A Pullback Opportunity in Copper

Adam Turnquist | Chief Technical Strategist

Gold has captured most of the spotlight in the metals complex this year after breaking out to record highs in March. However, copper may be an even more interesting story as the industrial metal has climbed steadily higher in the shadows of the yellow metal, amassing a 19% year-to-date return and topping gold’s gain of around 15% (as of June 5).

Copper is not only an important metal utilized across an array of products and industries, but it’s also widely considered a leading indicator. Rising demand for copper points to economic expansion and cyclical growth, a message further reinforced when copper is outperforming gold. And while demand for copper remains supported by the various facets of the building construction industry, rapidly increasing investments in the power grid, electric vehicles, renewable energy, and artificial intelligence-related technologies have elevated demand intensity.

Freeport-McMoRan (FCX), the world’s largest copper miner, highlighted on their first-quarter earnings call that we could be in the “early stages of a repricing for long-term copper prices.” The company further added that tight market conditions remain supported by “constraints on existing supplies, an absence of major new copper development projects, and extended multiyear lead times for supply development.”

The supply side of the equation is a bit more challenging. As highlighted below, London Metal Exchange (LME) and Chicago Mercantile Exchange (CME) copper inventory levels have been moving mostly lower throughout the year. However, Shanghai copper inventories have surged higher and continue to deviate from historical stockpile drawdowns into the summer as factory activity ramps up. Proposed cuts among China’s top smelters, which produce half of the world’s refined copper, have helped offset some of the more recent oversupply concerns.

The unusually large inventory build in China has sparked demand concerns from the world’s largest importer of copper. Weakening import demand has surfaced in the Yangshan premium, which recently turned negative and is now at its lowest level since 2017. This closely watched spread is used as an import demand proxy as it represents the premium paid on imported cargo into China over LME benchmarks.

Copper Stockpiles in China Remain Elevated

Line graph depicts the global copper inventories. Since July 2021, LME copper has been decreasing, CME copper increasing and Shanghai copper remains elevated.

Source: LPL Research, Bloomberg 06/05/24
Disclosures: Past performance is no guarantee of future results. Any futures referenced are being presented as a proxy, not as a recommendation.

The structure of the futures curve can provide additional insight into supply and demand balances. When the copper market is tight due to elevated demand and/or limited supply, the curve often moves into what is called “backwardation,” with spot prices trading at a premium to forward or future-dated contracts. In contrast, when spot prices are below the forward price, the market is in what is called “contango,” indicative of weaker demand. As highlighted below, copper’s futures curve has moved from contango to backwardation over the last six months.

Copper Futures Curve Points to Improving Demand

The chart depicts copper futures price is lower than the spot price, which contrasts from six months ago when the price was higher than the spot price.

Source: LPL Research, Bloomberg 06/05/24
Disclosures: Any futures referenced are being presented as a proxy, not as a recommendation. Past performance is no guarantee of future results.

The technical setup for copper remains constructive. As highlighted below, prices have recently pulled back from overbought conditions and took out support from the 2021-2022 highs. However, buyers have recently stepped up to defend copper’s uptrend off the February lows, an area that coincidentally overlaps with the rising 50-day moving average (dma). The pullback has helped alleviate frothy conditions and reset overbought conditions.

Speculators have also been piling into copper over the last few months. Managed money futures positions — highlighted in the bottom panel — have recently climbed to a three-year high, suggesting the long copper trade could be a little crowded, but the lack of technical damage amid the latest pullback suggests copper may not be over.

Copper Pullback Finds Support

This chart depicts copper prices over the last three years. It indicates that copper is in a downtrend, but there are signs that this could be changing.

Source: LPL Research, Bloomberg 06/05/24
Disclosures: Any futures referenced are being presented as a proxy, not as a recommendation. Past performance is no guarantee of future results.

Summary

Copper’s rally this year has been impressive, and despite the recent pullback, technical damage has been limited as bulls recently stepped up and defended a key area of support. Demand for copper has been reinforced by better-than-expected global growth, continued momentum in the energy transition, electric vehicle manufacturing, and the proliferation of artificial intelligence-related technologies. While the current supply story is a bit mixed with elevated inventories in China, the structure of the futures curve points to a tight copper market.

IMPORTANT DISCLOSURES

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk.

Indexes are unmanaged and cannot be invested into directly. Index performance is not indicative of the performance of any investment and does not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

This material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.

Unless otherwise stated LPL Financial and the third party persons and firms mentioned are not affiliates of each other and make no representation with respect to each other. 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.

Asset Class Disclosures –

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.

Bonds are subject to market and interest rate risk if sold prior to maturity.

Municipal bonds are subject and market and interest rate risk and potentially capital gains tax if sold prior to maturity. Interest income may be subject to the alternative minimum tax. Municipal bonds are federally tax-free but other state and local taxes may apply.

Preferred stock dividends are paid at the discretion of the issuing company. Preferred stocks are subject to interest rate and credit risk. They may be subject to a call features.

Alternative investments may not be suitable for all investors and involve special risks such as leveraging the investment, potential adverse market forces, regulatory changes and potentially illiquidity. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses.

Mortgage backed securities are subject to credit, default, prepayment, extension, market and interest rate risk.

High yield/junk bonds (grade BB or below) are below investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors.

Precious metal investing involves greater fluctuation and potential for losses.

The fast price swings of commodities will result in significant volatility in an investor’s holdings.

