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Market Blog Posted by lplresearch

Tuesday, June 22, 2021

The “dot plots” are slowly becoming the new phrase of the year after the July 16 Federal Reserve (Fed) meeting. As a reminder, the dot plots represent the expected path of short-term interest rates by Fed members. Each dot represents a member’s opinion on where the Fed funds policy rate should be over the next few years. While not official policy, it does provide additional transparency into Fed member thinking—albeit anonymously. Along those lines, St. Louis Fed President Jim Bullard made headlines by saying he was one of the Fed members who now thinks raising short-term interest rates in 2022 makes sense. His comments were notable as he has generally been seen as reliably dovish and has argued for more accommodative monetary policy in the past. (For more on what doves and hawks have to do with monetary policy, please see the June 21 Weekly Market Commentary.) Markets, always on the lookout for hints on Fed policy, have interpreted the recent dot plot release and Bullard’s comments as a hawkish shift in policy. Consequently, fixed income and equity markets reacted sharply to the news.

“Markets are looking for any sign of a change in Fed policy,” noted LPL Financial Fixed Income Strategist Lawrence Gillum. “Unfortunately, some of the ways in which the Fed is communicating are actually adding confusion and volatility to markets. We think it’s important for investors to filter out this noise and concentrate on longer-term goals.”

As seen in the LPL Research Chart of the Day, the bond market’s reaction can be seen as a tale of two interpretations. The front end of the yield curve sold off (yields increase as prices decrease), which is consistent with the prospect of earlier rate hikes. Short-term Treasury yields are more sensitive to changes in monetary policy, so higher yields for two and three-year tenors are consistent with the Fed’s expectation for raising policy rates in the next few years. However, the big rally in bonds on the longer end of the yield curve is more consistent with slowing growth expectations—something we tend to see during an actual rate hike campaign.

We think the move higher in yields on the front end of the curve is likely the right interpretation of shifting Fed policy, whereas we don’t think investors should read too much into the price action on the long end of the curve. We don’t think the bond market is pricing in a much slower growth environment. The exaggerated move in longer-term yields was likely from a popular trade on higher long-term Treasury yields unwinding into a Treasury market with more sellers than buyers. A number of liquidity indexes we watch support that view. So, the lack of liquidity in the bond market last week helped push longer-term yields lower—more so than a shift in Fed policy would suggest.

View enlarged chart.

When the dot plot was originally released, it was intended to provide additional transparency into the way individual members were thinking about monetary policy. In fact, these dot plots have often added confusion and volatility to markets, yet another reason the Fed tries to downplay the importance of these releases. In fact, during last week’s post-Fed meeting press conference, Chairman Powell said the dot plots should be taken with a “big grain of salt.” We agree. So, hopefully, we can stop talking about dot plots soon. Well, at least until a new set of dot plots are released after the Fed’s September policy meeting.

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 or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.

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.

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. LPL Financial doesn’t provide research on individual equities. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

All index and market data from FactSet and MarketWatch.

This Research material was prepared by LPL Financial, LLC.

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

Insurance products are offered through LPL or its licensed affiliates.  To the extent you are receiving investment advice from a separately registered independent investment advisor that is not an LPL affiliate, please note LPL makes no representation with respect to such entity.

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

Market Blog Posted by lplresearch

Monday, June 21, 2021

New highs amid higher inflation

The S&P 500 Index finally broke out to new highs late two weeks ago on the heels of the hotter than expected inflation data. Equity Strategist Jeff Buchbinder and Chief Market Strategist Ryan Detrick discuss how the market took the 5.0% year-over-year jump in the May Consumer Price Index (CPI) in stride, as the majority of the jump came from the reopening. Higher prices on rental cars, used cars, and hotels amounted for much of the huge jump. Ryan also discusses that new highs aren’t anything to fear, as future returns can be quite strong.

View enlarged chart.

Fed preview and lower yields

Lawrence Gillum joins the podcast to discuss the surprising lower move in yields. Nearly everyone is expecting higher rates, but last week the opposite happened. Some disappointing jobs data, a smaller infrastructure deal, and a dovish European Central Bank (ECB) all were attributed for the move lower. Ryan notes that sometimes when everyone is on the same side of the boat, that can cause a surprise move in the opposite direction.

