for a recession (albeit mild) makes the STAAC wary to upgrade the position.

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 Adam Turnquist, CMT, VP Chief Technical Strategist

Thursday, November 9, 2023

Key Takeaways:

• The S&P 500 and Nasdaq Composite are riding respective eight- and nine-day winning streaks into Thursday. Oversold conditions, solid earnings, and a sharp pullback in interest rates have been the primary drivers of the rebound.
• How long will the streaks last? History implies roughly 50% odds the indexes will extend their winning streaks in today’s session.
• And while all winning streaks eventually end, the degree of consistent buying pressure in U.S. equity markets suggests investor confidence is improving and momentum is building.
• Furthermore, winning streaks of this magnitude are not only rare, but they are also associated with solid forward returns over the next 12 months.

The S&P 500 and Nasdaq Composite are enjoying their longest winning streaks in two years. The S&P 500 has strung together eight straight days of gains, while the tech-heavy Nasdaq Composite has been up for nine consecutive sessions. Oversold conditions, solid earnings, and a sharp pullback in interest rates have been the primary drivers of the rebound.

From a technical perspective, the S&P 500 has climbed back above its 50- and 200-day moving averages, closing on Wednesday just below key resistance at 4,400. A breakout above this level would reverse the S&P 500’s current downtrend and check the box for a higher high, raising the probability that the correction lows were set last month. A similar technical story has developed on the Nasdaq Composite, which needs to clear 13,660 to break its October highs.

The S&P 500 & Nasdaq Composite have Rebounded Back to Inflection Points 

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How Long Could These Winning Streaks Last?

For the S&P 500, just over 50% of eight-day winning streaks turn into nine, while the longest run of consecutive gains is 14 days since 1950. As of November 8, the S&P 500’s 6.4% gain amid its current eight-day winning streak is also well above the average 4.5% gain generated during other exclusive eight-day winning streaks.

History implies roughly the same 50% odds for the Nasdaq Composite extending its current nine-day winning streak into 10, while the index’s longest streak of daily gains stands at 19.

View enlarged chart

Where Could the Market Go From Here?

Consistent buying pressure of this magnitude is not only rare—eight up days in a row have only occurred in 2.3% of all eight-day periods for the S&P 500 since 1950—but also a bullish sign for improving investor sentiment and market momentum. And while all winning streaks eventually end, history suggests the rally may not. The chart below highlights the average progression of the S&P 500 and Nasdaq Composite after generating eight and nine days of consecutive gains, respectively. On a 12-month basis, the S&P 500 has climbed higher by an average of 9.1% following an eight-day winning streak, with 72% of occurrences posting positive results. The Nasdaq Composite has posted an average gain of 11.0% 12 months after a nine-day winning streak, with 79% of occurrences producing positive results.

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SUMMARY

Stocks have staged a meaningful recovery off oversold levels. The S&P 500 is riding an eight-day winning streak that has left the index near key resistance at 4,400. A close above this level will be required to reverse its developing downtrend. And while all winning streaks eventually end, the degree of consistent buying pressure in U.S. equity markets suggests investor confidence is coming back and momentum is building. Furthermore, winning streaks of this magnitude are not only rare, but they have also been associated with respectable forward returns over the next 12 months.

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, November 8, 2023

Key Takeaways:

• The number of individuals experiencing long-term unemployment is back down to pre-pandemic levels, indicating a market functioning like it did before the pandemic.
• A growing number of individuals are holding multiple jobs as rising costs of living put increasing pressure on households.
• Small businesses expect lower real sales in the next six months as the economy slows. See chart below.
• Despite the headwinds, the economy grew above trend last quarter but this growth path is not likely sustainable.

What is Different This Time Around?

The historic shutdown and reopening of the economy continues to torque financial markets and analyst expectations. This was a key point made by this week’s speech by Neel Kashkari, the president of the Minneapolis Fed and the most hawkish voting member of the Federal Open Market Committee (FOMC). Relationships that traditionally explained what was happening to the economy appear to be severed. For example, hybrid work opportunities seem to have structurally changed the labor market, so traditional models that relate metrics such as the unemployment rate to inflation could be less helpful. Due to the hybrid option, households are less inclined to consider where they work for where they live.

