Archive

Economic Blog Posted by lplresearch

6/4/2021

Before diving into today’s jobs report for May, it will be a useful exercise to recall the curveball that April’s report threw at investors.

One of the more hotly contested topics investors have been debating recently is what to make of the jobs report released one month ago, where the consensus expectation was for 1,000,000 new jobs and we only got 266,000 (since revised up to 278,000). On the one hand, data releases are volatile by nature and it is possible that the large miss could have been broadly dismissed as a “one off” among a package of otherwise very healthy economic data. On the other hand, it did confirm anecdotal evidence of difficult hiring conditions facing companies and reinforced the notion that some workers may be reluctant to return to the workforce for a whole host of reasons. Moreover, if the April report really did unearth new evidence of a weaker-than-expected jobs market in this latter scenario, should we view the effect as temporary or does it have staying power that could spell new trouble for the overall economic recovery?

Against this backdrop, investors were hoping that today’s May jobs report would go a long way towards providing some definitive answers to these important questions.

It did not. But, that might actually be a good thing. Here are some key takeaways:

• The U.S. Bureau of Labor Statistics’ May employment report revealed that the domestic economy added 559,000 jobs in May, slightly below Bloomberg-surveyed economists’ median forecast for a gain of 675,000. The prior two months also received net positive revisions of 27,000 jobs.
• The unemployment rate fell more than expected to 5.8%, though that was paired with a disappointing drop in the labor force participation rate, which moved from 61.7% to 61.6%.
• Average hourly earnings rose 0.5% month over month, again signaling lower-wage workers did not rejoin the workforce to the degree expected. More new lower-wage jobs would be expected to put more downward pressure on wage increases.

“It is hard to view 559,000 added jobs as a disappointment, but it does leave something to be desired,” explained LPL Financial Chief Market Strategist Ryan Detrick. “There is strong potential for job prints in excess of one million over the coming months, but the truth is as strong as the economy is right now, the employment backdrop is clearly lagging what we were all expecting just a few months ago.”

As seen in the LPL Chart of the Day, May’s jobs number did jump above April’s disappointment, but still came well short of making a fresh new high for 2021.

View enlarged chart.

Where do we go from here? The US economy is still 7.6 million total payrolls shy of its peak prior to the recession, and given the magnitude of that number, we still believe there is the potential for strong upside surprises for at least the next several months. Several catalysts should also lend a helping hand in the near future. Enhanced unemployment benefits may be deterring lower-wage workers from returning to the labor market, as they reduce the relative attractiveness of a paycheck from an employer. In the last month, about half of all states have started eliminating these added benefits in order to reduce the disincentive. We believe this should show up in the data starting with the June employment report. Also, schools might be closing for the summer, but daycare centers are reopening more broadly, freeing parents up to find jobs. Warmer weather, ever-improving vaccination trends, and increasing comfort reengaging in normal activities should all play their parts as well.

The labor market will always be inextricably linked to the inflation outlook, this cycle perhaps more than past cycles, and for many that is the real story today. The Federal Reserve (Fed) has made it clear it will tolerate near-term inflation overshoots in order to achieve “substantial further progress” towards its employment goals before it begins taking measures to combat higher inflation. Recent hotter-than-expected inflation reports have increasingly turned the spotlight towards the Fed’s timeline for reducing their asset purchases, which, given their stated position, will depend on strong payroll reports. As such, we find ourselves (to a degree) in a “good news is bad news” scenario, as strong labor market readings could hasten the Fed’s timetable to begin normalizing monetary policy.

Today’s report likely did little to convince the Fed that the labor market is closer to meeting its “substantial further progress” goal on employment, and therefore, all else equal, will not compel them to consider reducing asset purchases sooner rather than later. There is much ground still to be made up in the labor market, and we believe the Fed will need to see a string of strong reports, likely in the one million range, before it begins to take action. From a Fed intervention standpoint, today’s employment report likely found a sweet spot, and the early indications are that equity markets are breathing a sigh of relief.

For a deeper dive into the inflation picture, check the blog on Thursday, June 10, when data for the Consumer Price Index (CPI) measure of inflation is set to be released.

