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Economic Blog Posted by lplresearch

Wednesday, February 24, 2020

Leading economic indicators are providing early signs that we may be exiting a recent soft patch and the economic recovery could be poised for a reacceleration.

On Monday, February 22, the Conference Board released its January 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 like the LEI, as it has a forward looking tilt to it. The index grew for the ninth month in a row, up 0.5% month over month in January, a slight increase from December’s 0.4% pace. Incredibly, its nominal value now sits just 1.5% below its all-time peak from July 2019.

Seven of the ten components grew in January, while the other three declined. Building permits, average weekly manufacturing hours, and the Institute for Supply Management (ISM) New Orders Index led the way among positive contributors. Average weekly initial claims for unemployment insurance, average consumer expectations for business conditions, and manufacturers’ new orders for nondefense capital goods excluding aircraft all detracted from the composite’s growth in January. This report exhibited strong positive breadth among component series, but highlights that the labor market continues to weigh on the recovery.

As seen in the LPL Chart of the Day, the monthly change in the index was slightly higher than in December, which has the potential to represent a break from the general downtrend seen since May 2020. While the monthly change  has been positive since May 2020, the index has been increasing at a decreasing rate, as COVID-19 cases have risen and mitigation measures have hit the recovery. But, the good news is that could be changing.

View enlarged chart.

“Vaccination progress is the be-all and end-all for the durability of this recovery,” said LPL Financial Chief Investment Officer Burt White. “Stimulus has done an effective job of bridging gaps in the economy, but we need widespread vaccine distribution for the economy to stand on its own two feet. And we believe that point is not too far off.”

After some initial rollout sputters, vaccines have largely been distributed to those most at-risk. Attention is now turning to the next phases of the population in line to be vaccinated: Those who tend to be more mobile and account for a greater share of economic activity. At present, we have two vaccines approved for emergency use authorization, and potential for a third in the coming weeks. Furthermore, we received data this week that at least one of the vaccines appears to not only be effective at preventing symptoms, but also at preventing transmission, a previously debated matter. This point will be key for getting people back to work. When paired with improving data in some parts of the economy and warmer weather on the horizon, we are hopeful that January is the start of the second wind in this economic recovery.

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, February 23, 2021

Treasury yields started moving sharply higher this past month (remember that as yields go up, prices go down). And while the upward march began in earnest last August when the 10-Year Treasury yield bottomed at an all-time low rate of 0.50% based on closing prices, the past week we saw the 10-year break through the 1.25% threshold and touch 1.35%, a new high for the year. So naturally, investors are right to ask two questions: 1) How does this recent move up in yields compare to previous recoveries and 2) what should be expected for the rest of the year?

“We believe more good news on the economy will continue to push yields higher, but there are also forces in play that may help slow the pace down.” said LPL Financial Chief Market Strategist Ryan Detrick.

How does this recovery compare to previous recoveries?

The LPL Chart of the Day outlines the yield movements during the recoveries after the last four recessions. Using the 1982, 1991, 2001 and 2009 recovery periods, we can see that we are in the middle of the increase in rates based on trading days. One thing that is unusual about the current recovery is that the rise in rates has happened later than in previous recoveries. In three of the four recoveries, yields peaked around 100 trading days into the recovery, while in 2021 rates have risen roughly a month later. The outlier recovery is 1982, which was delayed further by around 50 days. Back then, the increase in rates occurred, certainly because of increased growth and inflation expectations, but also because of the prospects of increased fiscal spending (remember the bond vigilantes?). While that sounds familiar to our current situation, we aren’t expecting those brave bond managers to eschew Treasury securities in the name of fiscal discipline.

View enlarged chart.

What are we expecting for the rest of the year?

Our base case is that rates will continue to rise due to increasing growth and inflation expectations and, eventually, Federal Reserve (Fed) normalization. We believe yields will continue to move higher throughout the year with an upward projection of 1.75% (our year-end range for the 10-year remains 1.25% to 1.75%). We also believe if rates move too high too fast, the Fed will intervene to make sure rising rates don’t become too restrictive and disrupt equity markets or the real economy (Fed Chair Powell’s testimony to Congress this week is important here). A number of consumer loans are influenced by the levels of the U.S. bond market, most notably mortgage rates. A more interesting question, at least to us, is not where rates will be at the end of the year but how quickly rates rise from here.

