Archive

Market Blog Posted by lplresearch

Monday, March 29, 2021

It has been a little over a year since the S&P 500 Index bottomed on March 23, 2020, and it was certainly an eventful year, to say the least. It’s also been one year since we at LPL Research upgraded our view on equities from market weight to overweight in Road to Recovery Playbook Update believing there had been a shift in the risk-reward dynamic between stocks and bonds.

It certainly was not an easy call, and it was made with the S&P 500 rallying roughly 15% from its low. Little did we know however, that the S&P 500 would stage the greatest one year rally in history. As shown in the LPL Chart of the Day, the rally from the 2020 low eclipsed the rallies from the 2009 and 1982 lows, climbing almost 75% since the low:

View enlarged chart.

Investing is a challenging endeavor, one that even the most seasoned and successful participants need to remain ever vigilant, for Mr. Market is always ready to serve a fresh batch of humble pie—a lesson we always keep in mind.

“Few on the Street were willing to lean into the market turmoil and change their outlook on stocks, but it was a call that paid off for us,” added LPL Financial Chief Market Strategist Ryan Detrick. “Even though we turned out to be on the correct side of history, investing is a ‘what have you done for me lately’ industry, and we have to continue to remain disciplined with our approach.”

Despite the historic rally off the low, we continue to overweight equities in our portfolios, as the backdrop of an expanding economy and favorable monetary conditions should be supportive of stocks over bonds going forward, but we acknowledge that year 2 of a bull market has a way of challenging investors.

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

Market Blog Posted by lplresearch

Friday, March 26, 2021

Our friends at Goldman Sachs recently announced a 2021 growth target for Gross Domestic Product (GDP) of 8% (Q4/Q4). Should this happen, it would be the biggest annual increase in GDP since 1951. Of course, last year was the worst year for GDP since the Great Depression; still, this is an amazing bounce back for our economy.

Although our GDP target is a little lower for now, closer to 5%, the truth is our economy continues to open up and improve faster than most expected, thus many increased forecasts have been taking place.

What would an 8% GDP print mean for stocks you ask? “Here’s the catch. Stocks usually do a great job of sniffing out future growth, well before the growth happens, meaning a big GDP jump isn’t always accompanied by significantly higher stock prices,” explained LPL Financial Chief Market Strategist Ryan Detrick. “Last year is the perfect example. The economy was horrible in the middle of the year, yet stocks soared as they sensed the great reopening. Now in 2021 we all know the economy will be much better, meaning the easy stock gains have likely been made.”

To help better explain this, as shown in the LPL Chart of the Day, S&P 500 Index returns are actually slightly better when GDP is negative or weak, versus if GDP is up significantly. The orange regression line slopes lower to help illustrate this concept. Using the regression line, GDP growth of 8% would translate into approximately a 6.9% return forecast for the S&P 500.

View enlarged chart.

Let’s be clear, there are many other factors that can go into this and we’ve seen some very solid returns during some big GDP growth years, but the time to expect big future returns on stocks tends to be during bear markets, and we know those usually happen during recessions.

Here are 12 more stats on GDP and the S&P 500. Please note, this data starts in 1949 (when the St. Louis Fed data on GDP begins).

• The average GDP growth per year was 3.1%
• GDP down more than 0.5% is actually very good for stocks, with the S&P 500 lower only once out of 7 instances, hitting double digit returns 6 times, with an average return of 16.9%
• The worst GDP print since the Great Depression was last year (down 3.5%), yet stocks gained 16.9%
• GDP up 6% or more has only happened 8 times, with higher stock prices 6 times, with an average return of 7.3%
• The best GDP print was 8.7% in 1951 and the S&P 500 added 21.7%.
• The best return for the S&P 500 was in 1954 when it added 45%. Incredibly, GDP fell 0.6% that year
• The best decade ever for GDP was the 1960s, up 4.5% per year on average
• The 2000s was the worst decade for economic growth, with GDP up only 1.9% on average per year
• The tech bubble began to burst in 2000, yet GDP added 4.1% that year
• During the tech bubble recession of the early 2000s, GDP was actually higher in 2000, 2001, and 2002
• The only time GDP was lower two years in a row was 1974 and 1975
• From 1983 to 2007 GDP was positive 24 out of 25 years, with the 0.1% contraction in 1991 the only blemish

For more of our thoughts on the second year of the bull market, higher rates, the Fed and economy, please watch our latest LPL Market Signals podcast video below or directly on our YouTube Channel.

