Wealth Management

Market Blog Posted by lplresearch

Thursday, August 26, 2021

Phones certainly aren’t just for making calls anymore, but how many see the power in the palm of their hand as an enduring weapon in the battle against inflation?

Through our phones and devices, consumers now have the power of near perfect price discovery as well as access to a wide range of markets near and far. That’s a powerful economic force that has impacted markets from cars to cornflakes. Supply chain disruptions are temporarily forcing consumers to compete on price. But as things move back to normal, consumers will increasingly regain control. That’s just the world we live in now.

For more on the power of price discovery to contain inflation and the new meaning it gives to “retail therapy,” please watch this recent Street View video with LPL Financial Director of Research Marc Zabicki. You can watch the video from our YouTube channel or 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
• Not Bank/Credit Union Guaranteed
• Not Bank/Credit Union Deposits or Obligations
• May Lose Value

Market Blog Posted by lplresearch

Wednesday, August 25, 2021

The S&P 500 Index made yet another new all-time high yesterday, the 50^th on the year. “The all-time record for any one year is 77 S&P 500 new all-time highs back in 1995,” explained LPL Financial Chief Market Strategist Ryan Detrick. “Incredibly, 2021 is currently on pace for 78 new highs. There’s a long way to go, but this has been an amazing year and this is yet another way to show it.”

View enlarged chart.

As impressive as 50 new highs is, investors need to remember that new highs happen in clusters that can last decades. We’ve been sharing this chart for years, saying exactly that: previous periods of new highs lasted much longer than most expected. Mark Twain said history doesn’t repeat itself, but it often rhymes. If history rhymes once again, we could still have several more years of new highs.

View enlarged chart.

Another interesting stat about S&P 500 all-time highs is every month so far in 2021 has seen a new high, 8 for 8. Only once have all 12 months made a new all-time high and that was in 2014. This is somewhat surprising, given the S&P 500 gained only 11.4% in 2014, but it was a very slow and persistent move. Most investors (including this author) would guess it was 1995, but that spectacular year saw new highs in ‘only’ 10 months.

View enlarged chart.

Although August tends to be historically weak for stocks, that hasn’t been the case this year. In fact, the S&P 500 has made an incredible 9 new highs already this month, the most since 1929. No, we don’t think this is another 1929, but this is just another way to show how astounding this bull run has been.

View enlarged chart.

As shown in the LPL Chart of the Day, 50 new S&P 500 all-time highs before the end of August is quite a feat. In fact, only twice has the 50 level been cracked through the end of August, in 1964 and 1995.

View enlarged chart.

So what happens next? The rest of the year in 1964 the S&P 500 added 3.6%, while it added 9.6% in 1995. Below we looked at all the years with at least 30 new all-time highs through August and sure enough, better than average returns the rest of the year are common. The final 4 months gained 4.7%, versus the average final 4 months gain for all years of 3.6%. Now this is skewed due to 1987s crash, as that was the only time stocks were lower the final 4 months after more than 30 new highs by the end of August. Smoothing things out, the median return jumps up to a very impressive 5.4%, versus a median return of 3.6% for all years.

View enlarged chart.

2021 is off to a roaring start and we continue to expect higher prices before all is said and done. The studies we did today do little to change our view. We’d use any potential weakness as an opportunity to add before potential higher prices.

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, August 24, 2021

Since 1978, the Federal Reserve Bank of Kansas City has played host to central bankers, policymakers, academics and economists from around the world at its annual economic policy symposium in Jackson Hole, Wyoming, which is slated to begin this week. This year’s symposium, “Macroeconomic Policy in an Uneven Economy,” will take place from Thursday to Saturday and the Federal Reserve (Fed) Chairman Jerome Powell will headline the event (a complete list of speakers has not been released yet). The symposium was originally scheduled to return to a live format this year, but late Friday afternoon (August 20), it was announced the event would be held virtually due to the “recently elevated COVID-19 health risk”.

