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Election Charts You Need To See: Part 3
Posted by lplresearch
Market Blog
One of the top requests we’ve received the past few weeks is for more charts on the US elections. We shared some of our favorite in Election Charts You Need to See: Part 1 and Part 2, and today’s the third blog in our series on this important event.
S&P 500 Index earnings are expected to jump close to 23% in 2021 according to FactSet, as the global economy recovers. Presidential nominee Joe Biden has made it very clear he will likely hike taxes, which could potentially cut 10 percentage points off earnings growth next year if implemented. If Biden wins, we would expect Chinese tariffs to be removed as well, which would offset some of that impact and according to our friends at Strategas Research Partners would suggest earnings growth of nearly 17%.
As shown in our LPL Chart of the Day, how the US dollar does ahead of the election has been a great indicator of which party might win in November. If the dollar is weak three months before the election, this bodes well for the incumbent party, while the incumbent party tends to lose if the dollar is strong. This signal has been right 7 of the past 8 elections.
As we saw back in March, when trouble hits, the US dollar tends to do well, as investors flock to the safety of the world’s reserve currency. When things are calm, the dollar tends to weaken, which favors riskier assets. So far, the dollar is slightly lower, which would suggest a potential win for President Donald Trump.
Also, the size of the tax increase proposed by Joe Biden as a percentage of gross domestic product (GDP) would be one of the largest ever and rival President Lyndon B. Johnson’s (LBJ) tax increases in the late 1960s. Let’s remember though, if there’s a split Congress, the chances of the full tax plan being implemented is quite slim. Additionally, a weaker economy would also reduce the chances of a large tax hike.
Finally, don’t forget to watch the latest LPL Market Signals podcast on our YouTube channel, as we discuss the election and recent market weakness.
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
Retails Sales Shifting to Slower Growth
Posted by lplresearch
Economic Blog
Retail sales rose 0.6% month over month in August following July’s downwardly revised 0.9% advance, but sales fell short of Bloomberg’s consensus expectation for a 1% increase. The retail sales control group, which excludes building materials, autos, and gas, fell 0.1% month over month and also missed estimates (source: US Census Bureau).
The speed of retail sales’ recovery to pre-pandemic levels—just five months—has been remarkable, although the July 31 expiration of supplemental jobless benefits provided a headwind during the important back-to-school shopping season. During the 2008–09 financial crisis, retail sales did not return to their prior peak for more than three years!
As shown in the LPL Chart of the Day, sales in August 2020 were 2.6% higher than in August 2019, impressive given the impact of the pandemic and lockdown recession. Some restrictions have eased but many remain in place, making this rebound particularly impressive. August sales were 1.9% above the levels back in February, when the numbers were inflated by an 8.5% year-over-year increase in grocery store sales on some early shelf-stocking.
“Retail sales’ ability to remain above pre-pandemic levels is remarkable considering the shrinking boost from supplemental jobless benefits while social distancing and business restrictions have continued,” said LPL Financial Equity Strategist Jeffrey Buchbinder. “We expect steady gains to continue as more restrictions are eased and consumer confidence is restored, though still-high unemployment and dwindling stimulus make the road ahead a bit tougher.”
Looking at the various segments, sales gains were supported by the continued recovery in restaurants, up 4.7% (but still down 17% year over year), and housing-related spending. Weak spots included food sales, sporting goods (off elevated levels), and department stores. E-commerce sales continued to chug along, growing 20% year over year but were unchanged from July’s levels.
The consumer recovery from the pandemic has been impressive despite the shortfall in August retail sales. Fading stimulus and still-high unemployment may slow the pace of consumer spending growth this fall, but the progess to date is encouraging.
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
LPL Market Signals: The Correction Continues
Posted by lplresearch
Market Blog
In the recent LPL Market Signals video, LPL Financial Chief Market Strategist Ryan Detrick and Equity Strategist Jeff Buchbinder discuss the recent two-week losing streak for stocks and more, including:
- The fastest correction ever for the Nasdaq—and why that might be a good thing
- The split economic recovery where some parts are coming back quickly while others may take years
- The continued struggle for Ryan’s Cincinnati Bengals
- Sentiment a little worrisome from a contrarian point of view
- Why the election is probably much closer than the polls suggest
You can watch the full discussion below and direct from our YouTube channel. Please be sure to subscribe to our 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
Central Banks Speak
Posted by lplresearch
Economic Blog
The US Federal Reserve (Fed) and Bank of Japan (BoJ) both meet this week, while the European Central Bank (ECB) met last week. When central bankers talk— markets listen.
