Wealth Management

Economic Blog Posted by lplresearch

COVID-19 cases have been rising in several regions around the world, prompting many countries to implement new restrictions to curb the spread of the virus. Governments in a few European countries have rolled out what has been dubbed “lockdown 2.0,” and high-frequency data in the region, highlighted in our blog Europe’s Lockdown 2.0 May Be Smarter, has shown a reduction in economic activity. While new restrictions are more targeted than those used in the spring, economies currently are in a more fragile position and some could even be at risk of a “double-dip” recession.

As shown in the LPL Chart of the Day, COVID-19 data in the United States has gotten worse in the fourth quarter. With conditions deteriorating and the weather getting colder, there is a growing risk that more restrictions will be enacted in the United States as well.  California and New York have already implemented some initial rollbacks such as nighttime curfews and school closings, while additional measures are being considered elsewhere.

View enlarged chart.

The US economy appears to be in a better position to withstand these curbs than it was in the spring, but unemployment remains high at 6.9%, and economic data for service-oriented industries has shown fading momentum in recent months. If the uptick in jobless claims last week is the beginning of a trend, consumer spending may decline, which could affect roughly 70% of the US economy.

“The worsening trends in COVID-19 data present a very real risk to an economy that remains on soft ground,” noted LPL Chief Market Strategist Ryan Detrick. “While recent news on vaccine progress has been a welcome development, the actual rollout of a vaccine could take longer than people realize.”

Even without new lockdowns, it appears that consumer behavior has already begun to react to the rise in cases, presenting a risk to economic activity regardless of any policy decisions to curb activity. Real-time data series like restaurant bookings through OpenTable have been declining in recent weeks, particularly since the acceleration in new case growth in October.

View enlarged chart.

Curiously, however, the stock market appears to be discounting the chances of new lockdowns—or at least the nature of them. As the S&P 500 Index sits near all-time highs, cyclical stocks are outperforming defensives, small caps have outperformed large caps, Treasury yields have been rising, and there’s been a rotation out of the “stay at home” stocks—certainly a very different market environment than we saw leading up to the March volatility. Recent progress on the path forward for a vaccine is a material development for a forward-looking mechanism like the stock market, and this may be what is altering the market’s perception of the risk of additional restrictions.

While a double-dip recession is not our base case and we are encouraged by the market’s resilience, the worrisome trend in COVID-19 data may have raised the chances of tripping up the recovery. We’ll continue to monitor real-time data indicators for insight on the path forward for the virus and the economy.

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

Leading economic indicators are confirming what high-frequency data has been telling us for weeks: The rate of the domestic economic recovery, while still positive, is slowing.

On November 19, the Conference Board released its October report detailing the latest reading for its Leading Economic Index (LEI), a composite of data series that tend to lead changes in economic activity. For the second straight month, the index’s value grew 0.7% month over month, suggesting still-positive economic growth, but at a significantly lower level than earlier in the recovery. For context, the monthly growth rate peaked in June at 3.1%, and was growing at a rate of 1.6% just two months ago, as seen in the LPL Chart of the Day.

View enlarged chart. 

Seven of the LEI’s ten component series increased in October, while two remained constant and one declined. The Institute for Supply Management (ISM) New Orders Index, average weekly initial claims for unemployment insurance (inverted), and the Leading Credit Index (inverted) led the way among positive contributors. Building permits and average consumer expectations for business conditions held steady, but manufacturers’ new orders for nondefense capital goods, excluding aircraft—one proxy for business investment—declined in October.

“It’s no surprise that we are seeing a soft patch in some of the real-time economic data,” said LPL Financial Chief Market Strategist Ryan Detrick. “The prospect of a widely distributed vaccine by mid-2021 is helping to lift optimism for the future, but in the meantime, the economy is having to contend with new highs in daily case counts and the specter of renewed targeted lockdowns.”

We are certainly heartened by the recent news regarding  efficacy rates in major vaccine trials. The flipside to this, however, is that seeing the light at the end of the tunnel may reduce Congress’s appetite to enact a major stimulus bill to see us through to the other side.  We continue to monitor high-frequency economic data, as well as positive case counts, to gauge the economy’s resilience and determine whether any worsening could force Congress’s hand on a stimulus bill.

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

Real-time European COVID-19 and economic data provides an insight into how the pandemic is affecting economies around the world. We’re monitoring real-time data because traditional economic data is too slow to pick up the changes that are occurring.

Europe is now in the midst of a significant second wave of COVID-19 infections, and local governments have implemented new restrictions, or “lockdown 2.0,” across much of the continent. “The high-frequency data we monitor shows the new round of targeted lockdowns have limited people’s mobility in recent weeks,” said LPL Financial Equity Strategist Jeffrey Buchbinder. “The smarter restrictions will hopefully help mitigate the economic impact until a vaccine is widely available in 2021.”

