Archive

Economic Blog Posted by lplresearch

1/21/21

The onset of the global pandemic shocked the economy and triggered one of the deepest recessions ever in 2020. As investors fled to “safe haven” Treasuries and the Federal Reserve (Fed) lowered interest rates, the yield on the 10-year Treasury traded as low as 0.31% intraday on March 9, 2020 (its lowest closing yield was 0.51% on August 8).

Earlier this year, mortgage rates followed the 10-year Treasury yield lower to register an all-time low value of 3.3%. Fueled by additional purchases of mortgage-backed securities (MBS) by the Fed, mortgage spreads have narrowed while Treasury yields remain at depressed levels, only recently trading above 1%. As shown in the LPL Chart of the Day, the average rate on a 30-year fixed rate mortgage has continued to fall, now trading at just 2.88% according to Bankrate.

View enlarged chart.

We’ve often referred to the economic recovery taking on a “K shape” where some segments of the economy are recovering and performing well (the upper leg of a K) and other areas are struggling (the lower leg of a K). The housing market has found itself in the upper leg of the recovery, as housing starts, building permits, existing home sales, and home prices have all surpassed their pre-pandemic highs.

“Perhaps it should come as no surprise that the housing market has boomed following a big decline in mortgage rates,” noted LPL Chief Market Strategist Ryan Detrick. “Low rates, undersupply, and the working-from-home environment have given us the best housing market in over a decade.”

Going forward, we continue to favor MBS relative to other investment-grade asset classes.  MBS provide a more attractive yield than Treasuries, while also providing better insulation from rising interest rates compared to investment-grade corporate 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 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

1/20/2021

Today Joe Biden becomes the 46th President of the United States. We’ve already looked forward at what his presidency, coupled with a blue wave in Congress, could mean for policy in Market Policy Projections for 2021, so today we take a look back at how stocks performed under President Donald Trump.

As shown in the LPL Chart of the Day, the Dow Jones Industrial Average (Dow) gained approximately 56% during Trump’s four years in office, which comes out to an annualized return of an impressive 11.8%. “President Trump’s annualized Dow return of 11.8% was the best for any Republican president since President Calvin Coolidge in the Roaring Twenties,” explained LPL Financial Chief Market Strategist Ryan Detrick. “This was still below the annualized returns of Presidents Bill Clinton and Barack Obama.”

View enlarged chart.

Over the past four years, the Dow has made 126 new all-time highs, more than the 123 under Obama in eight years (albeit at a drastically lower starting point), and the most since the record 263 under Clinton. It is hard to believe it, but six presidents never saw a new Dow high while in power, with Presidents Jimmy Carter and Gerald Ford being the most recent to checkmark this dubious feat.

View enlarged chart.

The records from 2020 don’t end there, as stocks have seen a record surge since the election. In fact, from election day until the inauguration, the S&P 500 Index has been up a record 12.8%.

View enlarged chart.

Lastly, for more of our thoughts on stimulus packages, policy, and the current earnings season, please watch our latest LPL Research Market Signals podcast below or on our YouTube channel. Also, if you like our podcast, please give it a positive review—those reviews go a long way to helping more listen to it. Thanks!

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

1/19/2021

Investment-grade credit spreads, the extra yield you get from investment-grade corporate bonds compared to similarly dated US Treasuries, have already tightened to a level you usually only see during the middle of the economic cycle—and that can have consequences for bond investors. As shown in the LPL Chart of the Day, the current spread as of January 15 was at 1%, close to the tightest level of the previous cycle of 0.91%, hit in February 2018, and in the bottom quarter of all values going back to 1997.

“Corporate bonds will likely get support from an improving economic outlook as vaccines become more widely distributed,” said LPL Research Chief Market Strategist Ryan Detrick, “but you’re not getting a whole lot of compensation for the added risk anymore.”

View enlarged chart. 

Tighter spreads are a strong sign of investor confidence that the economy is likely to continue to get back on track. At the same time, it makes corporate bonds relatively expensive and can increase their sensitivity to Treasury yields. When spreads have room to tighten, it can help offset rising Treasury yields. When spreads are already tight, the potential offset is small at best and may not occur at all.

We still see incremental value in corporates over Treasuries. That 1% of added yield over Treasuries from credit spreads remains attractive for many investors, especially if the economic outlook is positive. There are also shorter maturity investment-grade corporate options that may help limit rate sensitivity. There would be some lost yield at shorter maturities, but with sensitivity to changes in Treasury yields already increased by tight spreads, we think the trade-off is worth it.

With corporate spreads tight, our primary emphasis within investment-grade bonds remains mortgage-backed securities, where we believe the yield for the amount of underlying rate risk provides an edge over other investment-grade bond sectors.