We have also seen that the economy has been less sensitive to interest rates. Many households took cash out from their home equity and can thereby, skirt the credit markets and avoid the pressure from higher borrowing costs.

So What Does this Mean?

One possible scenario is an economy that slows and potentially dips into recession yet the unemployment rate might stay lower than normal given the anomalies in the labor market. The unemployment rate is still historically low yet we see some emerging concerns such as a high number of individuals holding multiple jobs. In October, 5.2% of those employed were working more than one job and that’s likely due to households feeling the pressure from higher costs of living. Holding more than one job is a way to handle higher prices.

Because of these abnormalities, businesses find it difficult to manage inventories and find qualified workers. Practically, we see firms becoming more cautious about future revenues. Most small businesses expect real sales to be lower in the next six months as illustrated in the chart below. Investors could expect an increasing number of firms to lower guidance as sale projections weaken. One positive consequence is markets will expect the Fed to stop raising rates and eventually cut rates in the next 12 months.

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Conclusion

Most small businesses expect real sales to decline over the next six months as the economy slows. The rising number of individuals suffering from long-term unemployment implies that consumer spending will slow in the coming quarters. Despite the headwinds in the U.S., we think domestic markets pose a relatively lower risk than international markets.

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 David Matzko

Tuesday, November 7, 2023

After over a decade of very low interest rates, the rapid rise in rates recently has been the primary reason most fixed income asset classes have generated negative returns. And while the losses for some asset classes have been steep (and historically awful), we think the risk/reward for fixed income has improved and think the probability of further losses has decreased. Why? Higher starting yields.

While not unique to fixed income per se, the asset class has a feature that makes negative price performance increasingly difficult to continue due to rising rates alone. Fixed income returns are a combination of price performance and income so as yields rise, the income component increases as well. The higher income component serves as a “hurdle rate”, or a yield cushion, that will need to be eclipsed before further losses are realized. As such, these higher hurdle rates may decrease the probability of losses due to an increase in interest rates.

Currently, the highest hurdle rates reside in the short-to-intermediate categories but have improved in most sectors. For example, in order for the short Treasury category (1-5 year Treasury securities) to generate a loss over the next 12 months, interest rates would need to increase by more than 2.56% from current levels. Similarly, given the increase in yields for the intermediate corporate credit category, interest rates would need to increase by 1.5% from current levels to offset current levels of income. However, while hurdle rates are the highest for shorter maturity sectors, the increase in yield cushion for (most) longer maturity sectors has improved as well. Taking on some duration risk makes more sense now than it did a few years ago. That said, it would only take a 0.33% increase in yields to offset current levels of income for the long Treasury category—something that is within a likely distribution of outcomes. And while we can’t rule out the possibility of still higher rates at this point, we think it would take a steep resurgence in inflationary pressures to get to the levels needed to generate further losses on most fixed income asset classes.

View enlarged chart

The move higher in yields recently has been unrelenting but we think we’re closer to the end of this sell-off than the beginning. Over the past decade, interest rates were at very low levels by historical standards. Now, the recent sell-off has taken us back to longer term averages. That is, at current levels, yields are back to within normal ranges. And while the transition out of the low interest rate environment to this more normal range has been a challenging one for fixed income investors, we think, given higher starting yield levels, the chances of further negative returns over the next year have declined.

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.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

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 Adam Turnquist, CMT, VP Chief Technical Strategist

Friday, November 3, 2023

Key Takeaways:

• Oversold conditions and tumbling interest rates have brought buyers back into equity markets this week. The S&P 500 has recaptured its closely watched 200-day moving average (dma).
• Historically, index returns following a move back above the 200-dma have yielded positive but underwhelming returns, suggesting crossovers should be used more as a confirmation of trend than a binary trading signal.
• Seasonal tailwinds could keep this recovery moving forward. The S&P 500 has generated an average return of 7.0% from November through April, marking the best six-month return period for the market since 1950.
• While the comeback in stocks this week has been constructive, there is more technical work to do before considering that the correction is complete. Specifically, we are watching for the S&P 500 to clear resistance at 4,400, for market breadth to expand, and for 10-year yields to reverse their current uptrend.

