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Market Blog Posted by lplresearch

Tuesday, October 19, 2021

China’s debt levels have surged since the global financial crisis and now sit at over 300% of gross domestic product (GDP), as of December 2020. The majority of that new debt has come from households and non-financial companies, which is why the Chinese government has made deleveraging a priority. Moreover, to help rein in the very high debt levels in the US$60 trillion China real estate market—which is likely the largest asset class in the world—more than 400 new regulations have been announced this year. As such, these regulations have caused Chinese junk-rated property developer bonds to underperform this year—and in the case of Evergrande, stoke concerns about broader economic spillovers.

“Default risk has clearly risen within the Chinese real estate market,” noted LPL Financial Fixed Income Strategist Lawrence Gillum. “However, we still think policy makers in China will prevent broader systemic risks to spread due to the deleveraging efforts currently taking place.”

As seen in the LPL Research Chart of the Day, yields on Chinese junk-rated bonds nearly touched 25% before falling recently. So far, this month has been one of the worst months in decades for the Chinese high yield market as the selloff in the property developer markets continued—the real estate sector makes up 66% of the high yield index. Additionally, of the $142 billion of U.S. dollar-denominated bonds trading at distressed prices (generally defined as debt with yields over 10%), 48% were issued by Chinese real estate companies, according to data compiled by Bloomberg. However, that the China investment-grade corporate index hasn’t responded in-kind provides us comfort that the spillover effects are, at this time, limited to the junk-rated property developer issuers. Property developers make up over 11% of the investment-grade index and while these companies have seen their yields increase, they haven’t increased nearly has much as their junk-rated counterparts. In aggregate, yields on the investment-grade property developers are still less than 5%.

View enlarged chart.

Interestingly, the most recent move higher in junk-rated yields wasn’t related to Evergrande, which has likely already been priced into markets. Rather, a much smaller property developer, Fantasia, told investors that it wasn’t going to make a bond payment when it was due despite having the necessary cash on hand to make the payment. Bond investors are generally concerned about an entity’s ability to pay its debts but also its willingness to pay its debt. That Fantasia decided not to pay its obligations caused investors to question the commitment of the property developer market broadly in servicing its financial obligations. That breach of financial responsibility caused the People’s Bank of China (PBOC) to finally break its silence on the ongoing selloff in the property developer market by urging real estate developers to pay its bills on time.

Additionally, the PBOC finally commented specifically on the potential spillover crisis at Evergrande and said the risk was “controllable”, which likely means there won’t be a bailout per se but we do expect the PBOC to ring-fence the risks and prevent them from spilling over into the broader financial system and the economy. Time is running out on Evergrande, though, as the company could officially be in default on October 23 after the payment grace period runs out.

IMPORTANT DISCLOSURES

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

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

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

All index and market data from FactSet and MarketWatch.

This Research material was prepared by LPL Financial, LLC.

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

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

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

Economic Blog Posted by lplresearch

Friday, October 15, 2021

The U.S. Census Bureau reported overall retail sales grew 0.7% month over month in September vs. forecasts for a 0.2% decline, while retail sales excluding autos and gas also saw solid gains, rising 0.7% month over month vs. estimates for a 0.4% increase. On a year-over-year basis, sales rose a solid 13.9%, slightly lower than August’s 15.4%. Excluding autos and gas, sales rose 15.6%. Total retail sales rose over the past two months and three of the past four, as shown in the LPL Financial Chart of the Day, despite the impact of the Delta COVID-19 wave this summer.

See enlarged chart.

Positive revisions to August retail sales (from 0.7% headline to 0.9%, and from 2.0% to 2.1% ex. autos and gas) provided further evidence of consumers’ resilience in the face of the latest COVID-19 wave, not to mention supply chain disruptions that limited supply of certain goods.

“The retail sales numbers are encouraging in the face of elevated Delta variant cases in September and supply chain issues many companies are facing,” explained LPL Financial Equity Strategist Jeffrey Buchbinder. “The shift away from services to goods last month makes sense as a pandemic response but the next uptick in sales is likely to be led by services if COVID-19 cases continued their recent convincing decline as we expect.”

But we don’t want to dismiss the major impact Delta has had on consumers. After a 12% increase in consumer spending in the second quarter, consumer spending may only grow 2-3% annualized in the third quarter, based on Bloomberg’s consensus forecast from economists and data from the Bureau of Economic Analysis.

