Wealth Management

Posted by Jeffrey Buchbinder, CFA, Chief Equity Strategist

Thursday, August 25, 2022

In general, some of the best investment opportunities come when the following conditions hold: 1) the market is pricing in a pessimistic outlook in the form of lower valuations, 2) earnings estimates are being revised higher and growth is accelerating, and 3) technical analysis indicators suggest an impending rebound.

These three conditions may be in place right now for the energy sector. Though a controversial investment for some, a look at fundamental and technical conditions accompanied by attractive valuations for the sector reveals a potential attractive opportunity.

“It looks like energy stocks still want to go higher,” wrote LPL Chief Equity Strategist Jeffrey Buchbinder. “There’s a healthy dose of pessimism baked into the sector while the fundamental outlook still looks positive overall. The sector’s strong gains since mid-July have encouragingly come without much help from oil prices.”

As shown in the LPL Chart of the Day, perhaps the best reason to consider the sector right now is it’s starting to work. Since August 4, the S&P 500 Energy Sector Index is up over 16% while the S&P 500 is flat.

View enlarged chart.

Let’s dig a little deeper. Here are 5 reasons to think about initiating or increasing energy sector allocations in your stock portfolios:

1. Improving fundamental outlook. OPEC just told us that they may cut production to support prices due to concerns about global recession. The energy sector has underinvested in recent years—partly due to the political environment and ESG movement. China still has a reopening ahead of it. The latest U.S. inventory data was bullish as U.S. stockpiles fell amid record petroleum exports. And an Iran nuclear deal to clear a path for Iran to sell more oil remains elusive.
2. Technical analysis picture looks good. Improving relative strength after brief period of underperformance points to a potential rebound, as shown in the chart above. A possible return to June relative highs introduces the possibility of 20 percentage points of relative outperformance. The sector, which is only 10% below its all-time high on June 6, is still in a long term uptrend. And breadth is strong, with over 90% of stocks in the sector at 20-day highs as of August 23.
3. Strong earnings momentum. With second quarter earnings season behind us, energy was the clear winner in terms of earnings growth and earnings revisions. Not only did energy generate the most earnings growth by far in the second quarter—and will lead this year as shown in the chart below—but the sector saw the largest upward revision to consensus estimates for 2022 and 2023 among all S&P sectors. Those earnings have increasingly supported dividends and share repurchases.

View enlarged chart.

4. Valuations still reflect pessimism. It’s difficult to assess value in the energy space because no one knows where oil and gas prices are going. But if we make the assumption that prices will be stable or higher in the months ahead—a reasonable assumption we think—then energy sector valuations look quite compelling. Forward estimates imply a price-to-earnings ratio below 9, as shown in the chart below, compared to the S&P 500 at 17.5. Cash flow valuations look just as compelling, with free cash flow yields over 10%, more than double S&P 500 levels (free cash flow yield is how much cash is generated after capital expenditures relative to share price). On a price-to-book value basis, the sector’s valuation is not as compelling at 2.4 times, but that is roughly in line with the long-term average and hardly expensive.

View enlarged chart.

5. Follow Warren. Warren Buffett and company (Berkshire Hathaway) have been big buyers in the energy sector recently. In fact, on August 19, Mr. Buffett received approval to purchase up to 50% of Occidental Petroleum (ticker: OXY). Berkshire owns over 20% of the company as of the latest SEC filings and has been aggressively buying. We’re not saying buy OXY, but rather that if Mr. Buffett likes the energy sector that much, we should pay attention.

So there are our five reasons to consider adding energy exposure. We believe the odds favor the sector going higher in the coming months. The energy markets are tight and getting tighter, while valuations look attractive and profits are on the upswing. Finally, being on the same side of a trade as Warren Buffett probably isn’t a bad thing!

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. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. For more information on the risks associated with the strategies and product types discussed please visit https://lplresearch.com/Risks 

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.

Unless otherwise stated LPL Financial and the third party persons and firms mentioned are not affiliates of each other and make no representation with respect to each other. 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.

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

For a list of descriptions of the indexes and economic terms referenced in this publication, please visit our website at lplresearch.com/definitions.

