Wealth Management

Economic Blog Posted by lplresearch

Friday, August 6, 2021

Investors finally got the strong pop in payrolls many have been calling for, breaking from the string of recent lukewarm jobs reports and weakening data from other segments of the economy that have been stoking peak growth fears. And, yet, while this is an unequivocally bullish jobs report, some questions remain.

The U.S. Bureau of Labor Statistics’ employment report revealed that the domestic economy added 943,000 jobs in July, beating Bloomberg-surveyed economists’ median forecast for a gain of 858,000. The prior two months also received strong net positive revisions of 119,000 jobs. Roughly two-thirds of the overall gain came from local government education and leisure and hospitality sectors, adding 220,700 and 380,000 respectively.

The unemployment rate fell to 5.4%, a big beat relative to expectations, and was paired with a slight uptick in the labor force participation rate, which moved to 61.7% from 61.6%. Getting that number back closer to the 63.4% pre-pandemic level is going to be key in making a full labor market recovery. And with the job openings rate at historic highs, the issue appears to be more with getting labor supply back online than with a lack of available jobs.

“This number was really good, but the best part was it wasn’t so strong that the Federal Reserve (Fed) would have to change policy,” explained LPL Financial Chief Market Strategist Ryan Detrick. “In that sense, it was not too hot and not too cold.”

As seen in the LPL Chart of the Day, we remain 5.7 million payrolls shy of February 2020’s peak.

View enlarged chart.

In the meantime, the more interesting debate may be what to make of wages, which rose 0.4% month over month compared to expectations for a 0.3% increase. Early on in the pandemic, in-person service sector jobs, which tend to be lower paying, were hit hardest. As lower paying jobs fell off, average hourly earnings logically rose. The expectation, therefore, was that when these jobs returned average hourly earnings would then face downward pressure. That has not played out exactly as the market thought, though, largely because the supply of labor has not fully returned and employers are being forced to pay up to attract workers that are willing to come back to work. Wages have important implications in the inflation debate, as they and rents are considered to be among the “stickier” components of inflation. It remains to be seen whether a potential large increase in the labor supply in coming months will be able to reverse the increasing wage dynamic.

The Delta variant and the potential for a reversal of reopening trends are wildcards in the labor market story. Ability to work is one thing, willingness to work is another. A pickup in the more dangerous Delta variant is denting confidence among those still skittish about COVID-19, and may blunt some of the expected “breaking of the dam” in labor supply come September, when schools and childcare facilities should be fully reopened and supplemental unemployment benefits will be eliminated nationwide. Furthermore, the observation window for today’s report closed before the Delta variant emerged in a major way, and therefore did not fully capture its effects. Any judgements on that front will have to be put on hold until next month’s report, which may temper the market reaction somewhat to these positive numbers. Still, we remain optimistic that the Delta variant will prove to be a temporary drag on the recovery based on vaccinations and containment measures.

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 3, 2021

Most investors are aware that seasonal patterns exist in equities, but they may not be as familiar with the seasonal patterns in fixed income markets. As pointed out in the LPL Research Market Blog on Monday, August 2, stocks have historically been relatively weak in August and September. This temporary increase in equity volatility is tough for equity investors, but can core fixed income investors glean anything from a traditionally volatile period for equity markets? Because of the seasonal patterns in the equity markets, changing investor risk sentiment in August could make core bonds more attractive because they tend to represent a safer option than stocks and a higher yielding alternative than cash.

“We still think high-quality bonds play a pivotal role in portfolios as they have shown to be the best diversifier to equity risk,” noted LPL Financial Fixed Income Strategist Lawrence Gillum. “While we expect further gains for stocks through year-end, unforeseen events happen. And it’s best to have that portfolio protection in place before it’s needed.”

As seen in the LPL Chart of the Day, some months appear more or less favorable for core fixed income, as measured by the Bloomberg Barclays Aggregate Bond index, with August generally being the best performing month. On average, the index was up 90 basis points (0.90%) in August, which was nearly 50 basis points higher than the average monthly return of 39 basis points over all months. Moreover, since 2001, the range of monthly returns generated in August were generally positive, which means core fixed income has done a good job of offsetting some of the equity losses during an otherwise volatile month.

See enlarged chart.

Whether the seasonal patterns in the equity or fixed income markets persist this year or not (and we are certainly not making a market call), we still think owning core bonds in a diversified portfolio makes sense. That the fixed income markets have performed best in August, when equity market volatility has tended to increase, is no coincidence. Core bonds have historically been the best diversifier to equity market risk. When you consider stocks are in the second year of a bull market and that, historically, has also brought increased volatility, core fixed income may help dampen or offset some of those potential losses and keep clients fully invested to help them achieve their long-term investment goals. While we still like equities over bonds over the course of the year, we do think high-quality fixed income continues to serve a purpose in portfolios despite likely modest returns.