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

Economic Blog Posted by lplresearch

Thursday, June 3, 2021

The U.S. economy is opening up and overall sentiment on Main Street is the strongest it’s been since our earliest analysis in 2005, according to LPL Research’s proprietary Beige Book Barometer (BBB). The result is based on our analysis of the Federal Reserve’s Beige Book, a publication released two weeks before each Fed policy meeting that captures qualitative observations made by community bankers and business owners—what we like to think of as “Main Street” rather than “Wall Street.” The BBB gauges Main Street’s sentiment by looking at how frequently key words and phrases appear in the text.

In the most recent Beige Book, “strong” words were near their highest since we first began tracking data in 2005 while weak words were their lowest on record, resulting in the strongest overall sentiment reading since inception. The strong reading is likely driven more by a change in direction than in overall activity, but even that is a welcome shift.

“The country and the economy are going through a disruptive but positive change as most COVID-related restrictions are lifted and the economy reopens,” said LPL Financial Chief Market Strategist Ryan Detrick. “Sentiment is up and that’s a great sign for the direction of the economy.”

View enlarged chart.

This was an important Beige Book in other ways. Mentions of COVID-related words (virus, COVID, pandemic) fell to their lowest level since the March 2020 Beige Book, when the words first started to appear. More concerning, words related to inflation also rose to their highest level since our earliest analysis. The downside of the economy’s rapid acceleration has been a mismatch between demand, which can ramp up quickly, and supply, which comes on line more slowly, while labor markets have also been slow to keep pace with reopening.

Overall, the fundamental backdrop for the economy remains positive. Supply chain disruptions can slow the pace of the economic rebound but are likely temporary, while we expect reopening to be enduring. There is still some risk around variants, however, and full supply chain relief will likely need support from accelerated global vaccine distribution. US economic acceleration will probably peak in the second quarter, but there’s still plenty of scope for growth to moderate and still remain above average. Much of the positive news is already priced in for equity markets, which are forward looking, and gains may not come as easily, but we still see solid potential for upside as the economy continues to rebound.

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, June 2, 2021

Although there was some notable weakness in the middle of May, the S&P 500 Index was able to rally late in the month to finish with a modest gain. Incredibly, this was the eighth year out of the past nine that stocks gained during in May. Who said Sell in May?

View enlarged chart.

As we noted a month ago, the worst six months of the year indeed are May through October, so we are still in the thick of a potentially challenging period based on seasonality. “After a nearly 90% rally off the lows, stocks could be ripe for a pullback, especially during the historically weak month of June,” explained LPL Financial Chief Market Strategist Ryan Detrick. “But with the improving economy, coupled with historic fiscal and monetary stimulus, we expect any weakness to be short-lived.”

View enlarged chart.

Here are some stats to think about regarding S&P 500 performance in June:

• Since 1950, June is the 4^th worst month of the year (September, February, and August are worse).
• It has been higher the past 5 years in a row, the longest since a stretch of 6 in a row in the late 1990s.
• The past 10 years, though, June was up 1.0% on average, ranking as the 7^th best month.
• According to Sam Stovall of CFRA, only 5 market declines in excess of 5% started in June versus an average of 8 for all 12 months (since WWII). In other words, it isn’t common for major market weakness to start in June.
• Building on this, when the S&P 500 is lower in June, it is down by 2.9% on average. This is the second smallest average loss, with only December better at -2.5%.

We wouldn’t be surprised at all if stocks took a well-deserved break in June, but this month is rather misunderstood, as a massive sell-off or the start of significant weakness isn’t likely, as that isn’t what June typically brings.

Lastly, last Wednesday marked the 100^th trading day of the year for the S&P 500. In fact, the S&P 500 was up more than 10% on the 100^th day, which historically is a great start to the year, but also has meant continued strong performance the rest of the year is quite normal.

As shown in the LPL Chart of the Day, when stocks are up more than 10% on day 100, the rest of the year has been higher 84.2% of the time and up 8.6% on average, both well above what the average year does. We continue to recommend an overweight to equities and underweight to fixed-income position relative to investors’ targets, as appropriate.