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

Posted by Lawrence Gillum, CFA, Fixed Income Strategist

Tuesday, August 23, 2022

Since 1978, the Federal Reserve Bank of Kansas City has played host to central bankers, policymakers, academics and economists from around the world at its annual economic policy symposium in Jackson Hole, Wyoming. This year’s symposium, “Reassessing Constraints on the Economy,” will take place from Thursday to Saturday and Federal Reserve (Fed) Chairman Jerome Powell will headline the event. While the topic of his keynote speech hasn’t been released yet, it is largely expected to provide additional clarity on how the Fed plans to keep raising short-term interest rates to get inflation under control. Whether markets believe him or not is a different question.

“Despite assurances of an unwavering commitment to bring down inflationary pressures, markets continue to think the Fed will “pivot” and cut rates in 2023 if economic growth slows,“ noted LPL Financial Fixed Income Strategist Lawrence Gillum. “Markets have a very different view of monetary policy over the next few years, which we think is a bit premature.” The chart below shows market expectations for where the Fed funds rate will end each year (purple line) versus the dot plot expectations from Fed officials with a pronounced divergence in 2023 and 2024. While markets and Fed officials seemingly agree on the near term trajectory of the Fed funds rate, markets expect the Fed to reduce interest rates by nearly 100 basis points (1.0%) in 2023 and 2024.

Economic forecasts set forth may not develop as predicted and are subject to change.

View enlarged chart.

The current goal of the Fed is to bring down the persistent increases in consumer prices. The primary tool it uses to achieve those objectives is through the adjustment of short-term interest rates. These changes in short-term interest rates flow into the real economy and are measured through financial conditions, which reflect the cost of funding in the economy and are strongly correlated with future economic growth. These financial conditions influence consumer and business spending, savings, and investments. The Fed needs tighter financial conditions to help align aggregate demand with aggregate supply, which in turn, helps bring down inflation.

As financial conditions tightened earlier this year, investors expected that the Fed wouldn’t have to be as aggressive in its interest rate hiking campaign. That is, the market believed in the Fed’s commitment to price stability.  However, as seen in the LPL Chart of the Day, which shows the Goldman Sachs U.S. Financial Condition index, because of this expected shift in monetary policy, financial conditions have eased recently. And now that financial conditions have eased, the Fed may actually have to be more aggressive in order to slow aggregate demand and bring down inflationary pressures. And while the Jackson Hole symposium isn’t a Fed monetary policy committee meeting per se, it is an opportunity for Powell to push pack on market expectations. Historically, markets have done a pretty good job of predicting rate cuts, but with inflationary pressures still significantly above the Fed’s target, Powell may need to reset market expectations. If he doesn’t, the Fed’s job may get tougher and the prospects of a softish landing could get harder.

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. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. For more information on the risks associated with the strategies and product types discussed please visit https://lplresearch.com/Risks 

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.

Unless otherwise stated LPL Financial and the third party persons and firms mentioned are not affiliates of each other and make no representation with respect to each other. 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.

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

For a list of descriptions of the indexes and economic terms referenced in this publication, please visit our website at lplresearch.com/definitions.

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

Posted by Jeffrey J. Roach, PhD, Chief Economist

Friday, August 19, 2022

Existing home sales in July fell over 20% from a year ago to an annualized rate of 4.81 million. Outside of the onset of the pandemic, the July sales rate was the lowest since late 2015 when the real estate market was recovering from the Great Financial Crisis.

Median prices rose 10.8% from a year ago although at a decelerating rate compared to earlier months when borrowing costs were more accommodative. Low supply of homes means real estate still moves at a brisk clip: homes were on the market for only 14 days, three days shorter than a year ago. In aggregate, 82% of homes were on the market for less than a month.

High prices have not deterred all-cash buyers and surprisingly, first-time buyers made up 29% of all purchases compared to 30% from a year ago when mortgage rates were significantly lower. “Higher mortgage rates will impact would-be first time buyers more than repeat buyers so we expect this demographic to shift to rental options in this environment,” said Jeffrey Roach, Chief Economist for LPL Financial. All-cash deals also include investors but according to the National Association of Realtors, investors made up only 14% of total purchases so we could infer that some cash deals are likely homeowners selling in a high prices region and moving to a lower priced region. As shown in the LPL Chart of the Day, regional variations are widening in this stage of the economic cycle. Sales of existing home in the West were hit hard in July. Outside of the pandemic, the rate of west coast sales were close to the sales rate in 2007 and 2008, when the economy was in the depths of a housing crisis.

View enlarged chart.

