Archive

Market Blog Posted by lplresearch

Thursday, May 13, 2021

We’ve warmed up to developed international stocks recently for several reasons. For one, the U.S. stock market has staged a tremendous rally—this week notwithstanding—since last March which has prompted us and others to start looking for other opportunities that aren’t pricing in so much optimism. Valuations, though not great timing tools, are more attractive in Europe and Japan. And we expect the US dollar to weaken which could boost non-US stock returns.

Another reason to take a closer look at international is the recent resurgence of value stocks. The developed international equity market (mainly Europe and Japan) is much more value-focused than the U.S. market, based on the MSCI EAFE Index and the S&P 500 Index. As shown in the LPL Chart of the Day, the relative performance of value stocks versus their growth counterparts has been well correlated to the relative performance of developed international stocks compared to those in the U.S. In other words, international tends to work when value works.

View enlarged chart.

“Should strong performance by value stocks continue—and we suspect it might—international stocks will have their best chance in over a decade to sustain outperformance,“ explained LPL Equity Strategist Jeffrey Buchbinder. “The strength in cyclical value stocks such as financials, industrials and natural resources, coupled with tech sector weakness, gives European and Japanese markets a fighting chance of keeping up with the U.S. as those economies fully reopen.”

We can see how developed international stocks are more value-focused when looking at sector breakdowns for key indexes. As shown in the graphic below, the U.S. equity market (represented by the S&P 500 Index) has a much higher technology sector allocation, making it a more growth-oriented index than the MSCI EAFE Index benchmark for developed international equities. If digital media (think Google and Facebook, which are categorized as communication services) and e-commerce (think Amazon, which is in consumer discretionary) are included in this sector comparison, the technology gap widens even further. In essence, for international to outperform, U.S. technology leadership needs to hand the baton over to cyclical value. That transition has been happening over the last couple months and very well could continue.

View enlarged chart.

At this point the primary factor holding us back from upgrading our view of developed international stocks to neutral from our current negative view is the pandemic. As Europe and Japan fully reopen and see the accelerating economic growth that the U.S. is seeing now, those markets may be in an even better position to outperform. Until then, we maintain our slight preference for U.S. stocks over developed international.

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

Wednesday, May 12, 2021

For nearly a year, investors have had the late spring/early summer months circled on their calendars for a potential jump in inflation. Base effects from rolling off weak data a year ago held the promise of eye-popping year-over-year numbers, and an economy that would be increasingly reopening meant inflation could start to run hotter month over month. Still, today’s inflation numbers came with some serious sticker shock.

The U.S. Bureau of Labor Statistics released its monthly report on inflation this morning, May 12, revealing that the headline Consumer Price Index (CPI) rose 0.8% month over month and 4.2% year over year. The core CPI, which strips out food and energy, rose 0.9% month over month, its highest reading since the early 1980s, and 3.0% year over year.

Given the base effects from a year ago, we view the month-over-month changes as much more informative for the inflation outlook. Used car and truck prices surged 10% in April, their largest gain ever and representing the largest contributor to the overall rise, while other components seeing large jumps month over month included lodging away from home and airfare. Major CPI components, though, such as rents (0.2%), showed much more moderate rises.

“Today’s data release is only going to escalate the market’s focus on inflation,” explained LPL Financial Chief Market Strategist Ryan Detrick. “Big beats in inflation data like today’s will increase the pressure on Federal Reserve (Fed) Chair Jerome Powell’s characterization of inflation as ‘transitory’ and pull forward calls for tapering asset purchases.”

As seen in the LPL Chart of the Day, 10-year inflation breakeven rates, a measure of intermediate-term market price-based inflation expectations, have climbed steadily in the last few months. In fact, breakeven rates are now at their highest level since 2013. The market has digested this move higher in inflation expectations rather orderly so far without a major challenge to the latest monetary policy guidance. But, given inflation’s tendency to self-reinforce, markets could begin to grow bolder in their demands that the Federal Reserve change course and act sooner.

View enlarged chart.

