Posted by lplresearch

Economic Blog

While the 10-year Treasury yield has traded in a narrow range since early April, the equivalent real yield, represented by the yield on 10-year Treasury inflation-protected securities (TIPS), has continued to fall and could go lower. Real yields remove the impact of inflation. As shown in the LPL Chart of the Day, while the 10-year Treasury set a new all-time low for yields way back in February, declining 10-year TIPS yields are still above where they were in late 2012.

Falling real yields tell a story. Often it means lower growth expectations, but it can also mean higher inflation expectations, especially with expectations coming off of low levels. It depends on whether investors are buying the safety of government securities or hedging against inflation. With central banks committed to keeping rates low, we think in this case changing inflation expectations may be an important part of the story.

“The bond market has not shown much confidence in the stock market rally,” said LPL Research Chief Market Strategist Ryan Detrick. “But with TIPS showing inflation expectations possibly creeping higher and credit spreads improving, it may be starting to listen.”

Click to view enlarged chart.

These conditions have been a good set-up for TIPS. Bond prices go up when yields fall, so still falling TIPS yields have been an important tailwind for TIPS returns while stagnant Treasury yields have capped Treasuries’ gains. The implied inflation expectations based on real yields fell to as low as 0.5% and is now a little under 1.5%, still low for the cycle but getting closer to normal, especially considering we’re still early in the recovery.

TIPS may still hold a small advantage over Treasuries but the big move has probably already happened. In the long run, the two tend to behave similarly. Over the last ten years, the Bloomberg Barclays US Treasury Index has returned about 3.4% annually, while the Bloomberg Barclays TIPS Index has returned 3.7%. The global economic recovery will take time, which will limit inflationary pressures, so there’s probably not a strong immediate need for inflation hedging, but we would still consider valuations compared to Treasuries attractive. TIPS, like Treasuries, are also sensitive to rising rates. But having some TIPS in the high quality bond mix can still make sense, especially for strategic investors.

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.

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

Retail sales data for June was reported on Thursday, handily beating expectations for the second consecutive month. As shown in the LPL Chart of the Day, June saw a 7.5% increase month over month, compared with Bloomberg’s consensus expectations for a 5% gain. This comes on the heels of a more than 18% gain in May, but also following by far the lowest reading ever, a 14.7% decline in April.

View enlarged chart.

Pent-up demand and the continued easing of lockdowns during June likely contributed to the large increase, which saw sales rise across most categories. Sales spiked 8.2% at auto dealers, but even sales excluding autos and gas rose 6.7%. Clothing store sales more than doubled (+105.1%) while sales in the hard-hit food services and drinking places climbed 20%.

“Consumer spending is still far below pre-pandemic levels and many of the real-time data we are monitoring have begun to level off in the past month,” said LPL Financial Chief Market Strategist Ryan Detrick. “We remain encouraged by the strong rebound in May and June, but would expect more gradual gains for retail sales in the second half of the year.”

For more insights into the real-time data we are monitoring, check out our blog post from earlier in the week.

IMPORTANT DISCLOSURES

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

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

Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

This Research material was prepared by LPL Financial, LLC.

Securities and advisory services offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC).

Insurance products are offered through LPL or its licensed affiliates.  To the extent you are receiving investment advice from a separately registered independent investment advisor that is not an LPL affiliate, please note LPL makes no representation with respect to such entity.

• 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 check in again today on some of the real-time economic data that LPL Research is monitoring to provide insight into how the latest increase in COVID-19 cases and the rollback of certain reopening measures are affecting the state of the US economy, as traditional monthly and quarterly economic data are too slow to pick up the changes that are occurring.

The high-frequency data that we monitor is now showing a pause, slowing, or even a modest reversal in the recovery. This comes as some states rollback reopenings, and Americans make changes to their behavior, in response to an increase in the number of new COVID-19 cases. The COVID-19 tracking project reported 62,879 new cases in the United States on Tuesday, July 14, which is down from the record high of over 66,645 on July 10, but still up 21% week over week. As shown in the accompanying chart, while more testing can account for some of the increase, more tests are also returning positive results. The 7-day average positive test rate has risen to almost 9%, well above the World Health Organization’s recommended positive test rate of 5%, and regressing to levels last seen in early May.