“Moving Jackson Hole back to an entirely virtual format this year is telling us that Fed officials are taking the Delta variant seriously,” noted LPL Financial Fixed Income Strategist Lawrence Gillum. “We’ll have to see if that alters the tapering timeline and importantly the market’s expectations for when the Fed will start to increase short-term interest rates.”

Notable economic policy shifts have occurred at the event in the past, including last year when Powell announced that the Fed would operate under a new monetary policy framework called Flexible Average Inflation Targeting (FAIT), which seeks to avoid premature interest rate hikes. We will have to see if this year’s symposium offers any monetary policy surprises as well. Fed watchers will be looking for any additional hints on when monetary accommodation will start to be scaled back. The July Fed meeting minutes were released last week and indicated that “most” participants judged that it could be appropriate to start reducing the pace of asset purchases “this year” if the economy evolves in line with their expectations. Additionally, “most” participants noted that substantial further progress has been made towards the inflation goals but the employment goals have not been met yet. Importantly, these minutes came from a meeting held more than three weeks ago—before a string of disappointing economic data releases and before the recent surge in COVID-19 cases.

This symposium may serve as an opportunity for Powell to clarify and update the committee’s current assessment of the economy, which will tell us if the minutes released last week are still relevant. Additionally, Powell may use his time to help separate any tapering decisions from upcoming interest rate decisions, which was something the committee has recently discussed. This would potentially help push back expectations for rate hikes despite potentially moving forward with tapering plans.

As seen in the LPL Research Chart of the Day, market expectations for when the Fed will start to raise short-term interest rates have not changed over the past few months. After the June FOMC meeting, the market repriced the Fed’s actions and pushed back expectations for rate hikes to the first part of 2023. Despite ongoing commentary from some Fed officials that indicate an initial rate hike in 2022 may be appropriate, the market remains unconvinced. Markets, however, will be watching for any clues from Powell on Friday (August 27) that may alter this view.

View enlarged chart.

Federal Reserve Chairman Jerome Powell’s remarks will be livestreamed to the public at 9 a.m. CT/10 a.m. ET on Aug. 27 via the Kansas City Fed’s YouTube channel at www.youtube.com/KansasCityFed. The program’s full agenda will be available at www.KansasCityFed.org at 7 p.m. CT/8 p.m. ET on Aug. 26. Continuing with past practice, conference papers and other materials will be posted as they are presented during the event. After the event, a transcript will be posted on the Bank’s public website.

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, August 20, 2021

With increased concerns about the Delta variant, high inflation, and recent misses on economic data, it can be easy to forget that we’re still in the middle of a robust economic recovery and leading indicators continue to support a positive outlook. On Thursday, August 19, the Conference Board released its July 2021 report detailing the latest reading of its Leading Economic Index (LEI), a composite of ten data series that tend to lead changes in economic activity. The index rose 0.9% month over month in July, accelerating from June and ahead of the consensus expectation, signaling strong potential for continued solid growth. Breadth was also robust, with all 10 components contributing to index gains for the first time since March 2021.

As shown in the LPL Chart of the Day, year-over-year growth in the LEI, currently at 10.6%, has only had stretches of 10% growth four times before. With a likely decline to below 10% year-over-year growth just ahead, what’s happened in the past when the LEI has crossed below this key level? Typically, the start of the next recession has still been a good ways off, with the economy continuing to expand for an average of over four more years. 1973 did see a recession within a year, but the other three times there was still a healthy period of solid economic growth ahead.

“While economic data has surprised to the downside recently, July leading indicators continue to signal a positive outlook,” said LPL Financial Chief Market Strategist Ryan Detrick. “August numbers may be more challenging due to the impact of the Delta variant, but with all 10 components of the Conference Board’s LEI contributing to gains in July, the economy will likely be able to endure a weak patch in some segments.”

View enlarged chart.

July’s index gains were led by the Institute for Supply Management (ISM) manufacturing New Orders Index, the Leading Credit Index, and the yield curve, while initial jobless claims made only a slight positive contribution. Near-term headwinds from the Delta variant may push some third-quarter economic growth expectations into the fourth quarter, but with extremely strong job gains over the last two months and leading indicators signaling the potential for continued economic momentum, we still consider the overall economic backdrop supportive for stocks.

