Wealth Management

Economic Blog Posted by lplresearch

Thursday, April 15, 2021

It has been a volatile year in 2021 for the retail industry, but improving COVID-19 trends and fiscal stimulus have improved the outlook. Weather-related disruptions and a high January watermark led to a soft patch in February, but retail sales rebounded in a big fashion in March, rising 9.8% month over month, the highest since May 2020, as vaccination rates have improved, consumers received additional direct stimulus payments, and more of the economy opened up.

The goal of fiscal stimulus during the COVID-19 pandemic has primarily been to bridge the gap for the economy until we were able to get the virus under control, and the surge in retail activity in March is a direct reflection of that:

View enlarged chart.

The $1.9 trillion aid package passed in February issued payments that were two and a half times bigger than those in January, so it may not be as much of a surprise that retail sales growth outpaced Bloomberg consensus forecasts in March. Further, payments were made from mid-March onward, so there may be additional fuel left in the tank for April. As several states expand their reopening plans against the backdrop of improving COVID-19 trends, we expect the economy will continue to grow.

“Stimulus has clearly mattered for the U.S. economy and has helped put us at the front of the pack in the recovery,” added LPL Chief Market Strategist Ryan Detrick. “We’re averaging around 3 million vaccine doses administered per day, and this has fast-tracked our emergence from the shadow of the pandemic.”

Looking under the hood of the March retail sales data, spending on clothing has returned to pre-pandemic levels—perhaps gearing up for a return to the office or summer activities—while spending on eating and drinking categories rose 13% month over month as dining restrictions have been lifted.

We still think it’s too early to sound the “all clear” for the U.S. economy, but it appears we have avoided the soft-patch that many expected in the first quarter, and more pent-up demand should be unleashed as COVID-19 trends continue to improve. In our Weekly Market Commentary on April 5, we upgraded our growth forecasts for the U.S. economy from 5–5.5% to 6.25–6.75% in anticipation of the full reopening of the economy over the next several months, and we believe the March retail sales print further justifies our view.

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

Markets Blog Posted by lplresearch

Thursday, April 15, 2021

Is it time to add international stocks to portfolios? Valuations are attractive in Europe and Japan relative to the United States. The environment is favorable for the value style—and international markets are full of value stocks that should benefit from economic reopening. We expect the U.S. dollar to move lower, which would boost international returns for U.S.-based investors. And we like the idea of diversification. So after such a tremendous rally in U.S. stocks—more than 80% for the S&P 500 Index since March 23, 2020—is it time for tactical investors to make a move?

There are many elements to making this decision, but an important one that some may overlook is the stark differences in sector composition across these international markets, as shown in the LPL Chart of the Day.

“The huge allocation to technology and internet companies in the U.S. and China stock indexes has offered a big advantage during the pandemic compared with Europe and Japan,” according to LPL Equity Strategist Jeffrey Buchbinder. “The progress on COVID-19 and the reopening of global economies suggest that an opportunity for European and Japanese stocks may be coming soon, but we still think the fundamentals favor the U.S. and Asia-focused emerging markets.”

View enlarged chart.

At first glance, the wide range of technology sector weightings stands out—27% in the S&P 500 Index compared with only 8% in Europe and 6% in China. But if we add digital media (think Facebook, Google, and Netflix) and e-commerce (think Amazon and Alibaba) to technology—so called “tech plus”—China’s weighting goes all the way up to 50%. The U.S. “tech plus” weighting is 39%, Japan’s is 17%, while Europe’s is just 10%.

The U.S. and China are more growth oriented markets—with a lot of so-called “stay-at-home stocks” and secular growth stories. Europe, on the other hand, is more focused on “old economy” sectors such as financials, industrials, healthcare, and consumer. Japan has healthy technology exposure and is generally more economically sensitive than Europe, which we like. Industrials and consumer discretionary make up the biggest portions of the MSCI Japan Index, followed by technology, supporting our preference for Japan over Europe.