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

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

Sure, Cash Is Cool Again, but Bonds Are Better

Lawrence Gillum | Chief Fixed Income Strategist

After ten years of nearly zero cash yields, the Federal Reserve’s (Fed) sharp increase in rates has raised cash rates, leading investors to place almost $6 trillion in cash accounts. And while cash yields are attractive, another attractive attribute for cash is the low risks associated with it. Cash has done a great job in recent years helping investors protect their portfolios from market turbulence. That was especially true in 2022, when both stocks and bonds experienced large drawdowns. But, with Fed interest rate hikes likely behind us, cash as an asset class may not be as important to portfolios as it was recently.  

And we know those attractive cash rates aren’t going to last forever. Just as the aggressive rate hiking cycle took Treasury yields higher, interest rate cuts will eventually take all cash rates lower as well. However, with bond yields still elevated and likely to stay around current levels, investors can extend the maturity of their excess cash holdings by locking in current bond yields (not too far out on the curve, though). Locking into high-quality, intermediate-term fixed income can provide consistent cash flow and desirable income levels for years to come, regardless of what lies around the corner. 

Moreover, bonds offer an optionality that you don’t get from cash. Although bonds and cash currently offer similar yields, bonds provide extra portfolio protection and the chance for price increases if the economy faces unexpected challenges, which cash does not offer. Additionally, over the past 40 years (ending April 2024), bonds have averaged a 6.1% annual return versus about 3.5% for cash. And bonds have been consistent outperformers. From January 1986 to April 2024, bonds had a better five-year return in 95% of the rolling five-year periods. In those few instances where cash did better, it only outperformed by less than 0.5%, on average. So, with cash rates likely to fall as the Fed cuts rates, bonds have demonstrated they do a better job than cash at helping investors grow their assets over the long term. 

Bonds Tend to Outperform Cash Over Time

Trailing 5-year Annualized Total Returns

Line graph of the Bloomberg Aggregate Bond Index and the FTSE Treasury Bill 3 Month Index from 1986 to 2024 as described in the preceding paragraph.

Source: LPL Research, Bloomberg 05/22/24
Disclosures: All indexes are unmanaged and cannot be invested in directly. Past performance is no guarantee of future results.

Investing is largely about setting up portfolios for future success.  We definitely consider cash as a valid asset class now, especially for investors with short-term goals spanning a few quarters to a couple of years. However, unless investors have short-term income needs, they may be better served by reducing some of their excess cash holdings and extending the maturity profile of their fixed income portfolio to lock in these higher yields for years to come. Bond funds and ETFs that track the Bloomberg Aggregate Index, along with separately managed accounts and laddered portfolios, all represent attractive options that will allow investors to take advantage of these higher rates before they disappear. 

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. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk.

Indexes are unmanaged and cannot be invested into directly. Index performance is not indicative of the performance of any investment and does not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

This material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.

Unless otherwise stated LPL Financial and the third party persons and firms mentioned are not affiliates of each other and make no representation with respect to each other. 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.

Asset Class Disclosures –

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.

Bonds are subject to market and interest rate risk if sold prior to maturity.

Municipal bonds are subject and market and interest rate risk and potentially capital gains tax if sold prior to maturity. Interest income may be subject to the alternative minimum tax. Municipal bonds are federally tax-free but other state and local taxes may apply.

Preferred stock dividends are paid at the discretion of the issuing company. Preferred stocks are subject to interest rate and credit risk. They may be subject to a call features.

Alternative investments may not be suitable for all investors and involve special risks such as leveraging the investment, potential adverse market forces, regulatory changes and potentially illiquidity. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses.

Mortgage backed securities are subject to credit, default, prepayment, extension, market and interest rate risk.

High yield/junk bonds (grade BB or below) are below investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors.

Precious metal investing involves greater fluctuation and potential for losses.

The fast price swings of commodities will result in significant volatility in an investor’s holdings.

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

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

For Public Use – Tracking: #582977

Main Street or Wall Street? Which is More Insightful?

Dr. Jeffrey Roach | Chief Economist

Main Street or Wall Street?

We are often asked about the apparent disconnect between happenings on Main Street versus Wall Street. Investors notice markets running in one direction, while business owners notice things going in another. So, who has the right perspective? In this blog, we explore the relationship between economic growth and Standard & Poor’s (S&P) operating earnings to develop a framework for connecting the dots between the two streets. We then address the “vibecession” phenomenon.

Returning to Normal

Growth in both the economy and company operating earnings are positively correlated, as illustrated in the chart below. The government shutdowns and subsequent reopenings shocked the relationship in recent years, but after this period of abnormality, we should expect a tighter link to emerge between these two variables by the end of this year.

We Expect Things to Return to “More Normal” by End of Year

Dot plot of nominal GDP vs. S&P operating earnings year over year as described in the preceding paragraph.

Source: LPL Research, Bureau of Economic Analysis, Standard and Poors 05/22/24

The macro setup implies that nominal economic growth will likely soon be under 4.5% as labor demand and disposable income growth are set to slow later this year. We have already seen payroll growth moderate a bit, and fewer hours worked implies business activity is slowing down from its breakneck speed. As nominal growth slows, we expect operating earnings growth to also slow but stay positive.

Why the Different Perspectives?

The periodic opposing perspectives between Main Street and Wall Street often boil down to the different perspectives on inflation.

