Wealth Management

Economic Blog Posted by lplresearch

Thursday, June 10, 2021

Make that two consecutive months that CPI inflation has surprised meaningfully to the upside.

The U.S. Bureau of Labor Statistics released its May inflation report this morning, June 10, revealing that the headline Consumer Price Index (CPI) rose 0.6% month over month and 5% year over year. The core CPI, which strips out food and energy, rose 0.7% month over month, and 3.8% year over year. Given strong base effects from rolling off weak data from a year ago, we find the month over month data more informative. With that context, more volatile components that are heavily tied to the economic reopening had the largest effects on the monthly increases, most notably prices for used vehicles, airfare, and rental cars.

We continue to see strong evidence that supply chain bottlenecks paired with a rapid demand rebound are causing major price increases. The most visible example is in used car and truck prices, which surged 7.3% in May following a historic 10% rise in April. The supply of new vehicles is constrained in the near term because of semiconductor chip shortages, and as a result, used cars and trucks are being bid up in the secondary markets. The good news is that we expect these market imbalances to largely resolve themselves with time as supply, which has a longer ramp-up time than demand, recovers.

“The inflation outlook has rightfully been top of mind since last month’s blowout report,” explained LPL Financial Chief Market Strategist Ryan Detrick. “Under the hood, though, we think the picture is a bit more sanguine than the headlines would suggest, and still believe inflation will be relatively well-contained over the intermediate-to-long term.”

As seen in the LPL Chart of the Day, owners’ equivalent rent of primary residences, a measure of rents for non-rent-controlled residences in urban areas, has bounced off depressed levels. The move thus far, though, is likely best described as returning to the pre-pandemic trend rather than threatening to break away to new heights…for now. This measure is critical for future inflation prospects, as it is one of the largest components of CPI and is considered to be less volatile than other components. Movements observed in the series are, therefore, viewed as more structural in nature and thus have the potential to be “stickier.” At the moment, we do not believe that the rent component poses an imminent threat to the broader inflation picture, and is merely displaying an increasing willingness for consumers to rent following a massive shift in preference to own brought on by COVID-19.

View enlarged chart.

Market-based measures of inflation expectations have also retreated from their fever pitch last month. 10-year breakeven inflation expectations, derived from the differences in nominal and real Treasury yields, have actually fallen since last month’s CPI report, not risen. And while we are hesitant to call that the peak in inflation expectations given ongoing bottlenecks in supply chains, there was a distinct air of a “buy the rumor, sell the news” dynamic to us.

Taken altogether, we believe the Federal Reserve (Fed) will view today’s inflation data generally as confirmation of its preexisting stance that the majority of excess inflationary pressures will be transitory. In a vacuum, despite the headline inflation beat, this likely does little to change the Fed’s timetable for tapering asset purchases, and the market reaction for now looks to be confirming that view. The coming months will be telling, though, as we are now entering the “show me” phase of the inflation debate where market participants will be increasingly anxious for the Fed to prove its assertion that higher inflation will be transitory.

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

Wednesday, June 9, 2021

The S&P 500 Index is flirting with new highs unlike nearly any time in history. In fact, it has now gone nine days in a row closing within 1% of an all-time high without breaking through. “There’s an old saying about not shorting a dull market. Well, lately it has been about as dull as it gets,” explained LPL Financial Chief Market Strategist Ryan Detrick. “The catch is other times that saw long streaks without a new high, yet very close to one, actually didn’t perform as well as one might expect.”

View enlarged chart.

Taking things a step further, the S&P 500 has closed within 0.15% of an all-time high without closing at a new high for three straight days. In the history of the S&P 500, that has only happened one other time, in September 1964. Stocks were flat three months later then and up only 2.6% six month later, so although this is only a sample size of one, a sharp move higher in the near term appears less likely.

We’ve shared this next chart before, but given we are talking about new highs it is important to point it out again. New highs usually happen in clusters that can last for a decade or more. Given this market has been making new highs since 2013, despite the 2020 bear market, history would suggest there could be several more years before this strong run is done.

View enlarged chart.

Take another look above. This year has a good amount of new highs already and it isn’t even half way over. In fact, 26 new highs over the first five months of the year is the most for any year during the first five months since 32 new highs in 1998.

Another angle on this: Should the S&P 500 make a new high in June, it would make a new high every month for the first six months of the year. This rare feat last happened in 2014 and 1986 before that. The rest of the year those years added 5.0% and lost 3.5%, respectively.

The S&P 500 is only 0.13% away from the last all-time high set back on May 7. Odds do favor another new high will eventually take place, which means this bull market continues. In the LPL Chart of the Day we show that this new bull market is already up 89% in just over a year, giving it one of the best annualized returns ever for a bull market, although bull markets do tend to have strong annualized returns early.

View enlarged chart.

What happens after stocks make new highs? Here’s a chart we shared last August. The bottom line is investors shouldn’t be scared of new highs, even though many are scared of heights.

View enlarged chart.

So there you have it, various looks at new all-time highs. Now we just have to make one!