IMPORTANT DISCLOSURES

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

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

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

All index and market data from FactSet and MarketWatch.

This Research material was prepared by LPL Financial, LLC.

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

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

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

Economic Blog Posted by lplresearch

Thursday, August 19, 2021

Much has been written on the prospects for sustained inflation over the next few years. While some are calling for inflation to be a problem, we are firmly outside that camp. We believe there are several structural considerations at play that will put downward pressure on prices over the medium to long-term. Demographics and global trade are two of those considerations. We also believe that more acute price competition is an important variable that can keep prices contained, and when current supply/demand imbalances are resolved we anticipate recently elevated price pressures could subside.

In our view, the ubiquitous use of the internet has indeed raised the price consciousness of the consumer. It has streamlined the price discovery process and has served to shift the pricing balance of power from producers to consumers. After all, investors can sift through prices for products and services without leaving their home. When the cost of price discovery comes down (thanks to internet ease of use), we believe consumers are more likely to engage in the search for the best price. We argue the behavioral elements of satisfaction derived from this enhanced price discovery process compels product producers to increasingly greet the consumer on his or her terms; whether that consumer purchases the good/service directly on the internet or not. The outcome is more marketplace knowledge for the consumer, a step-up in market power, and a producer that is compelled to compete on price to make the sale.

“We believe the internet’s existence as an epicenter of commerce has shifted the balance of power toward the consumer.  In our view, this phenomenon should serve as a long-term anchor on inflation,” explained LPL Director of Research Marc Zabicki.

The behavioral result is the consumer now derives satisfaction not only from the purchase of a good or service but also from the competitive price that is paid (an element of “retail therapy” if you will).  The combination of the good/service and the price has now become the new retail status symbol for many. We believe these consequences have forced producers to be more price competitive.

The products and services listed below have a definitive presence on the internet; illustrating the wide range of potential internet pricing influence on many CPI categories. Due in part to this effect, it is of little surprise to us that inflation has been benign for years, and we anticipate price pressures could again subside once COVID-19-related supply/demand imbalances run their course.

See enlarged chart.

IMPORTANT DISCLOSURES

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

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

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

All index data from Bloomberg.

This Research material was prepared by LPL Financial, LLC.

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

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

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

Economic Blog Posted by lplresearch

Thursday, August 18, 2021

Retail sales fell 1.1% in July as consumer spending likely experienced some drag from the spread of the Delta variant late in the month. The drop was larger than Bloomberg’s consensus forecast of a 0.3% decline and reversed June’s 0.7% advance.

Excluding volatile auto sales, the story was similar with a 0.4% decline in July, below the prior month’s 1.6% advance and the consensus forecast calling for a 0.2% increase. The good news in the non-auto numbers was the 0.7 point positive revision to non-auto sales for prior months.

Even though sales have generally been flat on a month-to-month basis since the stimulus and reopening surges in March 2021, these numbers still look quite strong on a year-over-year basis, as shown in the LPL Chart of the Day. With or without autos, retail sales were up about 16% year over year, though the shrinking boost from base effects (comparisons to the year-ago period have gotten tougher) and fading stimulus have taken annual sales growth rates down from over 50% in April (and 42.6% ex. autos) to mid-teens currently.

See enlarged chart.

“The Delta variant and fading stimulus are at least partly to blame for soft retail sales last month, even though restaurants saw gains during the month,” explained LPL Financial Equity Strategist Jeffrey Buchbinder. “Meanwhile, some consumers may be balking at higher prices, while others may have finished their pandemic-driven home improvement projects.”

Several soft spots were evident in the report. First, autos (-3.9%) are being hurt by high prices and low inventories related to global chip shortages. Second, e-commerce sales (-3.1%) likely saw some July sales pulled forward from the Amazon Prime event in June. Third, clothing sales (-2.6%) were down after being up 7.6% the previous two months. And last, building materials (-1.2%) continued to feel the effects of the cooling housing and home improvement markets. Despite these pockets of weakness, and several months of flat sales overall, we don’t think this report changes the Federal Reserve’s timetable for tapering its bond purchases, likely to begin within the next 3 to 5 months.

