Archive

Market Blog Posted by lplresearch

Wednesday, July 14, 2021

To state the obvious, coal mining is a dangerous occupation. Not only do coal miners have to deal with collapsing tunnels and explosions, they also have to deal with the potential for dangerous carbon monoxide fumes. Crafty folks that (obviously) wanted to stay alive, coal miners would bring canaries with them into the mines to help sniff out the dangerous fumes. Canaries, apparently, are much more sensitive to the odorless fumes so if miners saw the birds becoming distressed, it would serve as a warning sign that carbon monoxide fumes were likely prevalent and they should reverse course.

Within the fixed income markets, the high yield credit market can, at times, act like a canary in the economic coalmine. The return distribution for high yield investors is asymmetrical, which means the potential for losses can be magnitudes larger than the potential for gains. So, credit markets tend to react quickly when economic conditions start to deteriorate.

“Rarely does the price action in one market tell the entire story,” noted LPL Financial Fixed Income Strategist Lawrence Gillum. “When we take a more holistic look at markets though, we aren’t seeing broad economic weakness on the horizon. But we are continuing to pay attention to those market signals.”

The 10-year Treasury Yield’s fall of over 40 basis points (.40%) from March highs has left many investors asking if the bond market is telling us something we don’t know about the durability of the economic recovery. We don’t think so. As seen in the LPL Research Chart of the Day, historically, when Treasury yields have decreased because of economic slowdowns or some broader risk-off/macro event, credit spreads have increased—sometimes dramatically. If the Treasury markets were signaling a significant slowdown in growth, the credit markets would be showing something similar. Treasury yields and credit spreads tend to move in opposite directions, so the absence of a negative signal from credit markets gives us some comfort that the move lower in rates has been mostly technically driven.

See enlarged chart.

Positioning within fixed income has been pretty bearish- meaning investors have implemented strategies that work if interest rates increase. Over the past few weeks though, we have seen investors reverse course and close out some of these bearish positions, which perversely has likely caused interest rates to move even lower.

Additionally, even at 1.38%, U.S. interest rates are attractive to foreign investors when their home currency bonds are yielding near zero or even negative. With Japanese government bonds yielding 2 basis points (.02%) and German Bunds yielding -31 basis points (-.32%), we’ve seen a lot of foreign interest in U.S. Treasury markets, which has also helped push yields lower.

These technical pressures on yields are independent of the fundamental story, which suggests the economy continues to grow strongly. We are certainly paying attention to the price action in the Treasury markets but we don’t think it is signaling concerns that negative events are on the horizon.

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, July 13, 2021

LPL Research is proud to announce the release of Midyear Outlook 2021: Picking Up Speed.

While the speed can be exhilarating as economic growth accelerates, it can also be dangerous. Our updated outlook is designed to help you navigate the risks and opportunities brought on by the economy’s reopening for the rest of 2021 and beyond. View the interactive digital version here. The highlights in the report include:

• Economy: Speeding Up. The country has reopened and there is still plenty of momentum to extend above-average growth into 2022. LPL Research forecasts 6.25 to 6.75 percent U.S. real gross domestic product (GDP) growth in 2021, which would be the best year in decades.
• Policy: Taking a Backseat. The economy was supported through the pandemic by more than $5 trillion in stimulus measures and extraordinary support by the Federal Reserve. Policy will take a back seat in the second half of 2021 as private sector growth replaces stimulus checks.
• Stocks: Gaining Ground. Economic improvement should continue to support S&P 500 Index earnings, which had a stunning first quarter. While valuations remain somewhat elevated, LPL Research thinks they look reasonable after considering still low interest rates and earnings growth potential.
• Bonds: Safety Features. Inflationary pressure and economic improvement may put additional upward force on the 10-year U.S. Treasury yield. LPL Research anticipates the 10-year yield finishing 2021 in the range of 1.75 to 2 percent.

In our ceaseless pursuit of making it easier for our Advisors to help their clients, we will also be releasing supplemental materials and additional formats of our Outlook for Advisors to use with their clients. These include: an executive summary, an institutional version, a client letter, a PowerPoint presentation, videos, podcasts, and special webinars (LPL Financial advisors only). LPL Advisors can find all of these materials in one place, all on the Resource Center.