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 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 1, 2021

The amount of negative yielding debt is shrinking and that’s a good sign that the global economic recovery is well underway. While negative yielding debt became prevalent in many non-U.S. countries after the Global Financial Crisis of 2008/09, the amount had surged to over $18 trillion due to the accommodative monetary policies adopted immediately after the COVID-19 shutdowns. As economies recover though and with the eventual normalization of monetary policy, interest rates have started to move higher and now many developed non-U.S. countries have bond yields at multi-year highs.

As seen in the LPL Research Chart of the Day, the amount of negative yielding debt continues to trend lower. As mentioned, at one point there was over $18 trillion of negatively yielding debt but that amount has come down and currently stands at just over $13 trillion. The average yield associated with all that debt has steadily moved higher as well, from -0.40% at its lows to -0.27% now. The majority of negatively yielding debt has a maturity of five years or less so as that debt continues to mature, the amount of negative yielding debt outstanding should fall as well. Interestingly, all that negative yielding debt isn’t just issued by foreign countries. As of May 28, there is nearly a trillion dollars of corporate debt—including some issued by U.S companies—with negative yields. That is, investors are paying some companies to issue debt.

View enlarged chart.

“Foreign investors in U.S. Treasury markets are an important reason we haven’t seen U.S. 10-year yields move even higher,” noted LPL Financial Fixed Income Strategist Lawrence Gillum. “As the amount of negative yielding debt trends lower though the incentive for foreign investors to invest outside their home markets decreases, which could put upward pressure on our Treasury yields”

So what does this mean for U.S. fixed income markets? Despite rising yields in their home countries, many foreign investors are still better off investing in the U.S. Treasury market even after taking into consideration the costs to hedge out currency risk. That is, when foreign investors buy U.S. Treasuries, they take on the risk of the U.S. dollar as well. Foreign investors don’t want the currency risk so they will hedge that risk back into their home currency to isolate only the yield advantage of holding U.S. Treasuries. So, even after the added cost of hedging back into their home currency, many non-U.S. investors are able to pick up additional yield over their home country 10-year Treasury, which helps increase returns. As the amount of negative yielding debt decreases though, it becomes less likely that we’ll see the amount of crossover foreign investors needed to help keep our Treasury yields from climbing 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 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, May 26, 2021

Congrats to Phil Mickelson on his amazing victory on Sunday at the PGA Championship at the age of 50, officially the oldest person to ever win a golf major championship. This was Lefty’s 6^th major victory, leaving him just a win at the U.S. Open from completing golf’s Grand Slam and winning all four majors. He turns 51 the day before teeing off at Torey Pines for next month’s U.S. Open where he will try to join Gene Sarazen, Ben Hogan, Gary Player, Jack Nicolaus and Tiger Woods as the only players to ever complete the Grand Slam.

First things first, does the victory tell us anything about future equity performance? “Of course his victory is totally random in regards to stock performance, but we think it is worth at least noting that stocks gained each of the previous 5 years he won a major,” explained LPL Financial Chief Market Strategist Ryan Detrick, “So at least it isn’t a bad sign!”

View enlarged chart.

You have to hand it to Phil for his amazing victory at the age of 50, beating golfers half his age, while also hitting it further than most of them. His physical transformation is astonishing. Thanks to his new diet (he fasts 36 hours a week!) and exercise, he has turned back the clock and is in the best shape of his life at 50. He has also played in at least one major every year since 1990, which is the type of experience you simply can’t read in a book.

What can investors take away from Phil’s amazing victory? First off, we think it is being open to change. He changed his entire lifestyle to be able to compete with much younger athletes. But change isn’t always positive.

One of the best ways to show that things will change and you better be ready for it is this great chart from Credit Suisse that shows the size of various country stock markets relative to the rest of the world at the end of 1899 and then at the start of this year. Here are some major takeaways.

