Wealth Management

Market Blog Posted by lplresearch

Tuesday, June 29, 2021

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

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

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

See enlarged chart.

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

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

IMPORTANT DISCLOSURES

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

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

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

All index and market data from FactSet and MarketWatch.

This Research material was prepared by LPL Financial, LLC.

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

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

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

Market Blog Posted by lplresearch

Friday, June 25, 2021

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

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

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

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

View enlarged chart.

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

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

IMPORTANT DISCLOSURES

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

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

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

All index data from Bloomberg.

This Research material was prepared by LPL Financial, LLC.

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

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

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

Economic Blog Posted by lplresearch

Thursday, June 24, 2021

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

View enlarged chart.

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

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

View enlarged chart.

IMPORTANT DISCLOSURES

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

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

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

All index data from Bloomberg.

This Research material was prepared by LPL Financial, LLC.

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

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

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

Market Blog Posted by lplresearch

Tuesday, June 22, 2021

The “dot plots” are slowly becoming the new phrase of the year after the July 16 Federal Reserve (Fed) meeting. As a reminder, the dot plots represent the expected path of short-term interest rates by Fed members. Each dot represents a member’s opinion on where the Fed funds policy rate should be over the next few years. While not official policy, it does provide additional transparency into Fed member thinking—albeit anonymously. Along those lines, St. Louis Fed President Jim Bullard made headlines by saying he was one of the Fed members who now thinks raising short-term interest rates in 2022 makes sense. His comments were notable as he has generally been seen as reliably dovish and has argued for more accommodative monetary policy in the past. (For more on what doves and hawks have to do with monetary policy, please see the June 21 Weekly Market Commentary.) Markets, always on the lookout for hints on Fed policy, have interpreted the recent dot plot release and Bullard’s comments as a hawkish shift in policy. Consequently, fixed income and equity markets reacted sharply to the news.

“Markets are looking for any sign of a change in Fed policy,” noted LPL Financial Fixed Income Strategist Lawrence Gillum. “Unfortunately, some of the ways in which the Fed is communicating are actually adding confusion and volatility to markets. We think it’s important for investors to filter out this noise and concentrate on longer-term goals.”

As seen in the LPL Research Chart of the Day, the bond market’s reaction can be seen as a tale of two interpretations. The front end of the yield curve sold off (yields increase as prices decrease), which is consistent with the prospect of earlier rate hikes. Short-term Treasury yields are more sensitive to changes in monetary policy, so higher yields for two and three-year tenors are consistent with the Fed’s expectation for raising policy rates in the next few years. However, the big rally in bonds on the longer end of the yield curve is more consistent with slowing growth expectations—something we tend to see during an actual rate hike campaign.

We think the move higher in yields on the front end of the curve is likely the right interpretation of shifting Fed policy, whereas we don’t think investors should read too much into the price action on the long end of the curve. We don’t think the bond market is pricing in a much slower growth environment. The exaggerated move in longer-term yields was likely from a popular trade on higher long-term Treasury yields unwinding into a Treasury market with more sellers than buyers. A number of liquidity indexes we watch support that view. So, the lack of liquidity in the bond market last week helped push longer-term yields lower—more so than a shift in Fed policy would suggest.

View enlarged chart.

When the dot plot was originally released, it was intended to provide additional transparency into the way individual members were thinking about monetary policy. In fact, these dot plots have often added confusion and volatility to markets, yet another reason the Fed tries to downplay the importance of these releases. In fact, during last week’s post-Fed meeting press conference, Chairman Powell said the dot plots should be taken with a “big grain of salt.” We agree. So, hopefully, we can stop talking about dot plots soon. Well, at least until a new set of dot plots are released after the Fed’s September policy meeting.