Finally, we would like to thank all of our internal partners who contributed to the development of this piece. Such a detailed and high profile publication requires significant coordination between many different business groups, and we are extremely fortunate to have such talented and committed teammates.

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, July 9, 2021

The S&P 500 Index closed at a record high on Wednesday, yet investors seem increasingly on edge with the VIX Index, a measure of implied volatility on the S&P 500, spiking nearly 40% week-to-date. We won’t bury the lead here, our answer to the title is simple: this could be the start of a correction, but we aren’t betting on a significant decline in the S&P 500 and here’s why.

First of all, it is important to remember that corrections are a normal part of investing and there are plenty of reasons why stocks could pull back here. Just last week, we published Three Things That Worry Us, and highlighted the weak market internals, high valuations, and tendency for Year Two of a bull market to be difficult. Those points still ring true today.

However, in that commentary we also explained why we are comfortable with an overweight allocation to stocks versus bonds. We are maintaining that view for the following reasons:

Reason 1: Longer-Term Trends Remain Strong

Breadth was historically weak on the S&P 500’s recent streak of record highs, and that fact has been well documented by LPL Research and others. However, breadth can be measured on multiple time horizons, and though the percent of stocks above their shorter-term 50-day moving average showed a historically weak reading for record highs (below 50% for the first time since December 1999), the percent of stocks above the longer-term 200-day moving average is still remarkably strong at more than 90%. And looking at the index itself, the 50-day moving average (orange line) has acted as strong support year to date. We also identify technical support levels based on recent index lows at 4164 and 4056 (green dash lines). Even a move to the lower support level would only represent a 7% correction from Wednesday’s high.

View enlarged chart.

Reason 2: Most Vulnerable Groups Have Already Corrected

Much of the recent fear seems to have been pinned on the surging Delta variant of the COVID-19 virus, and the potential economic toll it might take. And to be fair, relative performance has reflected virus fears seen last year, with financials, industrials, and materials underperforming, and a rush back into “stay at home” growth stocks. This is much of the reason for the poor breadth readings. However, the flip-side of those poor breadth readings is that even if the S&P 500 starts to pull back, the stocks expected to do the worst in a scare have already corrected. We believe that to be the case for the financials sector, which has already reached an oversold reading based on the percent of stocks in the sector above their 50-day moving averages. When this reading falls near 20% and the sector is still in an uptrend, it has historically been a buying opportunity.

View enlarged chart.

Reason 3: Bonds Are as Unattractive as Ever

Financials in particular have been impacted by falling interest rates, which we believe are poised to resume their longer-term trend higher. As shown in the chart below, the yield for the 10-year Treasury has significant support near 1.2%, and based on the RSI-14, a technical indicator (bottom panel), is the most oversold since March 9, 2020, its all-time low. Not only do lower yields mean lower expected returns for bonds, but we don’t buy the narrative that falling interest rates indicate the bond market is pricing in problems with the reopening. High-yield credit spreads remain the tightest we have seen since 2014, something we do not believe would be the case if investors were pricing in true disruptions to the economy.

View enlarged chart.

Year 2 of the bull market is living up to its reputation for being difficult, but is also on track for delivering positive returns as it historically has. We expect that to be the case through the end of the year and are comfortable with our overweight equities recommendation.

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, July 8, 2021

The June Institute for Supply Management (ISM) Services Index was a bit softer than expected (60.1 vs. the Bloomberg consensus estimate of 63.5), although the overall reading remained near multi-year highs. The June figure also came in lower than May’s reading of 64.0. Survey respondents were bullish on many components of the overall index, including remaining order backlogs that needed to be filled and pricing power. However, supply managers did point to the proper availability of labor as a chief concern.  The labor component was down sharply from previous months. In sum, the overall index points to an economy firmly on the mend, but one that is suffering from some of the imbalances often associated with a shock to the economy’s supply/demand equilibrium.

“The U.S. economy’s services sector continues on its robust recovery trajectory, although the June figures were not quite as good as expected. Interestingly, services supply managers, like their manufacturing counterparts, have begun to highlight the difficulty in rebuilding their post-crisis workforces; a situation that may take a while to resolve,” explained LPL Director of Research Marc Zabicki.