• The U.S. stock market made up 15% of the global market in 1899 and rose to 55.9% by 2021.
• The UK was the largest stock market in the world at 24% in 1899 but fell to only 4.1% in 2021.
• Japan’s stock market is 7.4% of the global market now but wasn’t even on the board back in 1899.

View enlarged chart.

Change is inevitable and investors can benefit from being open to it and prepared for it. Being close-minded won’t help you in your personal life or in your investments.

Experience is the second big takeaway from Lefty’s win. He knew how to react to the pressure, as he’s been there many times over the years. What is something that experienced investors might know that a novice doesn’t? We’d say it is knowing your history. Experienced investors understand that markets move in major cycles that can last decades or more. As shown in the LPL Chart of the Day, the S&P 500 Index can make new highs for decades at a time and then it can go nearly just as long without a new high.

View enlarged chart.

Some interesting stats on the chart above:

• The S&P 500 made no new highs for 24 years after the peak in 1929.
• From 1954 to 1968 the index made 371 new highs.
• Then the next 11 years it made only 35 new highs.
• This kicked off the bull markets of the 1980s and 1990s, which resulted in 509 new highs over the next 20 years.
• From 2000 through 2012 though the S&P 500 made only 13 new highs.
• We are now nine years into a cycle of new highs with 301 new highs, which history would say could be followed by many more years of new highs.

The final takeaway from Phil’s win is time can be your friend. “It all depends on your investment horizon, but it is important to remember that if you invest for the long-term, you’ll probably make a positive return on your investments,” according to Ryan Detrick. “In fact, the S&P 500 has been higher nearly two-thirds of all years, but that goes up to 80% over three years, and the index has never been lower over any 25-year investment timeframe.” How many people sold stocks during the depths of the pandemic last March, even though they likely didn’t need that money for many years, or even decades?

View enlarged chart. 

We hope you enjoyed this blog and here’s to Phil winning next month in San Diego and completing the Grand Slam!

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, May 25, 2021

Mortgage rates are still around all-time lows but they may be headed higher. The 30-year national average mortgage rate hit an all-time low of 2.82% back in February, but with the U.S. economic recovery in full swing, mortgage rates have started to move higher. The Bankrate 30-year national average mortgage rate is currently 3.1%; however, that is still well below the 20-year average mortgage rate of nearly 5%.

“Higher Treasury yields typically mean higher mortgage rates,” according to LPL Financial Fixed Income Strategist Lawrence Gillum. “We expect the 10-year yield to end the year between 1.75%-2.0% so mortgage rates may move higher from these levels as well, but will likely remain low by historical standards.”

As seen in the LPL Research Chart of the Day, the 30-year national average mortgage rate has historically tracked the 10-year Treasury yield plus 1.75%. The additional 1.75% is a rough estimate of the costs associated with originating a mortgage loan. In 2020, we saw a big divergence from the 10-year Treasury figure as interest rates moved sharply lower but mortgage rates only gradually drifted lower throughout the year. Constrained mortgage origination capacity, due to the COVID-19 uncertainty, was likely the reason mortgage rates didn’t move sharply lower as well. The mortgage industry has increased mortgage origination capacity recently so that the relationship between 10-year Treasury yields and mortgage rates has converged and we expect that relationship to continue. Thus, with our expectation of higher Treasury yields this year, mortgage rates are likely to increase as well.

View enlarged chart.

Low mortgage rates have certainly contributed to the strong demand for residential housing as well as elevated mortgage refinancing activity. While we think mortgage rates are likely headed higher from current levels, we don’t think mortgage rates will return to their historical average anytime soon. As such, barring an unforeseen macro event, housing demand is likely to remain strong in the near term.

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, May 21, 2021

After some shaky economic data releases in recent weeks, most notably the latest employment report, investors had turned their eyes towards Thursday’s Leading Economic Index (LEI) report for confirmation that strong underlying economic trends are still intact. Indeed, investors received the news they were hoping to, as the LEI strongly suggested that economic growth would continue at a strong clip.

On Thursday, May 20, the Conference Board released its April 2021 report detailing the latest reading for the 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. The index grew 1.6% month over month, following up March’s strong 1.3% rebound from a brief dip into negative territory in February. Moreover, the index’s nominal value made a new all-time high, overtaking the previous peak from January 2020 prior to the recession.

