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Economic Blog

Yesterday, The Conference Board released last month’s reading for its Leading Economic Index (LEI), a composite of leading data series, which showed a month-over-month increase of 2.8%. As seen in the LPL Chart of the Day, the return to positive territory follows three straight months of negative monthly growth.

”We noted that the pace of the LEI’s deterioration slowed in the April report, potentially suggesting a bottom forming in the US economy,” said LPL Financial Senior Market Strategist Ryan Detrick. “Yesterday’s print was one of several positive economic data surprises we’ve observed recently, bolstering our optimistic view for economic growth in the second half of the year.”

View enlarged chart.

While the economy still has a ways to go in order to recover from the damage of the prior three months, the composition of May’s LEI advance encourages us. We noted a disconnect in April’s readout in which the financial market indicators tended to be net positive contributors while the “real economy” indicators detracted. May’s release saw a reversal of that trend whereby the economic subindexes played catch-up.  Seven of the 10 components were positive contributors led by an improvement in average weekly initial unemployment claims, average weekly manufacturing hours, and building permits. The three negative contributors were the Institute for Supply Management (ISM) New Orders Index, average consumer expectations for business conditions, and the Leading Credit Index.

The most recent LEI release reinforces our view that an economic bottom is likely behind us. Workers starting to return to jobs that they were unable to do remotely had material effects on May’s readout, and if that trend continues, a stock market trading at stretched valuations would have a stronger foundation under it.

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.

The Leading Economic Index is a monthly publication from the Conference Board that attempts to predict future movements in the economy based on a composite of 10 economic indicators whose changes tend to precede changes in the overall economy.

All index and market data from Factset and MarketWatch.

This Research material was prepared by LPL Financial, LLC.

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

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

• Not Insured by FDIC/NCUA or Any Other Government Agency
• Not Bank/Credit Union Guaranteed
• Not Bank/Credit Union Deposits or Obligations
• May Lose Value

Economic Blog

COVID-19 has decimated global demand as lockdowns materially re-shaped consumer and business behavior. Even as states have begun to re-open, significant questions remain about how demand could recover. The May retail sales print provided one of the first glimpses of that answer, rising 17.7% month over month and marking the largest monthly gain since data began in 1992.

Pent-up demand and an added boost from government stimulus helped fuel such a large gain. Each category of the report was positive in May, indicating broad-based increased demand for goods. As demand post-lockdown shifted away from discretionary spending items such as clothing and electronics, that trend appears to be reversing, with clothing sales in particular growing 188% in May.

However, as shown in the LPL Chart of the Day, despite the strong growth in May, several industries in the retail sales report are still making up ground versus their pre-COVID-19 levels:

View enlarged chart.

“Consumers appear to be ready to shop as states continue reopening. We’ll be watching to see if the retail sales rebound is a one-off or if it shows that consumer spending is returning to create a sustained trend,” said LPL Financial Senior Market Strategist Ryan Detrick.

Coming off the heels of the May nonfarm payrolls beat, the rebound in retail sales may prove to be the start of the return to normalcy for the US consumer, but both data points will need to show further stabilization before we can sound the all clear.

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 .

Retail sales measure the total receipts at retail and food services stores that sell merchandise and related services to final consumers. Data are collected from the Monthly Retail Trade Survey conducted by the U.S. Bureau of the Census. Retail sales cover both the durables and nondurables portions of consumer spending, which together typically accounts for about two-thirds of GDP, and is therefore a key element in economic growth.

This Research material was prepared by LPL Financial, LLC.

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

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

• Not Insured by FDIC/NCUA or Any Other Government Agency
• Not Bank/Credit Union Guaranteed
• Not Bank/Credit Union Deposits or Obligations
• May Lose Value

Economic Blog

The yield on the 10-year Treasury yield has been broadly declining since the early 1980s, when it peaked over 15%, but even over that long decline there have been intermittent periods of rising rates. In fact, after periods of especially large decline there has usually been an extended reversal over the next 1-2 years.

