Wealth Management

Market Blog Posted by lplresearch

Tuesday, May 04, 2021

Fixed income investments have generally played two key roles within a diversified asset allocation—generating a stable income and providing protection during equity market selloffs. While we still think high-quality fixed income investments can meet those two objectives, with yields as low as they are, the income objective has certainly become harder to meet. As such, income-oriented investors may have to look to non-core fixed income alternatives.

An alternative option worth considering may be preferred securities. As seen in the LPL Chart of the Day, preferred securities are amongst the highest yielding options within the fixed income categories. Following are five things investors should know before allocating to preferred securities.

View enlarged chart.

1. Hybrid securities. Preferred securities are “hybrid” securities that can be classified as either equity or debt within a company’s capital structure. They are senior to common equity but junior to traditional debt. As such, they don’t have the same capital appreciation potential of common equity nor do they possess the same capital preservation benefits of traditional debt. Preferred securities, then, tend to offer higher coupon payments to attract investors.
2. Financial focus. The majority of issuance comes from financial institutions. Preferred securities are highly correlated with the health of the financial system and a shock to the financial system would adversely impact these securities.

“Preferred securities can be higher yielding alternatives to traditional core fixed income options. They are concentrated in the financial sector but since the global financial crisis, many financial institutions have emerged with stronger balance sheets, which should limit downgrades and defaults,” according to LPL Financial Fixed Income Strategist Lawrence Gillum.

3. Credit risk. The securities tend to be BBB- or BB-rated, which means they carry higher levels of credit and default risks than the senior debt issued by the same issuer. However, since the issuers of preferred securities tend to be higher quality companies, default rates have been lower than similarly rated non-financial corporate bonds.
4. Multiple markets.S. preferred securities trade in two separate markets and while the issuer is the same, the security structures can be different. The $25 retail market is an exchange-traded market where the securities pay quarterly dividends, whereas the $1000 institutional market is an over-the-counter traded market where the securities pay dividends semi-annually.
5. Diversification benefits. Given the hybrid nature of preferred securities, there are diversification benefits to adding preferreds to a portfolio. While these securities tend to “act” like equity and high-yield fixed income securities across a full market cycle, since the financial crisis in 2009, these securities have generally held up better than both during equity market sell-offs (as measured by the S&P 500 Index).

With yields low within traditional fixed income sectors, the income component within fixed income has been harder to come by. For those income-oriented investors willing to take on some additional credit risk, preferred securities might be an attractive investment to consider.

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, April 30, 2021

“The sun was warm but the wind was chill. You know how it is with an April day. When the sun is out and the wind is still, you’re one month on in the middle of May.” American Poet Robert Frost

One of the best known investment axioms is to “sell in May and go away.” This is largely because the six months from May through October have historically been some of the weakest months of the year for stocks. As you can see below, the next six months have tended to be on the weak side.

View enlarged chart.

As shown in the LPL Chart of the Day, the next six months have indeed been the worst six months of the year, up only 1.7% on average. To add insult to injury, we are leaving the six most bullish months of the year. In fact, the S&P 500 Index is set to gain close to 30% during these most bullish six months, one of the best six-month gains ever.

View enlarged chart.

“Stocks are up more than 87% from the March lows, suggesting a well-deserved pullback during these troublesome months is quite possible,” explained LPL Financial Chief Market Strategist Ryan Detrick. “But with an accommodative Fed, fiscal and monetary policy, along with an economy that is opening faster than nearly anyone expected, we’d use any weakness as an opportunity to add to positions.”

Here’s the catch, isn’t there always a catch? Stocks have actually been higher during these worst months of the year eight of the past ten years.

View enlarged chart.

We will take a closer look at this important concept on Monday in our latest Weekly Market Commentary, so be on the lookout for it!

IMPORTANT DISCLOSURES

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

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

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

All index and market data from FactSet and MarketWatch.

This Research material was prepared by LPL Financial, LLC.

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

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

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

Economic Blog Posted by lplresearch

Thursday, April 29, 2021

In what was initially expected to be one of the slower quarters of the year, the U.S. economy jumped out of the gates in 2021, with gross domestic product (GDP) growing 6.4% quarter over quarter. A faster than expected vaccination program, nearly $3 trillion in fiscal stimulus—including direct payments to consumers—and faster than expected job growth helped fuel a surge in personal consumption—the largest portion of GDP.