In recent weeks, Europe has been facing a surge in COVID-19 infections with more than 2 million new cases reported by European nations last week. This is slightly down from the prior week as a new wave of targeted government lockdowns has taken effect across much of Europe.

View enlarged chart.

These new lockdowns aimed at curbing the second wave in Europe have been instituted either nationally, such as in France, or on a more regional basis, like Italy and Spain. The one thing that most of lockdowns 2.0 have in common is that they appear to be “smarter” compared with those that were hastily put into place in the spring. Most of the new lockdowns are targeting areas of the economy that have been more closely linked to community outbreaks of COVID-19, like hospitality and recreation, while allowing lower-risk areas of Europe’s economies, like manufacturing and construction, to continue to operate.

Using data from the online restaurant booking system Opentable, we are able to see that lockdown 2.0 has targeted this industry and decimated in-person dining activity in Germany, Ireland, and the United Kingdom (UK). These are now back at levels near zero as seen during the first lockdowns. Earlier in the summer, dining in these countries had enjoyed recoveries back to above 2019 levels.

View enlarged chart.

As shown below in the LPL Chart of the Day, the targeted nature of many of the new “smart” lockdowns appears to have allowed more people in Europe to continue to go to work, as measured by data from Google’s COVID Community Mobility Reports. During the initial lockdowns, the number of people going to work in the UK, France, and Italy fell by about 70%, compared to pre-pandemic levels, but so far have declined by only 10–20% since recent highs in mid-October. Germany appears to have coped the best, helped by the larger proportion of its workforce in the manufacturing and industrial sectors. Its citizens frequent their workplaces at a rate only 15% lower than in 2019 (up from a lockdown 1.0 low of down 52%).

View enlarged chart.

The high-frequency data on lockdown 2.0 in Europe suggests that Eurozone and British gross domestic product (GDP) will take hits in the fourth quarter 2020, and potentially the first half of 2021, until a vaccine is widely available. However, the economic effects likely will not be as catastrophic as in the first set of lockdowns. The data reinforces our expectation that economies in Europe likely will contract more than the economy of United States in 2020 and underpins our preference for emerging markets equities over those in developed international markets.

LPL Research continues to monitor high-frequency data from around the globe and will keep you updated, real-time, as appropriate.

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

First, the big economic data point this week was retail sales. Although the headline number was a little light at 0.3% versus an expected 0.5% gain month-over-month, it still hit another new all-time high along the way (source: US Census Bureau). “The miss could be a sign the consumer is finally starting to slow amid record COVID-19 cases and more restrictions, with restaurant sales dipping for the first time since April,” explained LPL Financial Chief Market Strategist Ryan Detrick.

The good news is retail sales has hit a new high for five consecutive months, and the economy has never been in a recession after three consecutive new highs—yet another sign the recession may be over, even if it hasn’t been called officially.

View enlarged chart.

How strong has the recent rally been? Well, as of Tuesday’s close, the S&P 500 Index was on pace to have its second-best month of November ever. November isn’t over yet of course, but this could open the door to a potential late-month snap back lower after a huge move, which would be perfectly normal and healthy.

View enlarged chart.

After Monday’s record close, the S&P 500 now has 24 new all-time high closes in 2020.

View enlarged chart.

The surge after the election was historic in many ways. The number of stocks in the S&P 500 recently making new monthly highs caught our attention. As shown in the LPL Chart of the Day, previous surges in new monthly highs opened the door for near-term weakness, but the weakness was a nice buying opportunity. In fact, a year after previous major breadth thrusts saw stocks higher every single time, not something we want to ignore.

View enlarged chart.

Last, more than 85% of the stocks in the S&P 500 recently were above their 200-day moving average—another sign of impressive participation in this recent market strength. Once again, future results would suggest this extreme strength is a sign of potential future strong performance and weakness could be used as a buying opportunity.

View enlarged chart.

For more of our thoughts on the recent market strength, please watch the latest LPL Market Signals video from our YouTube channel below.

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

Fixed income investors aren’t used to having to deal with the volatility of stocks, but in the year that is 2020, that is exactly what has happened thus far. Unfortunately, while we don’t see the volatility of Q1 2020 continuing in 2021, we do believe that interest rates may continue to rise in 2021, and this may put more near-term pressure on bond returns.

Two technical reasons lead us to believe that the yield on the 10-year Treasury note has not only bottomed, but could be headed higher in 2021.