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, June 21, 2021

New highs amid higher inflation

The S&P 500 Index finally broke out to new highs late two weeks ago on the heels of the hotter than expected inflation data. Equity Strategist Jeff Buchbinder and Chief Market Strategist Ryan Detrick discuss how the market took the 5.0% year-over-year jump in the May Consumer Price Index (CPI) in stride, as the majority of the jump came from the reopening. Higher prices on rental cars, used cars, and hotels amounted for much of the huge jump. Ryan also discusses that new highs aren’t anything to fear, as future returns can be quite strong.

View enlarged chart.

Fed preview and lower yields

Lawrence Gillum joins the podcast to discuss the surprising lower move in yields. Nearly everyone is expecting higher rates, but last week the opposite happened. Some disappointing jobs data, a smaller infrastructure deal, and a dovish European Central Bank (ECB) all were attributed for the move lower. Ryan notes that sometimes when everyone is on the same side of the boat, that can cause a surprise move in the opposite direction.

Ryan and Lawrence also discuss the big event this week: The Federal Reserve (Fed) meeting. Lawrence notes that it is expected they will leave rates at 0%, but the big question is when will they taper and have they even started to discuss it internally yet. It will likely be announced in Q3, with actual tapering starting early next year.

Sustainable investing in fixed income

Lawrence discusses why sustainable investing is becoming more mainstream in fixed income. We all talk about sustainable investing and usually think of equities, but Lawrence notes we are seeing explosive growth in fixed income as well. In fact, over $400 billion of environmental, social, and governance (ESG) related debt was issued in the first quarter of 2021. Lawrence explains that the future is indeed bright for this area of investing and we don’t see it slowing down anytime soon.

View enlarged chart.

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. Or you can watch it 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

Economic Blog Posted by lplresearch

Friday, June 18, 2021

As the economic focus has frantically shifted from inflation concerns to peak growth fears to the Federal Reserve’s (Fed) tightening timeline in recent weeks, it can be helpful to take a step back and assess the broad economic trend with a diversified set of indicators.

Through this lens, we are encouraged by the latest reading of the Leading Economic Index (LEI), which strongly suggested that economic growth would continue at a strong clip in the near-to-intermediate term.

On Thursday, June 17, the Conference Board released its May 2021 report detailing the latest datapoint for the LEI, a composite of ten data series that tend to lead changes in economic activity. Many economic data points are backward looking, but we pay special attention to the LEI, as it has a forward-looking tilt to it and spans many segments of the economy. The index grew 1.3% month over month, building on the strength seen in recent months since flirting with negative territory in February.

“Three consecutive monthly gains in excess of 1% tend to be rare, and in fact, we never experienced that coming out of the 2008 recession,” said LPL Financial Chief Investment Strategist Ryan Detrick. “That we have seen this dynamic twice now exiting the trough of the most recent recession speaks to the speed and strength of the recovery. We certainly understand near-term jitters, but we expect broader economic trends to remain positive over the intermediate term, consistent with the LEI’s message.”

As seen in the LPL Chart of the Day, the LEI has shown strong growth the last three months after limping through the second half of winter.

View enlarged chart.

Seven of the ten components grew in May, while two fell and one remained unchanged. Average weekly initial claims for unemployment insurance, the ISM New Orders Index, and the interest rate spread represented the three largest contributors. Building permits and manufacturers’ new orders for nondefense capital goods excluding aircraft detracted from the overall index’s performance, while average weekly manufacturing hours held steady.

Strong breadth among the underlying components reinforces our view of continued economic strength. While supply chain bottlenecks and a slower-than-desired labor market recovery have acted as near term speedbumps, we expect those dynamics to largely self-correct and propel the economy further in the second half of the year. Reopening effects are snowballing, and we believe ever-increasing vaccination numbers, warmer weather, and the potential for strong employment growth later in 2021 warrant continued optimism for this economy.

IMPORTANT DISCLOSURES

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

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

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

All index and market data from FactSet and MarketWatch.

This Research material was prepared by LPL Financial, LLC.

