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Posted by lplresearch

Market Blog

There are many charts that caught our attention this week, and today we share the top 5 charts we’re watching.

The S&P 500 Index recently had a four-week losing streak and fell nearly 10% along the way, while the Nasdaq and many large cap tech stocks fell even more. Then in a big move higher over the past two weeks, many stocks moved from oversold to overbought in a very quick timeframe.

As the LPL Chart of the Day shows, more than 90% of the components in the S&P 500 were beneath their 10-day moving average on September 24 and within two weeks saw more than 90% above this short-term trend line. This type of buying thrust is consistent with future strong returns, suggests quick reversals from oversold to overbought are a good thing, and could bode well for stocks to outperform bonds well into 2021.

View enlarged chart.

Parts of the economy are opening back up, while employment continues to disappoint. One specific area that continues to improve is how many people are flying, as the seven-day average number of travelers going through Transportation Security Administration (TSA) checkpoints hit a new recovery high. We discuss other high-frequency data points in our COVID Surge Stalling Europe’s Recovery blog.

View enlarged chart.

We’ve noted before that stock market gains ahead of the election historically support the incumbent party, while if stocks are lower it tends to support new leadership in the White House. Taking this further, the US dollar also tends to send signals for who might win. In fact, when stocks are up and the US dollar is lower ahead of the election, or if stocks are lower and the US dollar is higher before an election, the results have accurately predicted the last seven times those scenarios took place. Given stocks are up and the US dollar is slightly lower, this could be one clue the upcoming election will be much closer than many are expecting.

View enlarged chart.

Sticking with the election, many investors are worried about higher taxes and more deregulation if former Vice President Joe Biden wins. “Higher taxes may be one part of it, but Biden is also looking at huge spending initiatives,” explained LPL Financial Chief Market Strategist Ryan Detrick. “Stock markets like spending, and this could more than help offset potentially higher taxes.” Lower tariffs could potentially provide another offset as well.

View enlarged chart.

Last, Friday’s retail sales report came in better than expected, marking five consecutive months of year-over-year gains. It is worth noting the economy has never been in a recession after 4 or more consecutive monthly gains. Still, in the face of one of the most severe recessions ever, it took only a few months for sales to get back to new highs, as shown below. Historically, new highs in retail sales happen in expansions—and this is yet another clue the recession is likely over.

View enlarged chart.

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

Posted by lplresearch

Economic Blog

We continue to monitor real-time COVID-19 and economic data to provide insight into how the pandemic is affecting economies around the world. Traditional economic data sometimes can be too slow to pick up the changes that are occurring. Today we focus on Europe.

“The high-frequency data shows that the recovery from COVID-19 related economic disruption is happening at a different pace in different parts of the world,” said LPL Financial Chief Market Strategist Ryan Detrick. “Governments globally, but especially in Europe, are struggling with managing reopening economies while also controlling the spread of the virus.”

In recent weeks much of Europe has been facing a sharp increase in COVID-19 infections: Over 700,000 new cases were reported by European nations last week, the highest number since the start of the pandemic. This has led to partial lockdowns or curfews in France, Spain, and the United Kingdom (UK) as local governments impose tougher restrictions on regions and cities with higher infection rates.

Using data from the online restaurant booking system Opentable, we see that Germany, Ireland, and the UK all quickly recovered to pre-pandemic levels once lockdown restrictions were lifted. Later in the summer, the UK and Ireland were even able to vastly outpace last year, thanks in part to local promotions such as the UK government’s “Eat Out to Help Out” campaign. However, both countries have seen recent declines in restaurant bookings as local infections have risen, people have become less comfortable eating out, and restaurants and pubs are forced to reduce hours. Germany has also seen a decline in diners since mid-summer highs. These countries’ trajectories are very different from the United States where the recovery in dining out has been slower but steady.

View enlarged chart.

The data on the number of in-person shoppers visiting Europe’s busiest shopping centers also showed sharp recoveries after the first round of lockdowns were eased, and that the recovery has struggled to maintain momentum and seen declines since mid-August. The new lockdown measures in the UK and France will likely put further pressure on these brick-and-mortar retailers in coming weeks.

View enlarged chart.

Driving congestion data, from the location technology company TomTom, shows that Germany had a relatively quick return to pre-pandemic levels of traffic and France had just reached similar levels before declining in the last week. The UK, Italy, and Spain have all shown recoveries from earlier lows, but they’ve started to level off, or decline, recently. This contrasts again with the US data that has been slowly grinding higher since the end of March.

View enlarged chart.