What a difference a week makes! The S&P 500 has strung together four straight days of gains and is set to snap a two-week losing streak. Oversold conditions, solid earnings, hope for an end to the Federal Reserve’s rate-hiking campaign, and a sizable pullback in interest rates have brought buyers back into the market this week. Thursday’s 1.9% rally—powered by above-average volume and broad-based buying—pushed the index back above its closely watched 200-dma at 4,248. While we view this as a step in the right direction, a close above 4,400 would be required for the index to reverse its emerging downtrend. Furthermore, market breadth has been underwhelming amid the latest bounce, as less than half of the stocks within the S&P 500 are trading above their 200-dma.

S&P 500 Recaptures its 200-dma

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Crossover Performance

What does this mean for stocks going forward? Of the 216 times the S&P 500 crossed back above its 200-dma since 1950, forward three-, six-, and 12-month returns have averaged only 2.3%, 3.0%, and 4.7%, respectively. While these returns are a bit underwhelming, the latest crossover occurred after the index spent six days below the 200-dma, placing it in the third quintile group based on the number of days spent below the 200-dma before a crossover. Historical returns in this group have been higher on a 12-month basis, averaging 6.5%. Overall, we believe this data suggests price crossovers above the 200-dma should be used more as a confirmation of trend than a binary trading signal.

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Seasonal Tailwinds Return

Seasonal tailwinds could provide an additional boost to stocks into year-end. The S&P 500 finished the ‘Sell in May’ period this week with a modest 0.6% price gain. Historically, this six-month stretch has been the weakest for the index, averaging only a 1.6% gain. Fortunately for investors, the next six months look much better from a seasonal standpoint. The S&P 500 has generated an average gain of 7.0% from November through April, marking the best six-month period for the market since 1950. Furthermore, the S&P 500 has finished higher during this timeframe 77% of the time, marking the highest positivity rate across all other six-month periods (the second is December to July at 71%).

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SUMMARY

While the recent technical progress should help restore market sentiment, and the S&P 500’s move back above the 200-dma is clearly a step in the right direction, more technical evidence is required to affirm the lows of this correction have been set. Specifically, we are watching for: 1) the S&P 500 to reverse its emerging downtrend with a close above 4,400, 2) breadth to expand with at least half of the index constituents getting back above their 200-dma, and 3) for 10-year yields to reverse their current uptrend with a move below 4.35%.

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

Thursday, November 2, 2023

Additional content provided by John Lohse, CFA, Senior Analyst

In a unanimous decision yesterday, The Federal Reserve (Fed) left interest rates unchanged following its Federal Open Market Committee (FOMC) meeting. This marks the second straight meeting in which a rate hike was skipped, however, Chair Jerome Powell, didn’t rule out future increases. For now, the target rate remains at 5.25%-5.50%. Markets reacted positively to the news as stock prices rallied and bond yields fell.

Leaving the Door Open

The FOMC’s November Statement maintained the possibility of future rate hikes as they remain “highly attentive to inflation risks”. The Committee is still determining the lagged effects of the current monetary policy, as Powell stated, “the full effects of our tightening have yet to be felt”.

It believes both the financial and credit conditions will likely weigh on overall economic activity for households and businesses. As mortgage rates recently reached 8%, and the average credit card rate sits at over 20%, high borrowing costs are omnipresent for consumers and businesses alike. A broader measure of the Fed’s monetary policy stance can be gleaned from the Proxy Funds Rate, which takes into account wider measures of financial conditions that aren’t necessarily tethered to the fed funds rate. The chart below shows a divergence in the fed funds rate and the Proxy Funds Rate, indicating more strain on financial market conditions than would otherwise be measured by the fed funds rate.

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Wage Growth

While Wednesday’s Fed statement remained largely unchanged from the prior meeting, Powell did make a surprisingly positive statement on wage growth during the post-meeting press conference. Referencing Tuesday’s release of the Employment Cost Index (ECI) Powell noted that “If you look at the broad range of wages, the wage increases have really come down significantly over the course of the last 18 months to…where they’re substantially closer to that level that would be consistent with 2% inflation over time”. The ECI data showed private industry employment costs rose 4.3% year-over-year, compared with 5.2% the same month last year. Committee members expect to see some deterioration in the labor market before inflation reaches the long run target and would warmly welcome continued gradual moderation in wages.

