Wealth Management

Posted by lplresearch

Monday, February 7, 2022

“Bulls make money, bears make money, and pigs get slaughtered.” Old Wall Street saying.

The Chinese New Year (often called the Lunar New Year) kicked off on Tuesday, February 1, and with it will begin the Year of the Tiger. Although we would never suggest investing based on the zodiac signs (and there is no talk of Tigers in the quote above) —it is important to note that the Year of the Tiger has historically been quite strong for equities. Again, we’d never suggest to invest on zodiac signs, but it is worth noting that the Year of the Ox has been historically bullish and it did extremely well once again last year.

The LPL Chart of the Day shows how all the 12 Zodiac signs have done historically. Sure enough, the Tiger is near the top, with Goat and Ox also very strong, while the Rooster and Snake are the worst.

View enlarged chart.

“The year of the Tiger is the third of the 12 animal signs of the Chinese zodiac, and the Tiger is considered a symbol of competition, courage, and ambition. Equity returns indeed are quite ambitious during the Tiger, as it is the third best return out of the 12 Zodiac signs,” explained LPL Chief Market Strategist Ryan Detrick.

Given the author is a long suffering Cincinnati Bengals fan, maybe their recent success shouldn’t be all that much of a surprise, given we are in the Year of the Tiger after all. As you can see below, with nearly a 14% average return and more than a 23% median return, the Year of the Tiger has definitely stood tall (hopefully a sign for Joe Burrow and the Bengals next weekend).

View enlarged chart.

We want to stress that no one should invest purely based on the zodiac signs. This relationship is random and the sample size is small. Still, here’s hoping that the Year of the Tiger plays out well for the bulls once again!

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

Friday, February 4, 2022

The U.S. economy added 467,000 jobs in January, well ahead of the consensus estimate of 125,000, and December’s disappointment was wiped off the books after being revised upward from 199,000 to 510,000. Seasonal adjustments in January are often challenging and today’s upside surprise should probably be greeted with some skepticism. Nevertheless, a strong print in the month when the economic damage from Omicron likely peaked certainly tilts positive for the economic outlook. While good news for the economy, S&P 500 futures dipped modestly following the release on concerns over a potentially aggressive Federal Reserve (Fed).

“For markets, the jobs report is all about the Fed, and today’s upside surprises in both job creation and wage growth likely keep the Fed on track to begin raising rates in March and potentially hike four or more times this year,” said LPL Financial Asset Allocation Strategist Barry Gilbert.

Wage pressures continued to make themselves felt. Average hourly earnings rose to 5.7% year over year versus expectations of 5.2%. The unemployment rate ticked up from 3.9% to 4.0% but for the right reason as more workers joined the labor force. The labor force participation rate climbed a solid 0.3% to 62.2%, the best number since the recession but still well below the pre-pandemic peak.

As shown in the LPL Chart of the Day, job gains, after updated seasonal revisions, have been holding steady near 500,000 per month. However, gains are expected to slow over the course of 2022, likely averaging somewhat in excess of 300,000 per month over the year, which would still likely be enough to support solid above-trend economic growth.

The Fed is likely to discount the report somewhat and we don’t think it will materially change the path of rate hikes, but it did certainly support the Fed’s current emphasis on trying to get inflation back under control. Market participants will be keeping a close eye on next week’s January Consumer Price Index (CPI) report, with current consensus that year-over-year headline inflation will rise from 7.0% to 7.3% amid increasing signs that the yearly data may be near its peak.

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

Thursday, February 3, 2022

With the recent hawkish pivot by the Federal Reserve (Fed) indicating a now quicker removal of monetary accommodation, U.S. Treasury yields have moved higher to start the year. Over the past few months, the Fed has indicated it will end its bond buying program in March, start its interest rate hiking campaign (likely starting in March with five hikes expected currently), and potentially reduce its nearly $9 trillion balance sheet (likely starting in July). The sudden shift in expectations has caused the 10-year Treasury yield to increase by nearly 30 basis points (0.30%) so far this year. However, the sharp rise in interest rates is not unique to the U.S.

“The hawks are winning the inflation debate right now and markets have quickly repriced interest rate hike expectations globally,” noted LPL Financial Fixed Income Strategist Lawrence Gillum. “And while the rise in interest rates has been sudden, those investors that need additional income likely welcome the additional yield”.