The high-frequency data is starting to reflect the increasing spread of COVID-19 in Europe, which strengthens our view that we expect economies in Europe to contract more in 2020 than the United States or Japan, which has been supported by a very aggressive stimulus response. We continue to favor emerging markets equities over those in developed international markets, with China’s apparent success in containing the virus and reopening its economy a key factor.

LPL Research continues to monitor high-frequency data from around the globe and will keep you updated, real-time, as this changes.

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

Posted by lplresearch

Market Blog

With Election Day just under a month away and voting already taking place in many states, it is still anyone’s guess who will win on November 3. With all of the noise surrounding the election, we prefer to focus on the signals coming from the market. However, perhaps even the market is having a tough time sorting out who will win once the votes are counted.

Our friends at Strategas Research Partners have put together a basket of stocks likely to benefit from a Trump or Biden presidency. As shown in the LPL Chart of the Day, the Biden portfolio has been outperforming the Trump portfolio, though we acknowledge these stocks are driven by other factors as well.

View enlarged chart.

The Biden portfolio has been supported, in part, by green energy stocks, which have been on a particular tear in recent weeks. Given Joe Biden’s proposal for green energy policies, these stocks have helped drive strong performance for the Biden portfolio recently.

On the other hand, we have noted in the past that the performance of the S&P 500 in the three months prior to the election has a strong track record in predicting the fate of the incumbent party. Since August 3, the S&P 500 is currently up nearly 7% on a total return basis, suggesting that the incumbent party will win this year.

So which is it?

“We think it’s going to be a lot closer than the polls may suggest right now, similar to what we saw in 2016,” added LPL Research Chief Market Strategist Ryan Detrick.

Regardless of who may win the election, we think the continued economic rebound will support future equity gains. Further, we don’t think it is wise to base long-term portfolio decisions on the outcome of an election. In similarly polarizing elections in 2008 and 2016, investors who maintained their stock allocations were rewarded with future gains.

While headlines surrounding the election will continue to create uncertainty, we think the best response is likely to stay the course. As the improvement in the economy continues, we remain overweight stocks relative to bonds, and expect this environment will support further gains for this young 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 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

Posted by lplresearch

Market Blog

The 10-year Treasury yield has stayed in a narrow range since April 2020, helped by a supportive Federal Reserve and ongoing concerns about the COVID-19 pandemic. As shown in LPL’s Chart of the Day, the 10-year Treasury yield actually is sitting below inflation right now as measured by the Consumer Price Index (CPI) excluding food and energy. A negative real yield (a yield lower than inflation) was once rare, occurring periodically in the 1970s and early ‘80s due to high inflation, but since the start of 2011 the 10-year Treasury real yield has been negative almost 40% of the time.

“Negative real rates may be another sign that interests rates may push higher,” said LPL Financial Chief Market Strategist Ryan Detrick. “Even a return to the middle of the range since 2011 implies a 10-year Treasury yield of 2.1%, although it would likely take some time to get there.”

View enlarged chart.

The average 10-year Treasury real yield since the start of 2011 has been about 0.25%, which means the actual yield has been just a little bit higher than inflation, on average. Since 2012 the highest level of real yield was 1.3%, well below the long-term historical average (dating back to 1962) of 2.3%. We suspect the range since 2011 will remain the norm as global central banks continue to keep policy rates low. If core inflation returns to 1.9%, its average since 2011, it would imply a 10-year Treasury yield of 2.1%. However, even if plausible, it could take some time to get there, probably years.

Even spread out over several years that would be a headwind for investment-grade bond investors(bond prices fall as yields rise). Still, we believe investment-grade bonds are likely to remain useful portfolio diversifiers and the income from bonds should be enough to generate a positive total return if getting back to the historical average were spread out over three or more years, as we expect. Reducing the interest rate sensitivity of bond holdings and increasing the credit sensitivity would create more resilience in a rising rate environment, although at the potential cost of some diversification benefit.

With yields low, it’s unlikely to be as easy an environment for bond investors looking forward as it’s been over the last five, or even twenty-five, years. But quality bonds still have a role to play for appropriate investors in a diversified portfolio—they just may require more care and patience than they have in the past.

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.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

The market value of corporate bonds will fluctuate, and if the bond is sold prior to maturity, the investor’s yield may differ from the advertised yield.

Government bonds are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

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

Posted by lplresearch

Market Blog

In the recent LPL Market Signals video, LPL Financial Chief Market Strategist Ryan Detrick, Equity Strategist Jeff Buchbinder and Asset Allocation Strategist Barry Gilbert discussed the upcoming election, looking at it from all different angles, and more, including:

• The latest on the stimulus bill
• Whether technology is in trouble under a Blue Wave
• How you should invest if former Vice President Biden wins
• How you should invest if President Trump wins
• Some of our favorite election charts

You can watch the full discussion below and directly from our YouTube channel. Please be sure to subscribe to the LPL Research YouTube channel so you don’t miss anything! Also, if you like our channel, please give us a positive review—it helps more than you know!