Additionally, during recent LPL manager research calls with fixed income managers we’ve heard that asset managers (most notably pension and insurance funds) will get more interested in US Treasuries around the 1.50% level. It seems now those brave bond managers are likely to keep rates from rising faster than in years past, since there aren’t many other positive yielding options in this yield starved world awash with savings.

So it seems there are opposing forces pushing against each other to determine the appropriate level of rates. On the one hand, growth and inflation expectations are pushing yields higher, while the prospects of potential Fed intervention and increased savings demands due to aging demographics (both U.S. and non-U.S. savers) may help keep rates contained. We’ll continue to watch how this dynamic unfolds and see who ultimately wins this tug-of-war. Who says fixed income markets are boring?

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, February 19, 2021

Today marks one year since the market began to price in the effects that COVID-19 would have on the world. The old market adage “stairs up, elevator down” certainly rang true over the coming weeks, as the S&P 500 recorded the fastest bear market (closing 20% below a previous all-time high) in history, accomplishing that feat in a mere 16 days.

The stock market is a peculiar mechanism however, and despite the turmoil the world has experienced since the outbreak of the pandemic, the S&P 500 marched forward to set new all-time highs less than 6 months later on August 18 and hasn’t looked back. So after such a wild year since the market peaked on this day in 2020, what have we learned?

1. Markets are forward looking. While it’s difficult to pin down a date when we can expect our lives to completely return to normal, the stock market is already pricing in the normalization of daily life, even if that remains uncertain. Economic conditions around the world have been improving relative to how they were at the beginning of the pandemic. While pockets of weakness remain, the market is more concerned with where the economic conditions will be, not where they are currently.

2. Sector performance is dynamic. Investing in “stay at home” themed growth and technology stocks whose earnings were viewed to be relatively well insulated by the effects of the pandemic and subsequent lockdowns provided both downside protection during the March volatility as well as outperformance after the market bottomed. However, as shown in the LPL Chart of the Day, conventional early-cycle leadership from financials and energy stocks has emerged over the past three months:

View enlarged chart.

3. Remember your timeline. Everyone would love to be able to pull their money at the exact top, avoid all major market corrections and reinvest at the bottom, but unfortunately, there is no holy grail timing mechanism and market volatility is the cost of admission for stock investing. “It’s our jobs as investors to focus on our long-term goals,” noted LPL Financial Chief Market Strategist Ryan Detrick. “Drawdowns and bear markets are part of the path to get there, and limiting the latest shiny object from affecting our decisions is key to any investment strategy.” If an investor pulled their money from the market during last year’s volatility, there have been a plethora of reasons to be hesitant to reinvest it, and the subsequent bounce from the lows happened in a flash, meaning they may have bought back in at a higher price than they originally sold.

Thankfully, bear markets and extreme volatility like we experienced last year are rare, but they provide a unique learning opportunity for investors. No one truly knows what the future holds for the stock market, so making sure we learn from the past is crucial for long-term success as investors. For more on our market and economic views, check out our most recent Global Portfolio Strategy publication.

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, February 18, 2021

The US economy had a tumultuous year in 2020, to say the least, and after rebounding strongly in the third quarter, the holiday surge in COVID-19 cases increased the risk that the economy may stumble heading into the new year. The sharp increase in new COVID-19 cases led to additional curbs on activity to contain the virus, triggering a rise in weekly jobless claims, and many feared we might have a double-dip recession.

Sensing a need to act, Congress passed a fifth relief bill at the end of December, including additional direct payments to households. The lame-duck injection of fiscal stimulus to the US economy was just what it needed. Following a weak retail sales number in December—ordinarily one of the strongest months for retail sales—consumer spending rebounded firmly in January, rising 5.3% month over month according to the US Census Bureau—the most in seven months—and greater than all of the estimates in the Bloomberg economist survey.

