Archive
September Economic Data Roundup
Posted by lplresearch
Economic Blog
With the election drawing near, politicians, pundits, and especially voters will be paying even closer attention to the state of the US economy. It’s been a wild ride since the outbreak of COVID-19 around the world, and with such information overload, it can be easy to lose track of what is going on with the recovery.
Manufacturing continues to see growth as measured by the Institute for Supply Management (ISM) Manufacturing Purchasing Managers Index (PMI). Further, ISM new orders index, a leading economic indicator, has surged to the highest level since 2004, according to data from Bloomberg, and is still showing solid gains. Given the nature of the virus and our efforts to stem its spread, it may not come as a surprise that manufacturing has rebounded faster than the services sector.
Housing is another area that has boomed following the onset of the pandemic, benefiting particularly from the behavioral shifts of the work-from-home culture and social distancing, with the added boost of historically low mortgage rates. As many parents who have had their children taking classes from home are intimately familiar, additional space has been valuable, helping fuel the growth in new and existing home sales.
Labor market improvement has tapered, however, following the initial snapback that started in May after lockdowns were lifted. The state of the job market will be a particular sticking point for voters heading into the election, and as we saw in Tuesday night’s debate, it’s a central point of focus for both candidates. As shown in the LPL Chart of the Day, weekly claims for unemployment insurance have improved from their historic levels, but the decline has tapered since August:
“This morning’s slight improvement in jobless claims is a welcome development ahead of tomorrow’s nonfarm payrolls report,” added LPL Chief Market Strategist Ryan Detrick. “While the improvement had been slowing recently, it’s an encouraging sign that the labor market isn’t deteriorating as the effects of fiscal stimulus fade.”
Friday will bring the final nonfarm payrolls report before the election and an update to the unemployment rate. While this week’s ADP employment report pointed toward additional employment gains in September, more Americans joining the labor force may keep the unemployment rate elevated. Current Bloomberg consensus expectations call for the unemployment rate to fall to 8.2% from its current level of 8.4%.
Employment, of course, is a major driver of consumer spending, and as employment growth tapered toward the end of the summer, consumer spending did too. Retail sales for the month of August missed consensus expectations as enhanced fiscal assistance was reduced, although they did exceed pre-pandemic levels for the month, and recent headlines suggest another stimulus bill may be possible to help fill the remaining income gap from more permanent job losses.
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
October And The Fourth Quarter In Six Charts
Posted by lplresearch
Market Blog
“October: This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February.” Mark Twain
After a historic 60% rally, stocks pulled back in September before a late month bounce. In the end, the S&P 500 Index fell 3.9%, but was still up a very impressive 8.5% for the historically weak third quarter. As we noted three months ago after the S&P 500 gained 20% in the second quarter, continued strength was likely, and it played out well once again.
The good news? A big third quarter tends to point toward higher prices in the future. “Here’s the catch: The third quarter is usually weak, but when it is really strong, like it was in 2020, this says the rally isn’t over yet,” explained LPL Financial Chief Market Strategist Ryan Detrick. “In fact, after it gained more than 7.5% in the third quarter, the fourth quarter gained the past 11 times.”
Here’s how all four quarters have performed historically. The fourth quarter has been higher nearly 79% of the time and up 3.9% on average, ranking the fourth as the best out of the four quarters of the year.
However, this is an election year, so let’s break it down by the presidential cycle. As shown in the LPL Chart of the day, the fourth quarter during an election year is up 2% on average, but finishes higher a very impressive 82% of the time.
Looking at things based on seasonality, this is the weakest time of year. During an election year, stock prices tend to be weak from now until late October, but when a president is up for reelection, more sideways action is normal. Either way, we would say the calendar is one of the biggest worries in the near term.
Lastly, what about October? Well, this month has tricks and treats for nearly everyone. Over the past decade it ranks as the second-best month of the year, while it is the worst month of the year during an election year. It is known for crashes like in 1929, 1987, and 2008, but overall the month is actually not that bad, ranking as the seventh best month since 1950. So in the end, we’d say this month is more misunderstood than most think.