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

Posted by lplresearch

Economics Blog

Stimulus talks in Washington, DC, are getting a lot of attention from investors—and for good reason. The midpoint of the two offers—roughly $1.6 trillion from the White House and $2.2 trillion from US House Democrats—is about 9% of last year’s US gross domestic product (source: Bureau of Labor Statistics). That’s a big deal in terms of potential impact on the economy and markets.

We see stock market performance playing a role in President Donald Trump’s election chances. Historically when stocks rise heading into elections, incumbents tend to get re-elected—although at the same time, recessions tend to bring a change. Given how sensitive the market has been to the on-again-off-again stimulus talks in Washington, we would expect Trump’s interest in getting something done to be very high right now. The S&P 500 Index is up about 4% since August 3, which based on history favors the incumbent, but there’s a long way to go between now and November 3, and the recent recession may favor former Vice President Joe Biden.

“A compromise on a big stimulus package in Washington could potentially deliver another October surprise, but the odds are against it as Election Day approaches,” said LPL Financial Equity Strategist Jeffrey Buchbinder. “The optics of getting nothing done aren’t great on either side, and there are a lot of close Senate races right now, suggesting there still may be a glimmer of hope for a deal by November 3.”

For Republicans, the mini COVID-19 outbreak in the White House provides an added motive, in addition to the possibility of a wave of layoffs just ahead of the election, which won’t help the president or swing-state Republican Senators. On the other hand, the Democrats may be looking at the polls and thinking they will get more of their priorities if they wait. They also may not want to give Trump a signing ceremony right before most votes are cast. Plus, a piecemeal “skinny” deal now would reduce their leverage to get more of their wish list items.

Still, there is bipartisan support for a deal, moderates on both sides of the aisle are pushing for it, and the need is clearly there (ask Federal Reserve Chairman Jerome Powell), so we remain hopeful that something is passed this year. Unemployment remains near 8%, and many families and small businesses are still reeling from the effects of the pandemic that are not going to end soon unfortunately.

Looking beyond the election, we see these scenarios as reasonable possible outcomes:

Trump wins and Republicans retain the Senate. A deal similar to the Republicans’ offer around $1.5 trillion would be likely but far from assured.

Democrats sweep but keep the filibuster in place. A deal in the $1.5 to $2 trillion range becomes very likely. Without the filibuster, a potential deal may get even bigger.

Biden wins but Republicans retain the Senate. There is a risk of no deal at all in this gridlock scenario, though moderates may come through with a “skinny” deal.

Republican sweep. This scenario would almost certainly lead to a skinny deal including supplemental jobless benefits, small business aid, corporate liability protections, and some COVID-19-related funding. We view this as the most unlikely scenario given Democrats’ stronghold on the House this cycle.

Finally, for those looking for a bill to pass in the lame duck session of Congress if Biden potentially wins, we would argue that the Democrats may wait until Biden takes office to attribute it more to him.

Bottom line, this could go a lot of different directions. We’ll be watching closely. Stay tuned.

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

Posted by lplresearch

Market Blog

Stocks fared well during the third quarter despite September’s weakness, with the S&P 500 Index returning about 9%. The quarterly gain brought the return through the first nine months of the year to 5.6%. Here we peel back the onion on the third quarter’s stock performance to look at what worked and what didn’t.

Growth beat value for the quarter despite losing ground in September. The growth style of investing continued its impressive 2020 run during the quarter, shown in the LPL Chart of the Day, but underperformed during September as markets pulled back and rotated some from the winners to the laggards. Value’s outperformance for the month was its first such feat in 12 months, based on the Russell 1000 style indexes. Over the full quarter, growth got a boost from strong gains in technology, while value was hurt by weakness in the energy sector.

View enlarged chart.

“The improving performance of cyclical value stocks in September suggests markets may be increasingly pricing in a durable economic expansion,” said LPL Financial Equity Strategist Jeffrey Buchbinder. “We’re sticking with growth, but as more progress is made on vaccine candidates, value could make a run.”

Small caps held up slightly better than large caps during September but lagged for the quarter. As the US economy transitions from recession to a new expansion, we would expect small caps to do well as traditionally strong early-cycle performers. They did well coming off the March 2020 lows, but performance has leveled off in recent months due to the strength in large cap technology and other stay-at-home stocks.