Businesses struggling with a lack of qualified job applicants and rising input costs, along with consumers paying more for less, created a “vibecession” with all of this happening as stocks kept hitting all-time highs.

Sticky Services Inflation Turned a Corner

Line graph of core services inflation excluding housing from April 2022 to April 2024 as described in the subsequent paragraph.

Source: LPL Research, Bureau of Economic Analysis 05/16/24

We think inflation will further ease this year, despite the risk in the coming months of base effects keeping some of the monthly readings a bit hotter than normal. However, last week’s Consumer Price Index (CPI) release likely illustrates inflation did not develop a new trend at the beginning of the year but rather, the hot prints were an anomaly as items such as insurance were repriced.

Running in Parallel

To keep the analogy going, you could say Main Street and Wall Street run in parallel. They do not intersect, and they certainly are not synonyms for the same road.

Both streets, if you will, rely on each other. Financial markets need to run smoothly for businesses to access capital, and businesses need to run profitably and credibly to earn investors’ attention. So, if our destination is a flourishing economy, Wall Street needs Main Street and Main Street needs Wall Street as they both serve separate, but parallel functions.

Where do we go from here? In a slowing economy where consumers are starting to pull back on spending, it makes sense to be careful with stocks in the retail sector — as Target (TGT) suggested in its cautious commentary accompanying its earnings release this morning. That may put more reliance on more business investment-driven areas of the market such as technology and industrials if the broad indexes are going to add to recent strength.

If U.S. equities slow down, market participants may turn to other geographies for opportunities. LPL Research remains neutral on developed international equities. Within international, the outlook for Japan continues to remain positive as the country emerges from its decades-long battle against deflation yet accommodative monetary policy. Better recent performance in Europe is encouraging as economic growth has shown signs of bottoming in recent weeks as the U.S. dollar rally has paused. China still seems like an interesting short-term trade, while India’s recent weakness could offer an attractive entry point, although we maintain a cautious stance overall on emerging market equities.

Finally, commodities could benefit from this period of sticky inflation, especially while we have supply and demand imbalances.

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. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk.

Indexes are unmanaged and cannot be invested into directly. Index performance is not indicative of the performance of any investment and does not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

This material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.

Unless otherwise stated LPL Financial and the third party persons and firms mentioned are not affiliates of each other and make no representation with respect to each other. 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.

Asset Class Disclosures –

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.

Bonds are subject to market and interest rate risk if sold prior to maturity.

Municipal bonds are subject and market and interest rate risk and potentially capital gains tax if sold prior to maturity. Interest income may be subject to the alternative minimum tax. Municipal bonds are federally tax-free but other state and local taxes may apply.

Preferred stock dividends are paid at the discretion of the issuing company. Preferred stocks are subject to interest rate and credit risk. They may be subject to a call features.

Alternative investments may not be suitable for all investors and involve special risks such as leveraging the investment, potential adverse market forces, regulatory changes and potentially illiquidity. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses.

Mortgage backed securities are subject to credit, default, prepayment, extension, market and interest rate risk.

High yield/junk bonds (grade BB or below) are below investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors.

Precious metal investing involves greater fluctuation and potential for losses.

The fast price swings of commodities will result in significant volatility in an investor’s holdings.

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

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

Valuations Aren’t Great Timing Tools

Jeff Buchbinder | Chief Equity Strategist

Stocks have had a tremendous run since last fall (at least until yesterday), with four straight positive months, a series of record highs for the S&P 500, and, finally, one for the Nasdaq, and a more than 20% advance for both indexes.

When stocks do this well, we inevitably hear warnings about high valuations from strategists and pundits. For LPL Research, valuations and corporate fundamentals are major inputs into asset allocation decisions, so this is not intended to dismiss its importance. But good investment decisions, particularly over the short-to-intermediate term, are more comprehensive and incorporate several different disciplines — including technical analysis, in our opinion. Why is that so important? A big reason is traditional valuation metrics have historically not been good indicators of short-term performance.

A scatterplot chart with the S&P 500 Index price-to-earnings ratio (P/E) on the horizontal (x) axis and subsequent one-year return on the vertical (y) axis illustrates this point. If this relationship was well correlated, then the dots would form a downward-sloping pattern from upper left to lower right, indicating higher valuations precede lower returns, and vice versa.

But this scatterplot, including data back to 1990, shows no relationship whatsoever. Essentially, P/E offers very little insight into whether stocks will do well or not in the coming year.

P/E Ratios Have Not Historically Been Good Predictors of One-Year Performance 

Dot plot depicting the S&P 500 Index P/E on the horizontal (x) axis and subsequent one-year return on the vertical (y) axis as described in preceding paragraph.

Source: LPL Research, FactSet 03/05/24
Disclosures: Indexes are unmanaged and cannot be invested in directly. Past performance is no guarantee of future results.

If you are searching for the downward-sloping chart pattern described above, where higher valuations precede lower returns and vice versa, you need only extend the time horizon. When comparing P/E to subsequent 10-year returns, you will notice that predictive pattern — the dots start in the upper left quadrant with low P/Es preceding higher returns, and move to the lower right quadrant, signifying higher P/Es, and lower subsequent returns. In other words, valuations are important for long-term buy-and-hold investors, but not so much for traders or your typical tactical asset allocator.

The current P/E for the S&P 500 is near 23 on a trailing 12-month basis and suggests modest, low-to-mid-single-digit returns over on the next decade. That forecast may end up being overly pessimistic given the potential for a further structural shift higher in valuations as in prior decades, but it does suggest that another decade of double-digit annualized returns, which investors have enjoyed over the past 10 years, is unlikely.