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

January 15, 2021

One of the top questions we’ve received recently has been what a blue wave may mean for investments. After the Democrats won the two Senate runoff elections in Georgia, they will now control the White House and both chambers of Congress. Our January 11 Market Policy Projections for 2021 gave some of the immediate and longer-term policy impacts of the Democratic “blue wave,” and here we surf the blue wave with some interesting charts.

First off, blue waves have not been bearish for stocks, with the S&P 500 Index higher 6 of the past 7 times and up a respectable 9.1% on average since 1950.

View enlarged chart.

We shared this chart in 2020, and it shows that historically, stocks do better if an incumbent president wins versus a new president in office. This makes sense, as a new president will bring in new policies and likely question marks—while you know what you will get with a re-elected president. Remember, markets hate uncertainty and surprises.

View enlarged chart.

“Make it all nine new Democratic presidents since 1900 to bring with them both the House and the Senate. In fact, stocks do quite well that first year under such circumstances, up nearly 12% on average,” explained LPL Financial Chief Market Strategist Ryan Detrick. “Maybe investors shouldn’t fear a blue wave after all.”

As shown in the LPL Chart of the Day, when a new Democratic president has brought with them the House and Senate, stocks gained that first year of their new presidency 6 of 8 times. What stands out to us for 2021, though, is the House majority is only 11—the smallest for a new Democratic president since 1900.

View enlarged chart.

Looking at all of the times the Democrats controlled the House (since the 35th Congress when it was Democrats and Republicans), the 11-seat majority is the lowest since 9 seats in 1879. Yes, the Democrats are in power, but this small majority will make it very tough for any of the more extreme policies to pass.

View enlarged chart.

Lastly, the Senate is split a perfect 50/50, which is again extremely rare. In the chart below we share the seat difference between the two parties. “A 50/50 Senate coupled with only an 11-seat majority in the House, and it is safe to say we have about as close to a perfectly divided government as we’ve ever seen,” said Detrick.

View enlarged chart.

In our latest LPL Street View video Ryan discusses some surprises to kick off 2021, like the blue wave and continued strong equity performance.

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

January 14, 2021

Heading into 2020, we maintained our preference for growth stocks as we believed that earnings growth would become harder to come by as the economic cycle aged, and their robust earnings growth was greatly appealing. These same growth stocks bucked historical precedent and proved to be well insulated from the economic effects of the stay-at-home environment presented by the outbreak of COVID-19. As the economy began to emerge from lockdown after the horrendous second quarter of 2020, a cyclical trend began to emerge, and we’ve slowly been warming up to value stocks as a result

In particular, we upgraded our view of the financials sector from negative to neutral in our most recent Global Portfolio Strategy publication, supported by a steepening yield curve and rising interest rates. As shown in the LPL Chart of the Day, the yield curve has steepened more than 50 basis points (0.50%) since the summer low as investors began to price in higher economic growth and inflation, while the Federal Reserve has kept short-term rates anchored at zero.

View enlarged chart.

The steeper yield curve should help the net interest margin on new loan issuance while long-term rates are rising due to better economic prospects, which should limit defaults. However, the 10-year Treasury yield remains historically low at just over 1%, and we forecast the yield to finish 2021 in the range of only 1.25–1.75%. Financials would be better off if the higher-end of our range were met or exceeded. Despite the economy being in a considerably better place than it was over the summer, the battle against COVID-19 continues to threaten the path of the recovery.

“We’ve talked a lot about cyclicals as we emerged from the lockdowns of last spring, and we expect it will continue into 2021,” noted LPL Chief Market Strategist Ryan Detrick. “The economy has been improving, but the rollout of the vaccine will be the key determinant for the economy.”

Meanwhile, we have downgraded communication services stocks from positive to neutral. Communication services, which includes internet and digital media giants Alphabet (Google), Facebook, and Netflix, has benefited from the stay-at-home environment that persisted through much of the pandemic.  However, the top-heavy nature of the sector—the three largest stocks account for nearly 60% of the sector weight—leaves it vulnerable to the rotation toward cyclicals. It’s also possible that the incoming Joe Biden administration may change the regulatory landscape for these firms, presenting an additional risk going 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 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

https://www.youtube.com/watch?app=desktop&v=soRrYeCUXfU

Economic Blog Posted by lplresearch

1/13/21

Rising COVID-19 cases and concern about the policy environment put a dent in small business optimism in the month of December, the index’s second straight monthly decline. As shown in the LPL Chart of the Day, the National Federation of Independent Business (NFIB) Small Business Optimism Index, a survey of more than 500 firms, declined in December to 95.9, falling below the long-term average index value since 1973 of 98. Further, 9 of the 10 index components declined, while only one—satisfaction with current inventory—managed to improve.

View enlarged chart.

