US investment-grade bonds had a solid 2020 despite a tumultuous year overall. The broad Bloomberg Barclays US Aggregate Bond Index had a total return of 7.5%—not as strong as 2019’s 8.7% but its fifth-best year in the last 20 and the best two-year stretch since 2001–02.
“It was another good year for bonds in 2020, and some of the highest-quality areas of the bond market performed the best,” said LPL Financial Chief Market Strategist Ryan Detrick. “But like stocks, it was really the tale of two 2020s—before and after March 23.”
As shown in the LPL Chart of the Day, by the time 2020 wrapped up, there wasn’t a whole lot of dispersion among major segments of the bond market—but for riskier credit-sensitive bonds in particular, the path to getting there was a roller-coaster ride.
In general, more interest-rate sensitive sectors, such as Treasuries, Treasury Inflation-Protected Securities (TIPS), and investment-grade corporates were among the sector leaders for the year.
Despite the large bounce back by some of the most credit-sensitive bond sectors, such as emerging market debt, bank loans, high-yield corporates, and preferreds, the bond sectors didn’t match the rebound in the S&P 500 Index. At the same time, for income-oriented investors, these higher-yielding sectors did offer advances in 2020 while still providing an attractive yield.
Treasuries saw only a slight advance after March 23, 2020, but their performance over the first half of the year highlighted their potential value as a portfolio diversifier.
We do not expect 2021 to look like 2020. Treasury yields have started the year significantly lower than in 2020 and may rise as the economy continues to turn around and inflation normalizes or even starts to run a little hot. Based on these factors, we have a year-end 2021 forecast range of 1.25–1.75% for the 10-year Treasury yield. If we hit this range, it would create a headwind for rate-sensitive areas of the bond market. (Bond prices fall when their yields rise.) High-quality bonds are likely to continue to provide some downside protection if the stock market becomes volatile again, but after two consecutive years of solid returns, bond investors may need to lower their expectations.
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
The S&P 500 Index, Dow Jones Industrial, and Nasdaq Composite indexes, continued their November run in December. As noted last month, November was a record-breaking month for equities, thanks to positive vaccine news, a strong third quarter earnings season, and a likely split Congress. Even in the wake of weak economic data, market participants are looking forward to a new year and a potentially better economic landscape.
Information Technology Sprints Ahead While Financials Rebound
Financials were the best performing sector for December. The sector had been challenged for much of the year by the rate environment as well as the potential for more commercial and consumer loan defaults. Improved recent performance has been supported by an improved timeline for an economic recovery and a steepening yield curve (the difference between long-term and short-term rates).
Technology also had a solid December, continuing its dominance this year, returning over 43% year to date. This sector has benefitted from COVID-19-related demand for products and services such as remote learning, meetings, and entertainment.
Energy returned over 4% in December, following up on its strong run in November. The sector has been a major detractor to S&P 500 performance this year and finished down over 30% year to date.
Utilities Power Back
After two straight positive months in September and October—the only sector to accomplish that feat—utilities earned a marginally positive return and ended both December and November as the worst performing sector.
International Market Resilience
Like their domestic counterparts, international equities finished the month solidly higher. Emerging markets stocks, measured by the MSCI Emerging Markets (EM) Index, outperformed developed market equities, as indicated by the MSCI EAFE Index. Nevertheless both indexes returned over 4.5% for December.
Small Cap Strength
As we have noted during previous Weekly Market Performance blogs, small cap stocks have been standout performers recently. The small cap Russell 2000 Index outperformed all the major market US and overseas indexes for December. For more of our thoughts on small caps, please read Weekly Market Commentary: Three Reasons We Like Small Caps.
Fixed Income, Currencies, and Commodities
The bellwether Bloomberg Barclays US Aggregate Index finished the month fractionally higher. Major bond sectors mirrored the broad index’s performance in lockstep. High yield bonds, designated by the Bloomberg Barclays High Yield Index, finished the month a little less than 2% higher. International bonds, denoted by the FTSE World Government Bond Index, and emerging markets debt, measured by the JP Morgan Emerging Markets Bond Index (EMBI), also ended the month higher.