P/E Ratios Have Historically Been Excellent Predictors of Ten-Year Performance

Dot plot depicting the S&P 500 Index P/E on the horizontal (x) axis and subsequent 10-year return on the vertical (y) axis as described in preceding paragraph.

Source: LPL Research, FactSet 03/05/24
Disclosures: Indexes are unmanaged and cannot be invested in directly. Past performance is no guarantee of future results. 

Tying this example to the current environment, our message is this. Stock valuations are clearly elevated, especially technology stocks benefiting from the artificial intelligence boom. We’re probably overdue for a pullback. But fundamentals are quite good right now, so these elevated valuations may persist throughout 2024 and potentially even longer. (We wrote about big-cap technology company earnings in our March 4, 2024 Weekly Market Commentary.)

That leaves us watching technical indicators for signs of a breakdown in this market’s uptrend and looking for evidence of fundamental deterioration, which has not yet materialized. In the meantime, LPL Research recommends staying invested and maintains its neutral tactical stance on equities.

IMPORTANT DISCLOSURES

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk.

Indexes are unmanaged and cannot be invested into directly. Index performance is not indicative of the performance of any investment and does not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

This material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.

Unless otherwise stated LPL Financial and the third party persons and firms mentioned are not affiliates of each other and make no representation with respect to each other. 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.

Asset Class Disclosures –

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.

Bonds are subject to market and interest rate risk if sold prior to maturity.

Municipal bonds are subject and market and interest rate risk and potentially capital gains tax if sold prior to maturity. Interest income may be subject to the alternative minimum tax. Municipal bonds are federally tax-free but other state and local taxes may apply.

Preferred stock dividends are paid at the discretion of the issuing company. Preferred stocks are subject to interest rate and credit risk. They may be subject to a call features.

Alternative investments may not be suitable for all investors and involve special risks such as leveraging the investment, potential adverse market forces, regulatory changes and potentially illiquidity. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses.

Mortgage backed securities are subject to credit, default, prepayment, extension, market and interest rate risk.

High yield/junk bonds (grade BB or below) are below investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors.

Precious metal investing involves greater fluctuation and potential for losses.

The fast price swings of commodities will result in significant volatility in an investor’s holdings.

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

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

Is It Déjà Vu All Over Again?

Kristian Kerr | Head of Macro Strategy

I like to study the past. While having a good understanding of market history isn’t the be-all and end-all for investment analysis, it can often offer valuable insights by giving a window into the thinking that others before us had when facing similar circumstances and situations. After all, we are all only humans, and that is why patterns and episodes in the market tend to repeat in some form or another. Things like market structure and trading technology will always be evolving, but human behavior remains largely constant. 

Over the last year or so stock market index returns have been heavily influenced by just a handful of stocks. This intense bifurcation of the stock market is unusual, but not at all unprecedented. Many have likened the current environment to the late 1990s and there are certainly many similarities. Another potentially analogous period is the early 1970s and the rise of the so-called “Nifty Fifty” stocks. In response to the relatively brief yet painful bear market of 1968–1970, investors flocked into a group of around 50–75 high-quality growth stocks with exciting prospects that had held up well during the downturn. Initially, the move into the Nifty Fifty was driven by a search for safety and a desire to avoid speculation after a period of market pain. However, as is often the case when momentum takes over, the narrative morphed alongside the rapid rise in price. Prior to the peak of the Nifty Fifty phenomenon in early 1973, after a significant increase in share prices (many Nifty Fifty stocks doubled and some even tripled from their 1970 lows), and with roughly 30% earnings growth for the group in 1972, many investors had come to believe that these companies were impervious to the economic cycle, that their growth trajectories could continue indefinitely and that valuations were largely irrelevant.   

The irony, looking back, is that many of these companies are still around today, and a significant portion achieved impressive earnings growth over the following decades. However, this didn’t prevent their stocks prices from experiencing significant drawdowns (most over 40%) from 1973 to 1974 and underperforming the S&P 500 for the rest of the 1970s.  Just because a company is good doesn’t mean it is a good investment at that particular point in time. Price and valuation do matter over time. When everyone piles into the same stocks, they are often just chasing a theme, and themes can change quickly.

Will the current infatuation with just a handful of good companies eventually follow a similar path as the Nifty Fifty? And if so, are we currently only at the equivalent of 1971, or are we already in late 1972? Only time will tell, but this episode from the early 1970s serves as a reminder that myopically chasing growth stocks with exciting themes is probably not some magic formula for achieving above-average returns into perpetuity as much as the current market zeitgeist may try to convince us otherwise.

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. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk.

Indexes are unmanaged and cannot be invested into directly. Index performance is not indicative of the performance of any investment and does not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

This material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.

Unless otherwise stated LPL Financial and the third party persons and firms mentioned are not affiliates of each other and make no representation with respect to each other. 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.

Asset Class Disclosures –

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.

Bonds are subject to market and interest rate risk if sold prior to maturity.

Municipal bonds are subject and market and interest rate risk and potentially capital gains tax if sold prior to maturity. Interest income may be subject to the alternative minimum tax. Municipal bonds are federally tax-free but other state and local taxes may apply.

Preferred stock dividends are paid at the discretion of the issuing company. Preferred stocks are subject to interest rate and credit risk. They may be subject to a call features.