As shown in the LPL Chart of the Day, personal consumption grew 10.7% on an annualized basis in the first quarter, the second highest level since the 1960’s:

View enlarged chart.

“The U.S. economy is off to a great start in 2021, and this should set the stage for solid growth in the remainder of the year as pent up demand continues to flow through the economy,” added LPL Financial Chief Investment Officer Burt White. “Many areas of the country are still facing restrictions on activity, so we don’t think growth will just be limited to the first quarter.”

However, the growth story in the first quarter wasn’t solely about direct stimulus payments. While personal consumption has understandably gained a lot of attention, federal non-defense spending added the most to GDP in nearly 60 years, a segment of the economy unaffected by transfer payments like stimulus checks.

Digging into the numbers even further, spending on services grew a modest 4.6%, which should accelerate in the second and third quarters as remaining restrictions are lifted in response to falling cases and rising vaccinations. As of April 28, the US is averaging around 2.5-3 million vaccines administered per day, which has helped over half the adult population receive at least one dose of the vaccine, while nearly 40% of adults are fully vaccinated, according to the Center for Disease Control and Prevention.

The U.S. vaccination program has helped pull the economy forward, but net trade was a modest drag on growth in the first quarter, where domestic growth pulled in imports at a faster pace than the recovery outside of the U.S. lifted exports. As the rest of the world gets better control of COVID-19, rebounding economic growth overseas should provide an additional tailwind for U.S. economy.

We upgraded our forecast for U.S. GDP in our recent Weekly Market Commentary from 5–5.5% to 6.25–6.75%, and we expect to see the economy continue its pace in the second quarter as restrictions are lifted and activity normalizes.

IMPORTANT DISCLOSURES

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

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

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

All index and market data from FactSet and Bloomberg.

This Research material was prepared by LPL Financial, LLC.

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

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

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

Market Blog Posted by lplresearch

Wednesday, April 28, 2021

Incredibly, the COVID recession may have ended a year ago, but we still don’t have call from the National Bureau of Economic Research (NBER). That may when the first estimate of Q1 2021 gross domestic product (GDP) growth is released tomorrow. The Q1 numbers are likely to show nearly a full year of strong growth now behind us following the dramatic slowdown of the US economy in March and April 2020 due to efforts to contain the COVID-19 pandemic.

“Markets are forward looking and have been telling us the recession is over for some time,” said LPL Research Chief Market Strategist Ryan Detrick, “but an official recession call may still bring some peace of mind. NBER is smart to take their time, but the data is becoming increasingly clear and Thursday will likely bring further confirmation.”

The delay isn’t surprising. NBER has never changed a call once they’ve made it. They’re acting as economic historians and need to be nearly certain. As shown in the LPL Chart of the Day, they’ve typically had to wait an average of 15 months after a recession is over before they’ve had the clarity needed to make a call, a process they’ve been doing in real time since the late 1970s.

View enlarged chart.

While the average time from the end of a recession to NBER’s call has been 15 months, the two times we’ve had multiple quarters of growth over 5% (highlighted in green), the call has been quicker, averaging just 10 months. We may get our second quarter above 5% for the current cycle tomorrow. The current Bloomberg economists’ consensus sits a good margin above that level at 6.9%. If our estimate that the economic trough was in April 2020 is correct, that would put us about 12 months past the recession’s end, just a little longer than the average when there’s been a large economic rebound.

The impact on markets, however, may not be what you would expect. As is typical for bear markets, the S&P 500 low, back on March 23, 2020, likely took place somewhere in the middle of a very short but steep recession. As discussed in a recent Weekly Market Commentary, the second year of a bull market typically sees continued gains but also increased volatility with larger pullbacks. An announcement by NBER in the coming month or two would be welcome and something to celebrate, and we expect more than a full year of continued above-average gains compared to the 2009-2020 expansion ahead, although growth is likely to start to slow after the second quarter.

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, April 28, 2021

President Biden’s 100^th day in office is tomorrow, on April 29. Hard to believe it has been 100 days already, but overall the economy continues to improve and stocks have done very well under our new President.