Much of the recent jump in inflation has to do with changes in the supply picture in our estimation, as the base effects and demand pickup were fairly well telegraphed. Surging input costs in supply chains are forcing companies to raise prices. Raw materials such as copper and lumber have been some of the most high profile culprits of late. Moreover, signs are pointing to the supply of labor becoming increasingly expensive and difficult to acquire. The most recent employment report showed that workers may require higher compensation to be enticed back into the workforce, especially while enhanced unemployment benefits continue. Finally, supply chain bottlenecks associated with quickly ramping up production are preventing companies from keeping up with surging demand in many cases, which places upward price pressures on existing supply.

While we forecast an inflation jump in the short-to-intermediate term, we do believe that longer term inflation will remain reasonably well contained. Market-based measures can tend to overshoot in both directions based on prevailing sentiment, and we think ultimately that Fed Chair Powell will be successful in preventing inflation from spiraling out of control.  As mentioned, restarting the economy creates supply disruptions that feed into inflation, though in time these effects should self-correct. In fact, similar phenomena occurred exiting the 2008 recession, albeit on a more elongated timeline. Ultimately, though, inflation did not persist in earnest, as longer-term suppressors of inflation, such as globalization and technology, prevailed. We anticipate the story will end much the same this time around, but the ride may be bumpy in the meantime.

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

Tuesday, May 11, 2021

Inflation is one of the primary risks to bondholders. Rising consumer prices erodes the “real” value of principal and interest payments making them worth less. However, the Federal Reserve’s (Fed) reaction to increasing consumer prices could be a risk to bond prices as well. We answer questions surrounding the mechanics around measuring inflation and what we think the Fed’s reaction to rising inflation will be.

How is inflation measured? There is no great way to capture all the price changes in an economy but there are two main indexes used to measure inflation—the Consumer Price Index (CPI) and the Personal Consumption Expenditure Index (PCE), which is the Fed’s preferred index. While both indexes attempt to measure the price changes of a basket of goods, there are some differences between the two indexes. First, the weights to the underlying categories are slightly different. As of the most recent publishing, goods excluding food and energy represented 35% of the PCE index versus 38% for core CPI and the weight for services is slightly different as well (65% for core PCE and 62% for core CPI). There are additional differences at the sub-category level as well including: Owners’ Equivalent Rent (30% of core CPI and 13% of core PCE), Medical Care Services (9% of core CPI and 19% of core PCE) and Transportation Services (6% of core CPI and 3% of core PCE).

Additionally, core PCE makes adjustments based upon expected consumer behavior. That is, as prices rise on a good or service, the PCE index will swap out that good or service for a comparable one with a lower price. This biases prices lower in PCE inflation. Due to the differences between the two indexes, core PCE has generally been 0.25% lower than core CPI, on average.

What has kept core PCE under the Fed’s 2% target? As seen in the LPL Research Chart of the Day, the main reason we haven’t seen core inflation levels (orange line) above 2% has been the consistently lower prices within the goods sector (blue line). Due to things like price discovery and labor substitution, prices for goods have actually declined over time. (See our April 1^st blog post reasons why inflation has been contained over time and why we think it will likely be contained going forward.) Service prices (yellow line) have remained fairly stable—so for core PCE to exceed 2% for a meaningful period of time, the prices of consumer goods would have to consistently increase, all else being equal. In particular goods prices for food and beverages consumed offsite (8% of the index), motor vehicles and parts (4.5% of the index), and recreational goods and vehicles (4% of the index) would need to see sustained price increases.

View enlarged chart.

What will the Fed’s reaction be to higher consumer prices? The Fed wants core price increases to average 2% over time. Since core inflation levels have been below 2% for years, they want inflation levels to remain above 2% for “some time” so that price increases average 2% year-over-year. Moreover, they have stated that they will continue to provide monetary support to the economy until “substantial further progress” has been made toward the committee’s maximum employment and price stability goals.

There is a risk to this new approach though. If inflation isn’t transitory and consumer prices continue to increase more than that 2% year-over-year level, the Fed would likely have to react sooner and potentially raise short-term interest rates higher than the markets are expecting. Right now, we don’t believe that to be an imminent risk, but a risk nonetheless.