Looking under the hood makes the headline number even more remarkable. As shown in the LPL Chart of the Day, the largest month over month increases came in categories associated with discretionary spending, including a 23.5% surge in spending at department stores:

View enlarged chart.

“Fiscal stimulus was just what the doctor ordered for the US consumer in January,” added LPL Financial Chief Market Strategist Ryan Detrick. “The boom in spending on discretionary categories could become a trend if a wave of pent-up demand gets unleashed on the economy in 2021.”

Clearly, direct payments to households had a major effect on January’s retail sales, so does this mean that February sales will disappoint? Not exactly. Direct payments to households totaled roughly $166 billion, but the increase in January sales was only $29 billion and the savings rate remains high. Of course, not all of that money was spent on retail items, but there may be some gas left in the tank for February retail sales, particularly by individuals who didn’t receive their payments until later in the month or who will be receiving a credit on their federal tax returns.

Earlier this month, we raised our gross domestic product (GDP) forecast for the US from 4–4.5% to 5–5.5%. Yesterday’s retail sales number puts us on a solid path toward achieving that target—and may even raise the prospects of exceeding it. The first quarter of 2021 is expected to be the weakest of the year, so the January surge in retail sales removes much of the risk of the US economy stumbling out of the gates as we begin 2021.

However, a strong start to the year may embolden the call for a smaller price tag for President Biden’s fiscal stimulus proposal. Despite this, we ultimately believe a stimulus package north of $1 trillion is likely, which should prime the US economy for continued growth in 2021 as the battle against COVID-19 improves.

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, February 16, 2020

In LPL Research’s Weekly Market Commentary this week, we looked at some stock and bond options that may be attractive income-producing ideas for suitable income-oriented investors. On the bond side, many income-oriented investors are growing increasingly concerned about taking on additional interest rate risk at the beginning of a potential rising rate environment. (Bond prices fall when interest rates rise.) For those investors, bank loans, which carry minimal interest rate risk, may be an option. LPL Research recently upgraded bank loans to “neutral” given the favorable economic outlook, and loans may be especially attractive for investors focusing on income.

Bank loans are a type of security issued by companies that don’t have investment-grade credit ratings. These companies have a greater risk of experiencing credit downgrades, or even defaults, especially in challenging economic environments. Similar to high-yield bonds, these securities come with higher yields to compensate for that additional risk. And while bank loans and high-yield bonds are generally both issued by the same companies, loans are senior to other forms of debt, which means they have priority of assets in the event of default.

“In this yield starved world, we believe investors can increase portfolio yields by prudently adding risk without taking on additional interest rate risk” said LPL Financial Chief Market Strategist Ryan Detrick.

We think bank loans may make sense for several reasons. First, we are expecting strong economic growth for 2021 and into 2022, which would, in our view, put upward pressure on U.S. Treasury yields. Bank loans exhibit very little interest rate sensitivity because the interest they pay goes up when short-term yields increase. More importantly in the near term, investor demand may improve given positive economic conditions, which should help buoy prices. Finally, underlying fundamental conditions have improved for noninvestment grade companies and we do not believe increased default risk poses an imminent concern.

Looking more closely at interest rate sensitivity, in today’s LPL Chart of the Day, we rank the major fixed income sectors by income per unit of interest rate risk. Since fixed income indexes have different degrees of interest rate sensitivity, this exercise allows us to determine compensation for taking on interest rate risk on a more uniform basis. The obvious stand-out is the bank loan sector. Now, it is not realistic to assume that bank loans will provide the level of compensation outlined in the chart (the actual expected yield is 3.7%). But it does show that, relative to other fixed income alternatives, bank loans provide an attractive income option for investors looking to limit interest rate risk at the beginning of a possible rising rate cycle.

View enlarged chart.