Looking ahead, based on early-August dips in high-frequency data like restaurant dining and airline travel, next month’s retail sales may be hurt a bit more by the Delta variant. Soft consumer spending to start the third quarter could cause economic growth to decelerate from the second quarter—which grew 6.5%—to the third, based on real (inflation-adjusted) gross domestic product. That means there may be some downside to the consensus forecast for third quarter GDP growth of 6.9% annualized.

Keep in mind that successfully tackling the Delta variant could set up a fourth quarter growth rebound. Some of the states hit early by this latest COVID-19 wave are starting to see cases fall, including in Missouri and Arkansas. Consumers also still have a ton of excess savings—in the neighborhood of $2 trillion worth. So as the economy hopefully moves past the pandemic this fall, those dollars should end up supporting the economy—particularly on the services side.

IMPORTANT DISCLOSURES

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

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

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

All index data from Bloomberg.

This Research material was prepared by LPL Financial, LLC.

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

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

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

Market Blog Posted by lplresearch

Tuesday, August 17, 2021

As mentioned in the most recent Muni Market Monitor, high yield muni funds have accumulated $24 million of net inflows year to date, representing ~20% of total inflows to the total municipal category. With the prospects of higher individual tax rates and the continued need for after-tax income, tax-aware investors have found shelter in the higher yielding non-investment grade municipal market in record volumes. For those investors that recently allocated to the high-yield space or those that are considering it, below are some things to know about the asset class.

“Income investors have been challenged to find attractive yields within the more traditional fixed income markets and that has caused some investors to look to other, maybe unfamiliar, markets,” noted LPL Financial Fixed Income Strategist Lawrence Gillum. “Investors should certainly consider the risks associated with higher yields, and the high yield muni market is no exception.”

• The index is concentrated in only a few sectors: The lower rated municipal index is dominated by revenue bonds, which are bonds that are used to fund specific projects. Revenue generated from these projects is then used to pay back the interest on the loans. Revenue bonds tend to be riskier than general obligation bonds because they lack the taxing authority to support interest payments.
• Liquidity risk is an important consideration: The high-yield muni market can, at times, be fairly illiquid. As seen on the LPL Research Chart of the Day, the total market value of issuers within the high yield index is only around $150 billion, which is dwarfed by the national muni market at over $1.6 trillion and the corporate high-yield market at over $1.7 trillion. Moreover, there are over 5000 individual bonds within the muni high yield index, which makes the debt outstanding for each individual issue very light.

See enlarged chart.

• Tax-Equivalent Yields (TEY) for municipal debt still attractive: With the search for income a global phenomenon and interest rates around the world at or near multi-year lows, yields on many fixed income asset classes have been pushed lower. However, whether you’re looking at TEY or after-tax yields, for those investors in the top tax brackets, yields for the muni high yield market are still above those found in the corporate high yield market.

For a more in-depth view of the high-yield muni market, as well as how the technical backdrop for muni securities could help keep muni prices well bid, please see this month’s Muni Market Monitor.

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.

Municipal bonds are subject to availability and change in price. They are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise. Interest income may be subject to the alternative minimum tax. Municipal bonds are federally tax-free but other state and local taxes may apply.  If sold prior to maturity, capital gains tax could apply.

This Research material was prepared by LPL Financial, LLC.

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

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

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

Economic Blog Posted by lplresearch

Thursday, August 12, 2021

The term stagflation has been increasingly circulating in the financial media as inflation readings have risen sharply in recent months. The term is often associated with the 1970s which saw runaway inflation—largely driven by sky-high energy prices—and lackluster economic growth. One way to gauge stagflation is to calculate what is commonly referred to as the Misery Index—inflation plus unemployment.

As shown in the LPL Chart of the Day, the Misery Index today is nowhere near the extreme levels of the 1970s. In fact, not only that, the level of “misery” is near the long-term average of about 10 despite the highest inflation readings we’ve seen in over a decade. We expect inflation to soon begin to ease and the unemployment rate to continue its steady decline over at least the next year, which should bring this measure well below its long-term average and put an end to the stagflation fears that have been bubbling up recently (click here and here for our short- and long-term perspective on inflation.