“We should see higher inflation levels over the next few months but we don’t think it will force the Fed to react before they’re ready to,” according to LPL Financial Fixed Income Strategist Lawrence Gillum. “We think they’re on hold for some time.”

Our base case is that most of the inflation we’re likely to see this year will be transitory and the Fed can take its time before normalizing monetary policy. As such, we believe the Fed will continue with their asset purchase plan throughout 2021 and start to incrementally scale back purchases in 2022. Further, we expect the Fed to begin to raise short-term interest rates towards the second half of 2023. In the meantime, we do expect additional volatility in the bond market but, barring a policy misstep, we don’t see 10-year Treasury yields increasing meaningfully beyond our 1.75% to 2.00% year-end target.

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

Friday, May 7, 2021

Economic Blog Posted by lplresearch

Investors betting on a continued acceleration in U.S. payrolls in April following March’s impressive numbers received an unwelcome reminder of just how choppy the data can be month-to-month.

The U.S. Bureau of Labor Statistics released its monthly employment report this morning, revealing that the domestic economy added only 266,000 jobs in April, well below Bloomberg-surveyed economists’ median forecast for a gain of 1,000,000. The prior two months also received net negative revisions of 78,000 jobs. The unemployment rate unexpectedly rose to 6.1% from 6%, though that was paired with an above-estimate gain in the labor force participation rate, which moved from 61.5% to 61.7%, equaling a recovery high. Average hourly earnings rose 0.7% month over month, signaling lower-wage workers did not rejoin the workforce to the degree expected.

Anecdotal commentary provided by companies in recent months detailing their difficulty finding qualified job candidates evidently worked its way into the data this month in a big way. There are a few explanations for why this might be. Enhanced unemployment benefits may reduce the urgency for some to return to work. Additionally, still-closed schools and lack of child-care may make it difficult for workers to return to the in-person segments of the labor markets. And finally, March’s big jump in payrolls may have represented a rehiring of workers with whom hiring managers already had relationships, such as furloughed employees. Hiring new workers requires a more rigorous, and time-consuming, vetting process.

As seen in the LPL Chart of the Day, April bucked the reacceleration trend seen off the December 2020 low. Total payrolls still sit about 8.2 million below the February 2020 peak of 152.5 million, but we are still very optimistic about our ability to recapture the lion’s share of those losses quickly despite today’s disappointing readout.

View enlarged chart.

“The job market got a bit of a reality check this morning,” explained LPL Financial Chief Market Strategist Ryan Detrick. “While we always caution against reading too far into one data release, we think most of the cited factors that suppressed April’s payroll number should wear off naturally with time.  We believe that despite April’s speedbump the overall trend will be higher from here.”

Given the magnitude of the total loss that still needs to be recovered and the varying degrees to which parts of our economy are currently open, we believe jobs data will carry the potential for strong upside surprises for at least the next several months. Improving employment trends—though choppy—buoy consumer strength, and the economy overall, given consumers’ large weighting in the calculation of gross domestic product (GDP). As such, we continue to recommend positioning portfolios to take advantage of these trends, where appropriate, including an overweight allocation to equities relative to benchmarks, and a tilt toward sectors that may benefit more from a continued cyclical upturn.

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

Friday, May 7, 2021

As talk of inflation continues to heat up, one asset class fueling the fire has been the commodities complex. In our one-year review of the market low, we noted how commodities had been some of the biggest winners during the market recovery. Well that trend hasn’t stopped yet, and as shown in the chart below, on Wednesday, the Bloomberg Commodity Index closed at its highest level since August 2015.

View enlarged chart.

Whether this strength flows through to CPI or Core PCE (the Federal Reserve’s preferred measure of inflation) remains to be seen, but the technicals suggest this move could just be getting started. WTI crude oil is on the verge of breaking above a level of technical resistance that capped prices in 2019, while copper prices are less than 3% from their 2011 all-time highs. However, those who thought gold would benefit from inflation fears have been mistaken. In fact, of the 23 commodities tracked in the Bloomberg Commodity Index, gold is the worst performing year to date and one of the few that is actually negative over that time period.