Inverse Head and Shoulders Pattern

One of the most well-known patterns in technical analysis is the Head and Shoulders Pattern. A reversal pattern, noted for its three points (left shoulder, head, and right shoulder) as well as the neckline, this pattern can also signal a reversal from a downtrend to an uptrend when the pattern appears to be upside down. As shown in Figure 1, we believe we are close to completing an inverse Head and Shoulders Pattern on the yield of the 10-year Treasury. A weekly close above the neckline near 0.95% would signal confirmation and target a move to just above 1.3%. The range from 1.3% to 1.5% also marks significant resistance for yields, as it was support for nearly a decade before breaking down in February.

View enlarged chart.

Lower for Longer Is Now Consensus

The fundamental arguments against higher rates are numerous. The economy is still recovering from a historic recession, COVID-19 cases are rising or hitting all-time highs in multiple regions of the country, and the Federal Reserve (Fed) has signaled it plans to keep short-term rates at zero for the foreseeable future. However, from a contrarian perspective, we believe there is a case to be made that “lower for longer” is now too consensus of a position, and that if the masses are already positioned for lower rates, those lower rates may be behind us. As shown in Figure 2, after consistently predicting higher interest rates throughout 2020 and revising forecasts lower as they fell, economists have been slow to revise forecasts higher even as yields have risen in recent months. In fact, the average forecast for the 10-year Treasury yield is now just 1.01% by the end of Q2 2021, implying barely a 10 basis point (.1%) move in rates over the next seven months.

View enlarged chart.

According to LPL Financial Chief Market Strategist Ryan Detrick, “The consensus expectation is that lower rates are here to stay. But with a vaccine potentially on the horizon, and parts of the economy recovering faster than expected, the biggest risk for fixed income investors may be a sharp move higher in rates.”

As a reminder, bond prices move inversely to interest rates, and a move toward 1.3–1.5% in 2021, combined with the low absolute level of interest rates could mean near-zero returns for the Barclays Aggregate Bond Index in 2021. The poor near-term outlook for bond returns remains one of several key reasons we continue to favor stocks over bonds heading into next 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 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 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

It took more than two years, but small caps finally broke out to new highs, as the Russell 2000 Index on Friday closed at its first new high since August 31, 2018.

This capped off one of the longest stretches ever without a new high.

View enlarged chart.

“We’ve seen large cap strength for years, but it is great to finally see the little guys join the party,” explained LPL Financial Chief Market Strategist Ryan Detrick. “Don’t forget there are many more small cap than large cap names, so this is yet another sign that overall market breadth and participation is improving.”

As shown in the LPL Chart of the Day, when the Russell 2000 has gone more than one full year without a new high, the future returns going out a year have been quite strong, suggesting the recent strength could have plenty of legs.

View enlarged chart.

Small caps are more domestic by nature, and seeing small caps significantly outperform their large cap brothers the past few months could be another clue that the US economy may improve next year—maybe more than what most economists expect.

We recently upgraded our view on small caps, and you can read more in Three Reasons We Like Small Caps.

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

This year’s Masters Golf Tournament teed off Thursday at the Augusta National Course in Georgia. While there will be some familiar sights as the players compete for the coveted green jacket, it will also be a year unlike any other.

Due to the ongoing effects of the COVID-19 pandemic, the tournament is being played in November, rather than its usual spring slot, which means that Tiger Woods is still the defending champion 19 months after his comeback victory in 2019. This change in season will suit players who can adjust to the very blustery, rainy conditions, as demonstrated on the first day when play was suspended due to thunderstorms. The biggest change will be that there will be no fans at the course—no yells of “get in the hole!” and none of the famous atmosphere that some players revel in so much.

We at LPL Research have been trying to decide who we should be rooting for this year so we decided to take a light-hearted look at whether who wins the Masters had any predictive power for the stock market. As seen in the LPL Chart of the Day below we looked at the nationalities of all Masters Winners since 1974, when South African Gary Player won, and how the S&P 500 Index performed over the next four quarters.

View enlarged chart. 

Based on this data, an unlikely repeat for 2000 winner (and unwitting dot-com-bust harbinger), Fijian, Vijay Singh would be the worst signal for the market returns in 2021. But don’t worry—he’s currently a 2000 to 1 shot. Unfortunately, the nationalities with the best forward returns—Argentina, Canada, and Australia—don’t have any realistic prospects this time, so we are going to throw our irons behind the 10 to 1 shot, Spain’s John Rahm. On the five occasions that a Spaniard has triumphed, the S&P 500 has never been down over the next four quarters, with an average positive 16% return. Additionally, a winner from anywhere in Europe has led to an average 14% forward S&P 500 return versus 6% for the rest of the world!  “Once this year’s Masters winner is crowned on Sunday, we’ll be watching if this market predictor is up to par or, more likely, ends up in the rough,” joked LPL Chief Market Strategist Ryan Detrick.