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

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

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

Market Blog Posted by lplresearch

Thursday, June 17, 2021

The Federal Reserve (Fed) ended its two-day Federal Open Market Committee (FOMC) meeting yesterday and, as expected, there were no changes to current interest rate or bond purchasing policies. However, signaling on future path of short-term interest rates seemingly surprised markets. Notably, the number of Fed members that now expect interest rate hikes in 2023 changed dramatically. While an initial hike was once thought of as a 2024 event at the earliest, the majority of members now expect at least two quarter-point interest rate hikes to take place in 2023. Additionally, seven members (out of eighteen) expect at least one rate hike in 2022. While, it should be noted that these “dot-plot” projections are not voted on nor do they represent official policy, it does show the changing opinions of the committee members (more on this in next week’s Weekly Market Commentary). Nonetheless, the overall hawkish message surprised the bond market and as seen in the LPL Research Chart of the Day, Treasury yields across the curve moved sharply higher after the FOMC statement was released (yields move higher when bond prices fall).

“What was expected to be a routine Fed meeting turned out to be moderately interesting,” noted LPL Financial Fixed Income Strategist Lawrence Gillum. “While it was largely expected that the dot-plot would show that the first interest rate hike would likely occur in 2023, the number of members that pulled forward that expectation is more than the market was expecting and could show a more hawkish tilt to monetary policy going forward.”

See enlarged chart.

Other takeaways from the meeting and the subsequent press conference included:

• Summary of Economic Projections (SEP): Four times a year, the Fed updates its economic projections for the next several years as well its longer-term forecasts. The Fed now sees 7.0% GDP Growth in 2021 (up from 6.5% in March), and much higher inflation expectations with PCE headline and core metrics, their preferred inflation metrics, at 3.4% and 3.0%, respectively. However, the committee sees inflation falling to slightly more than 2.0% in 2022 and 2023. The expected unemployment rate in 2021, 2022 and 2023 remained largely unchanged.
• Tapering of bond purchases: The Fed continues to buy at least $80 billion of Treasury securities and $40 billion of agency mortgage securities each month. Chairman Powell, in his post-meeting press conference, indicated that they have started “talking about talking about” the potential to reduce those bond purchases but aren’t ready to curtail purchases just yet. Chair Powell mentioned that the committee will continue to talk about reducing its bond purchases and will announce its intention well in advance of actually reducing the amount of Treasury and mortgage securities.

While the bond market was surprised by the change in the number of members that now expect interest rates to move higher, it should be noted that the change is due to the continued economic recovery. In our view, it should be viewed as a positive that the Fed thinks the economy is recovering quicker than originally expected. The next FOMC meeting concludes on July 28 and while we won’t get updated economic projections, we should learn more about the future path of monetary policy.

IMPORTANT DISCLOSURES

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

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

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

All index and market data from FactSet and MarketWatch.

This Research material was prepared by LPL Financial, LLC.

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

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

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

Market Blog Posted by lplresearch

Wednesday, June 16, 2021

As nearly everyone knows by now, inflation has soared the past few months, with the May Consumer Price Index (CPI) coming in at 5.0% year-over-year, the highest since 2008, while the core CPI (excluding energy and food) was 3.8%, the highest since 1992. The Bloomberg consensus is calling for 3.4% headline CPI this year, which has many worried about potentially runaway inflation. We do not expect that to happen and we’d side with the actual number coming in lower than the current consensus.

How much has inflation been in the news? A recent CNBC survey noted that inflation worries are now investor’s biggest worry, topping pandemic worries for the first time in 15 months. Adding to that, here is a Google Trends showing that searches for the word ‘inflation’ have never been higher going back to 2004 (the furthest back their data goes), again suggesting that higher inflation shouldn’t be a surprise.

See enlarged chart.

First off, why is inflation higher? Record stimulus, a big economic recovery, major supply chain issues, a surprisingly tight labor market, and negative CPI this time a year ago (so the baseline is quite low) are all reasons inflation has soared lately. As we’ve said many times in recent months, we think the jump in inflation is transitory, and inflation will come back to trend by mid-2022.