To be clear, we are not calling for runaway inflation. In fact, breaking to five year highs shows that broadly commodities have gone nowhere over that time period. However, we do continue to have a bullish view of energy and industrial metals and wouldn’t be surprised to see this trend continue, albeit likely at a slower pace than the past year. If prices do continue to rise it may put more pressure on companies who are not able to pass those costs onto consumers. But if companies are broadly able to pass these increased input costs along, then expect price increases to begin showing up in traditional inflation measures, but any persistent impact is likely to be modest. Be sure to check out the LPL Research blog next Wednesday, as we examine the April CPI data release.

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

Thursday, May 6, 2021

New Cases Surge

Even as an unprecedented global vaccine rollout is underway the daily number of new COVID-19 cases reported (measured by the 7-day moving average) recently passed 1.25 million for the first time. The number of daily global cases has escalated rapidly, from a trough of under 500,000 in mid-February, driven by a devastating second wave of infections in India as well as increases in several other developing economies.

“A successful domestic vaccination program has so far largely inoculated the US from participating in the most recent global wave of COVID-19 cases,” said LPL Financial Equity Strategist Jeffrey Buchbinder.  “Especially in developing economies local governments are racing to deliver vaccines before new variants can take hold.”

As shown in the LPL Chart of the Day, the number of new daily COVID-19 cases in India is 46% of the global total (up from just 5% in mid-March), but the US proportion is at its lowest level (6%) since the start of the pandemic.

View enlarged chart.

Relative to its population, the outbreak in India (population 1.37 billion) is smaller than the third wave in the United States that peaked in January. At that time, the U.S. was reporting 116 new COVID-19 cases per day per 10,000 people, and even though India’s rate has climbed rapidly it is still around 42 new cases per day per 10,000 people. However, India has suffered immensely from persistent underinvestment in its heath systems (spending just 3.6% of GDP on heathcare compared to 9% in Brazil and 17% in the US). Given current shortages of oxygen and hospital beds in India, we at LPL sincerely hope that this rate does not escalate further.

Race To Herd Immunity

Herd immunity against COVID-19 remains the ultimate aim of government vaccination programs. Different countries are due to reach this milestone at different stages due to differing speeds of vaccine rollouts. Herd immunity has been suggested by immunologists to be around 75% of the population vaccinated or with COVID-19 antibodies but estimates range from 65% to 90%.

As shown in the chart below, at its current rate of vaccinations, 75% of the U.S. population could be vaccinated within 4 months; but that may not be achievable based on the experience of Israel. Israel has fully vaccinated 58% of its population, which appears to be near a ceiling. The pace of vaccinations there has dropped to a level such that at the current rate it would take another 11 months to get to 75% vaccinated.

India and Japan are both seriously lagging on their vaccination programs. Based on current rates it would take around 3 years for each of those countries to fully vaccinate 75% of their populations. Globally just 3.7% of the population is fully vaccinated as many developing countries continue to struggle to access vaccines. To date, the wealthiest 27 countries have administered 36% of vaccines but only have 10% of the world’s population.

View enlarged chart.

This immunity data does not include people who have COVID-19 antibodies after recovering from the virus, estimated by the American Red Cross based on blood donations to be over 20% of the U.S. population. As such, to get to a combined immunity level of 75% around 55% of Americans would need to be vaccinated (slightly less than vaccination rate that Isreal has achieved).

While new vaccine-resistant variants remain a risk, countries that have been successful in the deployment of COVID-19 vaccines could see more of a tailwind for their economies and markets. We still favor domestic equities over developed international equities, but the gap is narrowing. The COVID-19 situation in emerging market economies is mixed, with India and parts of Latin America struggling, but we expect economic growth across Asia and attractive valuations to provide support for investments in these regions.

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, May 5, 2021

“Our new Constitution is now established, everything seems to promise it will be durable; but, in this world, nothing is certain except death and taxes,” Benjamin Franklin

First off, we hope everyone has a happy and safe Cinco de Mayo!

One of the big discussions lately has been about how will higher taxes potentially impact the stock market. We’ve known since President Biden won the presidency and the Democrats secured control of the House and Senate that higher taxes were coming, likely in the form of higher corporate taxes and higher capital gains taxes on the wealthy—though probably not until 2022. It is worth noting though that stocks haven’t been fazed at all by all the higher taxes talk, as we just saw the best first 100 days for stocks under a new president since FDR.