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

Third quarter earnings season has been outstanding relative to expectations by many measures. Some of the highlights:

• S&P 500 Index earnings are tracking to a 7.5% year-over-year decline, as shown in the LPL Chart of the Day, more than 14 percentage points above expectations when earnings season began.

View enlarged chart.

• If the earnings beat rate of 86% holds with 10% of companies yet to report, it would mark the highest percentage of companies to exceed consensus earnings estimates since FactSet began tracking this statistic in 2008.
• On average, S&P 500 companies have beaten consensus earnings estimates by more than 18%, below last quarter’s 22% clip when analysts were pretty much guessing, but one of the best numbers recorded in recent decades.
• While S&P 500 earnings fell compared with prior-year levels, earnings for the Russell 1000 Growth Index actually rose 14% year over year during the quarter.
• Earnings estimates for the fourth quarter rose 1.8% during October, the best increase during the first month of a quarter since the first quarter of 2018, which was artificially boosted by corporate tax cuts via the Tax Cut and Jobs Act of 2017. Historically estimates tend to drop during earnings season.

“We believe the huge upside surprise in earnings may get more attention as more political uncertainty clears,” said LPL Financial Equity Strategist Jeffrey Buchbinder. “S&P 500 companies have a shot at returning to pre-pandemic levels of corporate profits in 2021, which we didn’t think was possible just a couple of months ago. We have to re-evaluate how much earnings power corporate America will have post-pandemic.”

Looking forward, it’s fair to say that—after seeing such strong third quarter results and record progress on vaccine development—we expect corporate America in aggregate to reach pre-pandemic levels of profitability sooner than we had anticipated just a month ago. The cost efficiencies companies have gained during the pandemic will bear fruit once the pandemic is over, and we think analysts will be surprised by how profitable S&P 500 companies will be once the economy is fully reopened.

At the same time, recent COVID-19 spread and renewed restrictions that may follow could slow the pace of the economic recovery and remain a risk to the earnings rebound while we wait for a vaccine(s) to be distributed in the months ahead. We also must watch the political landscape and tax and regulatory changes that may come along.

Look for more on the strong third quarter earnings season in our next Weekly Market Commentary due out Monday.

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 lplresearch

Economic Blog

Bond markets have had quite a ride since Election Day. The 10-year Treasury yield had been climbing very slowly in the months leading up to the election as the economy improved, but possibly also in anticipation of a potential Democratic sweep that could lead to a larger stimulus package. As shown in the LPL Chart of the Day, as polls were starting to close on Election Day, the 10-year Treasury yield had moved above 0.90%, a level at which it had not closed since June and then only barely. But then early results out of Florida and North Carolina let us know that this would be a closer election than many thought, and yields fell dramatically.

“Stock investors seemed to embrace the prospect of divided government as results came in, but bond traders were focused on other things,” said LPL Chief Market Strategist Ryan Detrick. “Part of it may have been weakening stimulus prospects. Part of it might have been increased election uncertainty as the race tightened. Either way, it looked like the reflation trade was off the table.”

View enlarged chart.

The “reflation trade” was simply market rotation that reflected improving prospects of a return to economic normalcy, potentially with the help of government stimulus. Leading up to the election, It was reflected not only in yields, but the relative performance of value style stocks and small caps, which had delivered improving relative performance in September and October after lagging sharply on a year-to-date basis through August.

As the new week opened on Monday, however, we were reminded that stimulus prospects were not the only signal for a reflation trade. Preliminary reports of encouraging vaccine trial results pushed the 10-year Treasury yield above election-day highs. At the same time, a badly beaten up Russell 1000 Value Index had its single best day versus the Russell 1000 Growth Index in its history. Small caps, not surprisingly, also had a strong day. Even as early broad stock market enthusiasm settled down to just a solid day of returns, yields largely held on to most of their early move.

Is this a sign of things to come? Really, it’s an extension of a trend that’s been in place since early September, but we would caution getting too excited about a single day. We do think interest rates are likely to extend their slow march higher, and we recommend bond allocations emphasize below-benchmark rate sensitivity. (Bond prices fall when interest rates rise.) For value and small cap stocks, it may be more part of the process of a slow thaw. In response to that, we did recently upgrade our view of small caps to neutral and do favor the more value-style oriented material sector. That single day of trading did at least signal that one potential avenue to a more durable return of the reflation trade is clear, as the work of doctors and scientists continues to have the potential to be a major market catalyst.

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