So should you take some profits in your U.S. stocks and add to developed international? Based on these sector allocations, and the relative outperformance of the U.S. economy compared with Europe’s and Japan’s, we don’t think so. Our technology sector view remains positive, we favor balanced exposure between growth and value, and we prefer economic sensitivity. That keeps us in the U.S. and emerging markets, including China, right now. But we’ll keep watching.

IMPORTANT DISCLOSURES

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

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

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

All index and market data from FactSet and MarketWatch.

This Research material was prepared by LPL Financial, LLC.

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

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

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

Market Blog Posted by lplresearch

Wednesday, April 14, 2021

Stocks are back at all-time highs while the economy is quickly improving, now comes first-quarter earnings season. This week on the LPL Market Signals podcast, Chief Market Strategist Ryan Detrick and Equity Strategist Jeff Buchbinder discuss why another very solid earnings season is on the horizon. With stocks up more than 80% from the lows last year, the bar is definitely set quite high, but corporate America will likely come through again.

Let’s talk earnings. The last two earnings seasons have come in much better than expected, and this earnings season may be no different as corporate America is poised for big earnings gains in the first quarter of 2021. Given strong economic growth, vaccine distributions, fiscal stimulus, and recent positive trends in company guidance, analysts’ estimates are signaling upside to expectations. Ryan and Jeff explain why first quarter could see a 30% year-over-year increase in S&P 500 earnings per share, the best in over a decade.

View enlarged chart.

Are things too good? With a 37-year high in manufacturing and an all-time high in services data, are things actually too good? Don’t forget, a year ago things were very bad on the economy, yet it was a great buying opportunity for investors. The truth is the bar is set quite high, as high optimism has nearly everyone expecting a stronger economy the second half of the year. Historically, when the ISM manufacturing survey is over 60 (like it is now), 3- and 6-month S&P 500 Index returns have actually been negative. Also, manufacturing tends to peak about a year after a recession ends, likely suggesting economic data going forward could begin to slow.

The Bull is still here. Ryan and Jeff list multiple stats that suggest the bull market could have plenty of time left. One signal they examine is what happens after a solid first quarter. A solid first quarter for the S&P 500 Index could signal continued strength, as historically a gain between 5-10% in the first quarter has led to continued strength the rest of the year 87% percent of the time. Chief Market Strategist Ryan Detrick has called this the sweet spot, as larger gains tend to lead to more muted returns, while weak returns open the door for weak returns the rest of the year.

View enlarged chart.

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

IMPORTANT DISCLOSURES

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

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

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

“I look to the future because that’s where I’m going to spend the rest of my life.” George Burns

The bull market continues, with the S&P 500 Index now up more than 10% in 2021. With stocks up more than 80% from the March 2020 lows, the reality is a well-deserved break or consolidation could happen at any time. Looking to the future, as George Burns said above, we would be a buyer of any material weakness, as we believe this bull market is alive and well as we’ll discuss more in this blog.

Here are four bullish stats we’ve found recently that indeed suggest this bull market could still have plenty of life left.

First, the S&P 500 Index was up just under 6% in the first quarter, an area we’d call the sweet spot. Looking back since 1950, when the S&P 500 was up between 5-10% in the first quarter, the rest of the year (so the final three quarters) gained another 12.4% on average and was higher 86.7% of the time. Compare this to when the S&P 500 was up >10% in the first quarter and the returns drop to 6.5% the rest of the year. Lastly, if the first quarter was negative, then the rest of the year was up only 3%. Sweet spot indeed.

View enlarged chart.

Second, the December Low Indicator has bulls smiling. This was created by Lucien Hooper, a Forbes columnist in the 1970s, and it simply says that if the S&P 500 closes beneath the December low during the first quarter then future weakness could be in the cards. But if this critical level holds, then higher prices could be around the corner.

As the LPL Chart of the Day shows, stocks held above the December lows in 2021 and this could mean continued higher prices, as the S&P 500 was up more than 18% on average previous years when this level held and incredibly was higher 33 out of 35 years.

View enlarged chart.