View enlarged chart.

The 7-day average of COVID-19 related hospitalizations has increased by almost 80% since its recent low on June 20, with the 7-day average number of new cases rising by 144% during the same period. As shown in the chart below, looking at the peaks that occurred in April, the number of patients hospitalized didn’t start to decline until about 10 days after the number of new cases peaked. If this pattern repeats, then based on the recent increase in new cases, hospitalizations may reach record levels in the coming weeks. At the same time, new cases have been skewing younger, slowing the trajectory.

View enlarged chart.

Given these recent increases in US COVID-19 cases and hospitalizations, it’s unsurprising that the recovery in many of the real-time indicators appears to have stalled recently. The number of diners in US restaurants, down 63% year over year from a recent high down 59% year over year on June 27, looks to have been particularly hard hit as states such as California have limited indoor dining (source: OpenTable).

View enlarged chart.

Electricity demand has also fallen from its recent peak in mid-June, indicating a slowdown in the rate at which businesses are reopening or softening demand for their goods and services, although it did pick up slightly in the past week.

View enlarged chart.

One real-time indicator that recently exceeded pre-pandemic levels was map routing requests by the Apple Maps app, with more requests indicating driving is occurring. This measure has leveled out, which could reflect people leaving home less frequently for non-essential tasks, offset by a substitution effect as people drive more rather than fly or use public transit.

View enlarged chart.

Worries over the increasing scale of the latest COVID-19 outbreak also now appear to be taking a toll on consumer confidence. The Bloomberg Weekly Consumer Comfort Index fell for the first time in eight weeks.

View enlarged chart.

“Most of the real-time data is now showing pause in the recovery as the US struggles to control the latest COVID-19 outbreak,” explained LPL Financial Equity Strategist Jeffrey Buchbinder. “This data is somewhat at odds with the optimistic economic recovery scenario reflected in stocks and supports our view that the economic comeback may take longer than some anticipate.”

LPL Research will continue to monitor the high-frequency data and provide timely updates.

IMPORTANT DISCLOSURES

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

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

Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

This Research material was prepared by LPL Financial, LLC.

Securities and advisory services offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC).

Insurance products are offered through LPL or its licensed affiliates.  To the extent you are receiving investment advice from a separately registered independent investment advisor that is not an LPL affiliate, please note LPL makes no representation with respect to such entity.

• 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

Based on the latest polling data, there’s growing consensus that former Vice President Joe Biden potentially may win the election and Democrats possibly may sweep Congress. Some might think this could be a negative for stocks, as a higher corporate tax rate that reduces earnings could be part of the Democratic platform.

Early writers of the US Constitution were worried about one party having too much power that could enable factions in Washington, DC, to enact more extreme policies and political ideals, upsetting the carefully balanced apple cart. As we noted in our recently released Midyear Outlook 2020, stocks historically have performed quite well when Congress has been split, although stocks actually have done better than most probably realized when the Democrats were in full control.

“Higher corporate taxes are quite likely should we see a potential Democratic sweep,” said LPL Financial Chief Market Strategist Ryan Detrick. “But to blindly say stocks will do poorly is quite a stretch, as historically stocks have done rather well under this .”

As shown in the LPL Chart of the Day, the S&P 500 Index has been higher 9 of the past 10 times and 15 of the past 18 times Democrats controlled both the White House and Congress. Although LPL Research anticipates a likely split Congress in November, with the list of overall worries growing, we don’t think a potential Democratic sweep should be at the top of investors’ list of worries.

View enlarged chart.

For more thoughts on our recently released Midyear Outlook 2020, check out our latest LPL Market Signals podcast, where we focus specifically on what we see happening the rest of 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.