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

Monday, August 2, 2021

Hard to believe, but we are in August already! The good news is stocks are still firmly in a bull market, but the bad news is the calendar is a potential worry now. As shown in the LPL Chart of the Day, August and September have been historically two of the weakest months of the year. In fact, during a post-election year, August has been historically quite poor, with only February worse on average. Turning to September, it has indeed been historically the worst month of the year on average. Don’t forget that last year stocks saw nearly a 10% correction during this troublesome month.

See enlarged chart.

Taking this a step further, stocks tend to peak in early August when a new party is in power in the White House. August 6 is the day stocks peak and they don’t bottom until September 25.

See enlarged chart.

Meanwhile, during a post-election year stocks peak on August 3 and bottom on September 24. Again, showing how the next several weeks potentially can be dangerous.

See enlarged chart.

It isn’t all bad news though. With the economy rebounding and earnings soaring, should we see any seasonal weakness, we’d use that as an opportunity to add to core equity positions. “The S&P 500 is up an incredible six months in a row,” explained LPL Financial Chief Market Strategist Ryan Detrick. “What most might not realize is that is a very bullish event. In fact, one year later it has been up 18 of 21 times with nearly a 12% average return. The bull might have a few tricks up his sleeve yet.”

See enlarged chart.

Look for our latest Weekly Market Commentary out later today as we dive more into events that could move stocks in August.

IMPORTANT DISCLOSURES

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

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

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

All index and market data from FactSet and MarketWatch.

This Research material was prepared by LPL Financial, LLC.

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

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

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

Market Blog Posted by lplresearch

Friday, July 30, 2021

China’s stock exchanges have been hit hard in response to several sudden regulatory actions that have dismayed investors. First came the crackdown on ride sharing service DiDi, which has about a 90% market share in China. Regulators had announced a cybersecurity review soon after its initial public offering on the New York Stock Exchange, eventually ordering the removal of DiDi from app stores. Then there were fines against tech giants Alibaba and Tencent. Next came an announcement that for-profit tutoring services would no longer be able to charge for certain core classes. The rapid sequence of government action against publicly traded companies has shaken market participants, with Chinese indexes and related stocks down significantly.

The issues in China also mean problems for investors in diversified emerging market equities. China has by far the largest weight in the MSCI Emerging Markets Index, at 35%, down from more than 40% prior to the recent sell-off. MSCI and other index providers have steadily increased their exposure to Chinese equities in emerging market indexes in recent years, a seemingly active decision that may surprise so-called passive investors.

As shown in the LPL Chart of the Day, China weighing down broad emerging markets is not exactly a new trend. While China outperformed other emerging markets (EM) amid the early stages of the COVID-19 pandemic, as global markets have recovered, a basket of emerging market equities that excludes China has strongly outperformed the MSCI China Index going back to last year.

See enlarged chart.

“Chinese officials have more recently taken a conciliatory tone to try and settle markets back down,” said LPL Financial Chief Market Strategist Ryan Detrick. “However, broken trust is not easily restored and technical damage will take time to repair. How China continues to respond will be important for investors to watch in August.”

We preview more things investors should know heading into August in next week’s Weekly Market Commentary. For now, we recommend that investors recognize that while China could bounce, alpha opportunities might lie elsewhere in 2021. In addition, we believe traditional active management makes the most sense for EM exposure, allowing experts to assess risk and reward for regions and companies rather than defaulting to market cap-weighted indexes.

IMPORTANT DISCLOSURES

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

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

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

All index and market data from FactSet and MarketWatch.

This Research material was prepared by LPL Financial, LLC.

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

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

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

Economic Blog Posted by lplresearch

Thursday, July 29, 2021

Lofty expectations for second quarter gross domestic product (GDP) growth were left somewhat wanting as a decent headline number fell short of expectations. Peering under the hood, though, we think this is still a fairly solid report.

The Bureau of Economic Analysis released its preliminary estimate for second quarter GDP this morning, showing the U.S. economy grew at a 6.5% annualized pace against the Bloomberg median forecast for 8.4%. While this represented a small acceleration from the first quarter’s 6.3% pace, investors viewed the headline number as a mild disappointment in light of the heightened expectations. The composition of the growth, though, largely reinforces the prevailing narratives of a strong consumer juxtaposed with supply chain bottlenecks, restricting growth.