Third, the S&P 500 was up nearly 54% in the 12 months ending March 2021, one of the largest yearly gains ever. Looking at previous times that had significant 12-month returns shows the potential for weak returns 1, 3, and 6 months later. This makes sense, as stocks could need some time to catch their breath. The good news? One year later the S&P 500 was higher more than 90% of the time, with only the year after the 1987 crash in the red. “It might seem counterintuitive to most investors, but big rallies like we’ve seen tend to mark the start of bull markets, not the end, so we wouldn’t bet on this bull market ending anytime soon,” explained LPL Financial Chief Market Strategist Ryan Detrick.

View enlarged chart.

Lastly, overall market breadth is extremely strong. Again, this could suggest near-term there could be an exhaustion point, but this isn’t what you see at the end of bull markets, in fact, it tends to usually happen at the start of new bull markets. Currently, more than 95% of the components in the S&P 500 are above their 200-day moving average, a level only seen two other times, in December 2003 and September 2009. Looking back at 2004 and 2010, 2004 saw consolidation a good part of the year, while 2010 had a well-deserved 16% correction after the huge gains off the March 2009 lows. But the key point is after extreme market breadth like we are seeing now, overall higher prices and the bull market lasted for many more years.

View enlarged chart.

Looking to the future, as George Burns said, we believe it could be a bright one for equity investors, particularly when we consider the return potential for stocks compared to cash and high-quality bonds.

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 13, 2021

Growth and inflation expectations are widely known fundamental variables used in determining fair value for fixed income securities, but are there seasonal patterns that exist in the bond market that can help investors determine when to allocate to fixed income? It would appear so. Most investors are aware that seasonal patterns exist in equities but they may not be as familiar with the seasonal patterns in fixed income markets. There are a number of ways to measure seasonality, but since the story this year has largely been about the change in the 10-year Treasury yield, we look at historical yield changes by month to answer the seasonality question.

“Despite what has historically been a good seasonal period for fixed income investors, we believe the expected upcoming good news on the economy will continue to push yields higher,” opined LPL Financial Chief Market Strategist Ryan Detrick.

As seen in the LPL Chart of the Day, some months appear more or less favorable to 10-year Treasury yield changes and thus 10-year Treasury bond prices. Each vertical bar represents the historical range of Treasury yield changes during each month of the year (omitting outliers in both directions). The orange dash represents the 30-year average change in Treasury yields. Dashes below the 0.00 line indicate falling yields (rising bond prices) and dashes above the line 0.00 indicate rising yields (falling bond prices). January, at least historically, has been one of the best months for 10-year Treasuries as yields on average have decreased. The next three months, however, have historically been fairly negative for bond prices. The most bullish months for 10-year Treasuries have historically been the May through September months before a challenging October to end the year.

View enlarged chart.

In our opinion, there are a couple of possible explanations for the seasonality in the data. First, short-term borrowing needs for the U.S. government tend to increase during the first part of the year due to tax season, which generally increases the supply of Treasury securities. This increased supply could cause yields to rise. Second, because of the seasonal patterns in the equity markets, changing investor risk sentiment towards the middle of the year could make Treasury securities more attractive because they tend to represent a higher yielding alternative than cash. Finally, reversing the trend into fixed income from equities could likely explain the October challenges as investors rebalance out of fixed income and back into equities.

While the data suggests that now could be a good time to start adding interest rate risk to portfolios, in our view, the historical seasonal patterns are unlikely to hold this year. Growth and inflation expectations continue to trend higher, which puts downward pressures on Treasury prices. The next few months could be challenging for fixed income investors as the economic data is likely to show further sustained progress towards recovering from the pandemic. We expect yields to continue to move higher throughout the rest of the year to a range of 1.75% – 2.0%. Eventually it will make sense to add interest rate risk to portfolios, but we’re not there yet.

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 9, 2021

Stocks have kicked off the year in a strong fashion, and history shows this may give reason to be optimistic for the rest of the year. After a solid—but certainly turbulent—year in 2020, the S&P 500 Index has continued to set new all-time highs in 2021, returning 5.8% in the first quarter.