Ryan and Lawrence also discuss the big event this week: The Federal Reserve (Fed) meeting. Lawrence notes that it is expected they will leave rates at 0%, but the big question is when will they taper and have they even started to discuss it internally yet. It will likely be announced in Q3, with actual tapering starting early next year.

Sustainable investing in fixed income

Lawrence discusses why sustainable investing is becoming more mainstream in fixed income. We all talk about sustainable investing and usually think of equities, but Lawrence notes we are seeing explosive growth in fixed income as well. In fact, over $400 billion of environmental, social, and governance (ESG) related debt was issued in the first quarter of 2021. Lawrence explains that the future is indeed bright for this area of investing and we don’t see it slowing down anytime soon.

View enlarged chart.

Tune in now

Listen to the entire podcast to get the LPL strategists’ views and insights on current market trends in the US and global economies. To listen to previous podcasts go to Market Signals podcast. You can subscribe to Market Signals on iTunes, Google Podcasts, or Spotify and find us on the LPL Research YouTube channel. Or you can watch it below.

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 or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.

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.

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. LPL Financial doesn’t provide research on individual equities. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

All index and market data from FactSet and MarketWatch.

This Research material was prepared by LPL Financial, LLC.

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

Insurance products are offered through LPL or its licensed affiliates.  To the extent you are receiving investment advice from a separately registered independent investment advisor that is not an LPL affiliate, please note LPL makes no representation with respect to such entity.

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

Economic Blog Posted by lplresearch

Friday, June 18, 2021

As the economic focus has frantically shifted from inflation concerns to peak growth fears to the Federal Reserve’s (Fed) tightening timeline in recent weeks, it can be helpful to take a step back and assess the broad economic trend with a diversified set of indicators.

Through this lens, we are encouraged by the latest reading of the Leading Economic Index (LEI), which strongly suggested that economic growth would continue at a strong clip in the near-to-intermediate term.

On Thursday, June 17, the Conference Board released its May 2021 report detailing the latest datapoint for the LEI, a composite of ten data series that tend to lead changes in economic activity. Many economic data points are backward looking, but we pay special attention to the LEI, as it has a forward-looking tilt to it and spans many segments of the economy. The index grew 1.3% month over month, building on the strength seen in recent months since flirting with negative territory in February.

“Three consecutive monthly gains in excess of 1% tend to be rare, and in fact, we never experienced that coming out of the 2008 recession,” said LPL Financial Chief Investment Strategist Ryan Detrick. “That we have seen this dynamic twice now exiting the trough of the most recent recession speaks to the speed and strength of the recovery. We certainly understand near-term jitters, but we expect broader economic trends to remain positive over the intermediate term, consistent with the LEI’s message.”

As seen in the LPL Chart of the Day, the LEI has shown strong growth the last three months after limping through the second half of winter.

View enlarged chart.

Seven of the ten components grew in May, while two fell and one remained unchanged. Average weekly initial claims for unemployment insurance, the ISM New Orders Index, and the interest rate spread represented the three largest contributors. Building permits and manufacturers’ new orders for nondefense capital goods excluding aircraft detracted from the overall index’s performance, while average weekly manufacturing hours held steady.

Strong breadth among the underlying components reinforces our view of continued economic strength. While supply chain bottlenecks and a slower-than-desired labor market recovery have acted as near term speedbumps, we expect those dynamics to largely self-correct and propel the economy further in the second half of the year. Reopening effects are snowballing, and we believe ever-increasing vaccination numbers, warmer weather, and the potential for strong employment growth later in 2021 warrant continued optimism for this economy.

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 or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.

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.

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. LPL Financial doesn’t provide research on individual equities. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

All index and market data from FactSet and MarketWatch.

This Research material was prepared by LPL Financial, LLC.

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

Insurance products are offered through LPL or its licensed affiliates.  To the extent you are receiving investment advice from a separately registered independent investment advisor that is not an LPL affiliate, please note LPL makes no representation with respect to such entity.