The mix shift in September also reflects Delta’s impact. The upside to forecasts reflected a shift from services to goods, consistent with elevated Delta COVID-19 cases during September that weighed on services activity. Auto sales rose 0.5% month over month despite the ongoing chip shortage. Merchandise sales rose 2%. Clothing rose 1.1%. We expect services spending to pick up in the fourth quarter as the next phase of the reopening occurs.

These are solid numbers in the face of several challenges. Consumers still have significant excess savings and are enjoying rising wages. The job market continues to heal as COVID-19 cases decline. Inflation is eroding some spending power but we remain in the transitory camp and see inflation pressures easing over the next several months.

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 data from Bloomberg.

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 Posted by lplresearch

Friday, October 8, 2021

The September payroll report likely created more questions than it answered.

The U.S. Bureau of Labor Statistics released its September employment report this morning, revealing that the domestic economy added a disappointing 194,000 jobs during the month, falling well short of Bloomberg-surveyed economists’ median forecast for a gain of 500,000. This comes on the heels of a lukewarm August report, which did receive an upward revision of 131,000. Somewhat contradictory, the unemployment rate fell more than forecast to 4.8% in September, beating expectations, though that was paired with a reduced labor force participation rate of 61.6% when expectations called for an increase.

“The observation window for this report likely came too soon for positive catalysts to really gain traction,” explained LPL Financial Chief Market Strategist Ryan Detrick. “Leisure and hospitality jobs, a proxy for economic reopening, were only marginally higher. We take this to mean Delta’s waning impact will likely be more evident in October’s report where we expect to see reopening momentum reassert itself.”

As seen in the LPL Chart of the Day, in-person segments of the labor market such as leisure and hospitality jobs grew steadily during the first half of the year when COVID-19 remained under relative control. However, the latest flare-up has dampened that trend. We expect to see renewed growth in this sector as the delta variant continues to abate.

View enlarged chart.

As mentioned, definitive takeaways from this report are difficult to come by due to the offsetting nature of the report. On the one hand, headline numbers came in very weak, but private payrolls, as well as manufacturing payrolls, fared better. The unemployment rate experienced a significant drop, but interpreting that number becomes muddied when considering the fact that we are already experiencing a significant worker shortage and the participation rate is declining, not increasing, as we would hope to see in a true recovery.

What is more, because the observation window for the report cuts off mid-month, we cannot yet draw conclusions about the impact of school reopening and the lapsing of enhanced unemployment benefits—hotly debated crosscurrents—plus the aforementioned waning delta impact. Regarding the inflation debate—average hourly earnings rose 0.6% month over month and 4.6% year over year. And while wages are undeniably growing and helping to fuel inflation, the data are not mix-adjusted and therefore are inflated due to the suppressed growth in the in-person, lower-wage segment of the labor market.

The biggest question, though, is what this means for the Federal Reserve’s (Fed) asset tapering plans. The market had all but expected the Fed to announce a tapering timeline at its next meeting coming into this report, with the caveat that Fed Chair Jerome Powell needed only to see a “reasonably good” job report first. Whether September’s surprise report has cleared that low bar or not now becomes an open question, one which the market had all but dismissed as a formality previously.

Indeed, in the aftermath of the report’s release Treasury markets immediately began pricing in a possible delay to any taper, and equity markets gyrated between positive and negative territory as they struggled to process whether bad news should actually be considered good news in this context. We will have to see in the coming weeks whether this report will be substantial enough to bring on the much-anticipated taper announcement, but one thing is for sure—there are no gimmies in this labor market recovery.

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.

If your representative is located at a bank or credit union, please note that the bank/credit union is not registered as a broker-dealer or investment advisor.  Registered representatives of LPL may also be employees of the bank/credit union.

These products and services are being offered through LPL or its affiliates, which are separate entities from, and not affiliates of, the bank/credit union.  Securities and insurance offered through LPL or its affiliates are:

• 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

Market Blog Posted by lplresearch

Friday, October 8, 2021

There is no reason to panic with all the big news about the bull market—October is known for volatility. As LPL Financial Chief Market Strategist Ryan Detrick discusses in the latest LPL Street View, when you look back at the past 20 years, October has actually been one of the top performing months—historically, the best fourth month. No other month sees 1%, 2%, or 3% moves than October—which we think is perfectly normal in the overall structure of a major bull market.