Also dealing with stubbornly high consumer price pressures, interest rate hike expectations for the European Central Bank (ECB) and Bank of England, to name a few, have also increased. Currently, markets are expecting the BOE to hike nearly five times this year (including today) and markets expect the ECB to hike rates twice this year. As such, and as seen in the LPL Chart of the Day, interest rates have moved higher globally. We’ll see if the ECB and/or the BOE push back on these market expectations during their respective meetings today.

Also of note, yields on 10-year German, Japanese, and Greek government bond yields have moved higher this year and, in the case of German Bunds, have turned positive for the first time since 2019 (0.036% as of 2/02/22). Japan’s 10-year government bond yield, after hovering around zero for years, has jumped to 0.17%,  the highest since 2016. Finally, one of the largest increases in interest rates this year has been the 60 basis point increase in 10-year Greek debt. Greek debt has been benefitting from the ECB’s emergency asset purchase program since the COVID-19 pandemic began, but the ECB plans to wind down the program this year and Greek government bonds may not be eligible for new central bank asset purchases. As such, we’ve seen a big sell-off in Greek debt.

So what does this mean for U.S. fixed income markets? Foreign investors in U.S. Treasury markets are an important reason we haven’t seen U.S. 10-year yields move even higher. As international interest rates move higher though, it becomes less likely that we’ll see the amount of crossover foreign investors needed to help keep our Treasury yields from climbing higher. Moreover, as the Fed starts to reduce its balance sheet, demand for U.S. Treasury securities will need to increase to offset the Fed’s reduced footprint. If investors outside the U.S. are no longer as interested in our markets (because their home rates are higher) we may need to see higher yields here to induce additional demand.

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

Wednesday, February 2, 2022

The Federal Reserve (Fed) has made a decidedly hawkish pivot, with fed funds futures now expecting five rate hikes in 2022. For our full breakdown of the latest Fed meeting, please read our January 27 blog, Federal Reserve Meeting Recap: March is Officially Live. However, today we want to take a look at other years that had a lot of rate hikes.

“Five rates hikes in 2022 sounds pretty scary to a lot of investors who haven’t lived through a period of hiking,” explained LPL Financial Chief Market Strategist Ryan Detrick. “But we’ve seen many years with this many (or more) hikes and bad news isn’t certain. In fact, stocks can do just fine with multiple rate hikes if the economy is strong and earnings are healthy.”

As we share in the LPL Chart of the Day, this has happened before, as most recently we saw 5 hikes in 2004 and 2005 (which had 8).

Taking things a step further, here are the years with at least four hikes in a calendar year and how stocks did. Yes, overall the full-year returns are more muted, but that doesn’t mean a bear market is imminent. In fact, in recent history we saw a total of 17 hikes in 2004, 2005, and 2006, yet the S&P 500 was green all of those years.

Lastly, we’ve shared this chart before, but a year after the first hike in a new economic cycle saw the S&P 500 Index up a year later the past 8 times, up an impressive 10.8% on average.

For more on rate hikes, the Fed, a rough start to this year, if the bottom of the pullback is priced in, and more, please watch the latest LPL Market Signals podcast with Jeff Buchbinder and Ryan Detrick, as they break it all down.

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

Tuesday, February 1, 2022

Stocks made a new all-time high on the first day of trading in 2022, but it was a very rough month from there. In the end, the S&P 500 Index lost 5.3% in January, for the worst first month of the year since 2009. It could have been worse though, as a huge 4.4% rally the last two days of January checked in as the best end of month rally since November 2011.

There’s an old adage on Wall Street that suggests, “As goes January, so goes the year.” This is widely known as the January Barometer and was first discussed in 1972 by Yale Hirsh of the Stock Trader’s Almanac, and it has an impressive track record.  Simply put, when the first month of the year was green, it bodes well for the rest of the year (and vice versa). Given stocks closed red in January, how worried should investors be?

As shown below in the LPL Chart of the Day, the numbers confirm that when the S&P 500 has been green in January, the index has been up 11.9% on average over the rest of the year (final 11 months) and higher 86% of the time. However, when that first month was red, stocks rose only 2.7% on average over the final 11 months and were higher 62% of the time.