“The trend has been toward lower interest rates for almost 40 years, and over that period many have expected higher rates, only to be disappointed time and time again” said LPL Financial Senior Market Strategist Ryan Detrick.

But there have been exceptions. Using quarter-end data, we looked at all the rolling one-year periods in which the 10-year Treasury yield fell more than 1.5%. As shown in the LPL Chart of the Day, this has occurred seven times since 1990, including the year ending on March 31.

View enlarged chart.

Of the six prior occurrences since 1990, the 10-year Treasury yield was higher a year later all six times, averaging an increase of 0.92%, and also higher a year-and-a-half later, averaging an increase of 1.09%. That historical pattern, together with our expectation of an economic recovery over the second half of the year, support our forecast of the 10-year Treasury yield trending higher over the remainder of the year. However, the size of the move may be limited by the Federal Reserve keeping short-term rates low, limited inflationary pressure, and attractive yields relative to other developed markets.

IMPORTANT DISCLOSURES

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

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

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

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

S&P 500 continues to climb following latest Fed announcement. The S&P 500 Index rebounded dramatically Monday following the Federal Reserve’s (Fed) announcement that it would start to buy a portfolio of individual bonds and is off to a solid start again this morning. Stocks got an additional boost this morning from a very strong retail sales report and optimism about a COVID-19 treatment.  International stocks were also broadly higher overnight, with Japan’s Nikkei up over 4% and European markets showing solid gains at midday.

Retail sales bounce. After falling a record 16.4% in April, retail sales bounced back a record 17.7% in May, as the economy continued to open back up. This follows recent improvements we’ve seen in services, manufacturing, and consumer confidence. Of course, these bounces in many cases were coming off some of the lowest levels in history, so it is important to put things in perspective.

What a reversal. Stocks were down significantly yesterday near the open, then reversed much higher as the day progressed. At the lows, the S&P 500 was down 2.5%, but managed to close in the green. The only two times it has done that in the past 10 years were March 19, 2020 and December 27, 2018.

Rates historically rebound after dramatic declines. At the end of the first quarter of 2020, the 10-year Treasury yield had fallen more than 1.5% over the trailing year for only the sixth time since 1990 using quarterly data. Looking back, every other time that happened the 10-year yield rose over the next year every time, averaging 0.92% higher, as discussed in today’s LPL Research blog.

COVID-19 news. Confirmed US cases rose 0.95% on Monday, up from 0.90% on the same day last week. That suggests stalled progress nationally, but the proportion of positive tests dipped to 4.1%, near the bottom of the recent range, while New York’s positive rate over the past week was just 1.2%. At the same time, positive test rates in Alabama and Arizona are over 10%. The number of reported infections in Beijing’s latest outbreak reached 106 (Source: COVID-19 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.

Retail sales measure the total receipts at retail and food services stores that sell merchandise and related services to final consumers. Data are collected from the Monthly Retail Trade Survey conducted by the U.S. Bureau of the Census. Retail sales cover both the durables and nondurables portions of consumer spending, which together typically accounts for about two-thirds of GDP, and is therefore a key element in economic growth.

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

Economic Blog

Real-time data continues to provide valuable insight into the current state of the US economy even as traditional economic data is too slow to pick up changes that are occurring.

Today we revisit some of the real-time data points that we are monitoring and find that while there is clearly a long way to go, there are green shoots indicating the US economy is on the road to recovery. Following the COVID-19 lockdowns and business closures in March and April, all 50 states have now reopened to some extent and we can already see the impact of the reopening in the real-time data.

Map routing requests by the Apple maps app, shown in the LPL Chart of the Day, continued their steady increase from March/April lows and are now approaching pre-pandemic levels. More map searches means more driving, which means more people going to work or to stores and more economic activity.

View enlarged chart.

Another real-time indicator that has come back strongly from being down 100% in March and April is the number of diners in US restaurants. While social distancing clearly puts a cap on the opportunity for restaurants, in states that reopened earliest diners have returned to levels almost halfway back from a year ago.

View enlarged chart.