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

Market Blog Posted by lplresearch

Thursday, June 17, 2021

The Federal Reserve (Fed) ended its two-day Federal Open Market Committee (FOMC) meeting yesterday and, as expected, there were no changes to current interest rate or bond purchasing policies. However, signaling on future path of short-term interest rates seemingly surprised markets. Notably, the number of Fed members that now expect interest rate hikes in 2023 changed dramatically. While an initial hike was once thought of as a 2024 event at the earliest, the majority of members now expect at least two quarter-point interest rate hikes to take place in 2023. Additionally, seven members (out of eighteen) expect at least one rate hike in 2022. While, it should be noted that these “dot-plot” projections are not voted on nor do they represent official policy, it does show the changing opinions of the committee members (more on this in next week’s Weekly Market Commentary). Nonetheless, the overall hawkish message surprised the bond market and as seen in the LPL Research Chart of the Day, Treasury yields across the curve moved sharply higher after the FOMC statement was released (yields move higher when bond prices fall).

“What was expected to be a routine Fed meeting turned out to be moderately interesting,” noted LPL Financial Fixed Income Strategist Lawrence Gillum. “While it was largely expected that the dot-plot would show that the first interest rate hike would likely occur in 2023, the number of members that pulled forward that expectation is more than the market was expecting and could show a more hawkish tilt to monetary policy going forward.”

See enlarged chart.

Other takeaways from the meeting and the subsequent press conference included:

• Summary of Economic Projections (SEP): Four times a year, the Fed updates its economic projections for the next several years as well its longer-term forecasts. The Fed now sees 7.0% GDP Growth in 2021 (up from 6.5% in March), and much higher inflation expectations with PCE headline and core metrics, their preferred inflation metrics, at 3.4% and 3.0%, respectively. However, the committee sees inflation falling to slightly more than 2.0% in 2022 and 2023. The expected unemployment rate in 2021, 2022 and 2023 remained largely unchanged.
• Tapering of bond purchases: The Fed continues to buy at least $80 billion of Treasury securities and $40 billion of agency mortgage securities each month. Chairman Powell, in his post-meeting press conference, indicated that they have started “talking about talking about” the potential to reduce those bond purchases but aren’t ready to curtail purchases just yet. Chair Powell mentioned that the committee will continue to talk about reducing its bond purchases and will announce its intention well in advance of actually reducing the amount of Treasury and mortgage securities.

While the bond market was surprised by the change in the number of members that now expect interest rates to move higher, it should be noted that the change is due to the continued economic recovery. In our view, it should be viewed as a positive that the Fed thinks the economy is recovering quicker than originally expected. The next FOMC meeting concludes on July 28 and while we won’t get updated economic projections, we should learn more about the future path of monetary policy.

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 or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.

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.

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. LPL Financial doesn’t provide research on individual equities. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

All index and market data from FactSet and MarketWatch.

This Research material was prepared by LPL Financial, LLC.

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

Insurance products are offered through LPL or its licensed affiliates.  To the extent you are receiving investment advice from a separately registered independent investment advisor that is not an LPL affiliate, please note LPL makes no representation with respect to such entity.

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

Market Blog Posted by lplresearch

Wednesday, June 16, 2021

As nearly everyone knows by now, inflation has soared the past few months, with the May Consumer Price Index (CPI) coming in at 5.0% year-over-year, the highest since 2008, while the core CPI (excluding energy and food) was 3.8%, the highest since 1992. The Bloomberg consensus is calling for 3.4% headline CPI this year, which has many worried about potentially runaway inflation. We do not expect that to happen and we’d side with the actual number coming in lower than the current consensus.

How much has inflation been in the news? A recent CNBC survey noted that inflation worries are now investor’s biggest worry, topping pandemic worries for the first time in 15 months. Adding to that, here is a Google Trends showing that searches for the word ‘inflation’ have never been higher going back to 2004 (the furthest back their data goes), again suggesting that higher inflation shouldn’t be a surprise.

See enlarged chart.

First off, why is inflation higher? Record stimulus, a big economic recovery, major supply chain issues, a surprisingly tight labor market, and negative CPI this time a year ago (so the baseline is quite low) are all reasons inflation has soared lately. As we’ve said many times in recent months, we think the jump in inflation is transitory, and inflation will come back to trend by mid-2022.

Many of the big picture things that have kept a lid on inflation for more than a decade are still in place. Things like technological innovation, globalization, the Amazon effect, increased productivity and efficiency, automation, and high debt (which puts downward pressure on inflation) are all still firmly in play and should help keep inflation in check later this year and beyond.