Strong quarter for emerging markets. Looking at regions, emerging markets stocks outperformed the United States during the third quarter with its 9.7% return, based on the MSCI Emerging Markets (EM) index. EM outperformance was driven by China, South Korea, and Taiwan, as China led the way out of the global pandemic and its technology-driven trading partners in Asia thrived. Developed international stocks lagged during the quarter, based on the MSCI EAFE Index, due to weakness in France and the United Kingdom. Over the first nine months of 2020, emerging markets edged 0.9% lower, while developed international stocks lost 6.7%.

Consumer discretionary topped all equity sectors for the quarter. Gains were broad-based, though homebuilders stood out with outsized gains as the housing market remains quite strong. The internet retailers lagged slightly behind the sector as some of the pandemic winners took a breather late in the quarter. Energy struggled mightily with a nearly 20% decline even though oil and natural gas prices rose, bringing the sector’s 2020 loss to 48% through September 30.

View enlarged chart.

LPL Advisors: For more on recent winners and losers and what asset classes and sectors LPL Research favors heading into the election, look for our Global Portfolio Strategy report October 9.

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

Posted by lplresearch

Market Blog

The third quarter was characterized by the carry-over of economic momentum from the second quarter, as states continued to lift restrictions to reopen their economies. Perhaps it was no surprise that some of the hardest hit and most economically sensitive areas of the fixed income market benefited.

As shown in the LPL Chart of the Day, the sectors of the fixed income market widely considered to be “risk on” outperformed, such as high yield, bank loans, and emerging market debt:

View enlarged chart.

Further, these sectors typically carry lower interest-rate sensitivity than other segments of the fixed income universe. While Treasury yields remained broadly flat during the quarter, the return of economic growth pushed many investors to position for a rise in yields, increasing the attractiveness of these sectors. Despite the strong quarter, however, the brutal environment during the onset of the COVID-19 pandemic has left these sectors playing catch-up to their investment-grade counterparts for the year.

“With economic growth returning during the third quarter, we expected the risky corners of the fixed income market to perk up,” said LPL Financial Chief Market Strategist Ryan Detrick. “Nevertheless, as the rate of growth following the initial rebound in the economy tapers a bit, there may be some additional volatility in these sectors.”

As we noted in our blog, Low Treasury Yields Present a Challenge, low Treasury yields also present a challenge for investors as the deflationary shock that characterized the early months of the pandemic subsided and inflation expectations normalized. Since nominal Treasury bonds presented very little income to investors while carrying greater interest rate risk as a result, we saw a strong environment for Treasury Inflation-Protected Securities (TIPS) in the third quarter as they outperformed their nominal counterpart.

Not to be left out, municipal bonds also fared well in the third quarter, outperforming Treasuries as well as the broader Bloomberg Barclays US Aggregate Bond Index. High-yield municipals fared the best—given the index’s exposure to revenue bonds—as economic momentum lifted the attractiveness of the sector. While a fourth stimulus bill remains elusive, investors expect additional stimulus will have some funding for state and local governments, perhaps raising the attractiveness of municipal bonds.

Looking forward into the fourth quarter, we continue to prefer high-quality fixed income exposure as the rate of economic growth has tapered, and further uncertainty around the path of the recovery could limit the attractiveness of the riskier segments of the fixed income 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

Posted by lplresearch

Market Blog

Index Performance

View expanded table.

View expanded table.

View expanded table.

US and International Equities

The S&P 500 Index gave back some gains in September after a strong five-month run, with most sectors finishing in the red. The utilities and materials sectors were the exceptions, both gaining for the month. The sectors with the largest pullbacks this past month were energy, communication services, information technology, and consumer discretionary. Given the challenges with the technology sector, large growth underperformed large value. In addition, mid and small cap equities also lost ground this month.

International equities were also broadly lower, with both the MSCI EAFE and MSCI EM indexes both down this past month.

Fixed Income, Currencies, and Commodities

The bellwether Bloomberg Barclays US Aggregate Index finished the month very slightly lower and most major bond sectors fell. US Treasuries along with short-intermediate municipal bonds finished this past month in the green. Emerging markets debt as measured by the JP Morgan Emerging Markets Bond Index (EMBI) was among the weakest of the major bond sectors.

Commodities were broadly lower this month. Gold, silver, natural gas, and crude oil prices declined with silver down over 10%. The exception was copper, which saw a return of more than 1% this month.

US and International Economic Data Recap

The Federal Reserve communicated following its September meeting that it’s committed to continuing to use monetary policy tools to support the economic recovery. The Federal Open Market Committee (FOMC) stated that short-term rates would remain targeted at 0% to .25%. Rates could stay anchored near zero until 2023 or beyond unless inflation rises consistently.