See enlarged chart.

“We don’t believe the current environment is anything like the stagflation experiences of the 1970s,” explained LPL Financial Director of Research Marc Zabicki. “We think much of the elevated inflation readings we’re seeing now are transitory and related to pandemic bottlenecks and materials shortages. Meanwhile, the economic reopening and massive stimulus should provide a strong one-two punch to keep economic growth well above average through 2022.”

That said, after the boosts from the reopening and stimulus pass, the U.S. economy may resume its pre-pandemic growth trend in the neighborhood of 2% real gross domestic product (GDP) growth. Bloomberg’s survey of economists points to just 2.3% real GDP growth in 2023, after 4.2% next year. Given the limited population growth in the United States, demographic headwinds as baby boomers retire, and low immigration rates, the opportunity for stronger economic growth than that may be limited.

The other way to drive higher economic growth is through productivity enhancements which may also be tough to come by after all of the technology spending and efficiency improvements undertaken by corporate America during the pandemic. Slower growth isn’t necessarily a bad thing, as it tends to keep inflation at bay which can limit increases in interest rates. But it may mean slower earnings growth and potentially lower stock returns over the next several years.

For the short-to-intermediate term, we remain comfortable staying overweight equities relative to fixed income. The economic growth and profit environment looks very favorable for the rest of this year and into early 2022, while we do not expect much return out of the bond market (though we like mitigating downside risk with bonds).

Clearly there are risks in terms of the Delta variant (which we wrote about https://www.lpl.com/news-media/research-insights/weekly-market-commentary/coming-covid-impact-on-economy.html last week). China’s regulatory crackdown and slowing growth is a concern. Our benign view of inflation could be wrong The Federal Reserve could make a policy mistake, causing interest rates to surge. Not our view, but possible.

For a recap of the blowout second quarter earnings season and our updated thinking on the earnings and stock market outlooks for the rest of the year please read our next Weekly Market Commentary on August 16.

IMPORTANT DISCLOSURES

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

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

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

All index data from Bloomberg.

This Research material was prepared by LPL Financial, LLC.

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

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

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

Economic Blog Posted by lplresearch

Wednesday, August 11, 2021

The U.S. Bureau of Labor Statistics released its July inflation report showing that the headline Consumer Price Index (CPI) rose 0.5% month-over-month and 5.4% year-over-year. The core CPI, which strips out the volatile food and energy components, rose 0.3% month-over-month, and 4.3% year-over-year. Given strong base effects from rolling off of weak data during the COVID-19 shutdowns, we find the month-over-month data more informative. Within that context, the more volatile components that are heavily tied to the economic reopening, as expected, have started to moderate. Price increases for used vehicles, airfare, and rental cars, for example, have slowed and have actually fallen in some categories.

We continue to see evidence that supply chain bottlenecks and a rapid demand rebound are pushing prices higher. Materials shortages and hiring difficulties will likely keep price pressures elevated in the near term, but we think these supply/demand mismatches will largely resolve themselves in coming months as supply, which has a longer ramp-up time than demand, recovers.

“This inflation release came in as-expected and so it doesn’t really change our view that we think these higher prices we’re seeing currently will subside over time,” explained LPL Financial Fixed Income Strategist Lawrence Gillum. “An economy operating more normally in 2022 should bring more normal inflation.”

As seen in the LPL Chart of the Day, owners’ equivalent rent of residences, a measure we’re watching closely to determine the “stickiness” of higher prices, increased 0.3% in July and rose 2.4% year-over-year, which was slightly higher than last month but still lower than in past years. Owners’ equivalent rent of residences, a measure of rents for non-rent-controlled residences in urban areas, is critical for future inflation prospects, as it is one of the largest components of CPI and is considered to be less volatile than other components. Movements observed in the series are, therefore, viewed as more structural in nature and thus have the potential to be “stickier.”

View enlarged chart.