“The positive takeaway from today’s report is that we are clearly seeing a rebound in the in-person consumption of services,” said LPL Financial Chief Investment Strategist Ryan Detrick. “This indicates a confidence by consumers to reengage with the parts of the economy beaten down most by COVID, and continued momentum here will be key if we are to see the consumer continue to power overall growth.”

As seen in the LPL Chart of the day, the US consumer continued to do the heavy lifting, offsetting weakness in most other major GDP components.

View enlarged chart.

Business fixed investment came in strong and demonstrated business’ attempts to ramp up output to meet surging demand. Residential investment had a more predictable decline, as well-documented labor shortages and high materials costs are restricting new projects. The volatile inventory components, though, did represent a drag.

Looking forward, we expect continued growth in the third quarter but with a different composition. Consumer spending should still be respectable, but likely will recede a bit due to the fading impact of past government transfer payments. New momentum in services as in-person commerce picks up should continue under the hood. Picking up the slack; though, business investment should continue to recover, and net exports may improve as the rest of the world plays catch-up to the U.S. in their recoveries, consuming more of our goods and services. Government spending and inventories also both have favorable outlooks.

The Delta variant of COVID-19 presents a risk to the outlook, but we see strong reason to remain optimistic. The U.S. is lagging the U.K. in its exposure to the Delta variant, and if we model our trajectory after theirs, which obviously is an imperfect comparison, we expect to see a peak in cases in the coming weeks. In fact, the U.K. is already on a strong path to recovery despite doomsday headlines. Domestically, COVID-19 cases are spiking in areas with the lowest vaccination rates. But, there is evidence that these are also the states experiencing the highest uptick in new vaccinations, which should help self-correct the trends. Positivity rates can be thought of as the fastest-twitch indicator, with hospitalization trends following in the ensuing weeks. Through that lens we see that some of the hardest hit states may have already seen their positivity rates peak.

We upgraded our 2021 forecast for U.S. real GDP growth earlier this year from 5–5.5% to 6.25–6.75%, and while there are sure to be bumps along the way, we expect to see the economy continue growing at a strong pace as activity further normalizes over the course of the year.

For further analysis on our outlook for the economy and financial markets, please check out our Midyear Outlook 2021: Picking Up Speed.

IMPORTANT DISCLOSURES

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

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

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

All index and market data from FactSet and MarketWatch.

This Research material was prepared by LPL Financial, LLC.

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

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

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

Market Blog Posted by lplresearch

Tuesday, July 27, 2021

The Federal Reserve (Fed) meets this week to discuss its ongoing support for the U.S. economy. During its regularly scheduled two-day meeting, the nineteen-member committee is expected to discuss if and when the Fed should start to remove the emergency level monetary accommodation that it has provided since the beginning of last year’s COVID-19 shutdowns. Last month’s meeting sparked some market volatility as some of the comments, along with the data releases, were interpreted as a shift in tone to be slightly less accommodative. While we won’t be getting the same type of data releases at the conclusion of this meeting, that doesn’t mean the market can’t (over)react to what is and isn’t said. Below are some of the things we’ll be watching for.

“We’re not expecting fireworks at this Fed meeting,” noted LPL Financial Fixed Income Strategist Lawrence Gillum. “But we are expecting the committee to go further down the road in discussing the when and how to start removing the emergency level monetary accommodation it has been providing markets.”

• Any changes in the language in the post-meeting statement. At the conclusion of Federal Open Market Committee (FOMC) meetings, the Fed releases its post-meeting statement summarizing the outcome of the meeting. Generally included is the committee’s assessment of the economy and potential risks to its recovery. Notably, the committee downgraded the COVID-19 risk last month. However, the committee may reinsert that language given the uptick in cases due to the Delta variant. An acknowledgement would likely indicate the committee’s hawkish shift last month may have been premature.
• More discussion around reducing the bond buying programs. The Fed currently purchases $120 billion of debt securities every month ($80 billion of Treasury and $40 billion of agency mortgage securities) to help provide liquidity and to support financial markets. In previous meetings, Fed Chair Jerome Powell has said that it’s too early to talk about reducing that support. While we don’t think the Fed is ready to announce the start of the tapering process, we do expect the committee to announce that those discussions are taking place with a formal tapering plan coming in the next few months.
• Still too early to talk about raising short term interest rates. The Fed has said that it would like to reduce its bond buying programs before it starts to increase interest rates. At the end of the day, the market is more concerned about rising interest rates than the tapering of bond purchases. Historically, when the Fed starts to raise interest rates, economic growth tends to slow. The market will be looking for any hint of when that process will start. Markets don’t expect that to take place for another year or so. Any suggestions otherwise will likely increase market volatility.