But we know there is no such thing as a free lunch. That additional income bank loans provide is compensation for assuming credit risk and illiquidity risk. In economic downturns and turbulent markets, loan defaults rise and sellers of loans may not find buyers quickly, which can lead to significant price dislocations in volatile market conditions, even in highly liquid investment vehicles like ETFs. So, before investing in any fixed income instrument, it’s important to understand the trade-off between interest rate risk and other forms of risk.

Other alternatives that may be appropriate for income-oriented investors include preferred securities and emerging market debt. Both of these options are also rated “neutral” by the LPL Research team and provide attractive yields relative to the amount of interest rate risk of the underlying investments. Please see the recently updated Global Portfolio Strategy report for our views on these markets.

IMPORTANT DISCLOSURES

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors 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, February 12, 2021

“One of the most helpful things that anybody can learn is to give up trying to catch the last eighth—or the first. These two are the most expensive eighths in the world.” –Jesse Livermore

Countless stock investors would prefer to exit their investment precisely at the top and put their money back into the market at the very bottom of a market correction. Avoiding volatility may sound good in theory, but volatility is the price of admission for the stock market, and the challenge of calling tops and bottoms can be an expensive one indeed.

Television, social media, and now websites like Reddit can create noise that can be distracting for investors, which can cause them to lose focus of their timeframe—which for many of us is a long time. Often times this can cause investors to make rash decisions and pull their money from the market even though the market continues to advance.

As shown in the LPL Chart of the Day, there have been a plethora of media headlines over the last 10 years that could have caused someone to get fearful of the near term:

View enlarged chart.

“It’s the media’s job to get you to tune in, but it’s our job as investors to focus on our long-term goals,” noted LPL Financial Chief Market Strategist Ryan Detrick. “Drawdowns and bear markets are part of the path to get there, and limiting the latest shiny object from affecting our decisions is key to any investment strategy.

Despite recording the fastest bear market in history in March 2020, and as difficult of a time as we’ve seen in recent years, looking past the short term when investing in stocks has proven to be the correct decision. With markets trading near all-time highs today, many are concerned that this could be another top. However, history has proven that the returns from all-time highs still tend to be solid over the next 6-12 months:

View enlarged chart.
So where do we go from here? Well, there is no guarantee of future returns, but history has proven that the stock market has generally rewarded investors for riding out any near-term volatility—as long as they’re willing to wait it out. We continue to believe that stocks remain more attractive than bonds as the global economy emerges from the turmoil caused by the global pandemic, while potentially rising interest rates could limit the upside potential for bonds.

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, February 11, 2021

The recession appears to be behind us in the United States, and the early stages of an economic expansion have been taking shape. There is a growing debate over whether an expanding economy, in conjunction with historic fiscal and monetary policies, may cause inflation to overheat. This begs the question, will we see a reflationary environment—where prices will merely normalize to prior levels—or outright inflation—where consumer prices begin to increase above trend?

Thursday’s consumer price index (CPI) release may have put some of those concerns about inflation to rest—at least for now. US CPI rose 0.3% month over month in January, where rising gasoline prices accounted for the bulk of the increase in the headline index. Core CPI (which excludes volatile food and energy prices), was flat on a month-over-month basis.

Broadly, we think inflation jitters are overblown at the present juncture, as slack in the labor market continues to present a headwind for persistent inflation. The Philips curve, a measure of the relationship between the unemployment rate and inflation, has flattened over time, suggesting that the US economy is able to stomach lower levels of unemployment before the labor market causes inflation to heat up—for example, the environment we saw in 2019 when the unemployment rate crossed below 4% without triggering inflation.

As shown in the LPL Research Chart of the Day, the unemployment rate remains quite high at 6.3%, while the number of permanent job losers (those looking for work whose employment ended involuntarily), remains near its pandemic highs:

View enlarged chart.

However, while inflation may be low right now, as we enter the spring, base effects from the deflationary environment seen last year will “inflate” the year-over-year CPI numbers over the next few months.

“It’s reasonable for the market to expect inflation to rise from depressed levels, but we’re not expecting inflation to get out of hand,” added LPL Chief Market Strategist Ryan Detrick. “We think we’re more likely to see more of a reflationary environment rather than a truly inflationary environment here in 2021.”