Alternative investments may not be suitable for all investors and involve special risks such as leveraging the investment, potential adverse market forces, regulatory changes and potentially illiquidity. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses.

Mortgage backed securities are subject to credit, default, prepayment, extension, market and interest rate risk.

High yield/junk bonds (grade BB or below) are below investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors.

Precious metal investing involves greater fluctuation and potential for losses.

The fast price swings of commodities will result in significant volatility in an investor’s holdings.

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

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

Core Fixed Income: Down but Not Out

Lawrence Gillum | Chief Fixed Income Strategist

Additional content provided by Colby Hesson, Analyst, Research

The Federal Open Market Committee (FOMC) faces a tough decision in 2024 as it is no longer a question of ‘if,’ but rather ‘when’ rate cuts will occur. The FOMC is not expected to cut rates at their upcoming March meeting, but according to recent market pricing, may instead opt for a rate cut in June. Since their last meeting in January, surprisingly elevated inflation readings have cast a shadow of doubt over those expectations. Premature rate cuts from the Federal Reserve (Fed) risk reigniting inflation, which they have been diligently trying to bring down to 2%. Even if rate cuts get priced out again, we expect fixed income to still provide utility to portfolios. 

Treasury yields have generally increased over the last month, while the Bloomberg Aggregate Bond Index (AGG) has declined by nearly -0.30%. However, we think yields could fall to the high 3s, potentially resulting in high-single-digit returns for core bonds. Moreover, reviewing the Hypothetical Returns table, while we think yields will end the year below current levels, even if rates rise, many core fixed income sectors are still likely to eke out positive returns.  

Hypothetical Returns: Interest Rate Scenario Analysis

 Change In Interest Rates
Index-1.0%-0.5%No Change+0.5%+1.0%
Bloomberg US Aggregate Bond Index11.8%8.9%4.9%3.2%0.3%
Bloomberg MBS Index12.6%9.8%5.1%4.1%1.2%
Bloomberg US Treasury Index11.0%8.2%4.5%2.6%-0.1%
Bloomberg US Corporate Index12.7%9.5%5.4%3.0%-0.2%
Bloomberg Intermediate Corp Index9.3%7.6%5.3%4.1%2.3%
Bloomberg US High Yield Corporate Index*10.0%8.7%6.2%6.0%4.6%

*Assumes 3% default rate and 30% recovery rate.
Source: LPL Research, Bloomberg 02/23/24
Disclosures: Past performance is no guarantee of future results. All indexes are unmanaged and can’t be invested in directly.

Conclusion

The market got ahead of itself late last year in pricing in aggressive rate cuts, so the back-up in yields is warranted, in our view.  Starting yields for many fixed income markets are still at levels last seen over a decade ago, so the return prospects for fixed income remain favorable as well, in our view. However, increased Treasury supply in the coming quarters could exert upward pressure on yields. And while we do not expect the Fed to cut rates in March, we still expect cuts this year. As such, our year-end 2024 range for the 10-year Treasury yield remains 3.75% to 4.25%, and we expect fixed income to outperform cash in 2024. 

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. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk.

Indexes are unmanaged and cannot be invested into directly. Index performance is not indicative of the performance of any investment and does not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

This material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.

Unless otherwise stated LPL Financial and the third party persons and firms mentioned are not affiliates of each other and make no representation with respect to each other. 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.

Asset Class Disclosures –

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.

Bonds are subject to market and interest rate risk if sold prior to maturity.

Municipal bonds are subject and market and interest rate risk and potentially capital gains tax if sold prior to maturity. Interest income may be subject to the alternative minimum tax. Municipal bonds are federally tax-free but other state and local taxes may apply.

Preferred stock dividends are paid at the discretion of the issuing company. Preferred stocks are subject to interest rate and credit risk. They may be subject to a call features.

Alternative investments may not be suitable for all investors and involve special risks such as leveraging the investment, potential adverse market forces, regulatory changes and potentially illiquidity. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses.

Mortgage backed securities are subject to credit, default, prepayment, extension, market and interest rate risk.

High yield/junk bonds (grade BB or below) are below investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors.

Precious metal investing involves greater fluctuation and potential for losses.

The fast price swings of commodities will result in significant volatility in an investor’s holdings.

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

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

As Goes January, So Goes the Year

Adam Turnquist | Chief Technical Strategist

After a relatively slow start, the S&P 500 rallied during the back half of January and closed out the month with a gain of 1.6%. Buying pressure was relatively narrow, as declining shares on the index modestly outpaced advancers. Similar to 2023, a few mega-caps did most of the heavy lifting. Shares of NVIDIA (NVDA), Microsoft (MSFT), and Meta (META) contributed 80% of the S&P 500’s total return during the month.

From a historical perspective, a positive January has been a bullish sign for stocks. Yale Hirsch, creator of the Stock Trader’s Almanac, first discovered this seasonal pattern back in 1972, which he called the January Barometer and coined its popular tagline of ‘As goes January, so goes this year.’

As highlighted in the chart below, the popular Wall Street maxim has stood the test of time. Since 1950, the S&P 500 has posted an average annual return of 16.8% during years that included a positive January. Furthermore, the index generated positive returns during these years 89% of the time. In contrast, when the index traded lower in January, annual returns dropped to -1.7%, with only 50% of occurrences yielding positive results.

S&P 500 January Barometer (1950–2023)

A positive January has been a bullish signal for stocks.

