Wealth Management

Posted by Ryan Detrick, CMT, Chief Market Strategist

Wednesday, June 8, 2022

The worries are mounting with Elon Musk and Jamie Dimon both adding to the fears over the economy. Last week, Jamie Dimon, JPMorgan Chase CEO, said to “brace yourself” for an economic hurricane, while Elon Musk had a “super bad feeling” about the economy and said that Tesla needed to cut 10% of its workforce.

Here’s where things get interesting. Musk pulled a quick 180, saying that Tesla will now increase headcount over the next year, while Dimon’s comments were quite different from his take on the economy just a few weeks prior. Additionally, the same day of Dimon’s hurricane comments, a JPMorgan quantitative analyst was out saying the S&P 500 Index could make back all of its losses by the end of the year.

“We aren’t ignoring the cautious comments we’ve heard from some high profile business leaders, but you have to wonder how serious they are when they quickly change their tune a day or two later,” opined LPL Financial Chief Market Strategist Ryan Detrick. “The economy is indeed slowing, but it isn’t headed for a recession any time soon in our view. Think about this, this would be the first recession ever to have record earnings and a booming jobs market.”

As shown in the LPL Chart of the Day, June is historically a weak month as we discussed here, but the majority of the trouble tends to come later in the month. High profile names making big calls get the headlines, but investors need to know that the calendar in June (particularly late June) could still be troublesome.

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China is opening back up, S&P 500 2023 earnings estimates are up 2.5% this year, supply chains are improving, semiconductor prices are peaking, and shipping rates and fertilizer prices have all begun to turn lower. Things aren’t perfect, but we are finally starting to see some improvement that could suggest peak inflation is here, just what is needed for a more sustainable stock market rally.

Lastly, be aware that the weak month of June has actually be quite strong lately. Up six years in a row and up eight years over the past decade, suggests June doesn’t always have to be weak.

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For more on Elon Musk and Jamie Dimon, the economy, and a June swoon, be sure to watch our latest LPL Market Signals podcast below, with Ryan Detrick and Jeff Buchbinder.

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 Lawrence Gillum, CFA, Fixed Income Strategist

Tuesday, June 7, 2022

The Federal Reserve (Fed) has stated that it would like to get its nearly $9 trillion balance sheet back down closer to 20% of GDP (its currently closer to 40%) so it has announced a plan to start to reduce the amount it currently reinvests, starting in June. Colloquially named quantitative tightening (QT), balance sheet runoff is another tool the Fed plans to use to help arrest stubbornly high consumer price increases. Following are four things to know about QT.

1. The Fed plans to shrink its balance sheet by slowing reinvestment first. Currently, as bonds mature, the Fed reinvests those proceeds back into Treasury or mortgage securities. However, the Fed plans to forgo some amount of reinvestment and allow the bonds to mature and not replace them. As seen in the LPL Chart of the Day, the Fed is capping monthly runoff at $47.5 billion — $30 billion for Treasuries and $17.5 billion for mortgage-backed securities (MBS) — until September. Those thresholds will then double to a combined $95 billion a month. Analysis by Bloomberg indicates that the Fed could see its balance sheet shrink by $2.5 billion by 2024.

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“While the exact impact on financial market conditions is unknown we do not expect any near term disruptions to markets,” noted LPL Financial Fixed Income Strategist Lawrence Gillum. “The Fed is committed to going slow, but as the process plays out over time, we do think the cumulative impact could be meaningful, especially if the Fed goes too far. However, there is still an abundant amount of liquidity in the financial system that needs to be removed before credit creation conditions deteriorate, which could take several years, in our view.”