The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1928 incorporates the performance of predecessor index, the S&P 90.
Please watch our recent LPL Market Signals video, where Ryan and Jeff Buchbinder discuss current market trends.
You can watch the full discussion below and direct from our YouTube channel. Please be sure to subscribe to the LPL Research YouTube channel, so you don’t miss anything!
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
Three Market Takeaways from the First Presidential Debate
Posted by lplresearch
The first presidential debate is now in the books, with two more (maybe) ahead and a vice presidential debate on October 7. The debate was raucus, occasionally uncouth, and more than a little surreal for viewers at home. But did anything happen that could potentially move markets? Probably not.
“Despite the chaos, viewers probably came out of the debate with largely the same impression of the candidates they came in with,” said LPL Financial Chief Market Strategist Ryan Detrick. “We expect markets will likely take a similar view.”
In our How Stocks Do Around The First Debate blog, we looked at market behavior in the days and weeks after first presidential debates in the past. Results have been all over the place, but on average the S&P 500 has been flattish and a little below the long-term average. That fits with several election patterns. Historically, the challenger, on average, has been viewed as the stronger performer in the first debate. At the same time, stocks tend to underperform leading up to a presidential election when the challenger ends up unseating the incumbent, although they tend to advance post-election no matter who wins. Put those together and it implies potential modest market weakness, or at least a lack of stength, after the first debate. However, the effect is likely temporary since debate bumps don’t usually persist. There’s also some impact from normal September and October seasonal weakness, which may be in play around the the time of the first debate.
What did we actually see in the first debate from a market perspective? There were three key things we were following to gauge the likelihood of a market reaction:
- Were there any changes in our understanding of the candidates’ respective policies?
The answer here is a resounding no. There was a lot of noise around how the candidates tried to portray each others’ policies, and there were actually some meaningful points buried in all the rancor, but we didn’t learn anything new.
- Will the election odds shift?
Rather than looking at who “won” the debate, it makes more sense to look at the debate from the perspective of what each candidate needed to accomplish. While we believe the election odds remain closer than the polls indicate, former Vice President Joe Biden does appear to maintain a small edge, even with President Donald Trump’s apparent structural advantage in the electoral college relative to the popular vote that we saw in 2016. Trump probably needed to make up some ground in the debate. Biden needed to hold serve. The president’s goal for the debate was more challenging, especially in the face of historically steady polling and a “divided and decided” electorate. And with five weeks to go until Election Day and voting already taking place in several states, the need to make inroads is becoming increasingly pressing. No matter how you choose to call the debate, it probably did little to change minds in either direction. From that perspective, last night appears to be a lost opportunity for the president. The market’s likely interpretation of all this? No change.
- Has the perceived possibility of a chaotic election outcome increased?
Markets don’t unlike uncertainty, and they could be rattled, at least temporarily, by an uncertain election outcome or legal battle. There was no clear market indication overnight that election uncertainty increased, but we’re going to give this one a maybe. We’ll tackle the potential for an uncertain election outcome and what it may mean for markets in greater detail in LPL Research’s Weekly Market Commentary next week. We continue to think that a meaningfully contested outcome is unlikely, but as has been the case over recent weeks, the president continued to express skepticism about the legitimacy of the outcome under current procedures and last night he once again raised the possibility of mounting a legal challenge. It’s worth noting that legal challenges to a close election have been raised by both sides—by Republicans in 1960 and by Democrats in 2000. The idea of challenging a close election itself is not the same as challenging the legitamacy of the process. But the rhetoric has been escalating. We still believe that the remarks are more part of the president’s pre-election strategy than post-election intentions, but they may still add to perception of uncertainty, which will be an added factor to monitor as Election Day nears.
The next debate is between the vice presidential candidates. Presidential debates historically have not had a large impact on elections, and vice presedential debates scarecely any at all. This one could be different. Either presidential candidates would be the oldest in U.S. history on inauguration day if elected (Trump would be 74 and Biden 78) and the vice presidential candidates may try to strike a more civil tone, opening up the possibility of a more substantive policy debate. But as for last night, despite all the fireworks, we believe that markets will be unmoved.