“Yes, this year could see inflation upwards of 3% or a tad more, but that isn’t exactly runaway inflation from the 2% inflation rate we saw most of last decade,” explained LPL Financial Chief Market Strategist Ryan Detrick. “Coming out of the worst recession we’ve seen in our lifetime, it makes sense that inflation could run hotter this year and maybe even into 2022, but the likelihood that we have a 1970s style inflation surge is quite slim.”

What does the market think? Odds are nearly everyone realized inflation is higher as the Google Trends data showed. In case you don’t like to Google things, just go get gas or head to the grocery store, you’ll see higher prices. But the market has a funny way of looking ahead and pricing things in well before most people understand why. There very well could be a major peak in inflation fears but the market may already be starting to move on from this worry.

Think about it, if the market was truly worried about inflation, would rates really drop in the face of that scary CPI data? Probably not.

See enlarged chart.

What about lumber? It has crashed 40% recently, yet another sign inflation worries may have peaked.

See enlarged chart.

Corn and soybeans appear to have also peaked.

See enlarged chart.

See enlarged chart.

Even copper has peaked out recently.

See enlarged chart.

Recently, as we show in the LPL Chart of the Day, 10-year breakevens, a measure of market-implied inflation expectations, peaked the exact same week that Barron’s had a magazine cover talking about inflation. In other words, inflation fever had gripped us back in May and just as quickly the market had it priced in and stopped worrying so much about it. (Note – The 10-year breakeven rate measures the difference or gap between 10-year Treasury Bond and Treasury Inflation Protected Securities (TIPS). The 10 year breakeven rate serves as an indication of the markets’ inflation expectations over the 10-year horizon.)

See enlarged chart.

What does it all mean? There are clear signs that higher inflation is priced into the market. Yes, we’ll get higher inflation, but it won’t be a surprise anymore. For more of our thoughts on inflation, we discuss inflation (and many other things) in our most recent LPL Market Signals podcast. You can watch it from our YouTube channel below.

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 or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.

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.

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. LPL Financial doesn’t provide research on individual equities. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

All index and market data from FactSet and MarketWatch.

This Research material was prepared by LPL Financial, LLC.

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

Insurance products are offered through LPL or its licensed affiliates.  To the extent you are receiving investment advice from a separately registered independent investment advisor that is not an LPL affiliate, please note LPL makes no representation with respect to such entity.

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

Tuesday, June 15, 2021 Posted by lplresearch

As investors we fight against behavioral biases in every investment decision we make. Our Director of Research Marc Zabicki talked recently about some of these biases in this video. We become attached to our ideas and when we think about selling, “FOMO” kicks in—the fear of missing out. Buying is the easy part. But selling is hard.

After maintaining a positive view of the technology sector for a number of years and seeing it do so well, the LPL Research team faced a difficult decision. Value stocks have been leading, benefiting from the economy opening back up again. More inflation, rising interest rates, and higher commodity prices are generally value-friendly macroeconomic factors. But a more positive view of value stocks should be paired with a less positive view of growth stocks—largely technology.

“It’s tough not to like technology given the strong fundamentals and rapid pace of innovation from many tech companies,” explained LPL Equity Strategist Jeffrey Buchbinder. “But we expect cyclical value sectors like financials, industrials, and materials to fare better the rest of the year as the economy gets a reopening jolt.”

We downgraded our technology view to neutral primarily for these reasons:

1) Reopening. We expect the market’s shift toward reopening beneficiaries and away from stocks best positioned for the work-from-home environment to continue. That means favor cyclical value sectors (financials, industrials, materials, and potentially energy) over the growth sectors including technology as well as consumer discretionary and communication services.

2) Valuations. The price-to-earnings ratio for the technology sector based on estimated earnings over the next 12 months (source: FactSet) is 25—high compared to the sector’s history. The relative valuation—at near a 20% premium to the S&P 500 (25x versus 21x)—is also high as shown in our LPL Chart of the Day. Comparing value to growth based on the Russell 1000 style indexes reveals an even bigger gap—the Growth Index is trading at a more than 60% premium to the Value Index, the most in 20 years. Also consider we expect interest rates to rise over the rest of the year, which could bite into richly valued growth stocks.