Since 1980, the average S&P 500 Index year sees a 14% peak to trough correction, as shown in the chart below. Half of the years since 1980 have seen at least a 10% correction. Market corrections are normal, but we believe things may go a little better than expected in the fourth quarter. Historically, when the S&P 500 is up at least 12.5% coming into the fourth quarter—for nine of the last ten years—stocks were up during the fourth quarter when there was a big gain coming into it.

You can watch Ryan below or directly from our YouTube channel.

IMPORTANT DISCLOSURES

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

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

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

All index and market data from FactSet and MarketWatch.

This Research material was prepared by LPL Financial, LLC.

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

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

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

Economic Blog Posted by lplresearch

Thursday, October 7, 2021

Based on recent readings of manufacturing and service sector activity, business demand remains strong, further damaging the “stagflation” narrative. At the same time, barriers to meeting demand continue to limit businesses’ ability to respond, including ongoing global supply chain disruptions, difficulties hiring, and high prices. As seen in the LPL Chart of the Day, the Services and Manufacturing New Orders Indexes in the Institute for Supply Management’s monthly surveys both posted strong numbers for September and remain elevated. New orders tend to be a leading indicator of future economic activity as orders are met.

“The most recent ISM new orders numbers show an economy still raring to go as we look toward 2022,” said LPL Chief Market Strategist Ryan Detrick. “There’s plenty of pent-up demand, but supply constraints are still in place and it’s going to take time for them to unwind.”

View enlarged chart.

The new orders readings for the manufacturing and service sectors helped support the headline purchasing manager index (PMI) readings in September. The headline numbers came in at 61.1 and 61.9 respectively, both topping economists’ consensus expectation and accelerating from August despite the ongoing impact of the Delta variant. But there were concerns underneath the surface. Price pressures picked up in both indexes and remain elevated. Supplier deliveries remain slow due to supply chain disruptions. The backlog of orders, while improving, remains somewhat elevated as well.

While we do believe these pressures will steadily decrease over the next year, it will be a gradual process. According to the Bloomberg-surveyed economists’ consensus estimate, we’re likely to average around 300,000 new jobs created per month in 2022 and headline inflation is expected to settle back down to around 3%, still elevated but moving in the right direction. Supply chains will probably take a couple of years to be fully addressed, just because of the scale of the problem. Despite challenges around supply chains, hiring, and prices, if the demand is there it will help drive continued improvement as businesses adapt to address challenges. That is likely to leave us with above trend economic growth, low recession risk, and a positive economic backdrop for markets for 1-2 more years.

IMPORTANT DISCLOSURES

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

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

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

All index and market data from FactSet and MarketWatch.

This Research material was prepared by LPL Financial, LLC.

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

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

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

Market Blog Posted by lplresearch

Wednesday, October 6, 2021

And just like that, the calendar turned to October and volatility picked up in a big way, with three consecutive 1% moves for the S&P 500 Index to start the month. As we noted in our October preview, this month gets a bad rap for being a bearish month (it isn’t), but it absolutely owns the title as the most volatile month.

It took nearly a full year, but the S&P 500 finally had its first 5% pullback of 2021, thus ending hopes of 2021 joining 1954, 1958, 1964, 1993, 1995, and 2017 as the only years to go a full calendar year without a 5% move lower.

“Volatility is the price of admission,” explained LPL Financial Chief Market Strategist Ryan Detrick. “Sure, we’d all prefer stocks go straight up forever, but that isn’t reality. Investors must learn to embrace and accept the eventual scares and bouts of volatility that are common even in the strongest bull markets.”

As shown in the LPL Chart of the Day, since 1980, stocks experience a 14.2% peak-to-trough pullback on average during the year, putting the recent 5% pullback in perspective. In fact, 21 out of the past 41 years saw at least a 10% correction. Incredibly, 12 of those years finished in the green and those 12 years gained an average of 17.0%. Who could forget last year’s 34% bear market and move back to up 16% by the end of the year?  In other words, big pullbacks can happen even in years that see outsized gains, which is why this chart is so important for investors.

View the enlarged chart.

The last new all-time high for the S&P 500 was on September 2, but as of the end of September there were still 54 new all-time highs in 2021, the second most ever with one quarter to go. The good news? Previous years that saw a lot new highs the first three quarters usually had strong performance the final quarter.

View enlarged chart.