Even real-time data coming from the epicenter of the US COVID-19 outbreak is moving in the right direction. While not bouncing back quite as quickly as the prior data points, commuting in NY/NJ, as measured by public transit usage, is continuing to trend upward as people return to work and other economic activity.

View enlarged chart.

While the real time data is encouraging there are still many challenges to a full economic recovery as some states such as Arizona and Texas, among others, are emerging as potential new hotspots for COVID-19 outbreaks. Consumer confidence appears to be reflecting these concerns in that, having bottomed in mid May, it has recovered somewhat but is still at histrorically depressed levels.

View enlarged chart.

“The market drives without a rear view mirror and only focuses on what’s happening today and the road ahead,” said LPL Financial Chief Investment Officer Burt White. “The good news is we’re seeing green shoots on the road to recovery in the timeliest data we can find.”

For more of Burt’s thoughts on the latest high-frequency data and what we can learn from this close-up view of the economy, please watch our recent 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

DAILY INSIGHTS

Last week’s slide continues. US stocks opened about 2% lower this morning amid rising concerns of a second wave of COVID-19. The pullback in the S&P 500 Index since June 8 has only reached 6% and may have further to go. Europe held up slightly better on healthcare sector resilience, while Asian markets fell broadly, with Japan losing 3.5%.

Stocks still appear ahead of fundamentals. We continue to believe stock prices reflect an overly optimistic view of the US economy. As we wrote here last week, our belief is that the next leg of recovery will be gradual as efforts to contain COVID-19 continue and the economic damage takes time to heal. The S&P 500 also was up over 44% from the March 23 low as of June 8 and significantly overbought, suggesting a pullback was overdue.

The week ahead. This week’s economic calendar features retail sales for May, which are expected to show an 8% increase from April’s historic 16.4% drop (source: Bloomberg). Federal Reserve Chairman Jay Powell will testify before Congress on Tuesday and Wednesday. The Bank of Japan policy announcement is slated for Tuesday, followed by the Bank of England on Thursday—both are expected to add stimulus.

Green shoots. Real-time data continues to provide valuable insight into the current state of the US economy as traditional economic data is too slow to pick up changes that are occurring. Today on the LPL Research blog we revisit some of these real-time data points that we are monitoring that indicate the US economy is on the road to recovery.

COVID-19 news. Confirmed US cases rose 0.94% yesterday, up from 0.92% on the same day last week, as testing rose about 9% and the percentage of positive tests remained steady slightly below 5%. Attention remains on about 20 states seeing increases since the Memorial Day holiday, particularly in the Sun Belt and Texas. An outbreak in Beijing tied to a food market led to China’s biggest daily increase in cases since mid-April (57) (Source: COVID-19 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

DAILY INSIGHTS

The day after. Stocks in the United States opened higher on the day after the S&P 500 Index lost 5.9%. Spikes in new COVID-19 cases, worries over a cautious Federal Reserve, small retail traders’ excitement over weak balance sheet companies, and historically overbought conditions were all factors. Europe is up nicely, and Asia was mixed. Calm is in the air, as there are no major new events moving markets so far today.

Worst day since March. Stocks sold off hard Thursday, with the S&P 500 having its worst day since March 16 and its first three-day losing streak since early March. After a 44% rally, we think a pullback would be well deserved. We show why historically overbought markets tend to occur near the start of bull markets, not the end, in today’s LPL Research blog.

COVID-19 news. Confirmed US cases rose 1.14% yesterday, matching the week-ago total and giving evidence that the downward trend may be flattening out. The biggest week-over-week increases came from Arizona (4.7%), Arkansas (4.3%), and Alabama (3.9%). Houston may re-impose stay-at-home orders after Texas reported its highest one-day tally of new cases. Cases in Germany are rising while falling steadily in the United Kingdom. Tokyo has moved to the final stage of its reopening plan (Source: COVID-19 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.

International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.

Value investments can perform differently from the market as a whole. They can remain undervalued by the market for long periods of time.