The US unemployment rate remains high compared to history. COVID-19 has played an adverse role on service industry employment. Even though the unemployment rate has dropped to near 8% from a peak of approximately 15%, we are quite a ways from having an economy at full employment. The final eventual approval of a COVID-19 vaccine should help the service industry, and thus our employment landscape.

US consumer spending slowed in August mainly because extended unemployment benefits ended. August core retail sales fell .1% as well compared to an expected increase of .9%. Given that progress on additional stimulus legislation has stalled, September retail sales may show a decline, as they did in August.

Looking Ahead

The election is expected to be a major theme in October as Election Day approaches. In addition, we’ll start to receive corporate third quarter earnings. Market participants will be focused on forward guidance among concerns about the direction of the economic recovery.

Progress on a second round of stimulus, which has been viewed as a low-probability event by many investors, would be quite welcomed, and given the recent employment report, could be on the table. Any changes in the spread of COVID-19 as the weather gets colder will be monitored closely, while positive progress on a vaccine may be cheered by 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. All market and index data comes from FactSet and MarketWatch.

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.

U.S. Treasuries may be considered “safe haven” investments but do carry some degree of risk including interest rate, credit, and market risk. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

For a list of descriptions of the indexes referenced in this publication, please visit our website at lplresearch.com/definitions.

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

Posted by lplresearch

Market Blog

First and foremost, we wish President Donald Trump and First Lady Melania Trump a swift and full recovery. This October surprise raises the already high level of political uncertainty markets are dealing with as Election Day approaches. As market participants digest this news and consider the possibility that the President may not be able to fulfill his duties, markets may become more volatile. However, we believe Trump’s odds of beating the virus, as the United Kingdom’s Prime Minister Boris Johnson and Brazil’s President Jair Bolsonaro did, are quite good. As the President and first lady of the United States, Donald and Melania Trump will be monitored closely and have ready access to the best health care in the world.

Here are some of the top questions surrounding today’s news and our immediate reaction and answers:

• Is this the October surprise? October is known for extremely volatile markets and some surprises. It’s safe to say this is officially our October surprise. The month has seen some spectacular crashes, but also some large gains. Some even say October is where bear markets go to die, marking the end of the “sell in May and go away” calendar effect. The bottom line is the month is one of the most volatile of the year—especially an election year—and we expect this October to be no different.
• Will he beat it? The President will be monitored constantly and have immediate access to the best healthcare in the world, and the virus was caught early, improving his chances. We believe his odds of beating the virus are high, as Prime Minister Johnson and President Bolsonaro did, even though his age puts him in a higher-risk category.
• How long will it impact the President’s schedule? The President is likely to observe quarantine for much of the recommended two week period, although he’ll be working throughout if symptoms allow. But we know the impact of the virus is idiosyncratic to each individual. Only time can answer this question.
• How will this affect the election? Markets appear to be pricing in former Vice President Joe Biden as the favorite, and this news likely does little to change that. If Trump bounces back quickly, he could potentially get a small bump. We continue to believe that this race is closer than the polls would suggest.
• Who else is sick? As of this morning, Vice President Pence and his wife Karen Pence have tested negative, as did Treasury Secretary Steve Mnuchin. We know that Trump advisor Hope Hicks has tested positive. Others in Trump’s close circle possibly may also be sick, and the immediate impacts are great unknowns. Biden is negative as of now as well.
• Could the President gain support? UK Prime Minister Boris Johnson gained support during his battle with COVID-19, so this could have similar impact with Trump. Additionally, President Ronald Reagan gained support after the failed attempt on his life in 2004.
• Will the 25th Amendment be invoked? We don’t think so, at least for now. Historically, the 25th Amendment has been invoked once under President Reagan when he had surgery (not for the assassination attempt) and twice under President George H.W. Bush for two colonoscopies. In all those cases the president was under anesthesia and literally could not make a decision if needed. That’s certainly not the case here and would take significant deterioration for it even to be a possibility.
• What does this mean for the next stimulus bill? It could speed up the two sides getting to an agreement if just to offset any perceived negative economic impact, not to mention that several major companies announced huge layoffs this past week and many people are in need of help. The stage is set for better news.
• Why aren’t defensive assets reacting more? The initial reaction has been quite muted from gold, the Japanese yen, and Treasuries. If this were a true risk-off moment, we’d expect more movement here. Although the market has not had much time to react, this is one positive, but something we will watch very closely.
• Is LPL Research changing its investment recommendations? As of now, we are making no changes to our investment recommendations as a result of this news. We will continue to look for opportunities on potential weakness to add to equities.

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