Taking things a step further, this year the S&P 500 produced one of its best ever year-to-date gains through September, up 14.7% with a quarter to go.  It turns out that good starts to a year tend to resolve higher. In fact, 9 of the past 10 years the S&P 500 was up at least 12.5% with a quarter to go there were further gains in the fourth quarter. As you can see below, the returns are greatly skewed due to 1987, but the median return in the final quarter of the year is an impressive 5.2% (versus the average fourth quarter return of 4.0%).

View enlarged chart.

Lastly, this week in the LPL Market Signals podcast Ryan Detrick and Jeff Buchbinder discuss many of these concepts, along with the latest on the drama out of Washington and supply chain issues slowing down the economy. You can watch the full podcast below, or directly from our YouTube channel here.

IMPORTANT DISCLOSURES

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

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

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

All index and market data from FactSet and MarketWatch.

This Research material was prepared by LPL Financial, LLC.

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

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

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

Market Blog Posted by lplresearch

Tuesday, October 5, 2021

The debt limit—commonly called the debt ceiling—is the maximum amount of debt that the Treasury Department can issue to pay its, already committed, financial obligations. The amount is set through Congress and has been increased 78 times since 1960. Through a bipartisan budget act in 2019 however, Congress suspended the debt ceiling through July 31, 2021. Since August 1, Treasury department officials have essentially shuffled funds around to meet the nation’s payment obligations — but Treasury Secretary Janet Yellen says the department will no longer be able to pay all of its debts when they come due on or shortly after October 18.

“Our base case is that Congress will do the right thing and raise or suspend the debt ceiling in time,” noted LPL Financial Fixed Income Strategist Lawrence Gillum. “However, the longer they wait, the more unnecessary volatility we’ll likely see in markets.”

If the debt ceiling isn’t resolved, the U.S. Government would technically default on its contractual obligations. As seen in the LPL Research Chart of the Day, bond markets are starting to price in, however remote, a chance of delayed payment. Yields on debt maturing after October 18 have started to move higher as they are the securities most at risk of a delayed payment. As we get further into October, unless resolved, we could see yields on additional short maturity Treasury bills move higher still as the prospects of non-repayment, however slight, gets further priced into the market.

View enlarged chart.

At this point, there are two traditional ways Congress could raise/suspend the debt ceiling- through a bipartisan vote or through budget reconciliation. A bipartisan vote, which would need 60 votes in the Senate and thus 10 Republicans to vote with Democrats, seems unlikely given the reluctance of Senate Republicans to vote for an increase in the debt ceiling. The more likely scenario is that the debt ceiling is raised or suspended through the budget reconciliation process, which only requires 51 votes so the Democrats can go at it alone. There has been a general reluctance from Democratic leadership to go this way but it is increasingly likely the only realistic way to stave off a technical default.

Other, less tested options, include the Treasury minting a trillion dollar platinum coin or through the Public Debt Clause found in the 14th Amendment, which some have interpreted to allow the Treasury to continue to issue debt to prevent default. Yellen has recently commented that both of those options are currently unworkable and both would likely be tied up in the courts for some time.

U.S. bond market investors have taken for granted the government’s ability and willingness to pay its debt. While its ability to repay its obligations is not in question, the debt ceiling debate complicates the country’s willingness to pay its debts. In 2011, Congress waited until the very last minute to fix the debt ceiling issues and S&P downgraded the country’s debt rating to AA+ from AAA because of the questions surrounding that willingness to pay its obligations. Now, another rating agency, Fitch, has threatened to do something similar if Congress fails to act soon. Another debt downgrade would likely be disruptive to financial markets. While we think Congress will act in time and either raise or suspend the debt ceiling, these games of political chicken can introduce volatility to markets in the meantime.

IMPORTANT DISCLOSURES

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

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

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

All index and market data from FactSet and MarketWatch.

This Research material was prepared by LPL Financial, LLC.

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

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

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

Economic Blog Posted by lplresearch

Wednesday, September 29, 2021

Stocks have come a long way since the S&P 500 bear market low way back on March 23, 2020, but despite the general strength of the bull market we’ve seen two very different types of trades leading markets at different times. They include a “work-from-home” trade characterized by strength among large caps and growth-style oriented stocks, strong performance by U.S. stocks in particular, and well contained interest rates. At other times, we’ve seen a “reopening trade,” where mid- and small-cap stocks have performed well, cyclically-oriented value-style stocks have led, interest rates have pressed higher, and performance across geographical regions has been more even. For most of the last six months the work-from-home trade has dominated, but we’re seeing some signs of potential rotation toward a reopening theme once again.