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, March 25, 2021

It has been just over a year since the S&P 500 Index bottomed on March 23, 2020, and while global stock markets have provided historic returns since the low, the biggest winners come from a completely different asset class: commodities. As global activity quickly ground to a halt, commodity prices plummeted, with oil prices even trading for a negative value for the first time in history.

Since March 23, 2020, commodity markets have roared back as the global economy has emerged from the shadow of COVID-19. As shown in the LPL Chart of the day, oil and lumber prices have more than doubled off the lows, while copper prices have pulled back a bit after reaching that feat back in February:

View enlarged chart.

“After likely their worst period in history, although I wasn’t around for the bubonic plague so I can’t be certain, commodity prices have roared back as the global economy continues to wake up,” added LPL Financial Chief Market Strategist Ryan Detrick. “The US and China are well ahead of other nations in terms of economy activity and output, so as the rest of the world plays catch up, we wouldn’t be surprised to see commodities rise even further.”

The emergence from lockdowns and subsequent increase in activity has boosted prices from the outright deflationary environment we saw last spring, to a more reflationary environment in recent months, and this has pulled commodity prices along with it. The commodity market’s top performer, lumber, has seen a particular boom in prices as the “stay at home environment” benefitted the housing market, leading to all-time highs in housing starts in December—even surpassing the high water mark set before the pandemic began. Adding to the fervor, mortgage rates continued to set record lows, falling as low as 2.82%, according to the Bankrate 30-year national average.

We upgraded our view on oil in our January Global Portfolio Strategy publication, as strong technical factors favored prices to accelerate higher. Further, oil prices have continue to benefit from a favorable supply environment, with OPEC+ maintaining output until global demand rises, though the risk of a global increase in production at higher prices remains a risk to our view.

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, March 24, 2021

It has now been a little over a year since the first COVID-19 restrictions and lockdowns were implemented in the United States, with California having implemented the first stay-at-home order on March 19, 2020. LPL Research can now use high-frequency data to compare where we are now to the early days of the pandemic.

“Much of the real-time data is showing huge improvements from where we were a year ago as U.S. consumers are venturing back out to restaurants, theaters and airports,” said LPL Financial Equity Strategist Jeff Buchbinder. ”While most data is still well below pre-pandemic levels, the mostly successful vaccination rollout is boosting consumer confidence which should aid the pace of economic recovery.”

One of the most extreme examples of the impact of reopening in the high-frequency data, compared with where we were a year ago, is box office receipts at U.S. theaters. As shown in the LPL Chart of the Day, gross box office receipts are up 424,966% versus the same weekend in 2020. Despite this huge year-over-year increase, revenues are still down 88% versus pre-pandemic 2019 levels. In perhaps a microcosm of how technology has changed the business environment for many companies during the last year, the highest-grossing movie last weekend, Raya and the Last Dragon, was also simultaneously released on Disney’s streaming service.

View enlarged chart.

Data on the number of people passing through U.S. airports have also shown a dramatic increase year over year; passengers are now up 80% compared to the very depressed numbers a year ago. Again, the overall levels of passengers are much lower than pre-COVID-19 levels with rolling average daily numbers currently at 1.3 million passengers compared to 2.4 million for the same period in 2019.

View enlarged chart.

Restaurant bookings as measured by OpenTable, appear to also be benefiting from increased confidence from consumers and rolling back of local restrictions, in the last week restaurants registered the most bookings relative to pre-pandemic levels. The latest data shows the last week had just 28% fewer bookings than the same period in 2019 and that compared to the same period in 2020 bookings are up 26,000%.

View enlarged chart.

The real-time data is indicating we have come a long way in the last year, but there is still some way to go to get back to pre-pandemic levels of activity in many areas of the economy. COVID-19 still presents a lingering near-term risk, with variants of the virus adding to the worry, but the robust recovery in the real-time data, along with vaccine distribution, fiscal and monetary stimulus, have our confidence high for an economic recovery. Sharp moves higher in interest rates pose a risk of equity valuations contracting meaningfully, though we see that as unlikely. We expect interest rates to stabilize in the near term and begin to fade as a concern for the bull market.

IMPORTANT DISCLOSURES

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors 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, March 23, 2023

While most market participants have been (rightly) focusing on the sell-off in the Treasury markets this year, U.S. corporate credit markets have sold off as well. Corporate credit markets, as defined by the Bloomberg Barclays U.S. Corporate index, are down over 5% for the year, which is on pace for the second worst start of a year since 1980. While the negative price performance has been meaningful this year, we don’t think it is a harbinger of things to come.