We’ve heard the question many times: Where does the Biden rally rank? That is what we will look at today. The term “hundred days” was first used on July 24, 1933, on the radio by President Franklin D. Roosevelt (FDR). He was discussing the 100-day session of the 73^rd U.S. Congress, but over time this term has changed to refer to the first 100 days of a new president.

Per Ryan Detrick, Chief Market Strategist, “President Biden has been quite kind for stocks, with the Dow up nearly 10%, which is on pace for the best first 100 days in office since FDR in the early 1930s. Then toss in the cherry on top that stocks had one of their greatest rallies ever from Election Day until the inauguration and it is clear that although maybe everyone might not like President Biden, but the stock market doesn’t have many issues with him.”

As shown in the LPL Chart of the Day, the Dow has averaged 4.3% the first 100 days of a new President, while it has been higher the first 100 days in office for five of the past six Presidents. In fact, President Biden’s return currently ranks as the third best since 1900, with only Taft and Roosevelt better. Lastly, breaking it down by political party and the first 100 days under a Democratic President was much stronger, up 10.3% on average versus down 0.2% for a Republican President.

View enlarged chart.

Here’s a chart we shared earlier this year that shows that stocks did amazingly well from Election Day until the inauguration under President Biden.

View enlarged chart.

What can we glean from those first 100 days? Is there any pattern that might suggest how stocks will do during the rest of the time President Biden is in office? You can look for yourself below, but there doesn’t appear to be any clue as to what might happen. President Eisenhower had a weak first 100 days, then a big rally over the remainder of his time in office. Conversely, President Taft saw a big rally during the first 100 days, only to have negative returns for the remainder of his time in office. In the end, fundamentals, valuations, and technicals drive long-term equity returns. The good news is only once since the Great Depression did that mean lower returns for the remainder of time in office after the first 100 days.

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, April 27, 2021

President Biden’s recently proposed $2 trillion infrastructure investment plan would, if enacted as-is—a big “if” for sure— provide much needed support to traditional infrastructure projects like roads and bridges amongst other projects. While the plan would tangentially support the municipal market through better economic growth and higher tax revenues, there could be other provisions that would impact the municipal market more directly. Three provisions in particular stand out to us as being supportive of current municipal market valuations:

• Higher income taxes: Along with higher corporate income taxes and higher capital gains taxes, Biden also campaigned on higher income taxes for the top income earners in the country. During the campaign, he proposed raising the top individual income tax rate to 39.6% from its current level of 37%. If enacted, and as seen in the LPL Chart of the Day, the tax-equivalent-yield (TEY) of municipal securities would surely benefit but given current valuations, most of the benefit would be seen at the longer end of the yield curve. Nonetheless, an increase in taxes generally increases the attractiveness of tax-exempt securities.

View enlarged chart.

• An increase in federally subsidized issuance: Similar to the taxable Obama-era Build America Bonds, which provided direct federal support to interest payments, there is a growing chorus for another program that allows municipalities to issue taxable debt that would be partially funded through direct federal subsidies. An increase in taxable issuance would impact tax-exempt issuance likely causing an otherwise shortage of traditional tax-exempt municipal securities.
• Flexibility around refinancing: As part of the 2017 Tax Cuts & Jobs Act, certain municipalities were prevented from retiring existing debt by issuing new debt—a practice called advanced refunding. Clever municipalities found a workaround for this limitation by issuing taxable debt as Treasury yields were at multi-generational lows. As Treasury yields move higher, taxable issuance becomes cost-prohibitive. Discussions are underway currently to eliminate that restriction, which gives municipalities (munis) cheaper ways of refinancing existing debt.

“Munis are one of the bright spots for fixed income investors this year, but there are a number of good reasons for that. The likelihood of higher individual taxes, most notably, have made munis fairly attractive” according to LPL Fixed Income Strategist Lawrence Gillum.

To be sure, these provisions are yet to be fully enacted or even approved as the bills are still being discussed in Congress. Nonetheless, the expectations of higher taxes in particular have caused certain investors to move pre-emptively into the municipal market. According to Lipper, which tracks investor flows into mutual funds, municipal bond funds have seen inflows in 48 of the past 49 weeks, totaling $101 billion. This has caused benchmark municipal yields to decrease to multi-year lows. However, with the financial support provided to many municipalities as part of the American Rescue Plan coupled with the technical support described above, the municipal market is likely to continue to warrant higher valuations.