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
How Stocks Do Around The First Debate
Posted by lplresearch
Market Blog
The first presidential debate is tonight, September 29, with millions of people expected to tune in to see how each candidate handles the pressure. With tensions heightened amid an election that may be much closer than the polls currently suggest, any potential mistake could be magnified exponentially.
Wednesday we’ll summarize our takeaways from the event, but today we’ll take a closer look at how stocks historically have performed around a first presidential debate.
The first presidential debate was in 1960 between Richard Nixon and John F. Kennedy. There wasn’t a debate in 1964, and in 1968 and 1972 Nixon refused to participate. Since then there have been debates before every presidential election since 1976.
Interestingly, from 1980 to 1996 the first debate was on a Sunday evening, but the past five debates have been on all five days of the workweek. This year’s first debate is on a Tuesday, and the only other first debate on a Tuesday was in 2000—a year marked by disputed election results. Although by no way would we suggest this election will have disputed results because of the day of the first debate, it is a rather spurious correlation.
“Could stocks give a clue who will win the election based on how they do after the debate?” asked LPL Financial Chief Market Strategist Ryan Detrick. “Unfortunately, it doesn’t appear to give any hints, as returns and winners are all over the place. Still, 2020 is unlike any year we’ve ever seen before, so we could be one Howard Dean gaffe or Ronald Reagan zinger away from a major sway in this election.”
As shown in the LPL Chart of the Day, there isn’t much of a clue how stocks do after the first debate and which party might win.
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
September Bears Strike Again
Posted by lplresearch
Market Blog
The September weakness continued with the S&P 500 Index 9.6% off the all-time high set on September 2 (as of 9/23/20). It is important to remember that after a 60% rally in the S&P 500—and much more in some of the large cap tech stocks—this type of seasonal weakness is normal and expected. We noted in our blog Historic August Opens Door To Worst Month Of The Year that some type of seasonal weakness could be in the cards.
Speaking of seasonal weakness, the second half of September historically has been one of the worst periods of the year for stocks, as shown in our chart below.
Another angle on this is showing how each day of the year does. Again, we are in the sweet spot for potential rocky seas.
“To see some late-September weakness after a record 60% rally shouldn’t be too surprising,” explained LPL Financial Chief Market Strategist Ryan Detrick. “What might surprise some investors, though, is that after some of the previous best six-month rallies ever, in a lot of cases, the strength continued going out a year.”
As shown in the LPL Chart of the Day, the recent rally was one of the best six-month rallies ever for the S&P 500. Looking at all the previous rallies that gained at least 30%, returns are somewhat muted near term. But going out a full year, prices have typically moved higher, up seven out of eight times a year later.
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
COVID-19 Trends Weaken the Case for Investing in Europe
Posted by lplresearch
Economic Blog
In recent months, we have warmed up to Europe as a destination for equity investments in global portfolios. Through July, Europe had done a relatively good job containing the first wave of COVID-19, and cases were plummeting to multi-month lows. Meanwhile, the United States was struggling with its second wave—or perhaps the second phase of the first wave—and was seeing cases surge in July despite the warm summer weather.
As shown in the LPL Chart of the Day, the situation has completely reversed in recent months. Cases in Western Europe are rocketing higher, and several countries are putting restrictions back in place. In the Spanish capital of Madrid, many neighborhoods have been placed back into semi-lockdowns, where residents are able to leave only for necessities. United Kingdom Prime Minister Boris Johnson encouraged the British public to work from home, put fresh restrictions on restaurants and bars, and called the situation “perilous.” Meanwhile, France has imposed new restrictions on bars and public gatherings in an effort to curb new case growth.
“After a cautious stance on Europe for the past several years, LPL Research started warming up to Europe this summer,” said LPL Financial Equity Strategist Jeffrey Buchbinder. “However, the latest wave of COVID-19 in Western Europe has hampered its economic recovery, evident in Wednesday’s softer than expected services report, weakening the case for adding allocations to European stocks.”