“Momentum breeds momentum, but you may not want too much of it,” said LPL Financial Chief Market Strategist Ryan Detrick. “Hitting singles and doubles has historically been the sweet spot for first quarter returns.”

As shown in the LPL Chart of the Day, returns between 5-10% have been the “Goldilocks” level in the first quarter, with an average return of 12.4% through the rest of the year.

View enlarged chart.

Returns through the rest of the year have historically been the worst when the S&P 500 is negative in the first quarter, averaging just 3.1%. However, too much momentum in the first quarter may not be ideal, either. When the S&P 500 has returned more than 10% in the first quarter, returns through the rest of the year have averaged 6.5%.

1987 is a year that is often referred to as the year of the “blow-off top,” as the S&P 500 returned over 40% through its peak in August, with over a 20% return in the first quarter alone. This was the only year with a first quarter return greater than 10% that was negative through the rest of the year, but removing 1987 from the data only raises the average to 8.7%, not enough to beat the 5-10% return group.

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 8, 2021

Before the pandemic we had begun to warm up to international stocks. Valuations relative to the U.S. markets had become increasingly attractive after a long stretch of outperformance by U.S. stocks compared with those in Europe and Japan. We had also anticipated that a weaker U.S. dollar would enhance international stock returns for U.S.-based investors.

Then the pandemic hit. Since then we have maintained our preference for U.S. stocks over their developed international counterparts. In 2020 the U.S. market benefited from its heavy concentration in technology, digital media, and e-commerce stocks that are well positioned for the stay-at-home and work-from-home environment. More recently, as the Eurozone has struggled to contain COVID-19, our conviction in our U.S. preference has increased.

“As the end of the pandemic has come closer into view and value stocks do better in anticipation of a full reopening, the environment should theoretically be better for international stocks,” said LPL Financial Equity Strategist Jeffrey Buchbinder. “But the global dominance of the U.S. market has continued in 2021, in part due to sluggish vaccine distribution in Europe, and LPL Research continues to favor U.S. stocks over those in Europe and Japan.”

A look at consensus expectations for economic growth around the world supports our preference for the U.S. As shown in the LPL Chart of the Day, not only is gross domestic product (GDP) growth in the U.S. expected to outpace Europe, the UK, Japan, and the broad emerging markets this year, but the U.S. has also seen the biggest increase in consensus expectations for GDP growth year to date—an increase of 1.9 percentage points to near 6% (source Bloomberg). Earlier this week we upgraded our U.S. GDP growth forecasts for 2021 to 6.25%—6.75%, while maintaining our growth forecast for developed international economies at 3.75%—4.25%.

View enlarged chart.

The reopening of the U.S. economy amid the accelerating pace of vaccine distribution is certainly a big driver of the increase in growth expectations this year. But massive fiscal stimulus—now over $5 trillion—is another key part of the story.

The chart below illustrates how massive this stimulus is relative to the size of the U.S. economy (about 26%), and also how much larger it has been than the response to the Global Financial Crisis in 2008-2009. While U.S. stimulus is comparable in size to Europe’s, U.S. stimulus has included more direct payments and spending, and therefore has been more impactful than stimulus in Europe, which has included more loan guarantees.

View enlarged chart.

We continue to recommend investors focus their regional tactical allocations on the U.S. and underweight developed international equities. We also recommend a modest allocation to emerging market equities, where suitable, to take advantage of a strong economic growth outlook and attractive 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.

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

Wednesday, April 7, 2021

The United States, and the rest of the world, are looking to emerge from the shadow of COVID-19, and business conditions may already have put the pandemic in the rear-view mirror—at least according to the monthly business surveys conducted by the Institute of Supply Management (ISM). The ISM Manufacturing PMI surged to 64.7 in March versus 60.8 a month prior (index levels above 50 indicate expansion) and above all but one of the Bloomberg consensus survey estimates.