Commodities were solid performers with the exception of natural gas. Natural gas has experienced much volatility during the fourth quarter of 2020. The commodity finished 32.8% higher in October, fell 14.1% in November, and gave back an additional 12% in December. Copper finished the month in the green gaining over 1%. Gold and silver ended higher to close out December with silver the standout, returning over 12%.
US and International Economic Data Recap
Conference Board’s Leading Economic Index (LEI). The Conference Board’s Leading Economic Index (LEI) increased 0.6% month over month in November. This follows a 0.8% increase in October along with 0.7% increase in September. The growth in the November LEI fell to its slowest pace in five months. New orders for manufacturing, average weekly initial claims for unemployment insurance, residential construction permits, along with equity prices were the strongest positive contributors to November’s LEI. Declining manufacturing working hours along with consumers’ outlook for the economy weighed on the index.
Inflation. Inflationary pressure remained tame in November, with the core Consumer Price Index rising 1.6% year over year, increasing fractionally on a month-over-month basis. Producer prices, measured by the core Producer Price Index, increased just under 1% year over year. This was less than expected and shows that producers are having marginal success increasing prices as the economy tries to recover from the impact of COVID-19. Inflation has risen slowly from low levels, but may still reach the Federal Reserve’s (Fed) inflation target by mid-year, at least temporarily, as the early impact of COVID-19 rolls off the year-over-year numbers.
US Consumer. The Conference Board’s Consumer Confidence Index fell in December from November’s reading, missing analysts’ consensus, and currently remains well below the pre-COVID-19 report from February 2020. The Present Situations Index declined sharply whereas the Expectations Index increased, reflecting the near-term impact of the surge in COVID-19 cases, but the improved longer-term prospects from more widespread vaccine distribution. In addition, US holiday sales increased over 2% from November to December 24th. This increase was less than what market participants expected and mirrors the near-term concerns in the consumer confidence data.
US Home Sales. Sales of previously owned US homes declined last month for the first time in six months. This may signal that surging prices and a low supply could be curbing demand. Median selling prices have risen over 14% year over year, potentially pricing some buyers out of the market. For more of our thought on housing prices, please read the LPL Research Blog, Housing Data Continues to Surge. This increase in home sales should help spending on home amenities as well, something that will be watched by market analysts.
US Business. The National Federation of Independent Business (NFIB) Small Business Optimism Index declined in November by over 2 points but was still above average. Moreover, the NFIB noted that the November’s uncertainty reading declined as well. Given the current COVID-19 climate, small business owners are dealing with major uncertainties, especially amid increased restrictions at both the state and local levels.
Federal Reserve Open Market Committee (FOMC). Following its December meeting, the FOMC, the Federal Reserve’s (Fed) policy arm, announced asset purchases would continue at their current pace and the Fed’s policy rate would remain at a target range of 0–0.25% but sharpened its guidance on how long it would continue its bond purchase program, also known as quantitative easing (QE). Fed Chairman Powell also noted that the Fed has the ability to buy longer-maturity bonds in the future, as some market participants have desired, to further help the economic recovery.
US Employment Claims. The US unemployment rate still remains high compared to history. COVID-19 continues to play an adverse role on service industry employment in particular. Even though the unemployment rate has declined from a peak of approximately 15%, we are quite far from having an economy at full employment. The distribution of a COVID-19 vaccine should help the employment landscape.
Looking Ahead
Investors will be following the run-off elections for the two Georgia senate seats this week. The result will determine which party controls the US Senate and whether there will be split-party rule.
Even with much positive news on the COVID-19 vaccine front, COVID-19 number spikes are still weighing on investors’ minds. As is evident from the economic reports, the effects of government restrictions on economic growth will also be closely watched by market participants, although the emphasis will remain forward looking. How we manage COVID-19 in the wake of ramped-up vaccine production and distribution will have a major influence on the investment landscape in 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. All market and index data comes from FactSet and MarketWatch.
Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
U.S. Treasuries may be considered “safe haven” investments but do carry some degree of risk including interest rate, credit, and market risk. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
For a list of descriptions of the indexes referenced in this publication, please visit our website at lplresearch.com/definitions.
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
For many economic data series, 2020 has been a roller coaster. Not for housing, however. The onset of the COVID-19 pandemic and social distancing measures jump-started the “nesting” behavioral shift away from urban apartments and into single-family housing in the suburbs, as households sought additional space.
As shown in the LPL Chart of the Day, the S&P CoreLogic Case-Shiller 20-City Composite rose 7.95% year over year (Y/Y) in October, marking the strongest y/y gain since 2014. A similar metric, surveyed by the Federal Housing Finance Agency, confirms the strong rise in home prices.
Nearly all of the 20 cities reported increases in home prices (although data from Detroit is delayed due to the pandemic), indicating prices are rising across the nation. The behavioral shift has also benefited from cyclical tailwinds like low inventories, historically low mortgage rates, and demographic forces, which have emboldened sellers to raise asking prices.
“It’s been remarkable to see that even during the height of the economic downturn, housing data has remained robust,” noted LPL Chief Market Strategist Ryan Detrick. “While the equity market has been more volatile, this data has underpinned the strength we’ve seen from homebuilders and materials stocks.”
While we don’t expect any near-term reversals of the health of the housing market, it wouldn’t be surprising for momentum to fade as the underlying data continues to set a high watermark for additional gains. Further, as the rollout of the approved COVID-19 vaccines continues, this may also begin to ease some of the behavioral pressure that has lifted demand for single-family housing.
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 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
2020 was an extraordinary year for the Federal Reserve (Fed). The Fed responded swiftly and decisively to the rapidly accelerating financial and economic uncertainty brought on by efforts to contain the COVID-19 pandemic. The current Fed was helped by precedents and policies created during the 2008-09 recession, but also went beyond them to address the specific economic needs of the current crisis. We are not on the other side of that crisis yet, although we’re certainly getting closer, but there’s at least enough perspective to look back at what we learned about the Fed and markets in 2020 as we head into 2021.
First Takeaway – Don’t Fight the Fed
“Don’t fight the Fed” may seem obvious now, but in the middle of the extreme uncertainty of March 2020, many market participants wondered if it would be true this time around.
“When I think about markets in 2020, the Fed’s Monday, March 23 rollout of all its new facilities sticks out as a key moment,” said LPL Chief Market Strategist Ryan Detrick. “It was unconventional policy with an uncertain outcome, but what was clear was that the Fed was making a statement. We upgraded our equity view the following week.”
The Fed’s influence is not unlimited and monetary policy is not a cure for all that ails the economy. Central banks have struggled for years to meet inflation targets and loose policy often seems to disproportionately support asset prices rather than the real economy while hurting savers.
At the same time, the Fed is at its best in a crisis, when its natural role as the lender of last resort and liquidity provider becomes especially important. How to respond to the needs of this crisis was not obvious. It took imagination and a willingness to push the boundaries of monetary policy. It wasn’t clear early that the new tools would work, but it was clear that the Fed would do whatever it could to support the economy.
Second Takeaway – The Fed Is Not Out of Policy Tools
With the 10-year Treasury yield already at a record low by the end of February 2020, some market participants thought the Fed was short on policy tools. It’s a refrain we continue to hear.
For this crisis, getting loans to struggling business and shoring up credit markets was essential. To get there, the Fed took a step closer to being a direct lender than it has in the past, taking a step toward acting more like a bank than a central bank for the financial system. It’s not really the role we want unelected Fed officials to play, but the Fed acted in coordination with Congress and the Department of the Treasury and it was probably the right policy for the right time. The Fed deployed other new policy tools as well. For example, the Fed directly bought corporate bonds in the secondary market for the first time, including via exchange-traded funds (ETF), which was also a first.
There certainly are, and should be, strict limits to what the Fed can do, but we would be reluctant to say they are ever out of policy tools. As we learned in both 2008 and 2020, if it seems that way it’s really just because the Fed hasn’t invented them all yet.