The weakness in Purchasing Managers’ Index (PMI) data has been particularly pronounced in the services sector—suggesting that consumer behavior is reacting to the rise in cases—while manufacturing survey data has actually beat consensus expectations, according to Factset. This divergence may have spillover effects that slow economic momentum in the fourth quarter, tapering the rebound we saw in the initial stages of the recovery.
In the United States, cases have fallen—until very recently—while hospitalizations and death rates have continued to trend lower, prompting many states to loosen restrictions. The will of the American people to get back to some semblance of normal life remains strong. Overall, the United States appears to be in a better place right now than Europe in terms of containing the virus. That additional drag on the economic recovery across Europe, including the UK, reduces the attractiveness of European equities relative to their US counterparts, despite attractive valuations and the potential for further weakness of the US dollar.
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
6 Months From the Low
Posted by lplresearch
Market Blog
On March 23, 2020, the S&P 500 Index closed down 2.9% for the day, bringing its total loss from its all-time high to 33.9%. The index was in the midst of its fastest bear market ever. A day earlier, New York Governor Andrew Cuomo had ordered the statewide closure of all non-essential businesses in an effort to slow the spread of the COVID-19 virus, following California’s example and kickstarting a wave of similar lockdowns across states that would ultimately bring the unemployment rate to more than 14%. Although nobody knew it at the time, that day marked the low for the closely watched stock market barometer, and it began a V-shaped recovery. The S&P 500 eclipsed its previous high by mid-August and rose 60% from the March 23 bottom through its most recent high point on September 2.
As shown in the LPL Chart of the Day, the S&P 500 was on track for its best six-month start to a bull market ever, but a recent pullback in prices has caused it to fall behind the 2009 financial crisis recovery.
“The economy still has a long way to go to regain pre-pandemic levels of activity,” said LPL Chief Market Strategist Ryan Detrick. “However, even with the recent pullback, the stock market’s recovery has been one of the strongest on record, and investors are clearly looking ahead to better times.”
Having a large allocation to technology and growth companies whose businesses have been more insulated from the negative impacts of the virus certainly has helped the S&P 500. However, we believe it is unfair to say that this recovery has occurred only in those particular types of companies. In fact, through the end of last week, all 11 sectors had gained at least 30% from the lows, and the small and highly cyclical materials sector was the best performing sector during that period, having gained more than 70%. In addition, the Russell 2000 Index, which measures the performance of small cap companies in the United States, was among the worst hit during the February–March bear market, but it has actually outperformed the S&P 500 since the market bottom.
History tells us that the gains may not necessarily be over either. In five of the six instances shown in the chart above, stocks went on to more gains in the next six months, with the only exception a less than 1% loss in months 6–12 of the dot-com bubble recovery. In addition, while the S&P 500 has already made new all-time highs this month, as the chart below shows, other key indexes remain well below all-time highs, potentially leaving plenty of room for upside if the economy continues to recover.
Perhaps most importantly, we do not view the recent pullback in stock prices as investors reassessing the durability of the recovery. Since September 2, credit spreads have remained contained, Treasury yields have held steady, and more economically sensitive areas of the market such as industrials, financials, and even real estate have outperformed large cap growth and the information technology sector. This is the exact opposite of what we saw in February and March. As discussed in our recent Weekly Market Commentary, we have raised our year-end fair value target for the S&P 500 to 3,450–3,500, implying 4–6% upside through 2020.
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 are 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
How Bonds May Perform When Rates and Stocks Fall
Posted by lplresearch
Market Blog
A few weeks ago we looked at how different bond sectors performed during rising rate periods during the last economic cycle (2009–2020). Today we look at falling rate periods—not the outcome we expect, but it can still be helpful to understand how investments respond to different environments.
As shown in the LPL Chart of the Day, there are really two stories to tell: During broad falling-rate periods (the top half of the chart), declining rates supported a wide range of bond sectors, although, not surprisingly, the most interest rate-sensitive sectors tended to lead. But when rates fell during periods of stock market uncertainty (the bottom half of the chart), it was often a time when the diversification benefits of Treasuries stood out.