Many of the big picture things that have kept a lid on inflation for more than a decade are still in place. Things like technological innovation, globalization, the Amazon effect, increased productivity and efficiency, automation, and high debt (which puts downward pressure on inflation) are all still firmly in play and should help keep inflation in check later this year and beyond.

“Yes, this year could see inflation upwards of 3% or a tad more, but that isn’t exactly runaway inflation from the 2% inflation rate we saw most of last decade,” explained LPL Financial Chief Market Strategist Ryan Detrick. “Coming out of the worst recession we’ve seen in our lifetime, it makes sense that inflation could run hotter this year and maybe even into 2022, but the likelihood that we have a 1970s style inflation surge is quite slim.”

What does the market think? Odds are nearly everyone realized inflation is higher as the Google Trends data showed. In case you don’t like to Google things, just go get gas or head to the grocery store, you’ll see higher prices. But the market has a funny way of looking ahead and pricing things in well before most people understand why. There very well could be a major peak in inflation fears but the market may already be starting to move on from this worry.

Think about it, if the market was truly worried about inflation, would rates really drop in the face of that scary CPI data? Probably not.

See enlarged chart.

What about lumber? It has crashed 40% recently, yet another sign inflation worries may have peaked.

See enlarged chart.

Corn and soybeans appear to have also peaked.

See enlarged chart.

See enlarged chart.

Even copper has peaked out recently.

See enlarged chart.

Recently, as we show in the LPL Chart of the Day, 10-year breakevens, a measure of market-implied inflation expectations, peaked the exact same week that Barron’s had a magazine cover talking about inflation. In other words, inflation fever had gripped us back in May and just as quickly the market had it priced in and stopped worrying so much about it. (Note – The 10-year breakeven rate measures the difference or gap between 10-year Treasury Bond and Treasury Inflation Protected Securities (TIPS). The 10 year breakeven rate serves as an indication of the markets’ inflation expectations over the 10-year horizon.)

See enlarged chart.

What does it all mean? There are clear signs that higher inflation is priced into the market. Yes, we’ll get higher inflation, but it won’t be a surprise anymore. For more of our thoughts on inflation, we discuss inflation (and many other things) in our most recent LPL Market Signals podcast. You can watch it from our YouTube channel below.

IMPORTANT DISCLOSURES

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

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

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

All index and market data from FactSet and MarketWatch.

This Research material was prepared by LPL Financial, LLC.

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

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

• Not Insured by FDIC/NCUA or Any Other Government Agency
• Not Bank/Credit Union Guaranteed
• Not Bank/Credit Union Deposits or Obligations
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Tuesday, June 15, 2021 Posted by lplresearch

As investors we fight against behavioral biases in every investment decision we make. Our Director of Research Marc Zabicki talked recently about some of these biases in this video. We become attached to our ideas and when we think about selling, “FOMO” kicks in—the fear of missing out. Buying is the easy part. But selling is hard.

After maintaining a positive view of the technology sector for a number of years and seeing it do so well, the LPL Research team faced a difficult decision. Value stocks have been leading, benefiting from the economy opening back up again. More inflation, rising interest rates, and higher commodity prices are generally value-friendly macroeconomic factors. But a more positive view of value stocks should be paired with a less positive view of growth stocks—largely technology.

“It’s tough not to like technology given the strong fundamentals and rapid pace of innovation from many tech companies,” explained LPL Equity Strategist Jeffrey Buchbinder. “But we expect cyclical value sectors like financials, industrials, and materials to fare better the rest of the year as the economy gets a reopening jolt.”

We downgraded our technology view to neutral primarily for these reasons:

1) Reopening. We expect the market’s shift toward reopening beneficiaries and away from stocks best positioned for the work-from-home environment to continue. That means favor cyclical value sectors (financials, industrials, materials, and potentially energy) over the growth sectors including technology as well as consumer discretionary and communication services.