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

After pulling back in the first quarter of 2020, flows into bond mutual funds and exchange-traded funds (ETFs) dominated stocks in the second quarter. As shown in the LPL Chart of the Day, the second quarter is consistent with recent history, as bond flows have topped stock flows in 15 of 18 quarters going back to the start of 2016.

“While there may be some natural explanations for bond flows, there is also concern that bond enthusiasm has moved toward an extreme after a multi-decade bull run,” said LPL Chief Market Strategist Ryan Detrick.

While bonds remain an important part of a diversified portfolio, returns going forward will likely become more muted due to low yields, less scope for rates to move lower (which supports prices), and the possibility that rates increase as the recovery progresses.

View enlarged chart.

A number of factors may be contributing to the differences in flows:

• The bond market is just bigger than the stock market.
• Demographics may be having an impact as baby boomers move to secure their nest egg in the face of potentially volatile markets.
• Demographics may also be driving an accelerating hunt for yield in a low yield world.
• Some investors may be buying what the Federal Reserve is buying.

The biggest concern would be if bond flows reflect a growing level of exuberance as a rising rate environment becomes a more distant memory and expensive valuations seem increasingly sustainable. We still believe there are forces that will help limit rate increases in the near term, including a supportive Federal Reserve, foreign demand for US Treasuries, a lower baseline for global growth, and an economic recovery that will likely continue to advance, but not in a straight line. But economic improvement is likely to lead to higher rates over time.

Bonds remain an important asset class, especially for income-oriented investors, but interest rate risk needs to be managed. As discussed in our Midyear Outlook 2020, allocations to bond sectors like mortgage-backed securities and investment-grade corporates may contribute to portfolio resilience looking out over the rest of the year and into 2021.

IMPORTANT DISCLOSURES

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

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

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 Paycheck Protection Program (PPP) is in the news again, as the list of the small businesses who received loans and for how much, is officially in hands of the public. Nearly 5 million small businesses took more than $650 billion in loans as of the end of June, used a lifeline to keep things going during the slowdown. The problem though is some of the loans made were quite questionable at best, upsetting many on Main Street why those who didn’t need a loan got it.

“The intent of PPP was to help a steadier employment picture during the COVID-19 shutdown, but yes, some businesses have tapped into the program who shouldn’t have,” explained LPL Financial Chief Investment Officer Burt White. “PPP has been far from perfect, but to focus on the few who shouldn’t have gotten a loan overshadows the enormous benefit received by so many that needed it.”

For more of Burt’s take on the PPP and why it has been a success, please watch our latest LPL Street View video 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.

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

The wild ride of 2020 continues, with the S&P 500 Index down 20% in the first quarter and up 20% in the second quarter. Much like dropping a 20 dollar bill and picking it up, this doesn’t mean you are 20 dollars wealthier. Down 20% and then up 20% actually comes out to a 4% drop for the first half of the year.

What does a negative first half of the year tell us? Turns out, gains could be hard to come by the second half of this year. “Although 2020 is like nothing we’ve seen before, the fact of the matter is a weak first half of the year could mean weaker than normal returns for the rest of the year,” according to LPL Financial Senior Market Strategist Ryan Detrick.

In fact, the S&P 500 had been higher in the first six months of the year a record nine consecutive years before being lower in 2020. Since 1950, there were 48 times when the first six months were higher and the rest of the year gained 77% of the time and added 5.8% on average those final six months. Compare that with when the first six months of the year were lower 21 times, the final six months were higher only 52% of the time and up only 1.2% on average.

As shown in the LPL Chart of the Day, a move higher is quite likely after strength in the first six months of the year, while very modest gains could be in the cards if those first six months underwhelm.

View enlarged chart.

Be on the lookout for our Midyear Outlook 2020, set to be released on July 14, for more of our thoughts on what the second half of 2020 could bring. Last, don’t forget to listen to our latest LPL Market Signals podcast, where we discuss trends impacting markets right now.

IMPORTANT DISCLOSURES

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

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

Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

This Research material was prepared by LPL Financial, LLC.

Securities and advisory services offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC).