See enlarged chart.

3) Neutral relative trend. The sector is near its all-time high and nearly 90% of the stocks within it are above their 200-day moving averages, indicative of a strong trend. But relative performance versus the S&P 500 Index peaked on September 1 and has been drifting sideways to lower since then, as shown in the accompanying chart. The lack of a trend, based on a flat 200-day moving average for relative performance, points to a neutral sector view.

See enlarged chart.

Even though we’ve tempered our enthusiasm, we acknowledge the sector still enjoys solid fundamentals. Demand for technology equipment and software won’t go away just because people get out more. In fact, we wouldn’t be surprised to see the sector grow earnings by 40% during the second quarter on a year-over-year basis (FactSet’s consensus estimate is currently calling for near 30%). But the rest of the S&P 500 companies may see something closer to 70%, including doubling of financials’ and materials’ earnings and tripling of industrials’.

The downgrade to neutral doesn’t mean we plan to head for the hills by any stretch. A neutral view would imply matching the sector’s weighting in the S&P 500 at 27% in applicable strategies. We believe the sector likely moves higher in the second half of the year, along with the broad market, but we just see better opportunities for outperformance in cyclical value stocks.

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 or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.

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.

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. LPL Financial doesn’t provide research on individual equities. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

All index data from Bloomberg.

This Research material was prepared by LPL Financial, LLC.

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

Insurance products are offered through LPL or its licensed affiliates.  To the extent you are receiving investment advice from a separately registered independent investment advisor that is not an LPL affiliate, please note LPL makes no representation with respect to such entity.

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

Friday, June 11, 2021 Posted by lplresearch

While U.S. economic conditions have certainly improved, and earnings momentum for S&P 500 companies has been strong, U.S. small business conditions remain somewhat less stable. Notably, the NFIB Small Business Optimism Index has improved since last year (99.6 in May, up from the 90.9 low in April 2020), and according to the Federal Reserve, perhaps less than 200,000 U.S. small businesses failed due to the pandemic last year. Both figures are likely better than many had expected during the height of 2020’s economic stress. However, the aggregate economic foundation of small business in this country probably has a ways to go before it fully recovers. This may create more instability at this point in the recovery than is typically seen. The message here is that while most high-frequency economic data indeed looks good, we should remain mindful of still unstable areas of the economy that may not show up in many data sets.

Fortunately, the National Federation of Independent Business (NFIB) provides economic and market participants with various survey results that deal with specific elements of small business operation. The NFIB not only surveys optimism, but they also compile data on hiring plans, compensation plans, capex plans, quality of labor, and sales expectations…among other items. Review of these data series indicates to us that there is still work left to do to get U.S. small businesses back on solid footing. As we can see from the LPL Chart of the Day below, business owners remain somewhat hesitant about their capital expenditure plans while hiring plans have trended more firmly with optimism. Still, other data tells us that NFIB survey respondents are cautious as to whether now is a good time to expand their business. Meanwhile, the surveys show that small business owners are indeed having a hard time finding quality labor and the cost of labor is rising, thus making job openings hard to fill.

See enlarged chart.

“Recent NFIB data tells us that small businesses have gotten off the floor following the pandemic punch, but the black eye on a formidable part of the U.S. economy still lingers. With post-COVID economic re-openings in full swing, we remain hopeful that small businesses will soon recover enough to add that final boost to domestic conditions,” explained LPL Financial Director of Research Marc Zabicki.

While small business conditions will be something to watch carefully through 2021 and into next year, we believe pent-up consumer demand could bode well for many establishments. We are expecting a robust summer traveling season that could have consumers readily opening their wallets. This may translate into further improvements in the NFIB optimism trend, provided that business owners find a solution to their current labor struggles.

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 or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.

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.

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. LPL Financial doesn’t provide research on individual equities. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

All index data from Bloomberg.

This Research material was prepared by LPL Financial, LLC.

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

Insurance products are offered through LPL or its licensed affiliates. To the extent you are receiving investment advice from a separately registered independent investment advisor that is not an LPL affiliate, please note LPL makes no representation with respect to such entity.

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

Economic Blog Posted by lplresearch

Thursday, June 10, 2021

Make that two consecutive months that CPI inflation has surprised meaningfully to the upside.