The hottest metro areas this year are mostly east coast as workers seek out lower costs of living. Most of the top ten areas had median prices lower than the U.S. as a whole.

View enlarged chart.

The domestic economy will likely experience more declines in housing, but this environment is very different from the Great Financial Crisis. The banking sector is well capitalized, we do not see a “Lehman moment” lurking, and homeowners are generally not under water with loan-to-value metrics. The potential risks are the Federal Reserve (Fed) overtightens, consumer incomes fall as the job market weakens, and inflation does not cool as much as the market expects. A slowing housing market could also impact consumer spending through secondary wealth effects.

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. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. For more information on the risks associated with the strategies and product types discussed please visit https://lplresearch.com/Risks 

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.

Unless otherwise stated LPL Financial and the third party persons and firms mentioned are not affiliates of each other and make no representation with respect to each other. 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.

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

For a list of descriptions of the indexes and economic terms referenced in this publication, please visit our website at lplresearch.com/definitions.

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

Posted by Jeffrey Buchbinder, CFA, Equity Strategist

Thursday, August 18, 2022

Market watchers, particularly market technicians, have had a lot to celebrate lately. The S&P 500 retraced more than half of its bear market decline earlier this year, which has historically confirmed the start of new bull markets. The Dow Jones Industrials Average broke above its 200-day moving average for the first time in four months. The utilities sector just became the first S&P 500 sector to break out to a new all-time high. And surging breadth has put more than 90% of stocks above their 50-day moving averages, as shown in this chart. This trigger has historically signaled transitions to new bull markets, as we discussed in this week’s Weekly Market Commentary here.

View enlarged chart.

“We need to be careful about overreliance on just one or two technical signals, wrote LPL Chief Equity Strategist Jeffrey Buchbinder. “But it does seem like the path of least resistance for this market is higher and surging breadth certainly strengthens the bull case.”

As shown in the LPL Chart of the Day, stocks have historically done very well after reaching this technical breadth milestone. After this breadth measure exceeds 90%, after being below it for three months or more, the average gain over the next 3, 6, and 12 months has been 5.5%, 8.7%, and 18.3%, with gains over the next 12 months 93.8% of the time (15 out of 16). These breadth surges, which have taken place shortly after big downdrafts, tend to act as confirmation that the rebound is on firm footing and are usually followed by sustained market rallies.

View enlarged chart.

We don’t know if history will repeat in this case. This study from Bespoke only goes back about 20 years so the sample size isn’t huge. And some of these rebounds were soon followed by corrections, such as the one in April-June 2012. Nonetheless, the stock market’s progress repairing the damage to the charts in the first half of the year is notable. We see further gains ahead as the market potentially prices in a less dire outlook and gets a lift from modest earnings gains, stable interest rates, and falling inflation.

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. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. For more information on the risks associated with the strategies and product types discussed please visit https://lplresearch.com/Risks 

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.

Unless otherwise stated LPL Financial and the third party persons and firms mentioned are not affiliates of each other and make no representation with respect to each other. 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.

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

For a list of descriptions of the indexes and economic terms referenced in this publication, please visit our website at lplresearch.com/definitions.

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

Posted by Lawrence Gillum, CFA, Fixed Income Strategist

Tuesday, August 16, 2022

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. History has shown that stocks have been relatively weak in August and September. Can core fixed income investors glean anything from a traditionally volatile period for equity markets? Because of the seasonal patterns in equity markets, changing investor risk sentiment in August could make core bonds more attractive as they represent a less volatile option than stocks and a higher yielding alternative than cash.

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

As seen in the LPL Chart of the Day, some months appear more or less favorable for core fixed income, as measured by the Bloomberg U.S. Aggregate Bond index, with August generally being the best performing month. On average, the index was up 84 basis points (0.84%) in August, which was nearly 50 basis points higher than the average monthly return of 37 basis points over all months. Moreover, since 2001, the range of monthly returns generated in August were generally positive, which means core fixed income has done a good job of offsetting some of the equity losses during an otherwise volatile month.

View enlarged chart.

Whether the seasonal patterns in the equity or fixed income markets persist this year or not (and we are certainly not making a market call), we still think owning core bonds in a diversified portfolio makes sense. The fact that fixed income markets have performed best in August, when equity market volatility has tended to increase, is no coincidence. Core bonds have historically been the best diversifier to equity market risk. And while we still like equities over bonds over the course of the year, we do think high-quality fixed income continues to serve a purpose in portfolios despite likely modest returns.