View enlarged chart.

As we look at various elements of this survey, it appears extended unemployment benefits may be contributing to some of the labor supply constraints pinpointed by supply managers. This may be most acutely felt in the services sector, where many businesses shut down, furloughed employees, and now must re-hire again.

Meanwhile, we are particularly interested in the prices component of this survey. If we look at the history of the ISM Services survey over the last 15 years, the much-talked-about rise in prices is not much different from what was witnessed as we exited the Financial Crisis (2009-2010).  The prices component is clearly higher today, although prices did spike to a high level in 2010 before settling back down as supply/demand elements of the economy found an equilibrium. We would anticipate the same to occur this time around as post-COVID supply challenges correct.

Overall, this report does not change the broad picture of a robust economic recovery, but service sector business are still facing some meaningful but likely temporary challenges to ramping back up.

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

Market Blog Posted by lplresearch

Wednesday, July 7, 2021

To quote the great Frank the Tank from Old School, “We’re going streaking!” Although Frank had another idea, stocks have been streaking in some historic ways, both near-term and longer-term.

Let’s start with the more recent action. The S&P 500 Index was recently higher seven consecutive days for the first time since last August, but even more impressive is it made new highs all seven of those days. You have to go back to June 1997 to find the last time we saw a streak like that! Incredibly, this has happened only eight other times since 1950 and stocks were higher a year later every single time.

See enlarged chart.

Stocks have also streaked to monthly gains for five consecutive months. “Although a five month win streak for the S&P 500 feels like a lot,” explained LPL Financial Chief Market Strategist Ryan Detrick, “a year later stocks were higher 25 out of 26 times after such long monthly win streaks. So the real strength could only be beginning.”

As shown in the LPL Chart of the Day, five month win streaks tend to be followed by strong performance over the next 12 months.

See enlarged chart.

Lastly, the S&P 500 has streaked to five consecutive quarterly gains. Some more color on this:

• The average return a year later has been only 6.6% because of very poor returns during the Great Financial Crisis. The median return a year later, though, is a solid 10.4%.
• The last time it was up five straight quarters was in the fourth quarter of 2016, when it went on to gain nine consecutive quarters.
• One year after that streak of five quarters stocks managed to gain more than 19% a year later.
• It has gained more than 5% for five consecutive quarters. Only from Q4 1953 through Q4 1954 did that last happen and stocks gained another 26% the following year.

See enlarged chart.

There is no doubt that stocks have put up some amazing streaks lately and history would suggest the path of least resistance remains higher. We listed some potential near-term worries in Three Things That Worry Us, but bigger picture going out a year or so, this bull market looks alive and well and these recent streaks do little to change that.

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 Strategy Blog Posted by lplresearch

Thursday, July 1, 2021

We believe one of the biggest mistakes investors can make is not adequately understanding the risk they are potentially taking in their fixed-income portfolios.  This is perhaps particularly true today, as the prevailing low-interest-rate environment has caused investors to increasingly seek exposures in higher-yielding fixed-income securities.  The problem is that while returns in these higher-yielding securities (what we call “non-core” bonds) can be attractive, they often carry higher degrees of risk and higher correlations with the equity market.  What does that mean?  Well, in times of higher market stress, some of these bond segments can act more like stocks than they do bonds.

We often find ourselves warning investors to be cognizant of exposures to those non-core bond segments that do not provide an adequate buffer against equity risk.  Segments such as U.S. corporate high yield, emerging market debt, bank loans, and non-agency mortgage debt can be nearly as volatile as equities at the most inopportune times (think March 2020).  Instead of relying too heavily on these segments, we believe investors should ensure adequate exposures to “core” bond segments (like those in the Bloomberg Barclays U.S. Aggregate Bond Index). These core segments may act as better buffers against higher-risk portions of the portfolio.

“One of the most important pieces of advice we can give to investors, especially those that have material equity exposure in their portfolios, is to ensure that the bonds they own act like bonds when markets endure spikes in volatility.  We believe the first step in this is to understand how much non-core bond exposure they have and to set limits on that relative to the rest of their fixed-income portfolio,” explained LPL Financial Director of Research Marc Zabicki.