The U.S. Bureau of Labor Statistics released its May inflation report this morning, June 10, revealing that the headline Consumer Price Index (CPI) rose 0.6% month over month and 5% year over year. The core CPI, which strips out food and energy, rose 0.7% month over month, and 3.8% year over year. Given strong base effects from rolling off weak data from a year ago, we find the month over month data more informative. With that context, more volatile components that are heavily tied to the economic reopening had the largest effects on the monthly increases, most notably prices for used vehicles, airfare, and rental cars.

We continue to see strong evidence that supply chain bottlenecks paired with a rapid demand rebound are causing major price increases. The most visible example is in used car and truck prices, which surged 7.3% in May following a historic 10% rise in April. The supply of new vehicles is constrained in the near term because of semiconductor chip shortages, and as a result, used cars and trucks are being bid up in the secondary markets. The good news is that we expect these market imbalances to largely resolve themselves with time as supply, which has a longer ramp-up time than demand, recovers.

“The inflation outlook has rightfully been top of mind since last month’s blowout report,” explained LPL Financial Chief Market Strategist Ryan Detrick. “Under the hood, though, we think the picture is a bit more sanguine than the headlines would suggest, and still believe inflation will be relatively well-contained over the intermediate-to-long term.”

As seen in the LPL Chart of the Day, owners’ equivalent rent of primary residences, a measure of rents for non-rent-controlled residences in urban areas, has bounced off depressed levels. The move thus far, though, is likely best described as returning to the pre-pandemic trend rather than threatening to break away to new heights…for now. This measure is critical for future inflation prospects, as it is one of the largest components of CPI and is considered to be less volatile than other components. Movements observed in the series are, therefore, viewed as more structural in nature and thus have the potential to be “stickier.” At the moment, we do not believe that the rent component poses an imminent threat to the broader inflation picture, and is merely displaying an increasing willingness for consumers to rent following a massive shift in preference to own brought on by COVID-19.

View enlarged chart.

Market-based measures of inflation expectations have also retreated from their fever pitch last month. 10-year breakeven inflation expectations, derived from the differences in nominal and real Treasury yields, have actually fallen since last month’s CPI report, not risen. And while we are hesitant to call that the peak in inflation expectations given ongoing bottlenecks in supply chains, there was a distinct air of a “buy the rumor, sell the news” dynamic to us.

Taken altogether, we believe the Federal Reserve (Fed) will view today’s inflation data generally as confirmation of its preexisting stance that the majority of excess inflationary pressures will be transitory. In a vacuum, despite the headline inflation beat, this likely does little to change the Fed’s timetable for tapering asset purchases, and the market reaction for now looks to be confirming that view. The coming months will be telling, though, as we are now entering the “show me” phase of the inflation debate where market participants will be increasingly anxious for the Fed to prove its assertion that higher inflation will be transitory.

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 or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.

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.

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. LPL Financial doesn’t provide research on individual equities.

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

This Research material was prepared by LPL Financial, LLC.

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

Insurance products are offered through LPL or its licensed affiliates.  To the extent you are receiving investment advice from a separately registered independent investment advisor that is not an LPL affiliate, please note LPL makes no representation with respect to such entity.

If your representative is located at a bank or credit union, please note that the bank/credit union is not registered as a broker-dealer or investment advisor.  Registered representatives of LPL may also be employees of the bank/credit union.

These products and services are being offered through LPL or its affiliates, which are separate entities from, and not affiliates of, the bank/credit union.  Securities and insurance offered through LPL or its affiliates are:

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

Market Blog Posted by lplresearch

Wednesday, June 9, 2021

The S&P 500 Index is flirting with new highs unlike nearly any time in history. In fact, it has now gone nine days in a row closing within 1% of an all-time high without breaking through. “There’s an old saying about not shorting a dull market. Well, lately it has been about as dull as it gets,” explained LPL Financial Chief Market Strategist Ryan Detrick. “The catch is other times that saw long streaks without a new high, yet very close to one, actually didn’t perform as well as one might expect.”

View enlarged chart.