Third Takeaway – For the Fed, the Threat of Inflation Is Not What It Used to Be
This one may have the most consequences as the economy moves forward as the Fed moves out of crisis mode. For decades, the Fed worried about acting too late to control inflation, because once inflation gets going the economic costs of getting it back under control increase. The Fed’s current view is that the danger over the last three economic cycles, dating back to the early 90s, has probably been the Fed acting too soon rather than too late.
This change has been embedded in the Fed’s recently updated policy framework, released in August 2020. According to the new framework, the Fed has decided to allow inflation to run a little over the Fed’s 2% target without tightening monetary policy if it has been running under the target for a while, so that it averages 2% in the long run. The Fed still doesn’t want to act too late on inflation, but it now sees a buffer against acting too soon as more important than the risk the buffer creates of acting too late. We’ll have to see how this new framework plays out, especially in the back half of the new economic cycle, but the Fed’s intention is clear.
Final Takeaway – Don’t Forget 2020 as We Move Into 2021
The Fed was tested in 2020 with a unique economic crisis that, in its own way, was as challenging as 2008. So far the Fed has passed that test and helped the economy get back on steadier footing. At least for now, the Fed is signaling it will remain very supportive for some time to come. We’ll be keeping that in mind as we look back at 2020’s reminders that the odds favor moving with the Fed, not against it.
IMPORTANT DISCLOSURES
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.
References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
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
Brexit, the United Kingdom’s (UK) withdrawal from the European Union (EU), is making news again as it stumbles toward its apparent conclusion on December 31, 2020. The major sticking point now: fish.
The UK officially left the EU on January 31, 2020, but it has been in a transition period, following all EU regulations while UK and EU negotiators worked on a deal defining the new UK-EU trade relationship. That will end on New Year’s Eve. Deadline after deadline has been blown through in recent months and weeks as issues such as state subsidies, enforcement mechanisms, and EU access to British fishing waters have dogged the process. As the negotiations reach their endgame, fishing rights appear to be the final barrier to an agreement.
“Time is running out for both sides to compromise if they are to avoid the negative economic effects of a no-deal Brexit,” said LPL Financial Chief Market Strategist Ryan Detrick. “Either way, outside of the potential for short-term volatility, we expect this to be a relatively minor event for global markets as the UK comprises only 4% of global output. ”
As shown in the LPL Chart of the Day, the British pound had been gaining in currency markets since the summer as a trade deal looked more likely, before dipping in recent days on negative news.
The fishing industry is just 0.1% of UK gross domestic product (GDP). It generates less revenue for the UK than the central London department store Harrods, but for an island and coastal nation whose unofficial national dish is Fish and Chips, it remains a sensitive subject. The UK and EU have long had a difficult relationship on fishing rights, with occasional physical clashes between fishing trawlers even occurring. The main objector from the EU side appears to be France, who would be the major loser if EU boats are denied access to British waters.
Both sides are playing hardball, and the possibility of a deal appears to hang in the balance, as UK and EU negotiators bounced back and forth “final” counteroffers early this week. The negotiations have been a long and arduous process, but we believe now there is very little daylight left between negotiating positions. Given the political ramifications of failure, neither party will want this to be the one that got away.
Adding to the urgency, much of the UK is in the midst of a renewed lockdown relating to a serious outbreak of a new strain of COVID-19, which has led to some prominent local lawmakers to call for an extension to the transition period. While an extension to the transition period would be difficult at this late stage, we believe it can’t be completely ruled out. If no deal is reached by December 31, the UK would revert to World Trade Organization rules, including the economically damaging introduction of trade tariffs and quotas.
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
Leading Indicators Signal Need For Bridge Stimulus
Leading economic indicators are flashing yellow, as it becomes clearer that rising COVID-19 case counts and renewed lockdowns are inflicting damage on a budding economic recovery.