1. The Fed will not sell securities, at least initially. As mentioned, the Fed plans to let securities organically roll off its balance sheet. The maturity of the Fed’s Treasury holdings are relatively short with over a $1 trillion set to mature in one year thus likely eliminating the need to sell securities. The MBS holdings are mostly long-dated but “mature” early through prepayments. With mortgage rates increasing recently, though, this will likely slow prepayments. In the near term there should be enough securities maturing without the need for outright sales of MBS. If the Fed wants to transition back to holding only Treasury securities though the Fed could conceivably sell MBS—an option outlined in the Fed March meeting minutes but only “after balance sheet runoff was well underway.”
2. QT technically started on June 1 but the first tranche of Treasury securities won’t actually mature until June 15 when nearly $15 billion is set to mature. An additional $33 billion is set to mature at the end of June. As such, $48 billion of Treasury securities are set to mature during the month and the Fed will reinvest only $18 billion of Treasury bonds—the other $30 billion will be removed from the Fed’s balance sheet. The planned amount of reinvestment in MBS that is anticipated for each monthly period will be announced on or around the ninth business day of the month and will generally be conducted over the subsequent one-month period until the next announcement.
3. The Fed has stated that QT will run in the background in tandem with interest rate hikes. However, the Fed has also mentioned that it plans to monitor the impact QT is having on markets. If it is deemed to be too restrictive to financial conditions, the Fed can moderate the amount of bonds removed from its balance sheet. Also, and importantly, the Fed has stated that QT could replace several rate hikes as a way to tighten financial conditions. Markets have already repriced an aggressive rate hiking campaign, so as the QT process plays out over time, we could conceivably see a lower Fed funds terminal rate than what is already priced in to markets, which should help the Fed navigate a “softish” landing.

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

Friday, June 3, 2022

Labor Markets Are Tight With Little Signs of Loosening

Employment in May grew by 390,000, driven by strong gains in leisure and hospitality, professional and business services, and transportation and warehousing. Job growth does not exist in an economy that has a high chance of going into a recession. The LPL Chart of the Day shows the 3-month average gain dipped from the highs from last year. “A softer trend is consistent with the slowdown in economic growth in the coming quarters but not outright contraction,” explained LPL Financial Chief Economist Jeffrey Roach. Unemployment in May was 3.6%, unchanged for the third consecutive month, and average hourly earnings increased 5.2% from a year ago. In this post, we look at the lingering effects from the pandemic and why the labor market is stubbornly tight.

View enlarged chart.

Unemployment is Too Low, Too Long for Some People

One reason that unemployment is low is from the large amount of individuals not in the labor force. Relative to pre-pandemic levels, the economy has an excess of roughly five million people who do not have a job nor are looking for a job. The Bureau of Labor Statistics does not include individuals without a job if those individuals are not actively looking for work.

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The long-term unemployed account for roughly 23% of all unemployed persons and should be a concern as “skill erosion” sets in for those out of work for an extended period. Even after social distancing restrictions lifted in many areas, schools and day care facilities remained constrained last year, causing many caregivers to remain unemployed. Those unemployed for over 27 weeks are considered long-term unemployed, and if this category remains elevated for an extended period, the economy could have lasting scars.

Construction Job Market Is Especially Tight

The National Federation of Independent Business (NFIB) reports that 61% of firms in all sectors are having few or no qualified applicants for current job openings. This metric is at all-time highs but the construction sector is more concerning: 69% of construction firms reported few or no qualified applicants. As a result, firms are raising total compensation to attract and retain talent. We see this as a risk to the inflation outlook if these imbalances remain and become embedded in the economy. But encouragingly, employment prospects are good, and a strong labor market will help offset the impact of rising borrowing costs.

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From the earlier Job Openings and Labor Turnover Survey (JOLTS), the labor market is extremely tight as quit rates are high, revealing that workers in many industries know they can likely get higher wages if they move from one firm to another. Still, the economy had roughly two openings for each unemployed individual.

Federal Reserve Likely to Continue on Projected Tightening Path

Job gains in May were broad based and with another good labor report, the Federal Open Market Committee (FOMC) can emphasize the imbalances to price stability over supporting labor markets. Inflation is the paramount concern for committee members and a tightening labor market adds fuel to the fire. As job gains moderate and more people come into the work force, we could see the unemployment rate increase, removing some of the tightness of the labor market. Our base case projection is the FOMC increases rates again in June by 50 basis points (0.5%).

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 Scott Brown, CMT, Technical Market Strategist

Thursday, June 2, 2022

Stocks rallied hard last week, as the S&P 500 Index broke a seven week losing streak in resounding fashion; its 6.6% gain was the best since November 2020. That strong response from equities, following one of the worst starts to the year ever, has many investors questioning, “Was that the low?” While we are certainly open to that possibility, today we will take a look at why the technical picture suggests volatility is likely to remain elevated in the near term.