Taking things a step further, the S&P 500 has closed within 0.15% of an all-time high without closing at a new high for three straight days. In the history of the S&P 500, that has only happened one other time, in September 1964. Stocks were flat three months later then and up only 2.6% six month later, so although this is only a sample size of one, a sharp move higher in the near term appears less likely.

We’ve shared this next chart before, but given we are talking about new highs it is important to point it out again. New highs usually happen in clusters that can last for a decade or more. Given this market has been making new highs since 2013, despite the 2020 bear market, history would suggest there could be several more years before this strong run is done.

View enlarged chart.

Take another look above. This year has a good amount of new highs already and it isn’t even half way over. In fact, 26 new highs over the first five months of the year is the most for any year during the first five months since 32 new highs in 1998.

Another angle on this: Should the S&P 500 make a new high in June, it would make a new high every month for the first six months of the year. This rare feat last happened in 2014 and 1986 before that. The rest of the year those years added 5.0% and lost 3.5%, respectively.

The S&P 500 is only 0.13% away from the last all-time high set back on May 7. Odds do favor another new high will eventually take place, which means this bull market continues. In the LPL Chart of the Day we show that this new bull market is already up 89% in just over a year, giving it one of the best annualized returns ever for a bull market, although bull markets do tend to have strong annualized returns early.

View enlarged chart.

What happens after stocks make new highs? Here’s a chart we shared last August. The bottom line is investors shouldn’t be scared of new highs, even though many are scared of heights.

View enlarged chart.

So there you have it, various looks at new all-time highs. Now we just have to make one!

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 or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.

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.

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. LPL Financial doesn’t provide research on individual equities. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

All index and market data from FactSet and MarketWatch.

This Research material was prepared by LPL Financial, LLC.

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

Insurance products are offered through LPL or its licensed affiliates.  To the extent you are receiving investment advice from a separately registered independent investment advisor that is not an LPL affiliate, please note LPL makes no representation with respect to such entity.

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

Market Blog Posted by lplresearch

Tuesday, June 8, 2021

While many of the taxable markets have generated negative returns this year, both the high quality and high yield municipal markets have generated positive returns (no guarantees that will continue, of course). State and local government finances are in better shape than many feared during COVID-19 shutdowns and many muni issuers are set to receive billions in federal aid. Thus, the fundamental backdrop for many muni issuers has improved recently. Yields, however, reflect that positive backdrop and are amongst the lowest they’ve ever been. As seen in the LPL Research Chart of the Day, the ratio of AAA municipal yields over 10-year Treasury yields, a common valuation metric, is significantly below the five-year average and around an all-time low.

“The municipal market has been a relatively good story for fixed income investors this year,” noted LPL Financial Fixed Income Strategist Lawrence Gillum. “And the continued need for tax-exempt income should help support prices.”

View enlarged chart.

While valuations are high, the technical backdrop for municipal securities remains supportive, in our view. Investor flows into municipal mutual funds and ETFs have been strong with an estimated $43 billion of inflows year to date through May, which is the highest on record according to Lipper data. Currently, we’re entering a strong seasonal period when, historically, reinvestment money has outpaced new municipal bond issuance. Over the next three months, Bloomberg estimates $165 billion will be returned to bondholders (due to maturing bonds and interest payments) for reinvestment into the market, which is roughly $45 billion more than what is expected to come to market from new issuance. All that money chasing fewer investment opportunities should provide stability to bond prices, at least in the near-term.

That said, risks remain in the municipal market. While many state budgets are currently flush with cash, underfunded pensions are still an issue. A recent report by a global pension consultant shows that, as of June 30, 2020, state pension plans, in aggregate, were only 70% funded. Moreover, there have already been 76 distressed muni borrowers this year (mostly smaller issuers), which puts this year on track to exceed almost every year since 2012 in terms of impairments (2020 was worse due to COVID-19). Nonetheless, with strong tax revenues, billions in federal aid and strong flows into the market, municipal bonds should remain well bid, particularly in the near term.

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 or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.

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.

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. LPL Financial doesn’t provide research on individual equities. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

All index and market data from FactSet and MarketWatch.

This Research material was prepared by LPL Financial, LLC.

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

Insurance products are offered through LPL or its licensed affiliates.  To the extent you are receiving investment advice from a separately registered independent investment advisor that is not an LPL affiliate, please note LPL makes no representation with respect to such entity.

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