With proposals for the $1.8 trillion American Families Plan (AFP) and $2 trillion plus infrastructure bill (known as the American Jobs Plan or AJP), higher taxes are needed to help finance the new spending. Let’s be clear though, with a 50/50 Senate (Vice President Kamala Harris breaks ties) and historically slim Democratic majority in the House, we think these final numbers will likely come in less than $3 trillion combined, as these initial numbers from the Democrats are starting points for negotiations.

Higher capital gains taxes on the wealthy are one way to pay for things, with the AFP proposing to increase the top tax rate on ordinary income to 39.6% from 37%, and capital gains and dividends taxes on those who earn more than $1 million to a maximum of 43.4% from the current 23.8%. Fun stat, only 0.32% of the population makes more than $1 million a year, so the truth is this won’t impact the other 99.68% of the population.

“We’ve known higher taxes were coming so this shouldn’t be a surprise to anyone at this point,” explained LPL Financial Chief Market Strategist Ryan Detrick. “Now here’s the catch, looking back at the times that taxes increased amid a strong economy, stocks did just fine. Given the strong economic outlook this year, you’d have to think history could repeat once again.”

As shown in the LPL Chart of the Day, in 1986 and 2013, capital gains taxes increased, but the economy was on firm footing back then, compared with the 1970s hikes, which saw an economy marred by higher inflation and sluggish growth. Not surprisingly, the two more recent hikes saw solid stock market performance, while the 1970s hikes didn’t. Is it as simple as how the economy is doing? It very well could be.

View enlarged chart.

Corporate taxes are currently 21% and President Biden has discussed increasing the level to 28%. Although we think in the end the level will be more like 25%, the bottom line is higher corporate taxes are likely coming, which could knock a few percentage points off of future S&P 500 Index earnings growth.

So what happens after corporate taxes are raised? As the table below shows, muted returns a year out are normal, but interestingly stocks have consistently been in the green the three months before the official date of the tax increase, suggesting investors weren’t very worried about higher taxes on the horizon.

View enlarged chart.

It’s always possible that higher taxes slowly take a bite out stock market returns over a longer time period than just a year, but if the concern is what all the talk about higher taxes may mean for markets over the next year, there’s not much historical evidence pointing to the potential for a bad outcome. The picture is murkier, though, with corporate taxes, which isn’t surprising, since stock prices are ultimately tied to earnings growth. But is often happens, markets seem to be more attuned to larger economic forces.

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, May 04, 2021

Fixed income investments have generally played two key roles within a diversified asset allocation—generating a stable income and providing protection during equity market selloffs. While we still think high-quality fixed income investments can meet those two objectives, with yields as low as they are, the income objective has certainly become harder to meet. As such, income-oriented investors may have to look to non-core fixed income alternatives.

An alternative option worth considering may be preferred securities. As seen in the LPL Chart of the Day, preferred securities are amongst the highest yielding options within the fixed income categories. Following are five things investors should know before allocating to preferred securities.

View enlarged chart.

1. Hybrid securities. Preferred securities are “hybrid” securities that can be classified as either equity or debt within a company’s capital structure. They are senior to common equity but junior to traditional debt. As such, they don’t have the same capital appreciation potential of common equity nor do they possess the same capital preservation benefits of traditional debt. Preferred securities, then, tend to offer higher coupon payments to attract investors.
2. Financial focus. The majority of issuance comes from financial institutions. Preferred securities are highly correlated with the health of the financial system and a shock to the financial system would adversely impact these securities.

“Preferred securities can be higher yielding alternatives to traditional core fixed income options. They are concentrated in the financial sector but since the global financial crisis, many financial institutions have emerged with stronger balance sheets, which should limit downgrades and defaults,” according to LPL Financial Fixed Income Strategist Lawrence Gillum.