First, let’s take a look at the technical set-up of the S&P 500. While stocks have bounced decisively off important support near 3800, the index is now faced with multiple levels of technical resistance, including broken support from the February and March lows, and the 50-day moving average at 4270. Given stocks steady series of lower highs and lower lows throughout 2022, it is important for us to see evidence that this trend has turned and can hold a higher high.

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Second, we remain skeptical that this market has truly bottomed without the capitulatory flush usually found at major market lows, as we discussed in last month’s Weekly Market Commentary. Nothing in markets has to happen, but whether it is put/call ratios, a stubbornly low VIX (a measure of implied market volatility based on options prices), or even just the fact that several of the nongrowth sectors arguably remain rangebound from 2021 and haven’t corrected, it would be highly unusual for us to see such a major market low without genuine signs of investor panic and indiscriminate selling. Of the five major signs of panic that we track and are often found at major market bottoms, only one has triggered so far this year in contrast to a minimum of 3 that have been found at recent lows in March 2020, the fall of 2015, late 2011 and the Great Financial Crisis in 2008-2009.

Finally, while we are inching closer, we remain in the seasonally weak part of the year and a May low would still be on the early side of the average low in a midterm year. Looking at all the midterm years going back to 1950, only two have seen their yearly low before May 19, when the S&P 500 made its closing low two weeks ago. We would note though, that the depth of this correction is almost exactly in line with the average mid-term year pullback. And regardless of when we make that bottom, as the chart below shows, the gains a year after the low have been substantial with a more than 30% average return and only one occurrence falling short of a double digit gain.

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“We are anything but market pessimists,” explained LPL Financial Technical Market Strategist Scott Brown. “In fact, we believe there will be substantial opportunity in stocks on the other side of this volatility and likely in the second half of the year. However, outside of this recent rally, very little about this market has changed from a technical standpoint and that makes us wary of calling the all-clear. We believe a slight lean towards defensive sectors and away from the growth-oriented areas of this market still make sense”.

LPL Research’s Strategic and Tactical Asset Allocation Committee is most positive on healthcare and real estate and is becoming increasingly positive on energy. Within growth sectors, we are most negative on communication services and consumer discretionary and also believe the industrials sector is likely to underperform.

To read more on what catalysts could drive a rally in the second half of the year, be sure to check out the latest 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 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

Posted by Lawrence Gillum, CFA, Fixed Income Strategist

Wednesday, June 1, 2022

The national municipal market has been under the same price pressures as the fixed coupon taxable markets this year as markets have aggressively repriced faster interest rate hikes from the Federal Reserve (Fed). Adding to these price pressures however has been the liquidation of nearly 5% of the muni market through investor redemption and fund outflows. Combined, national muni investors have experienced the worst start to the year in decades. But after the swift repricing that’s already taken place this year, munis are offering an attractive opportunity for taxable investors under most tax-adjusted scenarios.

“Of course, the path forward for Treasury yields and inflation is still uncertain,” noted LPL Financial Fixed Income Strategist Lawrence Gillum. “But the relative value proposition for munis has improved greatly this year. Coupled with much improved fundamentals, investors willing to handle elevated levels of price volatility could find today’s muni market levels an opportune time to invest.”

Over the past decade, the tax-exempt structure of the municipal market has provided around 50 basis points (0.50%) of incremental after-tax yield versus the respective Bloomberg corporate index. Now, as shown in the LPL Chart of the Day, the muni market is out-yielding (on a tax equivalent basis) the corporate market by nearly 100 basis points which is above the longer term average. And while the positive yield differential has retraced somewhat this month, we think the potential for further convergence to historical levels is possible, particularly over the summer months due to the positive summer seasonal found in the muni market.