While the Conference Board did acknowledge that measures of employment and production have yet to fully recover, it stated that it expects economic growth to continue, and even accelerate, in the near-term. For now, at least, investors seem willing to chalk the latest employment report up to “choppy data.”

“High magnitude swings in recent economic data have likely contributed to the unease in markets recently,” said LPL Financial Chief Investment Strategist Ryan Detrick. “There are a lot of questions out there at the moment, but we think investors need to focus on the broader trend. We are at the beginning of a new economic cycle, which brings some unique near-term challenges, but the bottom line is that in aggregate the direction is unequivocally positive.”

As seen in the LPL Chart of the Day, overcoming a difficult winter, the LEI has bounced sharply the last two months. This confirms our call for a reacceleration in economic growth, which we anticipate will continue at least for the next few months.

View enlarged chart.

Eight of the ten components grew in April, while two were unchanged. Average weekly initial claims for unemployment insurance, stock prices, and the ISM New Orders Index represented the three largest contributors. Average weekly manufacturing hours and manufacturers’ new orders for nondefense capital goods, excluding aircraft, held steady in April.

Strong breadth among the underlying indexes reinforces our view of a broad reacceleration. With the majority of the most at-risk population fully vaccinated, and the rest of the population coming along quickly, economic reopenings have begun in earnest. The Centers for Disease Control and Prevention’s recent scaling back of mask mandates should only get the ball rolling even quicker. And while there will always be the risk of one-off disappointments from economic data releases, we believe the overwhelming majority of the evidence points towards a promising second leg of this economic 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.

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

Thursday, May 20, 2021

The global economy continues to pick up speed as vaccine distribution gradually allows many countries to lift restrictions. The recovery, however, remains uneven, as some regions still struggle to contain the pandemic in the face of limited vaccine supply. But even for struggling regions, a rise in overall global demand is helping to spur economic activity.

The OECD’s Composite Leading Indicators (CLI), which aggregate economic data that tends to lead changes in economic activity, point to steadily improving growth for most of the global economy. As shown in the LPL Chart of the Day, China and the U.S. may have the best prospects for near-term growth, but the data for all the regions included in the chart has improved over the last six months.

“The pandemic is by no means over, but economic recovery is increasingly becoming a global story,” said LPL Financial Equity Strategist Jeffrey Buchbinder. “The U.S. is still leading the recovery for major developed economies, but investors may increasingly find more pockets of opportunity abroad.”

View enlarged chart.

S&P 500 Index gains have dominated both international developed markets (MSCI EAFE Index) and emerging markets (MSCI Emerging Markets Index) over the last three years, but over the last year the S&P 500 has lagged behind its international counterparts, with emerging markets actually leading over that period.

Lower return dispersion among major geographical regions in the last year may be a sign of things to come as markets potentially come to focus less on where recovery is taking place and more on how to participate in the dynamics of the recovery. We still favor emerging markets and the U.S. over international developed markets, but our conviction increasingly tilts away from a focus on geography and more towards those areas of the market that might benefit from accelerating growth, some inflationary pressure, and gradually rising interest rates, such as cyclically-oriented sectors and financials. For our thoughts on areas of the market that may benefit in an inflationary environment, see our recent blog, Where to Invest with Higher Inflation.

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, May 18, 2021

After the April consumer price index (CPI) release that surprised to the upside, indicating consumer prices in some areas of the economy are increasing at a faster pace than many expected, the discussion has shifted to the need for the Federal Reserve (Fed) to potentially normalize monetary policy earlier than they’ve indicated. While we still think the Fed will wait until some of these noisy economic data points have passed to provide clarity on policy normalization, we believe the discussion around tapering will continue to be an important financial story.

What is tapering?