On December 18th, the Conference Board released its November report detailing the latest reading for its Leading Economic Index (LEI), a composite of data series that tend to lead changes in economic activity. The index’s value grew 0.6% month over month, suggesting still-positive economic growth, but its value represents the lowest reading since it began recovering from April’s collapse. For context, the monthly growth rate peaked in June at 3.1%, and was growing at a rate of 1.6% just three months ago, as seen in the LPL Chart of the Day.
Seven of the ten component series grew in November, while three declined. Average weekly initial claims for unemployment insurance (inverted), the ISM New Orders Index, and building permits led the way among positive contributors. Average consumer expectations for business conditions, average weekly manufacturing hours, and manufacturers’ new orders for nondefense capital goods excluding aircraft declined in November. Many of these component series, which are released more frequently, have shown additional deterioration so far in December, most notably average weekly initial claims for unemployment insurance (inverted).
“There has been a lot to be thankful for the past month, most notably the start of broad vaccine distribution,” said LPL Financial Chief Market Strategist Ryan Detrick. “But this LEI print, paired with recent disappointing employment data, suggests a continued slowdown early next year is still quite possible. All eyes are now on Washington to provide a bridge solution to get us through to the spring.”
The good news is that policymakers seem to be aware that it is their turn to step up. As of this writing, reports suggest that bipartisan leadership is nearing a deal to provide additional fiscal stimulus support to the economy in the ballpark of $900 billion, which could be announced as soon as this weekend. If reports are to be believed, this would come with another round of direct stimulus checks, albeit smaller, and leave out some of the more contentious issues that have stalled negotiations for the past few months. We believe that this may set the stage for even more stimulus down the road that would incorporate these issues, and potentially even make an attempt at major infrastructure spending. We will continue to monitor these developments, as they will be sure to impact the forward looking data.
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
Stocks continue to surprise to the upside, with the Russell 2000 Index (small caps) and the Nasdaq making new all-time highs on Tuesday. The S&P 500 Index, a chip shot from new highs, already has made 30 new highs so far this year. “One thing that surprises many investors is new highs happen in clusters that can last a decade or more,” explained LPL Financial Chief Market Strategist Ryan Detrick. “Given that this cluster of new highs is only seven years old, history would suggest that we don’t bet against several more years of new highs.”
One of the more amazing charts (and our friend Sam Ro at Yahoo! Finance called this the chart of the year) is how this new bull market has tracked the 2009 bull market. We’ve been sharing this chart for months now, noting if things continued to track 2009, then significant gains could be in store and sure enough that has played out. Here’s the catch, continued strength could still be in store, as 2009 continued to gain the next few months from this point forward.
Lastly, will Santa come in December? We discussed this in detail at the start of the month in Big Gains Steal From Santa, but the truth of the matter is the S&P 500 Index is flat on average half way through the month and nearly all of the impressive December gains take place the second half of the month.
As shown in the LPL Chart of the Day, if Santa is going to come in 2020, now is the time for the reindeer to get ready and for stocks to potentially bounce.
For more of our thoughts on a Santa Claus rally, please watch our latest LPL Market Signals podcast from our YouTube channel below.
IMPORTANT DISCLOSURES
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.
References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
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
Back in July, we wrote in our July 23 LPL Research blog that dollar weakness may continue, highlighting a short-term bearish technical case for the US dollar. Since then, the Bloomberg US Dollar Index and the US Dollar Index (DXY) are down 5.3% and 4.1%, respectively.
Today, we take a more long-term look at the dollar and explore the historical reasons why we believe this weakness could be a theme in 2021 and beyond.
As shown in the LPL Chart of the Day, in recent months the US Dollar Index has broken a critical uptrend line that has been in place for nearly a decade. Down nearly 12% since the stock market bottomed in March, the momentum is clearly lower.