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So is the widening yield gap between munis and taxable corporates a market signaling the risk of muni downgrades/defaults has increased? We don’t think so. The fundamental picture for many state and local entities improved rather significantly during 2021. State and local operating budgets are in the best fiscal condition of our lifetimes, even better than the late 1990s, due to strong economic growth and the federal government’s financial support during COVID-19 shutdowns. Moreover, state and local governments are running their second consecutive year of surpluses for the first time since 1978. Additionally, as the economy recovers, state and local tax receipts should remain supportive of budgetary priorities

So what does that mean for muni investors? We think most of the rate move is behind us and we are seeing signs of outflows moderating, so we do expect muni performance to stabilize at current levels. Moreover, with recent stabilization in Treasury yields, it’s possible we’ll see additional institutional crossover buyers to take advantage of the excess yields in the muni market. And while interest rates could continue to go higher from current levels, the relative value proposition for munis has improved this year.

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 Ryan Detrick, CMT, Chief Market Strategist

Tuesday, May 31, 2022

After a late month rally, we can say goodbye to the month of May, which now opens the door to June. Here’s the bad news, June is historically a weak month and it is actually the worst month of the year during a midterm year, down 1.8% on average.

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As shown in the LPL Chart of the Day, the good news though is the past 10 years, it has been a solid month, up 1.4% on average to rank as the fourth best month. But the past 20 years it has been weak (only September has been worse) and since 1950 only August, February, and September were worse.

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“June has something for everyone, as it is no doubt a very weak month historically, but the past decade it has been strong,” explained LPL Financial Chief Market Strategist Ryan Detrick. “Still, after the big bounce in late May, we wouldn’t be surprised at all if this recent strength continued into a potential summer rally.”

Here are three reasons for optimism. First, after the huge gains last week, the 7 week losing streak for the S&P 500 Index is finally over. There had been only three prior 7 week losing streaks and twice (1970 and 1980) saw the S&P 500 up more than 33% a year later. On the other side though, the returns in 2001 weren’t very good as 9/11 and the recession hurt returns.

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Second, the S&P 500 corrected 18.7% before the rally last week, which could be a good thing as looking at previous corrections between 10-20% showed gains of nearly 25% on average a year later and nearly 40% two years later.

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Lastly, huge gains like the 6.6% gain for the S&P 500 last week are usually a great sign for the bulls. Here are all the times it has gained more than 6% in a week (since 1950) and the future returns are very strong. Up 12.5% on average six months later and nearly 22% a year later on average is something that could have most bulls smiling after the rough start to 2022.

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2022 has been a rough year for most investors, but we do see better times ahead. Last week’s bottom and rally could be the start of brighter skies ahead for investors.

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

Friday, May 27, 2022

Savings Rate Falls As Inflation Takes A Bite

The latest personal income and spending data from the Bureau of Economic Analysis show that part of the driver of spending growth in April was from savings. Another engine driving consumer spending was credit card usage but first, consider the savings rate.

Real consumer spending rose 0.7% in April, the fourth consecutive monthly increase in real spending.  The job market is tight, supporting consumer spending from gains in personal income, but the real cushion for consumers comes from excess savings accumulated during the pandemic. The savings rate in April fell to 4.4%, the lowest rate since 2008. But since the consumer is coming off of a period where monthly savings rates were 3 standard deviations above the norm, investors should look at the stock of savings and not just the rate of savings. Consumers stored up part of their income for a couple of years and built up a large stock of savings that is offsetting the historic inflation environment. “Overall, the consumer has solid footing to withstand tightening monetary conditions,” explained Jeffrey Roach, Chief Economist at LPL Financial.

Rebound In Credit Card Usage

In recent months, revolving consumer credit rebounded off the near term lows made in January 2021. So in addition to excess savings, consumers are turning to credit cards to fuel growth in real spending. Since the Great Financial Crisis (GFC), domestic consumers deleveraged and as of December 2021, the ratio of total household debt payments to disposable income is 9.3%, significantly lower than the all-time peak of 13.2% in 2007. The decade of deleveraging puts the consumer in a healthy spot for using credit to weather the current inflationary storm.

Inflation Rate Is Cooling But A Lot More To Go

The rate of growth in the core personal consumption expenditure (PCE) deflator in April declined to 4.2% year over year (YoY) from 5.2% YoY in the previous month.

Inflation dynamics are going in the right direction and should be welcomed news for Federal Reserve officials. The inflation rate for just durable goods has now declined for three consecutive months – falling to 8.4% in April from 11.5% in January. Not surprising, inflation rates in services are holding steady at 4.6% YoY.