IMPORTANT DISCLOSURES

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. For more information on the risks associated with the strategies and product types discussed please visit https://lplresearch.com/Risks 

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.

Unless otherwise stated LPL Financial and the third party persons and firms mentioned are not affiliates of each other and make no representation with respect to each other. 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.

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

For a list of descriptions of the indexes and economic terms referenced in this publication, please visit our website at lplresearch.com/definitions.

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

Posted by George Smith, CFA, CAIA, CIPM, Portfolio Strategist

Friday, August 12, 2022

The latest weekly data from the American Association of Individual Investors (AAII) showed a continued increase in the percentage of individual investors who are bullish about short-term market expectations (32.2%), and a continued reduction in the number of bears (36.7%). This puts the spread between the bulls and the bears at -4.5%, still slightly bearish overall but at the lowest level of pessimism since the end of March 2022.

“Bullish investor sentiment seems to be re-appearing in the AAII survey data as the equity markets have rallied from the June lows” said LPL Financial Portfolio Strategist George Smith “This could be most reflective of the strong bounce in some of the more speculative growth names favored by many retail investors.”

As shown in the LPL Chart of the Day, investor sentiment, as measured by the spread between bulls and bears in the AAII data, has been recovering, along with the stock markets, since mid-June. So far in 2022 the spread only veered into bullish territory once (at the end of March) but we suspect if the market manages to hold this current rally we may see a positive number again next Thursday.

View enlarged chart.

We tend to view the AAII as a contrarian indicator with extremes in negative sentiment tending, on average, to be bullish for near-term stock market returns and that extreme optimism tends to be bearish for the near-term outlook for stocks. This indicator can be a bit early; as shown in the table below, 3-month returns after the spread gets very bearish are only just above average but the average stock returns 6 months and 1 year out are better than average. This trend appears to be continuing in 2022 with extreme pessimism, as measured by a bull-bear spread more than two standard deviations below average, occurring early in the bear market, from mid-January onwards. If the S&P 500 doesn’t recover above those January levels (4400s) by the same point in 2023 it will be the first time since mid-2008 that an extreme in AAII data pessimism will have yielded a negative return one year out. For the time being on this signal we are into no-man’s-land, where it no longer provides strong future guidance either way other than to expect average returns, but we will be continuing to monitor for divergences to extreme levels.

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

For a list of descriptions of the indexes and economic terms referenced in this publication, please visit our website at lplresearch.com/definitions.

Posted by Jeffrey Buchbinder, CFA, Equity Strategist

Thursday, August 11, 2022

The U.S. dollar is getting a lot of attention these days. It’s up about 10% year to date, which is a big move for currencies. The dollar matters for a number of reasons and we would argue probably deserves the attention it gets.

10 Things to Know About the US Dollar

1) S&P 500 companies that have a global footprint have to contend with a stronger dollar denting their revenue growth. Approximately 30% of S&P 500 companies’ revenue is earned in markets outside the US. During the second quarter earnings season many companies noted that the strength of the dollar hindered their top line revenue growth. We estimate currency took perhaps 2 to 2.5 percentage points out of S&P 500 revenue in the second quarter.

2) As shown in the LPL Chart of the Day, the “twin deficits” of the U.S. economy—the combination of the budget deficit and the current account (or trade) deficit—have been relatively accurate predictors of long-term trends of the US dollar. While the deficit has come down some in recent quarters, this relationship suggests the dollar is more likely to weaken over the next year or two.

View enlarged chart.

3) An aggressive Fed rate hike campaign to curtail inflation would likely be bullish for the US dollar. Should inflation remain stubbornly high, the Federal Reserve may have work to do. In this scenario, the dollar may appreciate against the currencies of our key trading partners.

4) Emerging markets, in general, react negatively when the dollar climbs higher, as many have dollar-denominated debt with holdings of corporate and sovereign bonds. A stronger dollar makes it more difficult to service that debt. Many emerging market countries export commodities, so the strength of the dollar affects those sales. If emerging market countries import oil that’s priced in US dollars, it becomes more expensive.

5) Interest rate differentials affect currencies. When US interest rates are higher than those in other major economies, it tends to provide support for the U.S. dollar. The Fed’s aggressive rate hiking campaign has been supportive of the dollar to date, but Wednesday’s cooler inflation reading caused the market to pull back some on its rate hike expectations, causing the dollar to sell off.