The rise in COVID-19 cases in the fourth quarter of 2020 and the subsequent rise in restrictions implemented by state and local governments have taken a toll particularly on small businesses, pushing the Uncertainty Index component of the survey 8 points below the 6-month average. Meanwhile, the rise in COVID-19 cases has coincided with the election of a new administration in Washington, DC, and the potential regulatory and tax changes that may come with it, adding further uncertainty.

“Small businesses are rightfully concerned about their business outlook as new COVID-19 cases continue to surge,” noted LPL Chief Market Strategist Ryan Detrick. “The widespread vaccine distribution should be the key to lifting us out of the pandemic; however, local restrictions used as a bridge during the rollout of the vaccine will create a tough environment for small businesses.”

While survey data has suggested a tough economic environment, the stock market has been signaling this uncertainty may be short-lived, at least for publicly traded small cap stocks. As of January 12, 2021, the Russell 2000 Index of small cap stocks has handily outperformed its large cap counterpart, the S&P 500 Index, by nearly 11%. In Weekly Market Commentary: Market Policy Projections for 2021, we explain that the increased prospects for additional fiscal stimulus may encourage rotation toward areas of the market that may respond positively to economic reopening, which includes small cap stocks.

Even though small cap stocks—and perhaps the broader market—could be due for a breather after such a strong post-election rally, we think the future for small caps is brighter than the survey results may be suggesting.

In this week’s Market Signals podcast and video, LPL Research talks about 2021 policy updates and the possibilities of higher taxes and more regulation, more stimulus, higher Treasury yields, and better stock performance in 2021.

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

Economic Blog Posted by lplresearch

1/12/2021

Treasury yields hit two key levels the first week of 2021. As shown in the LPL Chart of the Day, the 10-year Treasury yield moved above 1% for the first time since March 2020, and the 10-year breakeven inflation rate, a measure of Treasury market-implied inflation expectations, climbed above 2% for the first time since November 2018.

“When stocks began to rally back in March 2020, Treasury investors stayed more cautious,” said LPL Research Chief Market Strategist Ryan Detrick. “But since early August 2020 the 10-year Treasury yield has been climbing, and we think we may see more of the same over the rest of 2021.”

View enlarged chart.

1% is still a low level for the 10-year Treasury—in fact, before 2020 it would have been a record low. But the move higher has been meaningful. The 10-year Treasury yield has been rising roughly 8 basis points (0.08%) per month since August, although the path has not been a straight line. We don’t think that rate of growth is sustainable over a full year, as we may see buyers, especially foreign buyers, come in more actively as yields move higher;  1.4–1.5%, near the 2012 and 2016 lows, may be an attractive buying point from a technical perspective. In addition, Federal Reserve (Fed) activity, a change in the economic outlook, or stock market volatility could all change the path of rates.

Despite a climbing 10-year Treasury yield, the 10-year Treasury Inflation-Protected Securities (TIPS) yield actually declined over December 2020 and into January 2021. The difference between the two, called the breakeven rate, reflects implied inflation expectations over the next 10 years. The breakeven rate generally has been held below 2% since October 2014, except for 2018 when it ran closer to 2.1% for much of the year. With the Fed allowing inflation to run a little hot, the breakeven inflation rate may widen a little more from current levels, but at some point growth expectations should lift the TIPS rate as well, helping to keep the breakeven rate near current levels.

Hitting these two key levels last week is an important sign of continued economic progress. Our target for the 10-year Treasury yield remains 1.25–1.75% for year-end 2021, supported by continued economic improvement and a manageable pickup in inflation.

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

1/8/2021

The differences in strength between the stock market and real economy were laid bare this week as the stock market surged to new highs while the jobs market continued to deteriorate and remains well short of its February peak.

The US Bureau of Labor Statistics released its monthly employment report on January 8, revealing that the domestic economy lost 140,000 jobs in December, falling well short of Bloomberg-surveyed economists’ forecasts for a 50,000 gain. It should be noted, though, that strong revisions to prior months—adding 135,000 jobs—somewhat offset December’s shortfall. Both the unemployment rate and labor force participation rate held steady at 6.7% and 61.5%, respectively. Average hourly earnings rose 0.8% month over month and 5.1% year over year, signaling lower-wage workers again bore the brunt of job losses.

As seen in the LPL Chart of the Day, December’s jobs loss represents the first return to negative territory since the jobs market began recovering from the April 2020 plunge. Compounding the negative monthly change, total payroll growth is stalling out 9.7 million below February’s peak of 152.5 million nonfarm payrolls. Only 56% of the jobs lost in March and April 2020 have been recovered.

View enlarged chart.