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.

A municipal bond is a debt security issued by a state, municipality, or county to finance its capital expenditures. These bonds are usually exempt from federal taxes, and may also be exempt from state and local taxes, especially if the investor lives in the state where the bond is issued.

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, April 23, 2021

The economic reacceleration is underway in the U.S., as the expanding vaccination campaign, lifting of mobility restrictions, and infusion of fiscal stimulus combined to lift the Conference Board’s Leading Economic Index (LEI) in March. The LEI grew 1.3% month over month, ahead of Bloomberg consensus forecasts of 1%, raising the Conference Board’s gross domestic product (GDP) expectations to 6% on a year-over-year basis.

After a weaker-than-expected February release that was primarily disrupted by the winter storm, data in March snapped back in a strong fashion. All ten components of the LEI rose in March, while jobless claims were the largest contributor to the growth of the index. Labor market data has continued to improve since the measurement period, as weekly jobless claims have posted back-to-back pandemic lows. The ISM New Orders Index was the second largest contributor to the LEI, which climbed to its highest levels since 2004.

The Conference Board revised the February data lower, however, snapping what was a 10-month streak of growth for the index. As shown in the LPL Chart of the Day, the LEI is back on the rise, suggesting further economic momentum in the coming months:

View enlarged chart.

“Momentum breeds momentum, and we expect the U.S. economy will continue to improve in the coming months as we move forward with reopening plans,” noted LPL Financial Chief Market Strategist Ryan Detrick. “As the rest of the world continues to improve as well, we expect some spill-over effects to also benefit the US economy.”

The U.S. is currently vaccinating around 3 million people per day, according to the Center for Disease Control (CDC), and over half of the adult population has received at least one dose of the vaccine. Meanwhile, over 80% of the population above the age of 65—the most at-risk age segment of the population—has received at least one dose of the vaccine. The improving vaccination data has helped embolden policymakers to lift restrictions, and prompted us to upgrade our GDP forecast for the U.S. to 6.25-6.75% in our recent Weekly Market Commentary.

IMPORTANT DISCLOSURES

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

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

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

All index and market data from FactSet and Bloomberg.

This Research material was prepared by LPL Financial, LLC.

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

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

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

Economic Blog Posted by lplresearch

Thursday, April 22, 2021

It was a particularly challenging year for the greenback in 2020, where the world’s reserve currency acted as a “safe haven” asset at the height of the March 2020 market volatility, only to fall over the remainder of the year. With the U.S. outpacing much of the developed world in economic growth in 2021, Treasury yields have been rising and the dollar has strengthened, bucking the consensus view for dollar weakness.

We view the “twin deficits” of the U.S. economy—the combination of the budget deficit and the current account deficit—as a long-term structural driver of a weaker U.S. dollar. As a historical net importer, the U.S. has usually carried a trade deficit (leading to a broader current account deficit in the process), while the flood of pandemic aid has stretched the budget deficit and ballooned the sum of the twin deficits to all-time lows as a percent of gross domestic product (GDP). As shown in the LPL Chart of the Day, changes in the twin deficits have been a relatively accurate predictor in the long-term trend of the value of the US dollar:

View enlarged chart.

With the twin deficits reaching all-time lows, it’s hard to be bullish the US dollar over the long-term relative to its major counterparts. “The short-dollar trade has certainly been a frustrating one for investors this year, but the long-term trend continues to point lower,” added LPL Financial Chief Market Strategist Ryan Detrick. “However, a counter-trend rally like we saw in the first quarter might have been enough to flush out some of the crowded consensus for a lower dollar.”

U.S. economic growth has outpaced our developed nation counterparts to begin 2021, but expectations for growth in the rest of the world may be playing catch up. In particular, the 30-year German bund yield broke out to its highest level since the onset of the pandemic, suggesting growth expectations for one of our major trade partners may be on the rise.