6) A strong dollar is deflationary. As a historical net importer, the U.S. has usually carried a trade deficit (leading to a broader current account deficit in the process). As a result, the strong dollar is welcomed now with inflation being the biggest challenge for the U.S. economy.

7) International investments benefit from a weaker dollar. Most foreign-domiciled investments generate profits in foreign currencies. For U.S.-based investors those profits are worth less in a rising dollar environment.

8) Commodities tend to benefit from a weaker dollar. Because many commodities such as oil and gold are priced in US dollars and sold globally, a weaker dollar provides a boost for prices, and vice versa.

9) A strong US dollar tends to correspond to tightening financial conditions. As monetary policy in the U.S. gets tighter, we would expect the US dollar to experience some upward pressure. As such, the strong dollar has done some of the Federal Reserve’s work for them in tamping down inflation.

10) The US dollar, as the global reserve currency, typically experiences safe haven demand when global economic and financial market conditions deteriorate. The dollar surged during the COVID-19 recession in the spring of 2020 and was strong from June 2021 up until just the past few weeks as markets increasingly priced in more Fed rate hikes and pushed Treasury yields higher.

So where does the dollar go from here?

Our best guess is once the market begins to worry less about inflation and gets visibility into the end of the Fed’s rate hiking campaign, that the dollar will weaken. The deficits have come down but they remain structural forces pushing the dollar lower.

At the same time, the challenging international economic environment, particularly with the energy crisis in Europe, and heightened U.S.-China tensions, may lead to periodic safe haven demand for the dollar. The U.S. economy still looks to be in better shape than Europe or Japan with much higher interest rate levels. As a result, it may not be prudent to position portfolios aggressively for a weaker dollar.

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. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. For more information on the risks associated with the strategies and product types discussed please visit https://lplresearch.com/Risks 

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.

Unless otherwise stated LPL Financial and the third party persons and firms mentioned are not affiliates of each other and make no representation with respect to each other. 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.

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

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

Posted by Jeffrey J. Roach, PhD, Chief Economist

Wednesday, August 10, 2022

Headline CPI eased in July to 8.5% year-over-year from 9.1% in June. Still above the Federal Reserve’s (Fed) long-run target rate, the annual rate of inflation seems to be cooling. As shown in the LPL Chart of the Day, inflation is easing as durable goods prices continue their descent from recent highs. For example, prices for appliances have declined for three out of the last four months and used vehicle prices declined four out of the last six months. “The July inflation report should change market expectations about future Fed activity,” explained Jeffrey Roach, Chief Economist for LPL Financial. “As inflation eases, the Fed can now tighten monetary policy at a slower pace.” The Fed still has a lot of work to do, but pricing pressures seem to be easing.

View enlarged chart.

The latest inflation report is welcomed news and could add support for the Fed to raise rates at a slower pace in September. However, the headline measure of inflation may be too good to be true because of the nagging price increases to rental costs.

Watch Out for Rent

Recent pricing trends for rent of primary residence is alarming. Since November 2020, monthly changes in rental costs have accelerated. Last July, rental costs rose 0.2% month-over-month and then inched up to 0.7% month-over-month in July 2022. The booming housing market explains most of the rise in rental costs. During the recent period of unusually low mortgage rates, housing demand skyrocketed and home price appreciation reached new levels. High housing costs pushed many homes out of reach for would-be millennial buyers and for first-time buyers with no pre-existing home equity. High demand for homes and low supply created insurmountable hurdles and pushed many to be renters instead of home buyers.

Fed Could Hike 50

As inflation rates slow, the Fed could revert to a 50 basis point (or 0.5%) increase at the next meeting of the Federal Open Market Committee (FOMC) in September. Inflation is the primary concern for policy makers. Although the employment situation is the other mandate for the central bank, inflation is currently the greater risk. The labor market is a key variable for investors as they anticipate future moves by the Fed. A slowing job market is a risk, especially since firms are announcing more layoffs. For more on the labor market and its relationship with Fed policy, be sure to watch our latest Econ Market Minute, where Chief Economist Jeffrey Roach gives more economic insights.

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. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. For more information on the risks associated with the strategies and product types discussed please visit https://lplresearch.com/Risks 

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.

Unless otherwise stated LPL Financial and the third party persons and firms mentioned are not affiliates of each other and make no representation with respect to each other. 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.

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

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