In our view, one way to ensure bond exposure is adequately balanced is to set a limit on the amount of non-core bond exposure one is allowed.  At LPL Research, our tactical limit on non-core bond exposure is 25% of our total bond portfolio in most cases.  For some investors, this limit may vary, depending on personal income and return needs.  However, such a governor on your portfolio may be a good way to improve your understanding of your personal bond exposures and keep your total portfolio risk profile tightly managed.  In today’s market, with bond spreads at historically low levels (as shown below), we believe it is a good time to double-check your bond portfolio and guard against the unintended consequences that may be lurking as a result of excessive non-core bond exposure.

See enlarged chart.

For more of our thoughts on this, please watch our latest LPL Street View below with Marc. You can watch it 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 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

Market Blog Posted by lplresearch

Wednesday, June 30, 2021

Incredibly, 2021 is halfway over! There’s a long way to go, but it has been a great year for stock bulls, a historically bad year for bonds, and a great year for the economy. We recently found these four charts that we think all investors need to see as we head into July.

As we turn the page on June, it is important to remember that the third quarter historically is the worst quarter of the year. The good news though is the weak performance opens the door to the historically very strong fourth quarter.

See enlarged chart.

Now here’s the catch about the third quarter, July is usually strong. It is August and September you need to worry about. “July is historically a really good month for stocks during the usually dull summer months,” explained LPL Financial Chief Market Strategist Ryan Detrick. “In fact, during a post-election year, it is the best month of the year, up 2.2% on average since 1950.”

See enlarged chart.

Apparently, stocks like July 4^th, as the few days leading up to the holiday are some of the best of the year for the S&P 500 Index.

See enlarged chart.

Lastly, a good start to a year is usually a good sign for the rest of the year. As shown in the LPL Chart of the day, when the first six months for the year gain more than 12.5% (like 2021 will likely do), then the final six months do extremely well, with a median return of 9.7%, nearly twice the median return of 5.0% for any given year.

See enlarged chart.

Hope you enjoyed these four charts and here’s to a happy and safe July 4^th holiday!

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, June 29, 2021

While most of the focus lately has been on the volatility in the Treasury markets, the corporate credit markets continue to tell an encouraging story about the economic recovery. The traditional U.S. corporate credit bond market represents roughly $8.5 trillion in debt outstanding from both investment grade and non-investment grade issuers. Companies, large and small, access the credit markets to help fund operations and improve their financial health. Last year, these companies issued more than $2.3 trillion in debt, which was one of the strongest issuance years ever. The robustness of the corporate credit markets is a positive sign for both equity and credit market investors.

“Credit markets tends to lead equities lower during market stresses so that we’re not seeing volatility in the credit markets is a good sign for equity investors as well,” noted LPL Financial Fixed Income Strategist Lawrence Gillum.

As seen in the LPL Research Chart of the Day, since the COVID recovery, option-adjusted spreads (OAS) remain well-behaved. OAS represents the compensation for holding risky debt and, generally speaking, corporate credit OAS is a good barometer for the overall health of the economy. So, that both investment grade (blue line) and non-investment grade (orange line) companies have seen their borrowing costs fall suggests the corporate sector is in good shape. Additionally, despite volatility in the Treasury markets, we haven’t seen the same volatility in corporate credit spreads, which is a good sign that the economic recovery is well underway. During periods of economic stress, such as in spring 2020, credit spreads widened, whereas now we continue to see spreads grinding tighter.

See enlarged chart.

From a fundamental perspective, broadly speaking, corporate balance sheets are in good shape. Leverage ratios have increased recently, but net-debt ratios (debt minus cash on the balance sheets) remain within historical norms. Also, due to the record amount of issuance over the last few years, companies were able to refinance debt at very low interest rates and push back when that debt was set to mature. As such, interest expenses have come down and now many corporations don’t need to access the capital markets anytime soon. What could push spreads wider? Outside of a broad macro event, we continue to watch how these companies manage capital allocation decisions. Increases in M&A activity, share buybacks and outsized dividends are all risks to bondholders and things that could push spreads higher.

So, while the fundamental landscape for corporate credit markets remains favorable, valuations remain stretched. All-in yields and spreads remain amongst the lowest they’ve ever been. We remain neutral on investment grade corporates but prefer the short-to intermediate maturity part of corporate curve. We’re less sanguine on non-investment grade bonds solely because of valuations. We still think equities offer more upside than non-investment grade bonds the remainder of 2021.