“It’s increasingly looking like the Delta-related surge in COVID-19 cases, while still dangerous, has passed its peak, and there are signals that markets may be anticipating the next stage of economic reopening,” said LPL Chief Market Strategist Ryan Detrick. “After a mid-summer head fake, we’re seeing signs that this time the rotation might stick.”

It all starts with interest rates. The 10-year Treasury yield started to stabilize in early August, and since then we’ve seen steady movement higher as elevated inflation looks increasingly sticky in the near term, and markets start to anticipate global central bankers slowly winding down extraordinarily supportive monetary policy. The full transition to neutral policy will likely take years, and central banks will remain supportive for some time, but the change in direction does matter. Seeing the 10-year yield move higher despite stock losses on Tuesday may be a telling sign.

A higher 10-year Treasury yield has supported financial sector stocks, which are the largest sector in the Russell 1000 Value Index. The breakout in relative strength compared to the August peak may signal a more sustainable change in direction this time.

It’s still too early to call a reversal by value-style stocks overall, but financial sector strength helps. Rising interest rates also tend to increase the value of near-term earnings over less visible long-term earnings growth, which may also give value stocks an edge. While there are some signs of a reversal higher in the value trade, what we’ve seen so far isn’t persuasive in isolation. But added to the broader market signals, we see potential for further relative strength, particularly for cyclical value sectors.

The relative strength of small caps looks more robust, breaking out to the upside after treading water for several months. Small caps went through a stretch of extraordinarily strong performance between September 2020 and March 2021, and it’s not completely surprising that they gave back a good share of those gains after coming so far so fast, but we still think the economic environment is likely to be supportive for small- and mid-caps compared to large.

We’ve been anticipating a rotation back to the reopening trade for some time. If you look at the charts there’s really been relative stability between the two themes since mid-July, but the last few weeks have provided solid signals of a potential reversal. With the latest surge in COVID-19 cases likely past peak, vaccination rates slowly rising, and economic surprises starting to come back into balance after a series of disappointments, it’s no surprise to see the shift toward the reopening theme.

But there are some potential economic negatives that support this trade as well, such as high commodity prices, higher interest rates, and growing risk of stickier inflation. Nevertheless, we think the fundamental backdrop for equities remains positive on the whole, and we continue to recommend modest overweights to equities while leaning into cyclically-oriented value sectors and tilting away from large caps.

IMPORTANT DISCLOSURES

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

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

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

All index and market data from FactSet and MarketWatch.

This Research material was prepared by LPL Financial, LLC.

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

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

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

https://www.youtube.com/watch?v=zbboTgz4z5g

Economic Blog  Posted by lplresearch

Friday, September 24, 2021

On Thursday, September 23, the Conference Board released its August 2021 report detailing the latest reading for the Leading Economic Index (LEI), a composite of ten data series that tend to lead changes in economic activity. Many economic data points are backward-looking, but we pay special attention to the LEI, as it has a forward-looking tilt to it and spans many segments of the economy. The index grew 0.9% month over month, the highest in three months and slightly ahead of expectations for 0.7%.

“August’s strong LEI growth supports the idea that the longer term recovery remains intact despite the latest COVID-19 flare-up,” said LPL Financial Chief Investment Strategist Ryan Detrick. “We continue to expect a strong fourth quarter GDP print coming off some softness in Q3.”

As seen in the LPL Chart of the Day, the LEI’s growth rate inflected higher off June’s low.

View Enlarged Chart.

Eight of the ten components rose in August, while one fell and one held steady. Average weekly initial claims for unemployment insurance, the Institute for Supply Management (ISM) New Orders Index, and building permits represented the three largest positive contributors. The lone negative contributor was average consumer expectations for business conditions, while average weekly manufacturing hours remained unchanged. Strong breadth among component indexes gives us increased confidence in the resilience of the economy.

When making investment recommendations, we always advocate taking a long-term view and not overreacting to the day-to-day newsflow. The economic backdrop is and always will be the most important factor in determining asset allocation, and despite some near-term challenges we continue to believe we are in the early stages of a new economic cycle, which should continue to power risk assets for years to come. August’s LEI report should help to reinforce that notion and we continue to recommend overweight allocations to stocks.

IMPORTANT DISCLOSURES

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

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

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

All index and market data from FactSet and MarketWatch.

This Research material was prepared by LPL Financial, LLC.

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