Insurance products are offered through LPL or its licensed affiliates.  To the extent you are receiving investment advice from a separately registered independent investment advisor that is not an LPL affiliate, please note LPL makes no representation with respect to such entity.

• 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

DAILY INSIGHTS

The win streak is over. US stocks opened modestly higher after the S&P 500 Index’s five-day win streak was snapped Tuesday. It is a very quiet day, with the usual concerns over COVID-19 cases and potential impact, along with discussions on challenges to the widely expected stimulus bill. Overnight, China continued recent outperformance, while Europe is down slightly.

Coming July 14. LPL Research’s Midyear Outlook 2020: The Trail to Recovery reviews where we’ve been in 2020, where we may be heading, and the path that will take us there. Our special elections section explains how stocks and the economy may predict the next president. Look for the interactive digital version, a streamlined printer-friendly version, and supporting marketing collateral July 14.

A quick look back. It’s been a wild ride for stocks in 2020. So far the year has delivered the worst pandemic to hit the United States in over 100 years, a government-induced lockdown recession, stomach-churning market volatility, and massive stimulus from policymakers totaling several trillion dollars. We look at the stock market’s performance in the first half of 2020 and highlight the leaders of the sharp rebound off late-March lows later today in the LPL Research blog.

COVID-19 news. In the United States, a record of 60,000 new cases were confirmed on Tuesday, up 31% week over week (source: Johns Hopkins). New cases in Texas topped 10,000 for the first time. Holiday catch-up played a role in case growth and testing, with a record 846,000 tests Tuesday. Discouragingly, the death rates in Arizona, Florida, and Texas all reached new highs. In Brazil, second only to the United States in cases globally, President Jair Bolsonaro tested positive for the virus. The World Health Organization acknowledged evidence is emerging of airborne spread of COVID-19 (source: The COVID Tracking Project).

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

Markets Blog

Posted by lplresearch

It’s certainly been a wild ride for stocks in 2020. Barely past the halfway point, the year has already brought the worst pandemic to hit the US in over 100 years, an unprecedented government-induced recession as much of the country was locked down, some stomach-churning market volatility, and massive, unprecedented stimulus from policymakers totaling several trillion dollars—that’s trillion with a “t”.

The dizzying volatility began in late February with the fastest-ever bear market decline (going back to the inception of the Dow Industrials in 1896). It took just 19 trading days for the Dow to close more than 20% below its record high (February 19 through March 12). The S&P 500 Index fell 20% during the first quarter, one of the worst starts to a year ever.

After the March 23 low in the S&P 500, the record breaking continued as the S&P 500 staged its best 50-day rally since the inception of the S&P 500 more than 60 years ago. The strong snapback led to a 20% second quarter gain, the best for the index since the fourth quarter of 1998, and brought the S&P 500 to within 3% of a positive year as of June 30 based on total return.

Growth stocks led the way, as shown in the LPL Chart of the Day, continuing their decade-long run of nearly uninterrupted dominance over value stocks as the Russell 1000 Growth Index trounced its Value counterpart during the quarter.

“The dominance of growth stocks is one of the biggest stories for the market in 2020,” noted LPL Financial Equity Strategist Jeffrey Buchbinder. “Stronger balance sheets, better earnings, and favorable positioning for the work-from-home trend suggest this historic run for growth stocks over the past decade may still have legs.”

The US continued its multi-year trend of outperforming non-US equity markets based on the MSCI EAFE and Emerging Market Indexes. And consistent with historical patterns coming off major market lows, smaller cap stocks outperformed their larger cap counterparts during the quarter.

View enlarged chart.

Sector leadership looked similar to that of the last bull market from March 2009 through February 2020, with consumer discretionary and technology on top. These growth sectors are well positioned for the current environment, in our view, given the work-from-home trend and large allocation to internet retail within the consumer discretionary sector.

View enlarged chart.

For more of our thoughts on the year, please listen to our latest LPL Market Signals podcast here.

Look for our Midyear Outlook 2020—an outlook for the economy, stocks, bonds, and the election—on July 14.

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.