In the immediate aftermath of the pandemic-induced economic shut-downs, the Fed effectively cut short-term interest rates to zero and reinstated a number of bond buying programs to help provide liquidity and financial stability to markets. While a number of these programs have expired, the Fed continues to buy $80 billion of Treasury securities and $40 billion of mortgage-backed securities (MBS) every month. Moreover, the Fed has indicated a willingness to continue to buy bonds in the stated amounts until “substantial further progress” has been made towards full employment and price stability (inflation).

Some have argued that, given the CPI report in particular, substantial further progress has already been made on inflation and the economy is at risk of “running too hot.”  Therefore, the Fed no longer needs to support markets and in fact is adding to financial instabilities by continuing to provide unneeded liquidity. Thus, the argument is that the Fed should start to reduce (taper) the size of these bond purchases sooner rather than later.

“The Fed is in a difficult situation right now,” according to LPL Financial Fixed Income Strategist Lawrence Gillum.  “Withdrawing policy support too soon may hamper the economic recovery but waiting too long may cause the economy to run too hot. We think the Fed will be patient before reducing bond purchases but their job is getting tougher.”

Why is tapering important?

As seen from the LPL Research Chart of the Day, the Fed’s balance sheet has grown tremendously over the past year with the central bank now owning over $7,000,000,000,000 of Treasury and mortgage securities. Certainly, the buying behavior of the Fed has helped support the Treasury and mortgage markets and has kept yields and mortgage spreads low. As the Fed reduces its purchases, though, we would expect yields and mortgage spreads to incrementally increase due to the removal of support. As yields increase, mortgage and other borrowing rates would likely increase as well and potentially slow down consumer activity.

View enlarged chart.

Our base case is the Fed will continue to follow the stated bond buying program for the remainder of the year, and then incrementally curtail purchases throughout 2022. This should continue to help support the Treasury and MBS markets and help digest the record amount of Treasury securities expected to come to the market this year.

That said, there is a growing chance that the Fed will start to reduce its purchases of MBS this year as more attention has been paid recently to the ongoing strength of the housing market. Indeed, the continued purchases of MBS have likely added to the increases in home prices this year. Nonetheless, withdrawing policy support should signal the Fed believes that the economic recovery is well underway and that markets can function on their own, which are clear positives, in our view.

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, May 14, 2021

So what is it like to go on CNBC? We’ll show that later, but in the meantime, here are a few charts that caught our attention recently.

Last week’s monthly nonfarm payroll was disappointing, but it usually takes a long time for jobs to come back after a recession, so maybe we shouldn’t have been so surprised. In fact, looking at the 10 previous recessions, it took 30 months on average to recover all the jobs that were lost. Given we still have 8 million jobs to make up this time, we could still be quite a ways away from getting the labor market back to where we were pre-COVID-19.

View enlarged chart.

The current bull market has tracked the start to the 2009 bull market nearly perfectly. “Be aware that right about now is when the 2009 bull finally took a break, falling more than 16% into the summer,” explained LPL Financial Chief Market Strategist Ryan Detrick. “We don’t expect that type of a pullback this time, but after an 89% rally, maybe a pullback or consolidation is in the cards.”

View enlarged chart.

Copper is breaking out to new highs after consolidating for 15 years. The last time it did that it eventually gained more than 150%. Every time is different, but with the global economy soaring back and demand for copper not ending anytime soon, we expect this industrial metal to continue to lead.

View enlarged chart.

We also keep an eye on the presidential cycle. We are now past President Biden’s first 100 days and choppy action with a new President in Office is perfectly normal right about now.

View enlarged chart.

The financial press has discussed the well-known “sell in May and go away” market saying, but did you know it actually starts on May 5^th? As the LPL Chart of the Day shows, the middle part of May is historically quite weak for stocks as the broadly weaker period begins. The calendar, you could say, isn’t doing anyone any favors even if the economy still is.

View enlarged chart.

Lastly, one of the top questions Ryan receives is, ‘What is it like to go on CNBC?’ Well, in our latest LPL Street View video we answer that question, along with some behind the scenes footage of Ryan’s recent CNBC hit. You can watch the full video below, or directly from our YouTube channel. Lastly, if you could give us a follow or a thumbs up, it would mean a lot. Thanks for watching!

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