Further stoking the debate about inflation, Congress is in the midst of debating additional fiscal stimulus with an expected price tag north of $1 trillion that it intends to pass before enhanced unemployment benefits expire on March 14. Meanwhile, Federal Reserve (Fed) Chair Jerome Powell has continued to reiterate the Fed’s stance that it is not even thinking about thinking about raising rates, and it does not intend to begin tapering its asset purchase programs in the near term, either. After the stubbornly low inflation environment seen after the 2008-09 recession, the Fed has made it abundantly clear that it is willing to look past any transitory inflationary forces in an almost “prove it” mentality for steady inflation above its 2% average target as the Fed emphasizes full employment.

At the same time, there are market dynamics pointing to rising inflation expectations, including:

• 10-year breakeven inflation expectations [the yield difference between Treasury inflation protected securities (TIPS) and nominal Treasury yields] have risen to the highest level since 2014
• Commodity prices, including WTI crude oil, lumber, and copper, have been climbing
• Banks and other cyclical sectors have been outperforming so far in 2021
• Sovereign bond yields have been rising globally

So who will blink first? Only time will tell, but we think any calls for runaway inflation are getting ahead of themselves.

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

Wednesday, February 10, 2021

“Bulls make money, bears make money, and pigs get slaughtered.” Old Wall Street saying.

The Chinese New Year (often called the Lunar New Year) will kick off Friday, February 12, and with it will begin the Year of the Ox. Although we would never suggest investing based on the zodiac signs—it is important to note that the Year of the Ox has historically been quite strong for equities. Not to mention we are saying goodbye to the year of the Rat. Good riddance to the Rat, as the last two years of the Rat were 2008 and 2020, not the best years for many reasons!

Since the Chinese New Year typically starts between late-January and mid-February, we looked at the 12-month return of the S&P 500 Index starting at the end of January dating back to 1950. And wouldn’t you know it? The Year of the Ox has been up more than 13% on average (with a median advance of nearly 18%); suggesting bulls are smiling indeed!

View enlarged chart.

“The year of the Ox is the second of the 12 animal signs of the Chinese zodiac, and the Ox is considered a symbol of diligence, persistence, and honesty. Equity returns indeed are quite persistent during the Ox, as it is the third best return out of the 12 Zodiac signs,” explained LPL Chief Market Strategist Ryan Detrick.

The LPL Chart of the Day shows how all the 12 Zodiac signs have done historically, with the Goat, Tiger, and Ox as the best, while the Rooster and Snake have been the worst.

View enlarged chart.

We want to stress that no one should invest purely based on the zodiac signs. This relationship is random and the sample size is small. Still, here’s hoping that the Year of the Ox plays out well for the bulls once again!

Lastly, please watch our latest LPL Market Signals podcast, as we discuss improving economic trends and why we upgraded our economic and stock market forecasts.

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
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Economic Blog Posted by lplresearch

Friday, February 5, 2021

US payrolls grew month over month in January following a brief dip into negative territory in December. Peering under the hood, though, this report did little to dispel the notion that the labor market’s recovery has been stalling out, and likely bolsters calls for additional fiscal stimulus.

The US Bureau of Labor Statistics released its monthly employment report this morning, revealing that the domestic economy added 49,000 jobs in January, falling short of Bloomberg-surveyed economists’ forecasts for a 105,000 gain. Large negative revisions to December’s number, as well as January’s large seasonality adjustments, cast this positive headline number in a somewhat more nebulous light. The unemployment rate notably fell to 6.3% from 6.7%, but that was paired with a labor force participation rate that declined to 61.4% from 61.5%.

Average hourly earnings rose 0.2% month over month and 5.4% year over year, signaling lower-wage workers have borne the brunt of job losses. One cohort of the labor market being disproportionately affected distorts these figures and reduces their usefulness as a gauge of whether inflation could begin to creep into the picture. The recently released Employment Cost Index, though, adjusts for these distortions and showed fourth quarter growth of 0.7% quarter over quarter and 2.5% year over year. This is below the prior cycle peak of 3.2% year over year, and therefore is not a present threat in our opinion.