Line graph depicting January positive returns from 1950 to 2023 have historically lead to a bullish signal for stocks as described in the preceding paragraph.

Source: LPL Research, Bloomberg 02/01/24
Disclosures: Past performance is no guarantee of future results. All indexes are unmanaged and can’t be invested in directly. The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1950 incorporates the performance of the predecessor index, the S&P 90.

Summary

U.S. equity markets have shrugged off a slow start to 2024 and rallied to record highs. The prospect for a soft landing, falling inflation, and a shift from rate hikes to rate cuts has helped offset an underwhelming fourth quarter earnings season thus far. Despite shorter-term overbought conditions, the technical backdrop for the broader market remains bullish, further supported by a positive January Barometer signal that suggests the path of least resistance for stocks remains higher.

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. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk.

Indexes are unmanaged and cannot be invested into directly. Index performance is not indicative of the performance of any investment and does not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

This material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.

Unless otherwise stated LPL Financial and the third party persons and firms mentioned are not affiliates of each other and make no representation with respect to each other. 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.

Asset Class Disclosures –

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.

Bonds are subject to market and interest rate risk if sold prior to maturity.

Municipal bonds are subject and market and interest rate risk and potentially capital gains tax if sold prior to maturity. Interest income may be subject to the alternative minimum tax. Municipal bonds are federally tax-free but other state and local taxes may apply.

Preferred stock dividends are paid at the discretion of the issuing company. Preferred stocks are subject to interest rate and credit risk. They may be subject to a call features.

Alternative investments may not be suitable for all investors and involve special risks such as leveraging the investment, potential adverse market forces, regulatory changes and potentially illiquidity. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses.

Mortgage backed securities are subject to credit, default, prepayment, extension, market and interest rate risk.

High yield/junk bonds (grade BB or below) are below investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors.

Precious metal investing involves greater fluctuation and potential for losses.

The fast price swings of commodities will result in significant volatility in an investor’s holdings.

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

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

How Markets Regard Democratic Incumbents

Jeff Buchbinder | Chief Equity Strategist

The 2024 election is right around the corner. The recent victories of Former President Donald Trump at the Iowa and New Hampshire primaries have moved Election Day closer, as it seems that the two candidates have been chosen earlier than usual, setting the stage for a contentious rematch of the 2020 race.

But this time, Joe Biden will be the incumbent. What could that mean for the stock market this year? Diving into the data, first, we find the S&P 500 performs well during election years. Since 1948, the S&P 500 has finished election years with an average return of 6.9%. Next, note that during election years when an incumbent is running for re-election, stocks have been higher each time since 1950 (10 out of 10 times), gaining an average of 12.5%. This is a small sample size for sure, but noteworthy still. Also consider that the last time a presidential candidate ran for re-election was in 2020, when the S&P 500 rose 16.3%.

Presidential Re-Election Campaigns Tend to Be Good for Stocks

Bar chart depicting S&P 500 performance during election years since 1948, with an average return of 6.9%, as described in the preceding paragraph.

Source: LPL Research, FactSet 01/29/24 (Data back to 1948)
Disclosures: All indexes are unmanaged and cannot be invested in directly. Past performance is no guarantee of future results. 
The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1950 incorporates the performance of predecessor index, the S&P 90.

Diving even deeper, we can break out how both Republicans and Democrats fare. This brings on another favorable historic trend for the S&P 500, as Democratic incumbents have a higher average return during election years than their Republican counterparts. Outside of the 2008 financial crisis, however, returns between the two parties are very similar. In other words, the stock market might be more likely to respond to the economic cycle than party politics. In general, that is the way these go, which means do not let politics disrupt your long-term investment plan. Corporate America is resilient and can grow profits and pay dividends in just about any political environment. 

Historical trends do help make the case for stocks to enjoy a promising 2024. But, of course, past performance is no guarantee of future results. Still, the fact that these performance trends have been consistent tailwinds for stocks over time is notable, through periods of high inflation, rising interest rates, and recessions. 

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. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk.

Indexes are unmanaged and cannot be invested into directly. Index performance is not indicative of the performance of any investment and does not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

This material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.

Unless otherwise stated LPL Financial and the third party persons and firms mentioned are not affiliates of each other and make no representation with respect to each other. 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.

Asset Class Disclosures –

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.

Bonds are subject to market and interest rate risk if sold prior to maturity.

Municipal bonds are subject and market and interest rate risk and potentially capital gains tax if sold prior to maturity. Interest income may be subject to the alternative minimum tax. Municipal bonds are federally tax-free but other state and local taxes may apply.

Preferred stock dividends are paid at the discretion of the issuing company. Preferred stocks are subject to interest rate and credit risk. They may be subject to a call features.

Alternative investments may not be suitable for all investors and involve special risks such as leveraging the investment, potential adverse market forces, regulatory changes and potentially illiquidity. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses.

Mortgage backed securities are subject to credit, default, prepayment, extension, market and interest rate risk.

High yield/junk bonds (grade BB or below) are below investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors.

Precious metal investing involves greater fluctuation and potential for losses.

The fast price swings of commodities will result in significant volatility in an investor’s holdings.