It isn’t all bad news though, as lately the January Barometer hasn’t been working. “Yes, a lower January is a potential worry for the bulls,” explained LPL Financial Chief Market Strategist Ryan Detrick. “But it is worth noting that the January Barometer has been broken lately. In fact, 9 of the past 10 times stocks were lower in January, the final 11 months were higher, with some huge gains in there.”

What about if you have a very poor January like we just did? This shows that some continued weakness in February could be in the cards. Here we show that after 5% or greater drops in January, February has been lower 6 of the past 7 times. Longer-term, performance over the final 11 months has been quite muted as well.

Lastly, since 1950, February is one of the worst months of the year, with only September worse.

We are encouraged by the big reversal in stocks last week and we think stocks are in the process of forming a meaningful bottom. But the truth is this year is going to be much more volatile than last year and investors had better buckle up their seat belts if the first month is any indication.

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

Monday, January 31, 2022

The latest weekly data from the American Association of Individual Investors (AAII) showed a sharp increase in the percentage of individual investors who are bearish (52.9%) about short-term market expectations, the second most bears of the past 10 years and the highest level since early April 2013. Even though the proportion of investors who are bullish was up slightly from a week ago (21% to 23.1%), the spread between the bulls and the bears fell sharply reaching -29.8%, a rapid decline from the turn of the year when bulls had outnumbered bears.

“As investors reacted to the worst ever start to the year for the S&P 500 the sentiment data is now at bearish levels not seen for the best part of a decade,” explained LPL Financial Quantitative Strategist George Smith. “However when we look at historic data extremes in investor pessimism, such a high number of bears could be a contrarian indicator that’s actually bullish for stocks, at least in the short term”

Contributors to the wall of worry that has turned investors more cautious include the first stock market correction since the 2020 COVID-19 related bear market, the markets adjusting to the prospects of Federal Reserve (Fed) rate hikes and quantitative tightening (QT), heightened inflation expectations, the potential for further global supply chain issues, and increasing geopolitical tension over Russia/Ukraine.

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 plummeted since the turn of the year. The spread between bulls and bears is also at its lowest level since April 2013 and last week dipped more than two standard deviations below the 10-year rolling average for the first time since the first half of 2020.

View enlarged chart. 

However, extremes in negative sentiment tend, on average, to be bullish for future returns in the near term (just as extreme optimism tends to be bearish for stocks). When the AAII Bull-Bear is more than two standard deviations below its long-term average, as it has been for the past two weeks, the average return one year out has been +11%. Caution is still required in interpreting this data as even at very bearish sentiment levels the annual average hides a wide range of returns; -47% to +57% (with these extremes occurring during the great financial crisis downturn and at the 2009 bear market bottom respectively). Since that 2009 bear market bottom when sentiment has become very bearish, as it is now, the average short term returns have been well above the average for the same period (with 3-, 6-, and 12-month returns of 10%, 17% and 32%, respectively compared to averages of 4%, 7% and 14% respectively)

View enlarged chart. 

Other sentiment indicators that we monitor, such as expectations for market volatility and the average put/call ratio have also recently been flashing potential contrarian signals.  The VIX futures curve has inverted, a sign that near term volatility is not expected to persist, and the put/call option ratio recently reached the highest ratio of puts since March 2020.

While we were certainly expecting, and have already seen, more volatility in 2022 than the “Goldilocks” year we had in 2021 we believe the current extreme levels of investor pessimism may be not warranted. We see a low probability of this correction being the start of cyclical bear market as the economic environment is still strong and, while not zero, the odds of a policy mistake from the Fed appear low. New Omicron cases in the U.S appear to be falling fast (down 20% from the peak) giving us hope that the related hit to supply chains and workforce participation may be approaching its peak. This would be good news for domestic price and wage inflation pressures leading us to believe that inflation could be nearing its peak by the middle of the year, especially as the base effect for year-on-year CPI numbers become more favorable as we move further into 2022.