Meanwhile, increasing vaccinations and further easing of restrictions—including the full reopening of several states—buoyed a rebound off a nine-month low for the ISM Services PMI to 63.7, a level above every economist estimate in the Bloomberg consensus survey.

As shown in the LPL Chart of the Day, both index levels are now at their highest of the 21^st century, with the ISM Services PMI setting an all-time record for the index:

View enlarged chart.

“Risks to the recovery presented by COVID-19 will remain present so long as other developed nations are battling the virus, but business leaders are clearly expecting business conditions to improve in the U.S.,” added LPL Financial Chief Market Strategist Ryan Detrick. “The vaccination program in the U.S. has of course been a major catalyst, helping us further our reopening plans and getting us that much closer to normal.”

According to the CDC as of April 6, nearly a third of the total US population has received at least one dose of the vaccine, and nearly a fifth of the population is fully vaccinated. Meanwhile, over 75% of the population over the age of 65—the most at-risk population segment—has received at least one dose of the vaccine while over 50% are fully vaccinated.

The nature of the pandemic has caused goods-based industries to fare better than services, but the recent success of vaccination efforts has been a shot in the arm to service industries—literally. The ISM Services PMI covers 18 industries that comprise roughly 90% of the U.S. economy, and all 18 reported growth in March, fueling considerable gains in the labor market in the process.

The nonfarm payrolls report showed the U.S. economy added 916,000 in March, trouncing the Bloomberg consensus of 650,000. Most notably, the segments of the labor market most dependent on in-person interaction saw the greatest gains, where nearly a third of the 916,000 total jobs added came from the leisure and hospitality industry.

The trifecta of rising vaccinations, fiscal stimulus, and easing restrictions across the country should continue to help unleash pent-up demand in the U.S., and we suspect the rest of the world—most notably Europe—will see similar improvement as the battle against COVID-19 continues. In our view, the improving economic backdrop is supportive of stocks and other risk assets, and reinforces our “risk on” portfolio positioning recommendation.

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

Tuesday, April 6, 2021

Coming into this year, we expected longer-maturity U.S. Treasury yields to rise, consistent with improving economic growth dynamics. That is indeed what we have seen, with the yield on the 10-year Treasury higher by 80 basis points (0.8%) year-to-date, and over 120 basis points (1.2%) since last year’s lows.

What we did not expect—at least not until the Democrats won two Senate seats in Georgia—was an additional nearly $2 trillion fiscal stimulus package on top of the super-accommodative Federal Reserve (Fed). The stronger economic growth outlook and resulting uptick in inflation expectations, which are key fundamental inputs into assessing Treasuries’ valuations, leads us to increase our year-end forecast for the 10-year Treasury yield to a range of 1.75% – 2.0%.

View enlarged chart.

“The economic recovery continues to surprise to the upside and we think higher Treasury yields will be a result of that continued growth,” according to LPL Financial Chief Market Strategist Ryan Detrick.

Additionally, in our Outlook 2021: Powering Forward, we took a look at how Treasury yields did after large declines, which we certainly had as of the end of the first quarter in 2020. Here we are a year later and the outcome is well aligned with history. As seen in the LPL Research Chart of the Day, over the six prior large declines since 1990, the 10-year yield climbed an average of 0.92 percentage points after a large decline; this time the number was just a little higher at just above a full percentage point. What happened next historically? In the next quarter, yields continued to rise, on average, but fell over the following two quarters to get about back to a little above where they were after a year. If that holds true this time, it’s a good fit with our updated forecast range of 1.75–2.0%.

Yields may temporarily eclipse 2.0% in the short-term, as inflation readings pick up and economic data continues to show material improvements. However, we still believe there are structural headwinds to sustained, outsized inflation levels that should limit further sell-offs in Treasuries and bring yields back in-line with our fundamental assessment by year end (read more on our inflation views here). Moreover, given the continued search for income, yield levels significantly above 2.0% would likely represent an attractive entry point to both foreign and domestic investors, assuming no material changes to the growth and inflation outlook.