To take advantage of low interest rates, shore up balance sheets and extend maturities, corporate CFOs issued a record amount of debt last year. By doing so though, those corporate borrowers increased the interest rate sensitivity of those securities. In fact, coming into the year the interest rate sensitivity of the corporate credit markets (as measured by duration) had never been higher—higher than even the Treasury index. Interest rate risk was and is a bigger concern for us than credit risk.

“While there is that saying that credit tends to lead equities, we don’t think the sell-off in the credit markets will spill-over into other markets,” according to LPL Financial Chief Market Strategist Ryan Detrick. “We believe the sell-off is related to rising interest rates reflecting better growth prospects, not rising credit risks.”

As we can see from the LPL chart of the day, the increase in yields for credit issuers is in line with what has happened in the Treasury markets (top chart). The solid orange and blue lines represent current interest rate levels for the U.S. Treasury yield curve as well as the BBB corporate yield curve, respectively. The dashed lines represent where those same curves began the year. As shown, both the U.S. Treasury curve and the BBB corporate curve have moved up in unison this year. Moreover, the compensation for taking on corporate credit risk (bottom chart) has remained well behaved. At the beginning of the year, the option-adjusted-spread (OAS) or the yield premium over Treasuries was slightly over 1.20%. As of close Friday, March 19, OAS had decreased marginally to 1.17%. If the market had credit concerns, we would see an increase in OAS—not further tightening. Thus, the sell-off in the credit markets has been an interest rate story and not a credit loss story, in our view.

View enlarged blog.

We remain neutral on corporate credit and we continue to recommend a blend of high-quality short-to-intermediate bonds in tactical portfolios. Compensation for longer-maturity, rate-sensitive bonds remains unattractive, in our view. We still see incremental value in corporate bonds over Treasuries, but credit spreads have little room for further tightening.

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, March 19, 2021

In almost every direction we turn, we see optimism mounting over a mid-2021 economic reacceleration. Unfortunately, it seems we will have to wait at least another month for that optimism to make their way into leading economic indicators in a major way.

On Thursday, March 18, the Conference Board released its February 2021 report detailing the latest reading for its Leading Economic Index (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 ettention to the LEI, as it has a forward looking tilt to it. The index grew for the tenth month in a row, up 0.2% month over month in February, a decrease from January’s 0.5% pace.

While this print still suggests future economic growth ahead, it fell short of expectations that had begun to price in an economic reacceleration on the back of improving vaccination trends. The Conference Board did make special note that factors which may prove to be transient, such as bad weather and related supply chain disruptions, did affect several component indexes. Moreover, it stated that the recently passed $1.9 trillion fiscal stimulus plan, a similarly large economic growth factor to vaccine progress, was likely not yet fully priced into the LEI’s value.

Six of the ten components grew in February, while three declined and one remained flat. Average weekly initial claims for unemployment insurance, the ISM New Orders Index, and the interest rate spread led the way among positive contributors. Building permits, average weekly manufacturing hours, and average consumer expectations for business conditions detracted from the composite’s growth, while manufacturers’ new orders for nondefense capital goods excluding aircraft held steady.

As seen in the LPL Chart of the Day, despite some small head fakes, the monthly change in the index has generally sloped downward since its initial bounce off of the 2020 lows. This signals the index has been increasing at a decreasing rate, as COVID-19 mitigation measures have prevented a full-fledged resurgence. We expect this trendline to turn meaningfully upward once a durable reopening begins to gain traction.

View enlarged chart.

“In recent months, financial markets have been agressively pricing in a strong second leg to this economic recovery,” said LPL Financial Chief Market Strategist Ryan Detrick. “We are still waiting for much of the economic data to confirm the move, but believe it should not be far off given the extremely promising vaccination trends and large fiscal package that was just recently passed. We think it is a matter of when there is a surge in US GDP growth, and not if there will be a surge.”

We continue to believe that vaccinations are the key to a sustained recovery and distribution trends have been truly remarkable recently. The most at-risk segment of the population is largely vaccinated already and at this point, more people in the United States have been vaccinated than have contracted the virus. We now have three vaccines approved for emergency use authorization, and President Biden projects that we will have enough vaccine supply for every adult American by late spring. Furthermore, we have increased confirmation that vaccines appear to be effective at preventing transmission as well as symptoms. While growth of variant strains does present a risk, we believe the overwhelming majority of evidence points toward a promising second leg of this economic recovery, which we believe justifies a tilt toward cyclical opportunities over defensive investments in portfolios.