“The global economy has been steadying faster than many expected,” said LPL Financial Chief Investment Officer Burt White. “But we still have a long way to go, and central banks will still be focused on risk, which means the story of the week from central banks will likely be all about steady support for as long as it’s needed.”
Central banks continue to provide market liquidity through bond purchases at a steady clip. As shown in LPL’s Chart of the Day, major central bank balance sheets have risen sharply this year. The three major central banks—US Fed, BoJ, and ECB—have expanded their balance sheets by about 45%, or over $6 trillion, as of the start of the year, which is larger than the first round of bond purchases during the Great Recession in percentage terms and much larger in dollar terms.
Here’s what to watch for in this week’s central bank meetings:
- US Federal Reserve. The Fed concludes its two-day policy meeting on Wednesday, September 16. In addition to the Fed’s brief policy statement, we’ll get updated projections and a press conference from Fed Chair Jerome Powell. We’ll be watching for more detail on the Fed’s revision to its policy framework, which may let inflation run a little hotter than in the past before pumping the breaks. Powell has become a more effective communicator over the course of his tenure as chair while increasing overall Fed communications, and his press conference will be closely watched.
- European Central Bank. The ECB met last Thursday (September 10) and left policy unchanged. While acknowledging economic improvement, ECB President Christine Lagarde said the improving picture was in line with expectations. Markets were watching for any signs of concern about the euro’s appreciation against the US dollar, but LaGarge emphasized that the ECB doesn’t target interest rates. An increase in the ECB’s stimulus program is still expected by the end of the year.
- Bank of Japan. The BoJ meets Thursday, September 17, and likely will also be on hold as it assesses improving economic conditions, with the leadership transition at prime minister garnering most headlines this week. Japan also has concerns about currency appreciation but is unlikely to do anything other than perhaps try to have an impact through its messaging.
Central banks will be increasingly acknowledging improving economic conditions this week, and hopefully, over the coming months, but it will be no barrier to maintaining extraordinarily supportive monetary policy for an extended period. It will take time for the global economy to be working at full potential, policy changes are signaling increased tolerance for inflation, and economic risks around COVID and its long-term economic impact remain. For now, the economy still needs all the help it can get.
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
Election Charts You Need To See: Part 1
Posted by lplresearch
Market Blog
First off, our thoughts go out to everyone who was impacted by the tragic events of September 11, 2001—19 years ago today. It is a day to reflect and remember those who were lost.
One of the top requests we’ve had here at LPL Research is for more charts on the election. Over the next week, we will share some of our favorite charts on this very important subject.
Here’s how the S&P 500 Index performs under various presidents and congressional makeups. The best scenario has historically been a Democratic president and Republican Congress, while a Republican president and Democratic Congress has been the weakest.
Building on this, a split Congress historically has been one of the best scenarios for investors.
The best scenario under a Republican president is a split Congress, a potential positive for 2020 that has played out after the massive reversal in the stock market since March.
Looking at the four-year presidential cycle shows that stocks haven’t been down during a year the president was up for a re-election since FDR in the 1940s, another bullish tailwind for 2020.
Here’s another look at this, as stocks historically have done much better when there isn’t a lame duck president.
Come back on Monday, as we’ll share some more election charts then.
For more of our thoughts on the election, please watch our latest LPL 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.
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
Election Charts You Need To See: Part 2
Posted by lplresearch
Market Blog
As we noted last week, the demand for election charts is off the charts (pun intended), so we are sharing some of our favorite election charts.
Without further ado, here are some more election charts you need to know as November 3 inches closer.
How stocks perform three months before the election has a stellar track record of predicting who will win in November. If stocks are higher, the incumbent party tends to win, while if stocks are lower, the incumbent party tends to lose. This indicator accurately predicted the winner 87% of the time (20 of 23) since the late 1920s.
Building on this, if President Donald Trump is going to win, right about now is when the S&P 500 Index should start to outperform. Of course, if it weakens, it could mean we will be looking at a President Joe Biden soon.
Speaking of presidents up for re-election, here’s what the S&P 500 historically has done during re-election years.
Lastly, here are two final charts that may help forecast the outcome.
If real per capita disposable income is higher, the incumbent president usually wins. Conversely, if wages are weak, that bodes well for someone new in the White House. Given real per capita disposable income is up more than 7% this year, it would suggest President Trump should take more than 70% of the votes. Of course, this is greatly skewed due to the CARES Act, so we’d put a major asterisk next to this one.