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

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

Semiconductors Lead Stocks Higher

Key Takeaways

  • Semiconductors continue to lead the broader market to new highs.
  • The growing integration and excitement around artificial intelligence (AI) has revitalized demand and optimism for the industry.
  • World chip sales have returned to growth for the first time in roughly 18 months, while the largest chip manufacturer recently forecasted “healthy growth” for 2024.
  • Historically, the return of growth in chip cycles has led to continued upside momentum in both semiconductor stocks and the broader U.S. equity market.

Records have been on repeat for the semiconductor space as the outlook for chip demand continues to improve. The proliferation of spending on AI, coupled with an expected rebound in PC demand and increased chip usage across the automotive industry, have helped offset concerns related to elevated inventories and slowing global growth.

As highlighted in the chart below, the Philadelphia Semiconductor Index (SOX) has rallied to new highs after recently breaking out from a bullish cup-with-handle formation. Momentum indicators, breadth, and volume are further confirming the bullish price action. In terms of upside, a minimum technical-based price objective for the SOX sets up near 5,200 based on the size of the prior formation. Perhaps more importantly, and as illustrated in the bottom panel, semiconductors are also leading this bull market, as the SOX vs. S&P 500 (SPX) ratio chart also broke out to new highs.

Semiconductors Breaking Out on an Absolute and Relative Basis

Line graph depicting SOX Index rally to new highs and SOX Index vs. S&P 500 ratio chart climbing to new highs as described in preceding paragraph.

Source: LPL Research, Bloomberg 01/24/24
Disclosures: Past performance is no guarantee of future results. All indexes are unmanaged and can’t be invested in directly.

Taiwan Semiconductor Manufacturing (TSM) — the world’s largest chip manufacturer and a key supplier to both Apple and NVIDIA — further revived confidence in the space after issuing positive revenue guidance during their fourth-quarter earnings release last week. TSM’s Chief Executive Officer C.C. Wei pointed to low to mid-20% revenue gains (in dollar terms) for 2024 and noted, “Our business has bottomed out on a year-over-year basis, and we expect 2024 to be a healthy growth year.”

The latest data from the Semiconductor Industry Association (SIA) corroborates TSM’s outlook. As illustrated in the table below, worldwide chip sales increased on a year-over-year basis in November for the first time since the summer of 2022.

Global Chip Sales Turn Positive 

Bar graph depicting monthly global semiconductor chip sales from 1991 to 2023 on a year-over-year basis as described in the preceding paragraph.

Source: LPL Research, SIA, 01/24/24
Disclosure: Past performance is no guarantee of future results.  

Given the cyclicality of the global semiconductor market, we analyzed how the SOX performs after each cycle turns positive. Considering semiconductors are also widely regarded as a leading economic indicator given their vast application use across industries, we also included how the broader SPX performed during these positive chip cycle shifts. As highlighted in the table below, momentum in both indexes continued. The SOX outperformed with an average 12-month forward return of 27.7% (eight of the nine periods also posted positive returns during the 12-month period).

Semis Lead, Stocks Follow  

Average SOX and SPX Return After Semi Sales Turn Positive 

Line graph depicting average SOX and SPX returns after semiconductor sales turn positive as described in the preceding paragraph.

Source: LPL Research, Bloomberg 01/24/24
Disclosures: Past performance is no guarantee of future results. All indexes are unmanaged and can’t be invested in directly.  

Summary

An upcycle for semiconductors appears to be underway as the excitement for AI revives demand. The growth story, supported by bullish guidance from the world’s largest chip manufacturer, the recent return to global chip revenue growth, recovering PC sales, and rising demand from the automotive industry, have all helped offset concerns over rich valuations and prior supply gluts. Historically, the start of growth cycles in chips has led to continued momentum for semiconductor stocks and a bullish sign for the broader market.

IMPORTANT DISCLOSURES

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk.

Indexes are unmanaged and cannot be invested into directly. Index performance is not indicative of the performance of any investment and does not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

This material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.

Unless otherwise stated LPL Financial and the third party persons and firms mentioned are not affiliates of each other and make no representation with respect to each other. 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.

Asset Class Disclosures –

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.

Bonds are subject to market and interest rate risk if sold prior to maturity.

Municipal bonds are subject and market and interest rate risk and potentially capital gains tax if sold prior to maturity. Interest income may be subject to the alternative minimum tax. Municipal bonds are federally tax-free but other state and local taxes may apply.

Preferred stock dividends are paid at the discretion of the issuing company. Preferred stocks are subject to interest rate and credit risk. They may be subject to a call features.

Alternative investments may not be suitable for all investors and involve special risks such as leveraging the investment, potential adverse market forces, regulatory changes and potentially illiquidity. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses.

Mortgage backed securities are subject to credit, default, prepayment, extension, market and interest rate risk.

High yield/junk bonds (grade BB or below) are below investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors.

Precious metal investing involves greater fluctuation and potential for losses.

The fast price swings of commodities will result in significant volatility in an investor’s holdings.

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

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

Record-High Watch for S&P 500 Remains in Effect

Adam Turnquist | Chief Technical Strategist

Key Takeaways

  • After over a 500-trading day wait, the S&P 500 is on the cusp of breaking out to a new record high.  
  • Historically, the market has posted average 12-month-forward returns of 11.7% after reaching a new high for the first time in at least a year.  
  • The technical setup for stocks remains bullish, and the selling pressure that started the year helped reset historically overbought market conditions.  
  • Breadth has notably broadened out with cyclical leadership intact, while the macro backdrop appears relatively less complicated compared to 2023.