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, March 18, 2021

Last week we reviewed updated global economic growth forecasts from the Organisation for Economic Co-operation and Development (OECD), highlighting the significant increase in their gross domestic product (GDP) forecast for the United States this year. Clearly the Federal Reserve (Fed) 2021 is reading from the same playbook because they did the same thing yesterday.

Here we look into another set of OECD data points but this time its global leading indicators. As we have noted with the US version from the Conference Board’s Leading Economic Index, we believe these indicators can provide useful insight into where economies may be headed in the near term.

As you can see in our LPL Chart of the Day, leading indicators in Asia and the United States are pointing to better growth than in Europe. The global growth outlook is no doubt improving, but the recovery is multi-speed.

“Global growth should continue to steadily rise as economies reopen and vaccines are deployed, consistent with the message from global leading indicators” according to LPL Financial Equity Strategist Jeffrey Buchbinder. “When we peel back the onion, we see a stronger picture in the United States and Asia, while Europe is more of a mixed bag. That reflects frustratingly slow vaccine distribution in the Eurozone.”

View enlarged chart.

The level of these indicators provide a valuable comparison across countries and regions. We also like to look at the momentum of these indicators to identify areas where the picture is getting better. On the chart below, you can see that the strongest momentum is found in Asia, particularly India and China, and the United States. Meanwhile, Japan is holding its own.

On the flip side, the growth outlook in most European economies has stalled, particularly in the United Kingdom. While the paused rollout of the AstraZeneca vaccine is part of the problem across Europe, we expect a strong vaccine program in the UK to help turn its economy around soon despite the country’s below-average LEI level and deteriorating momentum.

View enlarged chart.

We continue to recommend investors focus their regional allocations on the United States and the Asia-heavy emerging markets. Global LEI data and the pace of vaccine distribution reinforce that positioning, as the global but multi-speed economic recovery from the pandemic continues.

More risk tolerant investors may want to consider a tactical allocation to Japan, where appropriate, given the country’s relative success containing COVID-19 and bold stimulus efforts.

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, March 17, 2021

“The stock market is a giant distraction to the business of investing.” Jack Bogle, founder of Vanguard

First off, we hope everyone has a happy and safe Saint Patrick’s Day! We’ve had a lot of green out there over the past year and here’s to some more today and over the rest of 2021.

One year ago yesterday was one of the worst days in the history of the stock market, with the Dow losing 12.9%, the fourth worst day ever. In fact, only the ’29 crash, the ’87 crash, and the day after trading starting (after being halted for multiple months) in the midst of World War I in December 1915 were worse.

As the great Jack Bogle explained above, sometimes stock market volatility distracts us from our long-term goals. Many investors panicked and sold this time a year ago, only to see stocks soar higher, while bonds struggled and cash didn’t do anything. One of the most important takeaways from 2020 for long-term investors: it is important to have a plan in place before the skies turn dark.

As this current bull market nears the one-year anniversary of the March 23, 2020 lows, there will be a lot of reflection on how far we’ve come and where we could be going. The bottom line is the economy is recovering at a record pace, stocks are at all-time highs, and we’ll have the NCAA Tournament this year. Those are three things to be very grateful for.

So what happens now is the logical question? “The good news is previous bull markets have never been lower during the second year of their existence,” explained LPL Chief Market Strategist Ryan Detrick. “Although it won’t be an easy ride, investors need to remember that history is on the bulls’ side, as this bull market is still just an infant and continued gains are quite likely.”

As shown in the LPL Chart of the Day, the previous six bull markets since World War II all saw gains during their second year. The average bull market was up 43% one year in and up to 61% two years off the lows. It is worth noting that the current bull market is up close to 75%, making it the strongest start to a new bull market ever, besting the start to the 2009 bull market. But be aware, that bull was up 68% one year off the lows, but up 94% two years off the lows. In other words, strong gains continued (the green line below).

View enlarged chart.

We will take a closer look at this bull market as it turns one next week in our latest Weekly Market Commentary.

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, March 16, 2021

This week, the Federal Reserve (Fed) meets for their two-day Federal Open Market Committee (FOMC) meeting, which concludes on Wednesday followed by a press conference with Fed Chairman Jerome Powell. If we were invited to the press conference, here are five questions we would ask Chair Powell—each of which may meaningfully impact fixed income markets.

1. Why have (or haven’t) the Dot Plots changed from their December FOMC meeting? The Fed’s Dot Plots represent the committee’s expectations of where the federal funds rate should be over the next few years, ending with their longer-term expectations. Current projections have the federal funds target rate unchanged at 0-0.25% through 2023. These projections were before the recently enacted $1.9 trillion COVID-19 relief bill and before the success we’ve seen in vaccine deployment. Growth and inflation expectations have increased significantly since then, so is it time for the Fed to change the expected path of short-term interest rates?