2) Valuations. The price-to-earnings ratio for the technology sector based on estimated earnings over the next 12 months (source: FactSet) is 25—high compared to the sector’s history. The relative valuation—at near a 20% premium to the S&P 500 (25x versus 21x)—is also high as shown in our LPL Chart of the Day. Comparing value to growth based on the Russell 1000 style indexes reveals an even bigger gap—the Growth Index is trading at a more than 60% premium to the Value Index, the most in 20 years. Also consider we expect interest rates to rise over the rest of the year, which could bite into richly valued growth stocks.

See enlarged chart.

3) Neutral relative trend. The sector is near its all-time high and nearly 90% of the stocks within it are above their 200-day moving averages, indicative of a strong trend. But relative performance versus the S&P 500 Index peaked on September 1 and has been drifting sideways to lower since then, as shown in the accompanying chart. The lack of a trend, based on a flat 200-day moving average for relative performance, points to a neutral sector view.

See enlarged chart.

Even though we’ve tempered our enthusiasm, we acknowledge the sector still enjoys solid fundamentals. Demand for technology equipment and software won’t go away just because people get out more. In fact, we wouldn’t be surprised to see the sector grow earnings by 40% during the second quarter on a year-over-year basis (FactSet’s consensus estimate is currently calling for near 30%). But the rest of the S&P 500 companies may see something closer to 70%, including doubling of financials’ and materials’ earnings and tripling of industrials’.

The downgrade to neutral doesn’t mean we plan to head for the hills by any stretch. A neutral view would imply matching the sector’s weighting in the S&P 500 at 27% in applicable strategies. We believe the sector likely moves higher in the second half of the year, along with the broad market, but we just see better opportunities for outperformance in cyclical value 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 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

Friday, June 11, 2021 Posted by lplresearch

While U.S. economic conditions have certainly improved, and earnings momentum for S&P 500 companies has been strong, U.S. small business conditions remain somewhat less stable. Notably, the NFIB Small Business Optimism Index has improved since last year (99.6 in May, up from the 90.9 low in April 2020), and according to the Federal Reserve, perhaps less than 200,000 U.S. small businesses failed due to the pandemic last year. Both figures are likely better than many had expected during the height of 2020’s economic stress. However, the aggregate economic foundation of small business in this country probably has a ways to go before it fully recovers. This may create more instability at this point in the recovery than is typically seen. The message here is that while most high-frequency economic data indeed looks good, we should remain mindful of still unstable areas of the economy that may not show up in many data sets.

Fortunately, the National Federation of Independent Business (NFIB) provides economic and market participants with various survey results that deal with specific elements of small business operation. The NFIB not only surveys optimism, but they also compile data on hiring plans, compensation plans, capex plans, quality of labor, and sales expectations…among other items. Review of these data series indicates to us that there is still work left to do to get U.S. small businesses back on solid footing. As we can see from the LPL Chart of the Day below, business owners remain somewhat hesitant about their capital expenditure plans while hiring plans have trended more firmly with optimism. Still, other data tells us that NFIB survey respondents are cautious as to whether now is a good time to expand their business. Meanwhile, the surveys show that small business owners are indeed having a hard time finding quality labor and the cost of labor is rising, thus making job openings hard to fill.

See enlarged chart.

“Recent NFIB data tells us that small businesses have gotten off the floor following the pandemic punch, but the black eye on a formidable part of the U.S. economy still lingers. With post-COVID economic re-openings in full swing, we remain hopeful that small businesses will soon recover enough to add that final boost to domestic conditions,” explained LPL Financial Director of Research Marc Zabicki.

While small business conditions will be something to watch carefully through 2021 and into next year, we believe pent-up consumer demand could bode well for many establishments. We are expecting a robust summer traveling season that could have consumers readily opening their wallets. This may translate into further improvements in the NFIB optimism trend, provided that business owners find a solution to their current labor struggles.

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