A soft dollar has a variety of investment implications. While we continue to favor U.S. stock market exposure over developed international markets, investments overseas may benefit from the tailwind of the softer dollar. Meanwhile, commodities have historically benefitted from a weaker dollar, and may be positioned for further upside as economic activity in the rest of the world heats up. For more on our tactical market views, check out our April Global Portfolio Strategy.

IMPORTANT DISCLOSURES

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

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

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

All index and market data from FactSet and Bloomberg.

This Research material was prepared by LPL Financial, LLC.

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

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

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

Market Blog Posted by lplresearch

Wednesday, April 21, 2021

“Don’t fight the Fed.” Old investment saying

One of the popular questions we’ve received lately is what do stocks do after the first rate hike? Let’s be clear, we think the Federal Reserve Bank (Fed) will leave rates low until at least 2023, but what if we get a sudden dose of inflation? This isn’t our base case, but a rate hike could potentially happen sooner in that situation.

After all, the first rate hike in 2015 set off a huge sell-off into early February 2016, as the market was quite upset and let it be known that it felt the Fed acted too soon. In fact, the first hikes of 2004 and 1999 also saw losses the first three months after the first hike, but eventually stocks were in the green a year later.

“The first hike in recent cycles has indeed brought with it some selling pressure, but hikes usually take place in strong economies, so it isn’t surprising to see returns turn green once you go further out,” explained LPL Financial Chief Market Strategist Ryan Detrick. “But let’s not sound any alarms yet, we don’t see a rate hike for a couple of years. Still, it’s good to know what the playbook could be once it happens.”

As shown in the LPL Chart of the Day, that initial rate hike can cause some hiccups the first three months, but returns turn much better 6- and 12-months later.

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
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Market Blog Posted by lplresearch

Tuesday, April 20, 2021

“Price is what you pay; value is what you get.” – Legendary value investor Ben Graham.

Valuations matter—at least in the long run. We believe it to be true in the equity markets and in the fixed income markets as well. What you pay for an asset ultimately impacts your returns. So when looking at markets, we use, among other things, market-based metrics to help determine valuations. Within fixed income, while we don’t have the various price ratios, for example, to help guide the valuation conversation like equity investors do, we do have yield and spread measures. Two common metrics that we use include Yield-to-Worst (YTW) and Option-Adjusted-Spread (OAS).

YTW is the yield an investor can expect to earn either over the maturity of the bond’s life or until the bond is called away, assuming it doesn’t default first. OAS is the yield premium of owning a bond considered riskier than a U.S. Treasury security (remember that U.S. treasuries are considered one of the safest assets in the world). YTW allows us to determine the expected return of an asset, whereas OAS allows us to determine if we are being fairly compensated for taking on the additional risk.

“Certain areas of the bond market are generally expensive. Instead of taking on additional credit risk in our bond allocations, we think an overweight to equities makes sense because of the potential for higher returns,” according to LPL Financial Chief Market Strategist Ryan Detrick.

So what are we seeing today in terms of valuations? Bond yields remain low but they are getting higher, which helps impact the relative attractiveness of fixed income broadly. Starting yield levels are still the best predictor of future returns: As yields increase, future returns start to look more attractive—at least from a valuation perspective. However, as shown in the LPL Chart of the Day, the additional compensation for holding riskier fixed income assets are at very low levels. In fact, since 2010, the additional risk premium above Treasury securities has rarely been lower. For High Yield in particular, with OAS levels as low as they are, the yield premium over Treasury securities may not be worth taking on the additional credit risk (subject to investor risk tolerances and return needs). From a valuation perspective, it’s difficult to get excited about any of the broad sectors in general—we’re still positive on mortgage-backed securities (MBS) for their defensive properties during rising interest rate environments; however, valuations are stretched here, too.

View enlarged chart.

Valuations are a core component of our research process, but we acknowledge that they aren’t the only thing that matters. We also look at fundamentals and technicals when evaluating the attractiveness of various investments. So, while valuations are stretched across a number of fixed income markets, the fundamental landscape for credit markets remains favorable. Additionally, the continued search for yield will likely remain a technical tailwind to non-Treasury assets; however, given very low starting yield levels and stretched valuations, investors should expect low returns within their fixed income allocations for the foreseeable future.

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.

U.S. Treasuries may be considered “safe haven” investments but do carry some degree of risk including interest rate, credit, and market risk. They are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.

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