2. Has the Fed started thinking about thinking about raising short-term interest rates? Back in June 2020, Chairman Powell famously quipped “We’re not even thinking about thinking about raising rates,” in an effort to reassure markets that the low interest rate environment was here for some time. While we don’t expect the Fed to announce plans to raise rates anytime soon, the market has started pricing in an earlier liftoff (early 2023) than the Fed has communicated. It will be interesting to see if the Fed pushes back against these market expectations.

“The Fed has been one of the biggest stories in bond markets over the past several years. What will they say about inflation, about the economy, about the next rate hike, and about future bond buying? It all matters, so stay tuned,” explained LPL Financial Chief Market Strategist Ryan Detrick.

3. Will the Fed change its bond buying behavior? Additional quantitative easing programs are off the table, in our view. However, under the current program, the Fed has committed to buying $80 billion in Treasury securities and $40 billion in mortgage-backed securities (MBS) each month for the foreseeable future. Eventually, we believe the central bank will announce a reduction in bond purchases, likely before the Fed is ready to communicate an increase in short-term interest rates. Hoping to avoid a repeat of the 2013 Taper Tantrum, we think current Fed officials will eventually announce a gradual decrease in purchases. While we don’t think this will happen at this FOMC meeting, it’s likely to happen later this year and may push interest rates even higher.

4. Have the bond markets been focusing on the wrong thing? Chairman Powell has repeatedly said that the Fed is not focused on the level of one financial variable (10-year Treasury yields) but rather an index that captures overall financial and economic conditions. Nonetheless, largely due to an increase in yields over the past month, bond markets increasingly expect the Fed to intervene to slow the pace of the increase (similar to what the European Central Bank (ECB) did last week). However, as shown from the LPL Chart of the Day, rising interest rates have not negatively impacted financial conditions, at least not yet. Despite the 10-year yield rising over 60 basis points this year (orange line), financial conditions (blue line) remain accommodative by historical standards (lower readings indicate accommodative conditions). As long as financial conditions remain accommodative, rising Treasury yields aren’t likely to become an issue for the Fed, which means yields may continue to drift higher from these levels.

View enlarged chart.

5. Will the Fed extend the Supplementary Leverage Ratio exemption? Somewhat technical with this one, but last year a regulatory change was enacted that allowed banks to exclude nearly $2 trillion of Treasury securities from certain leverage ratios. That exemption is scheduled to expire at the end of March 2021. Treasury ownership by banks increased last year to 6% of total assets. Failure to extend this exemption may cause banks to have to sell Treasuries or not be an active buyer of Treasuries in the future in order to adhere to bank regulatory requirements, which may cause Treasury yields to increase.

While we’re unlikely to get answers to all of our questions at this FOMC meeting, the Fed will remain an important story for bond markets for the foreseeable future. As such, we will continue to follow Fed policy changes and update our recommendations as appropriate.

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, March 12, 2021

Few equity sectors on earth have been as poor as European financials since the Global Financial Crisis. The sector still sits more than 50% below its 2007 all-time highs, hampered by regulations, low to negative interest rates, and all around slow growth in the Eurozone. However, despite those headwinds, the sector has benefitted from a recent rotation to value, and has certainly been assisted by rising interest rates, a phenomenon we discussed earlier this week.

Not only is performance for European financials improving in absolute terms, as global equities continue to recover from the worst of the ongoing COVID-19 pandemic, but since early October the sector has outperformed the S&P 500 by more than 20 percentage points. As shown in the LPL Chart of the Day, the pattern relative to the S&P 500 appears to be on the verge of breaking out of a nearly year-long technical base, similar to where US financials stood just two months ago.

View enlarged chart.

While we don’t think European financials are going back to all-time highs anytime soon, remember, the sector still needs to gain 12% from current levels just to eclipse its 2020 pre-pandemic highs, a bar that certainly now seems attainable in 2021. “We remain broadly skeptical of foreign developed equities compared to their U.S. counterparts,” explained LPL Chief Market Strategist Ryan Detrick. “However, financials are the largest sector within Europe and improving performance and the continued rotation to cyclical value stocks make this a development to keep an eye on.”

For now, we recommend sticking with US financials, which we recently upgraded in our latest Global Portfolio Strategy report, and is now the second best performing sector year to date, trailing only energy.

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