IMPORTANT DISCLOSURES

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

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

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

All index and market data from FactSet and MarketWatch.

This Research material was prepared by LPL Financial, LLC.

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

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

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

Market Blog Posted by lplresearch

Tuesday, June 8, 2021

While many of the taxable markets have generated negative returns this year, both the high quality and high yield municipal markets have generated positive returns (no guarantees that will continue, of course). State and local government finances are in better shape than many feared during COVID-19 shutdowns and many muni issuers are set to receive billions in federal aid. Thus, the fundamental backdrop for many muni issuers has improved recently. Yields, however, reflect that positive backdrop and are amongst the lowest they’ve ever been. As seen in the LPL Research Chart of the Day, the ratio of AAA municipal yields over 10-year Treasury yields, a common valuation metric, is significantly below the five-year average and around an all-time low.

“The municipal market has been a relatively good story for fixed income investors this year,” noted LPL Financial Fixed Income Strategist Lawrence Gillum. “And the continued need for tax-exempt income should help support prices.”

View enlarged chart.

While valuations are high, the technical backdrop for municipal securities remains supportive, in our view. Investor flows into municipal mutual funds and ETFs have been strong with an estimated $43 billion of inflows year to date through May, which is the highest on record according to Lipper data. Currently, we’re entering a strong seasonal period when, historically, reinvestment money has outpaced new municipal bond issuance. Over the next three months, Bloomberg estimates $165 billion will be returned to bondholders (due to maturing bonds and interest payments) for reinvestment into the market, which is roughly $45 billion more than what is expected to come to market from new issuance. All that money chasing fewer investment opportunities should provide stability to bond prices, at least in the near-term.

That said, risks remain in the municipal market. While many state budgets are currently flush with cash, underfunded pensions are still an issue. A recent report by a global pension consultant shows that, as of June 30, 2020, state pension plans, in aggregate, were only 70% funded. Moreover, there have already been 76 distressed muni borrowers this year (mostly smaller issuers), which puts this year on track to exceed almost every year since 2012 in terms of impairments (2020 was worse due to COVID-19). Nonetheless, with strong tax revenues, billions in federal aid and strong flows into the market, municipal bonds should remain well bid, particularly in the near term.

IMPORTANT DISCLOSURES

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

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

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

All index and market data from FactSet and MarketWatch.

This Research material was prepared by LPL Financial, LLC.

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

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

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

Economic Blog Posted by lplresearch

6/4/2021

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

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

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

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

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

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

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

View enlarged chart.

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

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

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

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

IMPORTANT DISCLOSURES

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

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

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

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

This Research material was prepared by LPL Financial, LLC.

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

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

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

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

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

Economic Blog Posted by lplresearch

Thursday, June 3, 2021

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

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

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

View enlarged chart.

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

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

IMPORTANT DISCLOSURES

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

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

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

All index and market data from FactSet and MarketWatch.

This Research material was prepared by LPL Financial, LLC.

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

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

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

Market Blog Posted by lplresearch

Wednesday, June 2, 2021

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

View enlarged chart.

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

View enlarged chart.

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

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

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

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

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

View enlarged chart.

IMPORTANT DISCLOSURES

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

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

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

All index and market data from FactSet and MarketWatch.

This Research material was prepared by LPL Financial, LLC.

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

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

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

Market Blog Posted by lplresearch

Tuesday, June 1, 2021

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

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

View enlarged chart.

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

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

IMPORTANT DISCLOSURES

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

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

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

All index and market data from FactSet and MarketWatch.

This Research material was prepared by LPL Financial, LLC.

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

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

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

Market Blog Posted by lplresearch

Wednesday, May 26, 2021

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

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

View enlarged chart.

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

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

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

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

View enlarged chart.

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

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

View enlarged chart.

Some interesting stats on the chart above:

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

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

View enlarged chart. 

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

IMPORTANT DISCLOSURES

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

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

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

All index and market data from FactSet and MarketWatch.

This Research material was prepared by LPL Financial, LLC.

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

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

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

Market Blog Posted by lplresearch

Tuesday, May 25, 2021

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

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

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

View enlarged chart.

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

IMPORTANT DISCLOSURES

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

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

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

All index and market data from FactSet and MarketWatch.

This Research material was prepared by LPL Financial, LLC.

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

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

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

Economic Blog  Posted by lplresearch

Friday, May 21, 2021

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

On Thursday, May 20, the Conference Board released its April 2021 report detailing the latest reading for the LEI, a composite of ten data series that tend to lead changes in economic activity. Many economic data points are backward looking, but we pay special attention to the LEI, as it has a forward-looking tilt to it. The index grew 1.6% month over month, following up March’s strong 1.3% rebound from a brief dip into negative territory in February. Moreover, the index’s nominal value made a new all-time high, overtaking the previous peak from January 2020 prior to the recession.

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

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

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

View enlarged chart.

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

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

IMPORTANT DISCLOSURES

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

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

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

All index and market data from FactSet and MarketWatch.

This Research material was prepared by LPL Financial, LLC.

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

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

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