While one inflation release does not make a trend, it does show that some of the higher prices we were seeing over the past several months were likely transitory. Our base case remains that we think well above average consumer price increases will be temporary as the structural headwinds to higher prices (globalization, technology, instant price comparisons, etc.) remain in place. That certainly doesn’t mean we can’t continue to see higher prices in the near term, but we do think the pace of price gains slows over time.

IMPORTANT DISCLOSURES

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

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

Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities.

All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

This Research material was prepared by LPL Financial, LLC.

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

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

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

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

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

Market Blog Posted by lplresearch

Tuesday, August 10, 2021

The Chairperson of the Federal Reserve (Fed) is appointed by the President of the United States and serves a four-year term. The current Chairperson, Jerome Powell, has held that position since 2018 so his initial term is ending early next year. As such, markets are beginning to wonder if Powell will be reappointed or if President Biden will select someone else to lead the Fed. While the (re)appointment of the Fed chair has largely been a non-event, what makes this time different is that this will be the first time in modern memory that a potential leadership change is taking place just as monetary policy is about to change as well. A surprise selection by the President has the potential to add uncertainty and, thus, volatility to markets.

“If monetary policy alone wasn’t already market moving, we now have to watch for a potential change in leadership at the Fed,” noted LPL Financial Fixed Income Strategist Lawrence Gillum. “Markets think Powell gets another four years so a shift in leadership could potentially be disruptive for markets.”

So, if not Powell, the leading candidate to replace him is Lael Brainard. A comparison between the two candidates follows:

• On monetary policy: Both Powell and Brainard are considered “doves” as both believe current levels of monetary accommodation are still warranted and that we still have not made substantial further progress towards full employment.
• On financial regulation: Brainard has expressed her frustration with Powell’s inability to aggressively regulate big banks, which recently caught the attention of the more progressive wing of the Democratic Party. The assumption here is that Brainard would use all the regulatory tools at the Fed’s disposal to head off financial excesses.
• On including social goals within monetary policy: Conventional wisdom is that Brainard would be more willing to incorporate social considerations when enacting monetary policy. However, Powell has put a lot of emphasis on the breadth and inclusiveness of the job market recovery, especially when it comes to lower income households and communities of color.
• On political ideology: While the Fed has claimed political independence, the sitting President still nominates the Fed Chair and the Senate vets the selection. Powell, a Republican, was nominated by then-President Trump, so there will likely be political pressure from Democrats to choose a candidate from their side of the aisle. Brainard, a Democrat, spent time at the U.S. Department of the Treasury and served as the deputy national economic adviser and deputy assistant to President Clinton.

Our best guess is that Biden will reappoint Powell but it is not a sure thing. Powell has done a commendable job supporting markets during the COVID-19 shutdowns. Moreover, while we’re out of the recession, we aren’t through with the pandemic and we think stability and leadership continuity is important. Plus, Biden has other opportunities to influence the make-up of the Fed as the Fed Vice Chair’s term ends next January and the Vice Chair of Supervision’s term in that position ends in October 2021. Moreover, there is a vacancy on the board as Trump’s final nominees failed to garner enough Senate support to be appointed.

All that said, regardless of who is ultimately appointed to lead the Fed, he/she will be chiefly responsible for overseeing a balance sheet that continues to grow. As seen on the LPL Research Chart of the Day, the Fed’s balance sheet continues to grow and will continue to grow even after the taper announcement. The Fed is buying $120 billion a month ($80 billion in Treasury securities and $40 billion in mortgage securities), adding to its over $7 trillion of bond holdings. Once the tapering process starts, the Fed will continue to purchase bonds, in ever-smaller monthly increments, until it is no longer purchasing bonds at all, which will likely be in the middle of next year. Conceivably though, the Fed’s balance sheet could eclipse $8 trillion next year.

See enlarged chart.

While we do not think a change in Fed leadership will change the trajectory of tapering, it may change the timing and pace of interest rate hikes. Additionally, the Fed has indicated a willingness to eventually start to reduce its balance sheet, which could be a key responsibility of the next Fed Chair. It’s still too soon to know for sure which direction Biden will go but markets will be 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