3. Credit risk. The securities tend to be BBB- or BB-rated, which means they carry higher levels of credit and default risks than the senior debt issued by the same issuer. However, since the issuers of preferred securities tend to be higher quality companies, default rates have been lower than similarly rated non-financial corporate bonds.
4. Multiple markets.S. preferred securities trade in two separate markets and while the issuer is the same, the security structures can be different. The $25 retail market is an exchange-traded market where the securities pay quarterly dividends, whereas the $1000 institutional market is an over-the-counter traded market where the securities pay dividends semi-annually.
5. Diversification benefits. Given the hybrid nature of preferred securities, there are diversification benefits to adding preferreds to a portfolio. While these securities tend to “act” like equity and high-yield fixed income securities across a full market cycle, since the financial crisis in 2009, these securities have generally held up better than both during equity market sell-offs (as measured by the S&P 500 Index).

With yields low within traditional fixed income sectors, the income component within fixed income has been harder to come by. For those income-oriented investors willing to take on some additional credit risk, preferred securities might be an attractive investment to consider.

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

Friday, April 30, 2021

“The sun was warm but the wind was chill. You know how it is with an April day. When the sun is out and the wind is still, you’re one month on in the middle of May.” American Poet Robert Frost

One of the best known investment axioms is to “sell in May and go away.” This is largely because the six months from May through October have historically been some of the weakest months of the year for stocks. As you can see below, the next six months have tended to be on the weak side.

View enlarged chart.

As shown in the LPL Chart of the Day, the next six months have indeed been the worst six months of the year, up only 1.7% on average. To add insult to injury, we are leaving the six most bullish months of the year. In fact, the S&P 500 Index is set to gain close to 30% during these most bullish six months, one of the best six-month gains ever.

View enlarged chart.

“Stocks are up more than 87% from the March lows, suggesting a well-deserved pullback during these troublesome months is quite possible,” explained LPL Financial Chief Market Strategist Ryan Detrick. “But with an accommodative Fed, fiscal and monetary policy, along with an economy that is opening faster than nearly anyone expected, we’d use any weakness as an opportunity to add to positions.”

Here’s the catch, isn’t there always a catch? Stocks have actually been higher during these worst months of the year eight of the past ten years.

View enlarged chart.

We will take a closer look at this important concept on Monday in our latest Weekly Market Commentary, so be on the lookout for it!

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

Thursday, April 29, 2021

In what was initially expected to be one of the slower quarters of the year, the U.S. economy jumped out of the gates in 2021, with gross domestic product (GDP) growing 6.4% quarter over quarter. A faster than expected vaccination program, nearly $3 trillion in fiscal stimulus—including direct payments to consumers—and faster than expected job growth helped fuel a surge in personal consumption—the largest portion of GDP.

As shown in the LPL Chart of the Day, personal consumption grew 10.7% on an annualized basis in the first quarter, the second highest level since the 1960’s:

View enlarged chart.

“The U.S. economy is off to a great start in 2021, and this should set the stage for solid growth in the remainder of the year as pent up demand continues to flow through the economy,” added LPL Financial Chief Investment Officer Burt White. “Many areas of the country are still facing restrictions on activity, so we don’t think growth will just be limited to the first quarter.”

However, the growth story in the first quarter wasn’t solely about direct stimulus payments. While personal consumption has understandably gained a lot of attention, federal non-defense spending added the most to GDP in nearly 60 years, a segment of the economy unaffected by transfer payments like stimulus checks.

Digging into the numbers even further, spending on services grew a modest 4.6%, which should accelerate in the second and third quarters as remaining restrictions are lifted in response to falling cases and rising vaccinations. As of April 28, the US is averaging around 2.5-3 million vaccines administered per day, which has helped over half the adult population receive at least one dose of the vaccine, while nearly 40% of adults are fully vaccinated, according to the Center for Disease Control and Prevention.

The U.S. vaccination program has helped pull the economy forward, but net trade was a modest drag on growth in the first quarter, where domestic growth pulled in imports at a faster pace than the recovery outside of the U.S. lifted exports. As the rest of the world gets better control of COVID-19, rebounding economic growth overseas should provide an additional tailwind for U.S. economy.

We upgraded our forecast for U.S. GDP in our recent Weekly Market Commentary from 5–5.5% to 6.25–6.75%, and we expect to see the economy continue its pace in the second quarter as restrictions are lifted and activity normalizes.

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 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