To sum up, Gallup poll approval ratings have done a nice job of predicting how many votes a president up for re-election might get. With a 42% Gallup approval rating currently, this comes out to 49% of the total votes for President Trump, which points to a close race.
Later this week we will share more of our favorte election charts, so keep checking this blog. For more of our election thoughts, please watch this recent LPL Market Signals podcast.
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
Weekly Market Performance – September 11, 2020: Rocky September Start for the Markets
Posted by lplresearch
Market Blog
Index Performance
S&P 500 Index:-2.4%
Dow Jones Industrial Average: -1.7%
Nasdaq Composite: -4.0%
US and International Equities
During this shortened trading week, the equity markets sold off following a strong summer advance. While continued losses in the technology sector stole most of the headlines, the energy sector was the biggest decliner, posting a loss of over 6% this week, while materials was the only sector in the green. Large value outperformed large growth, despite absolute losses for both styles. Small caps gave back less than 2% for the week.
International equities posted mixed results with the developed international market, positive for the week, as denoted by the MSCI EAFE. Emerging market equities, tracked by the MSCI EM, finished lower.
The S&P 500 Index and Nasdaq both made new all-time highs on Wednesday, September 2, but the next five days were another story. The S&P 500 was down 6.7%, for the worst five-day string since March 20. This also was the worst five-day return after making a new all-time high since an 8% drop in February 2020. Prior to 2020, the last time the S&P 500 fell more than 6% after new highs was October 1989. This recent drop took place above the 50-day moving average, for the worst five-day drop from new highs above this trend line since December 1928.
“What a rollercoaster of a week! The bottom line is stocks probably got ahead of themselves in the near term and some type of correction or consolidation was needed,” explained LPL Financial Chief Market Strategist Ryan Detrick. “But the good news is the economy continues to surprise to the upside, and we’d be using any weakness to add to equity exposure.”
Fixed Income, Currencies, and Commodities
Fixed income markets were quiet during the shortened week, as the yield on the 10-year Treasury moved slightly lower. Commodities were broadly mixed this week. Gold and silver finished near flat, while crude oil prices fell an additional 5% on the heels of last week’s 7.4% drop. The US dollar strengthened modestly for the week, primarily against the British pound, which suffered its worst week since late-March. We provided an update on Brexit this week on the LPL Research blog.
US Economic Data Recap
There appears to be increasing pessimism in Washington concerning a fifth round of COVID-19 stimulus being approved before the November election. A pared down Senate Republican proposal that included approximately $500 billion in new aid was blocked this week. Both houses in Congress agreed on a second round of $1,200 stimulus checks, but with the blocking of this latest proposal, many are wondering if consensus on a new proposal can be achieved.
Filings for initial jobless claims came in at 884,000 for the week ending September 5, above expectations (850,000 per Bloomberg) and flat week over week (source: US Department of Labor). Continuing claims for the week ending August 29 (reported with a one-week lag) also disappointed, coming in at 13.4 million, above Bloomberg’s consensus of 12.9 million, and up marginally over the prior week. The job recovery still has a ways to go with claims above pre-pandemic record highs and a path that has become tougher as stimulus fades.
August Consumer Price Index (CPI) and Producer Price Index (PPI) both came in ahead of consensus this week. The 1.3% year-over-year rate in CPI edged out July’s report of 1%. Gasoline, used cars and trucks, apparel, and COVID-19-related sectors showed strength.
Looking Ahead
Next week, the following economic data is slated to be released:
- On Tuesday, data on August’s export and import prices along with last month’s manufacturing production will be published.
- Wednesday is all about August retail sales, July’s business inventories, along with September’s National Association of Homebuilders Index.
- Thursday provides investors another anticipated weekly initial unemployment claims report. Moreover, August’s housing starts and building permits will be announced.
- Friday wraps up the week with Q2 current accounts along with September’s Michigan sentiment.
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
2 Key Brexit Dates
Posted by lplresearch
Economic Blog
With everything else going on this year due to COVID-19, it’s been easy to lose track of the latest fallout of the United Kingdom’s (UK) withdrawal from the European Union (EU), also known as Brexit.
The UK is currently in the middle of an 11-month transition period that started on the official Brexit date of January 31, 2020. This period, during which the UK is still following all EU regulations, was designed to give both parties 11 months to finalize the new rules on a host of issues including trade, security, and immigration.