However and perhaps more compelling is that the downward movement in the dollar is entirely consistent with a roughly eight-year boom-and-bust cycle that has played out over the past 50 years. The bottom panel shows the rolling eight-year rate of change for the dollar, and the regularity is truly remarkable:
September 1969–October 1978 (9 years and 1 month): -33%
October 1978–February 1985 (6 years and 4 months): +93%
February 1985–August 1982 (7 years and 6 months): -51%
August 1982–January 2002 (9 years and 2 months): +52%
January 2002–March 2008 (6 years and 2 months): -40%
March 2008–December 2016 (8 years and 9 months): +42%
According to LPL Financial Chief Market Strategist Ryan Detrick, “Despite briefly surging in March, the US dollar remains in a secular downtrend that arguably started nearly four years ago. If history is any guide, we could only be at the halfway point of a significant move lower in the dollar.”
The dollar is down nearly 4% since the beginning of November, and while the index is oversold in the very near-term, we remain bearish on the dollar’s trajectory in 2021. We believe this could have positive implications for international equities and commodities next year.
For more of our 2021 market insights and forecasts, including our positive take on emerging markets, please read our new LPL Research Outlook 2021: Power Forward.
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 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
The November reading for the Consumer Price Index (CPI), the most well-known measure of inflation, was released Thursday, December 12, and while both the headline and “core” readings (excluding food and energy) came in slightly higher than the Bloomberg-surveyed economists’ consensus, core inflation remains tame at 1.6% over the trailing year. Inflation is likely to pick up as the economy improves and may run a little hotter than we’ve seen in recent years in 2021, but we believe the risks of a substantial inflation surprise over the next year is limited.
“Congress and the Fed provided massive stimulus this year and it seems like that should be inflationary,” said LPL Chief Market Strategist Ryan Detrick, “but it’s important to remember that the stimulus was there to fill a giant hole from lost wages and an economy running well below its potential.”
As shown in today’s LPL Chart of the Day, core inflation on a trailing-year basis still has some catching up to do, although the one-month reading is now largely consistent with pre-Covid levels. inflation over the last decade has remained subdued and largely steady.
Core inflation has not hit 2.5% since 2008 and hasn’t hit 3% since 1996. Both levels may be reachable toward the middle of next year due to the short-lived inflation spike in June, July, and August 2020 as prices normalized, and may remain somewhat elevated as the economy recovers while the Federal Reserve likely keeps rates low. A falling dollar also tends to be inflationary, making foreign goods more expensive and COVID-19 could also create some supply chain disruptions, which may temporarily lift inflation.
FORCES THAT MAY HELP KEEP INFLATION IN CHECK
At the same time, there’s reason to believe inflation may have a ceiling in the 2.5 –3% range:
The conditions that limited economic growth, and inflation with it, before COVID are still in play. Workforce growth is slowing, populations are aging, especially in developed economies, and productivity gains have been limited despite strength in some areas of the economy.
Wage pressure is likely to be limited as long as there’s still slack in the labor market.
The economy may continue to have spare capacity until it returns to long-term potential growth levels.
Technological developments and increased use of green energy sources has steadily lowered the energy intensity of economic growth, decreasing the likelihood of energy supply shocks.
Inflation historically bottoms early-to-mid expansion and only becomes a threat later in the business cycle.
We are likely to see trailing-year inflation numbers in the middle of next year that we haven’t seen in a while, but the monthly run rate will probably be less elevated. We do think we’ll see inflation run hotter than it has in recent years, but after years of central banks failing to push inflation towards 2%, we don’t yet see the kind of structural shift that could lead to inflation becoming a serious economic risk looking out over the next year.
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
LPL Street View: Why Some Items Are Still So Hard to Find
As the US economy continues to transition during the current pandemic— where many local and state governments are still enforcing restrictions affecting economic output—this, along with changing consumer preferences, might cause supply constraints. We assess COVID-19 effects on current business conditions.
Business supply chains are very dynamic organisms. For example, COVID-19 has affected labor shortages in certain industries which can directly impact finished-good production. “Companies like Whirlpool are reliant on hundreds of suppliers for parts,” explained LPL Chief Investment Officer Burt White. “And every one of these suppliers requires their own influx of raw materials.”
We discuss this in our recent LPL Street View video, “Why Some Items Are Still So Hard to Find,” available below and on the LPL Research YouTube channel. Please be sure to give this video a like or follow our channel, so you don’t miss anything!
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
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