While severe weather watch alerts sweep across many parts of the U.S. this week, a record-high watch is now in effect for the S&P 500. The index rose 0.6% yesterday, closing only 13 points away from its January 3, 2022, record-high close of 4,796.56. In the event of a breakout, the next resistance level to watch sets up at the S&P 500’s intraday record high of 4,819. Support for the broader market sits at 4,737 (20-day moving average) and the 4,690 – 4,700 range (late 2021 highs/recent January lows).  

Building participation off the October correction lows has underpinned the recovery. As highlighted in the bottom panel of the chart below, over three-quarters of S&P 500 stocks are trading above their 50- and 200-day moving averages. Moreover, the composition of breadth remains bullish as participation among the offensive sectors continues to outpace the defensive sectors.

The S&P 500 is Closing in on Record Highs

Line graph depicting improving participation in the rally has lifted the S&P 500 to within inches of a record high as described in the preceding paragraph.

Source: LPL Research, Bloomberg 01/10/24
Disclosures: Past performance is no guarantee of future results. All indexes are unmanaged and can’t be invested in directly. 

Investors have been waiting for over 500 trading days to celebrate a new high for the S&P 500. While for many, it may feel like an eternity, especially after such a volatile 2022, it could be worse when putting the current period into historical context. The chart below breaks down the total number of trading days between record highs for the S&P 500 and the drawdowns incurred during each period. The chart begins in 1954 to deliberately exclude the Great Depression-era outlier of 6,249 trading days to recapture the highs set in 1929. Outside of that period, the current 508 trading-day wait ranks as the sixth-longest without a new high. In addition, the maximum drawdown since January 3, 2022, has been relatively shallow at 25%. This compares to the largest S&P 500 drawdown between new highs of 57% incurred during the Global Financial Crisis (GFC).  

S&P 500 Trading Days and Drawdowns Between Record Highs

Line graph depicting trading days since last record high and bar graph depicting maximum drawdown between highs as described in preceding paragraph.

Source: LPL Research, Bloomberg 01/10/24
Disclosures: Past performance is no guarantee of future results. All indexes are unmanaged and can’t be invested in directly. The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1950 incorporates the performance of the predecessor index, the S&P 90.

If the market can make a new high, the next obvious question from investors is, what happens next? As the saying goes, momentum often begets momentum, an adage also supported by historical price action. The table below highlights periods when the S&P 500 took at least one year, or 252 trading days, to post a new record high. Forward 12-month S&P 500 returns after a new record high was reached averaged 11.7%, with 92.3% of periods producing a positive return. 

Good Things Come to Those Who Wait

Periods With at Least One Year Between New S&P 500 Highs

Date of Previous Record HighDate of New Record HighTrading Days Between HighsMaximum Drawdown12-Month Forward Return
1/11/19737/17/19801,898-48.2%7.7%
3/24/20005/30/20071,803-49.1%-8.5%
10/9/20073/28/20131,376-56.8%18.4%
11/29/19683/6/1972820-36.1%4.9%
8/2/19569/24/1958540-21.6%14.1%
1/3/2022?508*-25.5%*
11/28/198011/3/1982488-27.1%14.4%
8/25/19877/26/1989485-33.5%5.3%
12/12/19619/3/1963434-28.0%13.6%
8/3/19591/27/1961375-13.9%11.3%
10/10/19831/21/1985324-14.4%17.4%
2/9/19665/4/1967310-22.2%4.6%
5/21/20157/11/2016286-14.2%13.5%
2/2/19942/14/1995260-8.9%35.9%
   Average11.7%
   Median13.5%
   Percent Positive92.30%

*Ongoing
Source: LPL Research, Bloomberg 01/10/24
Disclosures: Past performance is no guarantee of future results. All indexes are unmanaged and can’t be invested in directly. The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1950 incorporates the performance of the predecessor index, the S&P 90.

Summary

The S&P 500 is on the verge of breaking out to new highs following a 500-plus trading day drought since its last record high. Prolonged periods without a new high have historically produced double-digit 12-month gains once a record high is reached, pointing to solid potential gains this year if the S&P 500 can clear 4,797. The technical setup remains bullish, and the slow start for stocks this year helped reset historically overbought market conditions. Breadth has notably broadened out with cyclical leadership intact, while the macro backdrop appears relatively less complicated compared to 2023.  

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. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk.

Indexes are unmanaged and cannot be invested into directly. Index performance is not indicative of the performance of any investment and does not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

This material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.

Unless otherwise stated LPL Financial and the third party persons and firms mentioned are not affiliates of each other and make no representation with respect to each other. 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.

Asset Class Disclosures –

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.

Bonds are subject to market and interest rate risk if sold prior to maturity.

Municipal bonds are subject and market and interest rate risk and potentially capital gains tax if sold prior to maturity. Interest income may be subject to the alternative minimum tax. Municipal bonds are federally tax-free but other state and local taxes may apply.

Preferred stock dividends are paid at the discretion of the issuing company. Preferred stocks are subject to interest rate and credit risk. They may be subject to a call features.

Alternative investments may not be suitable for all investors and involve special risks such as leveraging the investment, potential adverse market forces, regulatory changes and potentially illiquidity. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses.

Mortgage backed securities are subject to credit, default, prepayment, extension, market and interest rate risk.

High yield/junk bonds (grade BB or below) are below investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors.

Precious metal investing involves greater fluctuation and potential for losses.

The fast price swings of commodities will result in significant volatility in an investor’s holdings.

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

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