“It’s a tough time for bond investors,” said LPL Financial Chief Investment Officer Burt White, “because Treasuries, which are usually the best way to play defense, are also vulnerable to rising rates and have very low yields right now.”
While riskier bonds, such as high-yield corporates and bank loans, have actually posted gains during falling-rate periods during the last economic cycle, higher-quality sectors, which also tend to be less risky, have generally outperformed. During the six stretches in which the S&P 500 Index declined at least 10% between 2010 and 2020, however, riskier bonds saw losses on average, while Treasuries led. There was one period of stock declines in early 2018 when inflation concerns were one of the catalysts. During that stock market decline, rates actually rose slightly, and none of the bond sectors shown above provided a safe haven for investors. While we think inflation will be contained in the near term, this scenario may become more important as the new cycle ages.
There’s an important lesson in the overall pattern. Even when positioning for a rising-rate environment, some core bond exposure, including Treasuries, can help provide important ballast. If rates do run higher because of strong economic growth, potential stock gains may be able to offset bond losses. Overall, we still recommend bond positioning that is underweight Treasuries, but no matter what the expected environment, there’s still a good reason for bond investors to emphasize high-quality 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
5 Real-Time Data Charts To Track the Recovery
Posted by lplresearch
Economic Blog
We check in again today on some of the real-time economic data that LPL Research is monitoring to provide timely and valuable insights into the state of the US economy. Traditional economic data is often reported too slowly to pick up the changes that are occurring in response to the COVID-19 pandemic.
The latest data on US COVID-19 cases has shown steady progress since peaking at the end of July. COVID-19 hospitalizations are at the lowest levels since the end of June and are close to the lows of mid-June. The number of positive COVID cases rose over the last week, and while the number of tests performed increased, the positive test rate also increased to near 6% (source: COVID Tracking Project). Further, Labor Day get-togethers may have created the recent bump in transmission, a trend we saw following other holidays over the summer.
“Even as much of the real-time data shows a slowing recovery as Americans adjust to the new normal, it’s encouraging that new COVID-19 cases and hospitalization rates have improved greatly since mid-summer,” explained LPL Financial Chief Market Strategist Ryan Detrick. “Progress on a COVID-19 vaccine and fiscal stimulus could help the economy and markets in the fourth quarter, but as investors struggle with election uncertainty and US-China tensions remain elevated, it’s likely to be a bumpy ride.”
Out of all the indicators we monitor, US retail sales had been showing one of the most robust recoveries toward the end of the summer as it exceeded 2019 levels on a year-over-year basis, but the most recent weekly readings from retailers on same-store sales recently slipped back lower than last year (source: Bloomberg, Johnson Redbook). It’s not surprising that consumer confidence levels, as measured by the Bloomberg Weekly Consumer Comfort Index, also dipped on their last reading.
Driving map routing requests by the Apple maps app exceeded pre-pandemic levels but have since leveled off and is now declining slightly. This real-time indicator steadily recovered from March and April lows as people returned to work or other economic activity, and it’s been continuing at a higher than normal rate as Americans travel by car when they previously may have used public transit or air travel. Public transit usage, as measured by Moovit, is still at only 50% of its baseline level, as working from home has a huge effect on usage numbers in major metropolitan areas.
Electricity demand is also showing a bumpy recovery. It had recovered, dipped, and then recovered, only to dip again since the start of September. Demand for electricity dropping again potentially indicates a slowdown in the rate at which businesses are reopening or softening demand for their goods and services.
During the midst of the March lockdowns, the number of diners in US restaurants hit extreme lows of -100% compared to the same time last year. The last reading on this indicator was -45%, coming off a recent peak of -30% on September 7 (source: Opentable). Restaurant bookings could be under pressure as cooler weather makes outdoor dining less comfortable in parts of the country.
As the seasons change from summer to fall, consumer behavior often changes, too, and the potential for heightened rates of viral transmission grows. We will continue to monitor key high-frequency data and provide updates for clues about the path of the economic recovery as we continue to battle the outbreak of COVID-19 across the globe.
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