Risks do remain, like the potential for supply chain issues stemming from Chinese lockdowns to lead to elevated inflation lasting longer than expected, geopolitical risk in relation to Russia/Ukraine escalations, potential for earnings or economic data misses, new COVID-19 variants, and while not our base case, a Fed policy mistake. Mid-term years have also tended to be more volatile than the first year of a presidential term. Given the start to the year we have seen we have no reason to believe 2022 will be any different, but we still believe the economic environment for stocks still looks favorable compared to bonds and cash.

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

January 27, 2022

The U.S. economy outperformed expectations in the fourth quarter. Gross domestic product (GDP) grew at a 6.9% annualized rate according to the initial Bureau of Economic Analysis’ estimate, clearing the Bloomberg consensus forecast of 5.5% by a healthy margin. The pace picked up nicely from the 2.3% growth rate in the third quarter plagued by the Delta variant.

As you can see in our LPL Chart of the Day, the biggest driver of the upside surprise during the quarter was 4.9 points of inventories. The good news is companies were optimistic enough about the outlook to restock. Perhaps even better news is that companies were able to build those inventories amid shortages and supply chain bottlenecks. Less good, however, is that extra inventory building last quarter likely translates into a much smaller build in the first quarter.

“The strong GDP number for Q4 is encouraging, no doubt,” according to LPL Financial Equity Strategist Jeffrey Buchbinder. “But last quarter’s big inventory contribution won’t recur while the drag from Omicron continues, setting up a potentially soft first quarter.”

As is often the case, consumer spending also provided a lift to GDP. High inflation did not prevent shoppers from spending this holiday season, as consumer spending rose 3.2% annualized during the quarter (remember these GDP numbers are expressed in real terms and are adjusted for inflation). The contribution to GDP by consumer spending increased from 1.4% in Q3 to 2.3% in Q4. Business investment maintained its tepid pace, growing 2% annualized after 1.7% growth in Q3. Shortages and supply chain issues were clearly at play.

The solid overall growth rate in a challenging environment is impressive. However, the inflation data that came with this report was less reassuring. The GDP deflator rose 6.9% in the quarter, well above the consensus forecast of 6.0%, while the core personal consumption expenditure (PCE) price index, which excludes food and energy, remained elevated but in line with expectations at 4.9%. This data certainly does little to reduce the inflation anxiety for markets, nor will it make the Federal Reserve regret leaving the door open to four, or possibly more, interest rate hikes this year.

The Omicron variant has already introduced some downside risk to our 2022 GDP growth forecast of 4-4.5%. The less bullish inventory picture as 2022 began adds a bit more potential downside risk—though it got us to 5.7% GDP growth for full year 2021, fastest since 1984. So while we are not changing our GDP forecast for this year at this time so we can see more data, the next move is more likely to be down than up. That said, coming off such a strong 2021, and considering the pre-pandemic trend around 2%, something in the high 3% range would still represent solid growth for the U.S. 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 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

Thursday, January 27, 2022

The Federal Reserve (Fed) ended its two-day Federal Open Market Committee (FOMC) meeting yesterday and the outcome was broadly in line with the Fed’s recent hawkish shift. As expected, despite calls for a quicker exit, the Committee announced that the monthly asset purchase programs would end in “early March.” Also, the Committee indicated that, due to persistent inflationary pressures, a rate hike may soon be appropriate. Finally, the Fed also indicated a willingness to start shrinking its nearly $9 trillion balance sheet, but that process would start after interest rate liftoff and through a predictable manner. While details on rate hikes and balance sheet runoff were scarce, Chairman Jerome Powell noted that “the FOMC is of mind to raise rates at the March meeting”. Powell said the Committee will be turning its attention to the details on the balance sheet contraction process in subsequent meetings but would likely begin in the second half of the year.

“The hawkish shift we heard in December was further confirmed at this meeting,” noted LPL Financial Fixed Income Strategist Lawrence Gillum. “The Fed wants the public and markets to know it is serious about arresting high consumer prices, as best it can. It will be interesting to see, though, how much of this is trying to manage expectations through forward guidance and what is actually going to happen.”

While most of the details provided were consistent with market expectations—a point Powell made by saying the communications with the public and markets are “working”—there were some details that implied the Fed could move faster than expectations. As shown in the LPL Chart of the Day markets expectations for rate hikes increased after the meeting and are now pricing in more than four rate hikes this year.