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

The economic data keeps getting worse, yet stocks have been in the midst of one of the greatest multi-week rallies ever. As the LPL Chart of the Day shows, the S&P 500 Index gained 27.2% in the 15 days after the March 23 lows, the greatest three-week rally since 1933. Take note, this rally took place amid millions of initial jobless claims, while consumer confidence, retail sales, and manufacturing crashed.

View expanded chart.

“As scary as the headlines have been, stocks are doing well, as they could be trying to sniff out potential better times ahead,” explained LPL Financial Senior Market Strategist Ryan Detrick. “We’ve found that stocks have tended to bottom about five months before a recession ends, so it is actually normal to see stocks improving amid poor economic data.”

In this week’s LPL Street View video, LPL Financial Senior Market Strategist Ryan Detrick discusses these points.

Stocks posted solid gains for the week, on the heels of the largest weekly gain for the S&P 500 Index since 1974. While participation was led mostly by growth stocks early in the week, reports of a drug from Gilead Sciences that showed positive results in treating COVID-19 fueled broad-based gains on Friday. Ultimately, the S&P 500 gained modest ground for the week, while the Nasdaq outperformed as growth stocks bested value by the widest margin since April 2001.

Large caps led small caps, with the Russell 2000 Index declining slightly. Consumer discretionary was the top-performing sector as Amazon broke out to record highs, while financials lagged as earnings reports began to roll in. Equity investors were unfazed by economic data that continued to paint the picture of an economy firmly in the depths of a recession. More than 5 million new people filed for unemployment insurance for the third consecutive week, and retail sales for March showed an 8.7% month-over-month decline, more than double the previous record drop.

International markets were little changed for the week. Both the MSCI EAFE and MSCI Emerging Markets Index were slightly negative through Thursday’s close, though both European and Asian stocks rallied strongly on Friday following news of the potential effectiveness of Gilead’s antiviral drug.

Fixed income markets continued to flex their resiliency despite strong returns from equities. Investment-grade (IG) and high-yield (HY) corporate bonds led as credit spreads for both sectors contracted further, now down significantly from their March 23 highs. Treasuries also continued to rally with 2-year yields reaching new all-time lows, undeterred by increasing discussion of plans to reopen the US economy.

After a brief yet strong rally following a brutal first quarter, WTI crude oil briefly slumped below $18 per barrel to its lowest price since 2001 as concerns over falling demand have painted a bleak outlook for energy commodities, which remain oversupplied. The US dollar was firmer on the week although currency market headlines were dominated by volatility in the Australian dollar as it shrugged off disappointing first quarter growth in China.

The economic calendar is light early next week; however, Thursday will see the release of Markit Purchasing Managers’ Index data for April in addition to another initial jobless claims report. Friday’s reports include durable goods for March and the April edition of the University of Michigan Consumer Sentiment Index.

Stock returns get all the headlines, and with US equities entering their first bear market since 2008, there is good reason for that. However, fixed income may account for a significant portion, or even a majority, of many investors’ portfolios, making bond returns just as important for those investors.

While we believe stock returns can offer similar upside to their history and that the current decline in prices will ultimately prove to be an opportunity, the same may not be true for fixed income.

As the LPL Chart of the Day shows, future long-term returns of bonds have been primarily determined by the starting yield. In other words, the coupon may be the most significant factor in your total return over the long term. Through Wednesday’s close, the Bloomberg Barclays US Aggregate Bond Index returned 4.8% year to date, following last year’s nearly 9% return. But because yields fall as bond prices rise, the yield on the benchmark bond index recently hit its lowest level ever, implying that total returns over the next 10-year period could be less than 2% annualized for fixed income based on that particular bond benchmark.

View expanded chart.

“Bonds have once again proven themselves a reliable ballast to equity market volatility,” said LPL Financial Senior Market Strategist Ryan Detrick. “However, investors may be underappreciating what the recent decline in yields means for the future of fixed income returns and an already tough search for yield.”

For more information on all our views, including why we currently rate equities “overweight” and fixed income “underweight” please view our latest Global Portfolio Strategy.