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 changed over the past month. Largely due to the expected slowdown in economic growth due to the COVID-19 delta variant, the market now thinks the Fed will wait until the first part of 2023 to hike rates. Moreover, the expected path of interest rates over time has come down slightly with the market only pricing in four 25 basis point (0.25%) interest rate hikes over the course of the next five years.

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 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, July 23, 2021

On Thursday, July 22, the Conference Board released its June 2021 report detailing the latest reading for the Leading Economic Index (LEI), a composite of ten data series that tend to lead changes in economic activity. Many economic data points are backward looking, but we pay special attention to the LEI, as it has a forward-looking tilt to it and spans many segments of the economy. The index grew 0.7% month over month, a bit slower than the previous three months but still squarely in positive territory.

“The market’s upward momentum is contending with a few bearish narratives at the moment, one of which is second derivative economic growth concerns,” said LPL Financial Chief Investment Strategist Ryan Detrick. “And while June’s LEI growth certainly did come in below the elevated levels of the past few months, we continue to see plenty of strong economic growth ahead of us.”

As seen in the LPL Chart of the Day, the LEI’s growth rate came off its hot run rate from the last three months, but it is still growing at a healthy clip by historical standards.

View enlarged chart.

Eight of the ten components grew in June, while two fell. Average weekly initial claims for unemployment insurance, the Institute for Supply Management (ISM) New Orders Index, and the Leading Credit Index represented the three largest positive contributors. Building permits and average weekly manufacturing hours detracted from the overall index’s performance.

We noted in last month’s coverage of the May LEI report that the trailing three months had all seen monthly gains in excess of 1%, which is a historicaly rare feat. Perhaps, then, some giveback was to be expected this month as the LEI can be a volatile series. Through this lens, we caution against interpreting the deceleration as a sign that the economic outlook is deteriorating. The broader trend remains definitively positive, we remain in the early stages of a new economic expansion, which can be accompanied by occassional jitters, and continued strong breadth among underlying components should act as support for the overall index. We continue to see plenty of reasons for optimism as we move into the second half of 2021 where we expect labor supply to come back online and bottlenecks to begin to resolve themselves, allowing for increased output.

IMPORTANT DISCLOSURES

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

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

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

All index and market data from FactSet and MarketWatch.

This Research material was prepared by LPL Financial, LLC.

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

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

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

Market Blog Posted by lplresearch

Friday, July 23, 2021

Inflation is soaring and Jerome Powell still isn’t overly worried about it. In fact, he was grilled by Congress last week and held his ground on his inflation views. This week in the LPL Market Signals podcast Chief Market Strategist Ryan Detrick and Equity Strategist Jeff Buchbinder breakdown that, along with a preview of first quarter earnings.

Earnings season is here.

First quarter earnings season officially kicked off and is already off to a great start. Jeff noted that just last week we thought earnings could be up in the mid-70% range year over year, now it could hit 80%. Ryan noted last quarter earnings came in way above expectations and wouldn’t be shocked to see that one again. Jeff noted that the majority of the gains should come from reopening areas, as the economy continues to surprise to the upside.

See enlarged chart.

Jerome Powell goes to Washington

Last week was Federal Reserve (Fed) Chairman’s biannual meeting with Congress and overall he remained steadfast that the spike in inflation the past three months is indeed transitory. Ryan pointed out this is also our base case as well, that inflation will be higher, but we don’t see runaway 1970s style inflation. Jeff then noted that the majority of the jump in prices can be found in areas like new cars, used cars, airfare, and hotels. In other words, these areas are all about the reopening and the other parts of the economy are seeing prices remain more tame.

The start of something more?

Ryan and Jeff end the conversation discussing Monday’s big market drop. Ryan noted after a 90% rally, some type of pullback would be perfectly normal. Also, we aren’t quite seeing the amount of breadth we saw last year and earlier this year, so this is indeed a potential warning sign of a well-deserved break. Jeff pointed out that the S&P 500 hasn’t had a 5% correction since October, which is a very long time. In fact, you tend to see three separate 5% corrections a year on average, so to not have one the full first half of this year only increases the odds of a 5% pullback in our views.

Tune In Now

Listen to the entire podcast to get the LPL strategists’ views and insights on current market trends in the US and global economies. To listen to previous podcasts go to Market Signals podcast. You can subscribe to Market Signals on iTunes, Google Podcasts, or Spotify and find us on the LPL Research YouTube channel.