UK-EU negotiations were disrupted by COVID-19 and resumed in July and August, but have not been going well to date. Major sticking points include alignment of workers’ rights and environmental protections, the level of state subsidies allowed (the UK wants to keep the ability to boost tech startups with state aid), and the EU’s access to British fishing waters. Adding to difficulties are current domestic disputes within the UK parliament on the internal trading status of Northern Ireland.
“Given the economic challenges brought about by COVID-19, we think both parties in these negotiations may eventually compromise to avoid any further negative effects,” said LPL Financial Chief Market Strategist Ryan Detrick. “However, no matter the outcome, we expect this be a relatively minor event for global markets as the UK comprises only 4% of global output.”
Two key dates lie ahead:
October 15–16: European Council Meeting
British Prime Minister Boris Johnson has set this EU summit as the unofficial deadline for a free trade agreement to be reached, stating that if both parties cannot come to terms by then, they should “move on” and start to prepare for the end of the transition period with no deal in place.
December 31: End of the Transition Period
The end of the transition period, in theory, is when terms of any new agreement, goes into effect. If there’s no deal, the UK would revert to World Trade Organization rules, including the introduction of trade tariffs, in a potentially economically damaging “hard Brexit.” While the deadline to extend the transition period officially passed on June 30, we believe a further extension, which would take some agreed backtracking from both sides, can’t be completely ruled out given the effects that COVID has had on the UK and EU economies.
As shown in the LPL Chart of the Day, the British pound has been suffering in currency markets in the past week as stalled negotiations has made the prospect of a “hard Brexit” more plausible.
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 Lessons Learned About Rising Rates
Posted by lplresearch
Economic Blog
While the direction of the 10-year Treasury yield over the last cycle was decidedly lower, as shown in LPL’s Chart of the Day, there were still six extended periods where it rose at least 0.75%, and in two of those it rose almost 2%. Looking ahead, economic growth below potential, slack in the labor market, and an extremely supportive Federal Reserve (Fed) may limit rate pressure in the near term, but with interest rates already low and massive stimulus in place, we believe the overall direction is likely to be higher.
“Even in a falling rate period there are lessons from the last cycle about rising rates,” said LPL Financial Chief Investment Officer Burt White. “Among them: Careful when the Fed stops buying and sometimes the best defense is a good offense.”
While every economic cycle is unique, the last cycle highlighted these key takeaways about periods of rising rates:
- Careful when the Fed stops buying. The two drivers of rising rates last cycle were economic growth and Fed bond purchases, also known as quantitative easing (QE). The Fed buys bonds to keep rates down, but the start of Fed buying has actually been the time when rates rise—likely on expectations that the purchases would help strengthen the economy. These periods also often followed large rate declines either because markets anticipated the start of Fed buying or the economy was faltering. The takeaway: unless the economy is really taking off, any rising-rate period may pause for an extended period, or even reverse, when the Fed backs off bond purchases.
- Sometime the best defense is a good offense. Lower-quality, more economically sensitive bond sectors actually performed well during periods of rising rates during the last cycle. Rate gains were largely driven by economic improvement rather than a large pick-up in inflation, and that’s typically a good environment for sectors like high-yield bonds and bank loans. The downside is that these are much riskier bond sectors and don’t provide the potential diversification benefits of higher-quality bonds during periods of stock declines.
- Don’t expect TIPS to provide much resilience because of their inflation adjustment. Treasury Inflation-Protected Securities (TIPS) are high-quality bonds that have provided a little extra insulation against rising rates compared to similarly dated Treasuries when inflation expectations increased. TIPS prices are adjusted for inflation, but even with the adjustment, they are still very sensitive to rates.
- Investment-grade corporates can both hurt and help. If credit spreads narrow when rates are rising, investment-grade corporates can post some solid gains in a rising-rate environment, but if spreads are holding steady or even widening, they can be very sensitive to changes in Treasury yields, potentially (although not often) even more sensitive than Treasuries.
- Mortgage-backed securities (MBS) have not provided as much insulation as corporates, but they also have had less downside. While MBS have certainly outperformed Treasuries during periods of rising rates, they have not performed as well as investment-grade corporates. But they also have come with less downside, losing only 1.4% in their worst performing period compared to a 4% loss during the worst period for corporates.
With the Fed still providing strong stimulus and economic growth potentially poised to accelerate, we currently see an increased risk of rates moving higher. We are playing some offense with our equity exposure, which allows us to emphasize a focus on higher-quality bonds. Among bond sectors, we are emphasizing MBS and still prefer investment-grade corporates over Treasuries. History may not repeat, but if it rhymes, this positioning may help add resilience to a fixed income portfolio if rates extend their move off recent lows.
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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