As seen in the LPL Chart of the Day, the jobs recovery has plateaued just under the 143 million payrolls level in the last four months. This follows an initial sharp recovery off April’s bottom, and it should come as no surprise that the tapering off has coincided with rising case counts and colder weather. We remain about 9.9 million jobs short of February 2020’s 152.5 million peak.

View enlarged chart.

The composition of January’s report follows trends that are all too familiar from previous COVID-19 spikes, the dichotomy between jobs that can be done at home and those that cannot. Retail trade lost 37,800 jobs while the leisure and hospitably industry lost 61,000, two segments that have been hardest hit throughout the pandemic. Meanwhile, professional and business services added 97,000 jobs and government jobs increased by 43,000.

“The past few months on jobs day, we have flagged the need for fiscal stimulus to get us through to the other side of this economic soft patch,” explained LPL Financial Chief Market Strategist Ryan Detrick. “As the pace of vaccinations picks up, we are hopeful that the job market may soon start to benefit from more sustainable economic growth.”

Earlier this week, an important milestone made headlines across the country as the total number of vaccinations administered surpassed the total number of COVID-19 cases. Boots on the ground are becoming increasingly efficient at distributing the vaccine, and positive trial data boosted hope that a third vaccine soon may be made available for emergency use. Obviously, as a larger proportion of the population receives their vaccinations, economic activity can pick up and hiring in hard-hit service jobs can resume.

We may already be seeing nascent signs of this. The jobs report’s window cuts off at the end of the week containing the 12^th of the month. Initial claims for unemployment data, however, improved notably in the second half of the January. If the improvement in layoffs were also reflected in hiring, we would expect that to show in next month’s report. We may be slightly early in our optimism, but when paired with warmer weather on the horizon, vaccination progress gives us hope that we will soon break through this near-term ceiling in total US payrolls.

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

Thursday, February 4, 2021

Negative yielding debt has been one of the most extraordinary and peculiar consequences of global monetary policy initiatives, turning the basic premise of fixed income investing upside down. Instead of one party lending another party money, and the lender receiving interest in return for the risk incurred, since 2018 the levels of outstanding debt in which the lender pays the borrower for the privilege of loaning the borrower money has skyrocketed. This has left both lenders and fixed income investors in the unfortunate situation of attempting to “lose less” rather than “earn slightly more” than the value of the loan extended.

The total value of negative yielding debt around the globe set a new record in the final month of 2020, eclipsing more than $18 trillion as governments around the world issued debt to combat the COVID-19 pandemic. The majority of these bonds are issued by governments in the developed world such as Japan and Europe, while US Treasuries remain one of the few sovereign bonds in the developed world that held positive yields throughout the pandemic. Though the Federal Reserve has committed to keeping short-term rates near zero for the foreseeable future, it should come as a relief to investors that thus far, Fed Chair Jerome Powell has dismissed the idea of negative short-term rates in the U.S.

However, negative yielding debt does affect U.S. investors. Even after accounting for the costs of hedging out currency risks, Japanese investors can obtain 70 bps more in yield by investing in the U.S. 10-year Treasury note compared to a 10-year Japanese government bond, while German investors can earn 0.37% after hedging costs, compared with the -0.45% current yield of the German 10-year bund, which is the highest level in nearly five months. These factors increase demand for U.S. debt, which has helped to depress Treasuries yields and dampen the outlook for fixed income investors.

What does the future of negative yielding debt look like? As shown in the LPL Chart of the Day, the good news is that this amount of negative yielding debt has declined substantially in the past two months and fallen back below the previous record high set in 2019. We believe this amount should continue to fall in 2021 as global economies recover and safe-haven yields rise, contributing to the 10-year Treasury yield moving toward our year-end 2021 forecast of 1.25–1.75%.

View enlarged chart. 

For more of our 2021 market insights and forecasts, please read our new LPL Research Outlook 2021: Powering Forward.

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 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