While we are updating our year-end Treasury yield forecast, our preference for less interest-rate sensitive fixed income investments has not changed. Additionally, we still believe an underweight to fixed income relative to targets within a diversified asset allocation makes sense at this time.

IMPORTANT DISCLOSURES

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

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

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.

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 1, 2021

It’s tempting to predict runaway 1970s inflation as an April Fools’ Day joke. But at the risk of upsetting our friends in the compliance department, we’ll shoot straight here. With that important disclaimer out of the way, here we provide 10 reasons why we aren’t worried about inflation long term:

1) Technological development. As we learned in our economics 101 textbooks, prices for goods and services tend to be tied to their marginal costs. As technological development continues at a rapid pace, costs to produce and distribute goods and services should continue to fall, putting downward pressure on prices.

2) Globalization. One of the reasons inflation has been well contained in recent decades is access to cheaper labor and manufacturing capacity in developing nations. Although political pressure to diversify away from China is intensifying, plenty of alternatives still exist—Vietnam, India, and Mexico, just to name a few.

3) Price transparency. Sometimes called the “Amazon effect,” consumers and businesses have never had an easier time comparison-shopping. The price transparency e-commerce provides has made it much more difficult for price increases to stick.

4) Labor substitution. Labor is the biggest piece of the inflation puzzle because it is such a large part of companies’ costs. As a result, when companies have the ability to replace labor with cheaper machines, employees have less leverage for more pay. Labor unions also wield less power today than they did decades ago, which hurts collective bargaining power.

5) Anchored inflation expectations. The trend is your friend as they say. Because prices have risen at such a modest pace over the past two decades, people have come to expect modest price increases and pushed back against anything more. Call it a self-fulfilling prophecy.

6) Fed credibility. Federal Reserve (Fed) Chair Paul Volcker famously broke the back of inflation in the early 1980s. Since then, the Fed has effectively won this battle—even if they lost some credibility by overshooting with their inflation forecasts during the last cycle. There are doubters, but we believe the Fed will be to able keep inflation under control.

7) It’s a show me story. Even the Fed was surprised at how little inflation the US economy generated during the last economic expansion (2009-2020). The Fed’s preferred inflation measure—the core personal consumption expenditures (PCE) index, excluding food and energy—rose at an average pace of just 1.6% during the last expansion (2009-2020) and 1.8% during the 2000s. Japan’s central bank has been trying to create inflation for several decades and failed. We’ll believe it when we see it.

8) Low interest rates. It’s tough for equity investors to admit this, but the bond market has historically been a pretty good predictor of long-term economic trends. Historically, until the last decade or so, economic growth plus inflation had followed a similar path as long-term interest rates. We believe still-low long-term interest rates reflect the market’s expectation that inflation will remain contained over the long term.

9) Demographics. The aging of the baby boomers has put downward pressure on economic growth and inflation. The rise of the millennials may begin to reverse that trend in coming years but that is still a long ways off in our view. High debt levels may crowd out demand and investment, reducing inflationary pressures.

10) Link between money supply growth and inflation appears to be broken. Money supply, as measured by M2, has surged by an unprecedented 25% during the pandemic, leaving many to wonder why that extra money sloshing around from the Fed’s “money printing” hasn’t shown up in the inflation data. If that cash sits in consumer and business bank accounts, it doesn’t do much for growth or inflation. Until the funds are put to work and increase the velocity of money (a measure of the rate at which money is exchanged in the economy), inflation will remain subdued. We’ll call this another show me story.

View enlarged chart.

Bottom line, brace yourself for much higher inflation in the coming months. But if we are right, those price increases will be temporary as weak data from a year ago rolls off and the structural forces that have been putting downward pressure on inflation for decades will come to the fore again. We suggest bond investors limit interest rate sensitivity given the expected increase in interest rates, and we continue to recommend an underweight allocation to fixed income relative to investors’ targets where appropriate. But we would not let the anticipated ramp up in inflation scare investors out of bonds, which remain a prudent diversifier of risk.

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