IMPORTANT DISCLOSURES

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

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

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

Friday, June 25, 2021

As growth-style stocks extend their recent rally relative to value, we’ve been increasingly asked whether the value rally in place since September 2020 is durable. In short, we think that it is.

Factors still supporting value? Above-trend economic growth that we expect to extend through 2022; the prospect of higher interest rates due to economic improvement and higher inflation; a strong earnings picture; and valuations that still look fairly cheap versus growth stocks relative to history.

“With the growth reversal somewhat overextended near term and technical support in play, we are looking for this to be a potential rally point for value as the fundamentals reassert themselves,” commented LPL Research Chief Market Strategist Ryan Detrick.

As shown in the LPL Chart of the Day, the medium-term trend favoring value that started in September 2020 is still intact, but growth has rallied strongly relative to value since mid-May. (In the chart, the relative strength trending higher indicates outperformance by the Russell 1000 Growth Index relative to the Russell 1000 Value Index.) Several technical factors favor value potentially reasserting itself. Both the 200-day moving average and proximity to recent highs can act as price levels that potentially pull traders back in to the value trade. In addition, near-term conditions for growth stocks relative to value are now overbought, as measured by the relative strength index (RSI) technical indicator seen in the bottom panel.

View enlarged chart.

Longer-term conditions may also favor value. Since 2000, the relative performance of growth versus value has gone through two major phases: between 2000 and 2006 value mostly outperformed; since then growth has mostly outperformed. It has essentially taken since 2006 for the value rally between 2000 and 2006 to completely unwind. At the same time, that puts the relative strength between the styles at the long-term support point from the end of the tech bubble. The long-term underperformance trend is a contributor to historically attractive valuations for value relative to growth.

While we favor value looking at least to the end of the year, we still see long-term secular trends that may favor the technology-oriented growth stocks in the long run and don’t believe in an inherent value premium, but neither do we believe that growth will outperform value most of the time. It’s all about the economic and market environment despite growth stocks outperforming value for most of the last fifteen years. Given current conditions, we still believe fundamentals favor value stocks right now, as does the technical trend despite the recent growth rally.

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

Thursday, June 24, 2021

As recent economic data shows, the robust post-COVID recovery has brought about a historic rebound in U.S. manufacturing activity. Pent-up demand and low inventories of capital goods have caused companies to fire up their machines at record levels, and manufacturing supply management professionals have responded with relative delight in recent surveys. Both the IHS Markit and Institute for Supply Management (ISM) Manufacturing Indices have been robust across the board, as new order growth, hiring plans, and the backlog of orders point to better health in the sector. The downside…higher prices, as purchasing managers’ queried in the survey pinpointed high levels of input cost inflation brought about by a broad-based spike in raw materials prices. The latest survey results show the June IHS Markit U.S. Manufacturing PMI at a new all-time high of 62.6, which compares to the Bloomberg consensus estimate of 61.5 and May’s reading of 62.1.

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“The demand for goods and the rebound in manufacturing activity have been remarkable as folks seem determined to get on with their lives. We know that U.S. consumers like to spend, and it seems like they are more than willing to make up for lost time.” explained LPL Financial Director of Research Marc Zabicki.

We believe the latest IHS Markit manufacturing readout may foretell a good result for the ISM benchmark’s expected release on July 1. That index series has also been near record levels, although just below its all-time high. The long-term ISM chart paints a fairly good picture of past peaks and troughs and the roller-coaster of activity that can occur in the manufacturing sector. In fact, the recent highs in the two manufacturing indicators we have mentioned have us looking ahead to an eventual deceleration in activity, which could come later this year. This deceleration could be brought about by the ultimate slowing of demand for some of the hottest items of late: automobiles, appliances, and technology devices. This doesn’t mean we are souring on the prospect for economic growth in the U.S….only that peak activity, as we are witnessing now, which is usually followed by an eventual slowdown in demand. We should see some of this become visible via U.S. gross domestic product (GDP) growth that is expected to advance at a slower pace in late 2021 and early 2022.

View enlarged chart.

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