The composition of December’s report follows trends observed around prior COVID-19 spikes, namely a divergence between goods-producing jobs and service-providing jobs. In an environment where consumers can still shop for goods from home, goods-producing jobs remained strong, adding 93,000 net jobs, with manufacturing a bright spot. Service-providing jobs lost 188,000 net jobs, with leisure and hospitality accounting for 498,000 job losses, a staggering number driven by declining in-person interaction and renewed shutdowns.

“The disappointing jobs number confirms what we know: The employment picture continues to weaken as new restrictions are put in place and COVID-19 cases soar,” explained LPL Financial Chief Market Strategist Ryan Detrick. “The good news is with the recent stimulus package—and more likely on the way soon—we can help those that need it the most until a broader rollout of the vaccine can be implemented.”

While December’s bridge stimulus package did some of the work of getting timely support to those most affected, the Democrats’ somewhat surprising capture of Senate control may lead to another big stimulus package. While hardly a substitute for a self-sustaining economy, a large fiscal package on the horizon may help shore up confidence that the economy will make it through this difficult period with little additional lasting damage. Investors, at least initially, have been cheering these developments, pushing stocks to all-time highs. We remain focused on whether the real economy can take the baton from policymakers and justify the stock market’s optimism as we move through 2021.

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

Markets Blog Posted by lplresearch

1/07/21

2020 was a good year for stock investors despite unprecedented challenges.

After being down more than 30% at the March 2020 lows, the S&P 500 Index ended the year with a solid 18.4% total return. Last year marked the first time the index ended a year positive after being down at least 30% during that year. Gains were driven primarily by the emerging economic recovery taking hold, bolstered by massive stimulus, and the remarkably fast COVID-19 vaccine development that encouraged market participants to begin to price in the end of the pandemic.

We take a look at some of the asset class and sector winners and losers in 2020.

Massive growth outperformance. The growth style of investing had one of its biggest runs ever relative to the value style in 2020, benefiting from better positioning for the pandemic, superior earnings growth, and balance sheet strength. As shown in the LPL Chart of the Day, the major growth indexes returned over 30% while the value indexes produced mid-single-digit gains. The technology sector was the biggest driver of growth outperformance (about 60% of it), but the consumer discretionary sector—led by Amazon, one of the biggest stay-at-home stocks—also outperformed the broad markets and value indexes by a wide margin last year.

View enlarged chart.

“We maintain a slight preference for growth but have become more interested in value stocks as the outlook for economic growth has improved,” said LPL Financial Equity Strategist Jeffrey Buchbinder. “The additional fiscal spending we may get from the Democratic-controlled Congress adds to the case for value by boosting interest rates and supporting financials.”

Technology topped all sectors. Technology led all S&P 500 sectors in 2020 by a wide margin with its nearly 44% return. Remove the sector away from the S&P 500 performance, and last year’s 18.4% gain would drop to around 6%. Of course, the work-from-home, stay-at-home environment provided a big boost for the sector last year. But we continue to like the sector’s prospects given the solid earnings outlook and powerful secular tailwinds such as 5G, cloud computing, mobile payments, and artificial intelligence.

Small cap comeback. When the United States entered a recession and stocks plummeted in March 2020, it was no surprise that small caps underperformed. They are generally more economically sensitive, domestic by nature, and are less able to withstand economic and market stress than larger cap companies. But small caps stormed back as confidence in the economic recovery increased, including the Russell 2000 Index’s best quarter ever in Q4 (+29.3%). Small caps actually slightly outpaced the large cap S&P 500 Index for the year. We upgraded our small cap view in September because they tend to do well early in economic cycles, and we expect solid gains for small caps again in 2021 as the recovery gains steam.

Rough year for energy. Energy was the biggest loser in 2020, with a decline of more than 30%, more than 10 percentage points worse than the next worst sector—real estate. You probably don’t need to look any further than the 20% decline in crude oil prices to explain the weakness, but sensitivity to travel added to the sector’s woes. Crude’s rally back to pre-pandemic price levels in the $50 per barrel range and related improvement in sector performance are encouraging, but we’re staying cautious for now.

Developed international. Developed international stocks lagged in 2020, based on the MSCI EAFE Index, due mostly to weakness in France, Japan, and the United Kingdom (UK). These countries lack the technology exposure that the US indexes enjoy, and therefore, their markets were hit harder by the pandemic. Meanwhile, the Brexit drama added to the UK’s challenges. Emerging markets fared much better than developed international markets, roughly matching gains for the US indexes thanks to strength in China, which led the world out of the global pandemic, as well as South Korea and Taiwan.

Be on the lookout for our updated views on the major equity asset classes and sectors in our next Global Portfolio Strategy report due out on January 12. And for more of our latest thoughts on 2020 and where stocks may be headed in 2021, please watch our latest LPLResearch  Market Signals podcast below.

IMPORTANT DISCLOSURES

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.

References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

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All index and market data from FactSet and MarketWatch.

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