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Risks Balancing Out

At the start of the rate hiking campaign over 18 months ago, the predominant concern was targeting an appropriate interest rate level to prevent inflation from becoming entrenched. As we stand today, that predominant concern has become more balanced with a competing concern if they’re doing “too much”. The Committee is proceeding carefully, with the risks of higher interest rates becoming more two-sided. Although the economy grew at 4.9% annualized in Q3, the Atlanta Fed’s GDPNow growth tracker is projecting 1.2% for Q4. As inflation continues to moderate, albeit still not at its long-term target, the Fed now has the luxury of more heavily considering the economic growth outlook, as witnessed by a second straight pause.

Bottom Line

The Fed will continue to try to determine the proper level of interest rate policy as it goes “meeting-by-meeting”. We’ve seen dot plot projections deteriorate over longer periods. Members’ forecasts are fluid, as they search for unambiguous and decidedly consistent data relating to inflation, employment, and overall economic health. It may lean towards a hiking bias in the December meeting as they’re still not assertively confident that the current policy is restrictive enough, but incoming data will heavily influence the next move.

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

Wednesday, November 1, 2023

Even after a red October provided more trick than a treat for stock market investors, we continue into what has historically been one of the strongest periods for stock market seasonality.

A red October was the third consecutive month in a row that the S&P 500 was lower. August and September have never been good for stock market seasonals but historically, and especially in recent years, October has had a fairly solid track record for stocks—not the case in 2023 as the S&P 500 fell 2.2% during the month. The good news is that from a seasonality perspective, looking at data back to 1950, November has been the strongest month and the start of both the strongest two-month, and six-month periods for stocks.

November is the best performing month since 1950 and second best month over the past five and 10 years.  Furthermore,  only one of the past 11 Novembers has the S&P 500 been down over the month (in 2021), though in the midst of overall impressive average returns (+1.7% monthly return since 1950) November has also had its share of big down months, notably in 2008 (-7.5%), 2000 (-8%), 1987 (-8.5%) and 1973 (-11.4%).

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November-December is also the strongest two-month period on average looking at all periods back to 1950 but this two-month pairing has been often been relying on November in recent years as December’s “Santa Claus Rally” returns have been mixed.

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Looking at six-month return windows, November-April is also the strongest of these looking at all periods back to 1950 and over the past 20 years. In recent history over the past five and 10 years, this pattern has broken down somewhat with the November-April returns more middle of the road and the strongest six-month period being March-August. Over all periods since 1950 the old stock market adage of “Sell in May” appears to have some credence as the May-October does have the weakest returns of all six-month periods, but in recent years this has also shifted somewhat and September-February has been the weakest six-month stretch over the past five and 10 years.

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When studying the proportion of positive monthly returns since 1950 November has posted a positive return around 69% of the time.  The only months that have historically finished in the green more often are April and December.

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October’s negative return meant stocks finished down three months consecutively for the first time since the midst of the COVID-19 outbreak at the start of 2020, and prior to that in 2016. Taking a look at how stocks performed after such occurrences the good news is that if October turns out to be the end of the run of negative months, then the S&P 500 return one year out following such an inflection is well above average with a 17.9% rebound versus an average of 8.9% for all periods. If the negative run of monthly returns continues past three months, then the returns a year out are below average (perhaps unsurprisingly given this period includes at least one negative month to start) but are still positive more often than not and have a healthy median return. If the run of negative months stops at four or five, then the returns a year out are still strong as on average stocks bounce back over the following 12 months. The longest run of consecutive down months since 1950 was 9, occurring from January to September 1974 (during which time the S&P 500 was down 35% but went on to recover 32% over the next 12 months).

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In summary, though somewhat mixed, overall historic stock market seasonals are still pointing to a supportive environment for stocks coming into the year-end. Three consecutive months of selling pressure may have also exhausted sellers and left stocks approaching oversold levels. We do maintain our outlook of a slight preference for fixed income over equities in our recommended tactical asset allocation (TAA), but this is more a function of fixed income valuations remaining relatively favorable over equities due to their attractive yields. We see this as a reason to temper enthusiasm for equities, but not to be bearish, remaining neutral, sourcing the slight fixed income overweight from cash, relative to appropriate benchmarks.

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