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

2020 is an election year, and history shows that the US economy has had major bearings on presidential election. How stocks and the economy are performing prior to the election may forecast the winner.

The Makeup of Congress is very important

Although all election years feel different, 2020 no doubt may be one of the most unique election years ever. We have a pandemic, a deep recession, extremely heightened partisanship, a mail-in ballot controversy, an unpredictable president, and the oldest presidential candidate ever.

Amazingly, 1940 was the last time the S&P 500 Index was lower during an election year with an incumbent in the White House. Historically, when a president has been up for reelection, it has tended to boost stocks. Stocks were down big in 2008—but President George W. Bush had finished his two terms. It isn’t about Republican or Democrat—it’s about incumbents trying to boost the economy and stock prices by the time voters go to the polls. Some good news on the economy in the coming months or progress toward a vaccine could potentially get the S&P 500 back to positive territory for the year, after being down 30% year to date in March, and it’s possible that may help President Donald Trump’s reelection chances.

We’re often asked if stocks perform better under a Republican or Democratic president. We’d take a different view and point out that stocks have tended to do their best when we have a split Congress [Figure 1]. Markets tend to like checks and balances to make sure one party doesn’t have too much sway.

When Republicans have controlled both chambers in Washington, DC, on average the S&P 500 has gained 13.4% per year and gross domestic product (GDP) has grown 3%. When Democrats have controlled both the House of Representatives and the Senate, the economy did a little better, with GDP growth of 3.3%, while the S&P 500 was up 10.7% on average. Some of the best stock gains in recent memory took place under a split Congress. Stocks gained close to 30% in 1985, 2013, and 2019, all under a split Congress. The average S&P 500 gain with a divided Congress was 17.2% while GDP growth averaged 2.8%, again suggesting markets may prefer split power come November.

Watch the Economy

History shows that the US economy has had major bearings on the presidential election outcomes. If there has been a recession during the year or two before the election, the incumbent president has tended to lose. If there were no recession during that time, the incumbent tended to win. Incredibly, the economy has predicted the winning president every year going back to President Calvin Coolidge, when he won despite a recession within two years of the election. But Coolidge inherited a recession when President Warren G. Harding passed away, and by the time people voted in November 1924, the Roaring ‘20s had started to take hold, and the economy was strong again.

Our analysis suggests the 2020 presidential race is still up in the air. If the economy continues to open up, a vaccine is on the way, and the massive stimulus continues to drive asset prices higher, President Trump’s chances may improve. A weak economy struggling to come out of recession and weaker markets would likely favor challenger former Vice President Joe Biden.

And watch the Stock Market

Since 1928, the stock market has accurately predicted the winner of the presidential election 87% of the time, including every single election since 1984. It’s quite simple. When the S&P 500 has been higher the three months before the election, the incumbent party usually has won; when stocks were lower, the incumbent party usually has lost.

Think back to 2016, when virtually no one expected Hillary Clinton to lose—except for the stock market. Stocks were quite weak leading up to the election, with the Dow Jones Industrial Average down nine days in a row. Copper (a President Trump play on infrastructure) was in the green a record 14 consecutive days.

Potential policy changes

Markets tend to be volatile ahead of elections because of the uncertainty around possible policy changes. In this election, the stakes are particularly high for corporate America because a takeover of the Senate by Democrats and a possible Biden victory reportedly may lead to an increase in the corporate tax rate from 21% to 28% and unwind the corporate earnings boost the 2017 Tax Cut and Jobs Act delivered.

Other areas to watch that could impact markets:

• Tighter financial regulation could have some market impact.
• Healthcare should perform well regardless of the election outcome with “Medicare for All” off the table.
• Energy could be hurt by a potential blue wave, but prices may get support from lower production and higher production costs.

As we get closer to the November election, how stocks and the economy are doing could be a big signal for who will win the election and be in office in January. 

Read previous editions of Weekly Market Commentaryon lpl.com at News & Media.

Ryan Detrick, CMT, Senior Market Strategist, LPL Financial
Jeffrey Buchbinder, CFA, Equity Strategist, LPL Financial

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