You can watch the full video below and directly on our YouTube channel. Please be sure to subscribe to the LPL Research YouTube channel so you don’t miss anything! Also, if you like our channel, please give us a positive review—it helps more than you know!

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.

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

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

All index and market data from FactSet and MarketWatch.

This Research material was prepared by LPL Financial, LLC.

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

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

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

Economic Blog Posted by lplresearch

Thursday, July 22, 2021

In data we received on Tuesday, July 20, U.S. Housing Starts increased 6.3% in June to 1.64 million units, a 3-month high. By region, housing starts rose in the South and West, and in the Northeast, single-family home construction soared more than 34% from the prior month. The data suggested residential construction continued its sharp post-COVID rebound despite the difficulties builders are having in finding labor and materials.

As seen in the LPL chart of the day, Housing Starts are now hovering in the same territory as the highs reached prior to the Great Recession; an economic instance spurred by excess housing activity and high home prices. While recent housing activity has been decidedly robust, efforts to ramp up supply have still not offset demand. The chart illustrates that the Months’ Supply of Home inventory continues to dwindle (only 2.5 months of inventory as of May).  This has kept upward pressure on housing prices and reduced housing affordability.

“U.S. residential construction activity continues to be robust, but builders, faced with labor shortages and high materials costs, can’t seem to catch up with demand. The supply of home inventory continues to shrink suggesting today’s U.S. housing market may be even tighter than prior to the Great Recession,” explained LPL Financial Director of Research Marc Zabicki.

We believe the tight supply condition is not expected to dissipate anytime soon. Why? A key reason is that home building activity may be showing signs of slowing. Building Permits, a proxy for future housing construction (also released on Tuesday), fell 5.1% in June which followed a 2.9% drop in May. That’s the lowest permit activity since October 2020 and it suggests a more moderate pace of homebuilding in coming months. High materials costs and shortages of land and labor are stifling efforts to ramp up supply to meet demand.

See enlarged chart.

Should current conditions persist, we believe high housing prices could begin to negatively impact consumer spending and become a net drag on economic growth in the coming quarters.  We believe high prices may lead to higher mortgage payments and higher rental cost.  According to the S&P CoreLogic Case Shiller Home Price Index, house prices rose 14.9% year-over-year in April (the latest data available). This same index has risen by double-digit percentages since December, a pace that is likely not sustainable for long.

IMPORTANT DISCLOSURES

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

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

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

All index data from Bloomberg.

This Research material was prepared by LPL Financial, LLC.

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

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

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

Market Blog Posted by lplresearch

Wednesday, July 21, 2021

Monday’s big down day was a harsh reminder of how markets actually can produce volatility. It was the worst day of the year for the Dow and only the second drop of 1% or more for the S&P 500 Index in just over two months.

As we noted recently in Three Things That Worry Us, there are many reasons to think that after more than a 90% rally (and virtually a double on a total return basis), the S&P 500 could finally be ready for a break. From less stocks participating, to weak seasonality, to a lack of bears, to typical choppiness during year two of a bull market, the summer months could be ripe for an eventual pullback (down 5-9%) or even a 10% correction.

See enlarged chart.

“The truth is investors have been very spoiled by the recent stock market performance,” explained LPL Financial Chief Market Strategist Ryan Detrick. “Incredibly, we haven’t seen as much as a 5% pullback since October. Although we firmly think this bull market is alive and well, let’s not fool ourselves into thinking trees grow forever. Risk is no doubt increasing as we head into the troublesome August and September months.”

As shown in the LPL Chart of the Day, the average year sees three separate 5% or more pullbacks for the S&P 500 with not a single one happening yet in 2021. This doesn’t mean a 5% correction is directly around the corner, but note that most stocks are actually already down as much as 10% off their recent highs, suggesting the internals of the market are a tad weak and risk is higher than normal.

See enlarged chart.

Looking at 10% corrections, the S&P 500 has averaged exactly one a year since 1950. Of course, with the historic volatility last year we saw four separate 10% corrections, though there hasn’t been a 10% correction since March 2020. Again, this could be getting long in the tooth after the 90% plus rally from the lows.

See enlarged chart.

Overall, worries over inflation, yields, the Delta COVID-19 variant, peaking economic data, or something else will get the headlines for any market weakness. We know that year two of bull markets can be choppy and frustrating, but the truth is earnings remain extremely strong, justifying stocks at current levels. It is just that sometimes stocks need to catch their breath, and we wouldn’t be surprised at all if that happened over the coming months.

IMPORTANT DISCLOSURES

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

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

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

All index 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