The current economic environment allows the Federal Reserve to maintain focus on price stability and will likely hike by 50 basis points at the June meeting. See the Econ Market Minute v-log for more insights.

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.

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

Posted by Ryan Detrick, CMT, Chief Market Strategist

Thursday, May 26, 2022

Yesterday was the 100^th trading day of the year for 2022 and although stocks managed to gain about 1%, it was still the worst start to a year since 1970 for the S&P 500 Index.

In fact, it is the fourth worst start to a year ever after 100 days, with only 1932 (Great Depression), 1940 (World War II), and 1970 (Vietnam and a recession) worse.

There is actually some good news in there though, as we’ve usually seen the previous worst starts ever come back nicely—sometimes in record fashion. “Down 16.5% after 100 days for the S&P 500 is the worst start to a year since 1970 and one of the worst starts ever,” explained LPL Financial Chief Market Strategist Ryan Detrick. “But the good news is previous bad starts have seen some nice rubber band snap backs and 2022 could be in line to do it once again.”

As shown in the LPL Chart of the Day, the previous five worst starts to a year ever saw the remainder of the year higher every single time, up 19.1% on average compared with the average rest of the year gain of 5.0%. 2022 has been very tough, but most investors would likely take a 19% bounce the rest of the year.

View enlarged chart.

For more on the bad start to this year and bear markets, but sure to watch our latest LPL Street View, where Ryan Detrick takes a closer look at bear markets.

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 Buchbinder, CFA, Equity Strategist

Wednesday, May 25, 2022

While the S&P 500 Index has not yet fallen into bear market territory (a decline of more than 20% based on closing prices), there are a number of areas of the market that have already endured bear market declines. The technology-heavy Nasdaq is already there, with its near-30% decline since November 19, 2021. The average S&P 500 stock is down about 24% from the highs. The small cap Russell 2000 Index has fallen 28% since its record high back on November 8, 2021.

“While the S&P 500 Index has not officially entered bear market territory, plenty of areas of the market have,” noted LPL Equity Strategist Jeffrey Buchbinder. “The consumer discretionary sector is one of them with a 35% drop from its November 2021 high. And as we heard from some of the biggest retailers during earnings season, the outlook is only getting tougher as energy prices soar and supply chain problems persist.”

The LPL Chart of the Day illustrates just how difficult earnings season was for the consumer discretionary sector. No sector saw its earnings estimates for the next four quarters cut more during reporting season than consumer discretionary. Retailers have struggled with the transition from pandemic to reopening and intensifying cost pressures. The LPL Research Strategic and Tactical Asset Allocation Committee (STAAC) maintains its negative view of the sector.

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The impact of inflation and snarled supply chains on retailers, the biggest piece of the discretionary sector, is widely understood. But we would argue that it’s not quite priced in.

The next chart shows the price-to-earnings ratio (P/E) for the discretionary sector relative to that of the S&P 500 Index. The sector still trades at a 34% premium to the market, compared to the 10-year average of 26%. That’s certainly a lot more reasonable than the 100% premium valuation the sector reached last summer, but we would argue that the sector still does not warrant valuation support. This market has not been friendly to richly valued stocks, and consumer discretionary still has a good amount of them despite the more than 30% decline.

View enlarged chart.

From a technical standpoint, our analysis doesn’t get any more optimistic. The sector was one of the top performers off the market low, outperforming the S&P 500 by more than 10% in the first year following the COVID-19 driven bear market. However, since then relative performance has significantly deteriorated and the sector now sits at its lowest level relative to the S&P 500 since January 2015. And while the sector is one of the most concentrated, with biggest components Amazon and Tesla accounting for an eye-popping 46% of the sector, the weakness has been broad based as only 2 of the 60 stocks in the index remain above their respective 200-day moving averages.

The sector has a lot going against it right now but there is a silver lining. The hotels, restaurants, and other travel & leisure categories are getting a boost from the reopening. It hasn’t been enough to offset the other headwinds mentioned above, but once the the inflation and supply chain headwinds ease further, the sector could be poised to rebound. The potential for interest rate stability should eventually help higher priced growth stocks like those that make up the bulk of consumer discretationary sector. It’s just too early in our view.

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