The genesis of the move higher in expectations likely came from Powell’s comment that the Committee believes there is considerable room to raise rates “without threatening the labor market”—a fairly bold assertion from Powell who is generally cautious with his comments. Moreover, Powell refused to rule out raising interest rates at every FOMC meeting this year (there are seven remaining) versus the expected quarterly rate hiking schedule that was priced in previously. We’re likely to hear more details from Fed speakers in the coming weeks but the next scheduled FOMC meeting concludes on March 16 and the meeting minutes from the January 25 meeting will be released in three weeks.

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

Wednesday, January 26, 2022

2022 has been one of the worst starts to a year ever for stocks. As of January 25, 2022, the S&P 500 is down 9.2% (on a closing basis) from the peak earlier this year, suggesting we are inching closer to a potential market correction of 10%, the first since March 2020.

In fact, it took the S&P 500 Index only 15 trading days to be down 10% for the year (on an intraday basis), one of the fastest ever as you can see here.

The action so far this week has been quite memorable as well, as both days saw stocks down significantly, only to recover later in the day, well off the lows. Incredibly, Monday was only the third time in history the S&P 500 was down 4% at the lows and then finished higher.

We know why this is happening. The market is repricing risk with the realization that rate hikes are coming, likely as many as four hikes this year are being priced into the equation. Add on the continued supply chain issues, shortages, inflation, and a slowing economy due to the Omicron variant, and you have many reasons to think stocks could be down.

But one other reason stocks are down so far this year is that is just what they do sometimes. “Contrary to what many investors think, stocks do go down as well,” explained LPL Financial Chief Market Strategist Ryan Detrick. “Remember, we haven’t seen a 10% correction since March 2020, a long stretch without a normal break. Last year really spoiled new investors, as we only had a single 5% pullback all year, which isn’t normal and means investors should buckle their seatbelts in 2022.”

The average year sees nearly three separate 5% corrections, putting in perspective just how rare last year was with only one and why greater volatility this year would be quite normal.

Taking it out to 10% corrections, the S&P 500 has about one per year, but again, we haven’t seen one of those since March 2020. There was a 9.6% correction in September 2020, but that’s as close as we got. With the S&P 500 currently down 9.2% from the peak earlier this year, we could be looking at our first correction quite soon. But again, is this really surprising? Investors who came into 2022 with a plan likely anticipated the chances of a double-digit correction at some point in the year, so this shouldn’t be a major shock.

Add to that the fact that midterm years tend to be quite volatile. In fact, the S&P 500 typically sees a 17.1% peak-to-trough decline during a midterm year, the largest pullback out of the four-year Presidential cycle. The good news? A year later stocks are up more than 32% on average. No pain, no gain.

Lastly, here’s our LPL Chart of the Day. It shows all the 10% corrections since 1980, bringing back some interesting memories for long-time market watchers. What stands out is the future returns are extremely strong: A year later, up 25% on average and higher 90% of the time. This analysis reminds us that panicking in the face of weakness probably isn’t the best way to reach longer-term investment goals. Take note, this resets once the S&P 500 has a 10% rally; that is why you likely don’t see some of the 50% haircuts after the tech bubble and Financial Crisis.

For more on the rough start to this year and what is likely needed for a bottom to form, please watch the latest LPL Market Signals podcast with Jeff Buchbinder and Ryan Detrick, as they break it all down.

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

Tuesday, January 25, 2022

On Friday, January 21, the S&P 500 Index closed below its 200-day moving average for the first time since June 2020 and by mid-day on Monday was 10% below its all-time highs, one of the fastest 10% declines from the start of a year on record.

“Big market swings tend to signal more market volatility ahead,” explained LPL Financial Asset Allocation Strategist Barry Gilbert. “But after these kinds of pullbacks there’s an increased likelihood of above-average returns over the next three and six months.”

As shown in the LPL Chart of the day, after the S&P 500 Index has closed below its 200-day moving average for the first time in at least a month, the average return over the next three and six months as well as the likelihood of a positive return is higher than usual. But once you look forward a whole year performance tends to be back in line with historical performance.

View enlarged chart.

Even though we believe it’s important to take a longer-term view of recent market volatility, Monday was an extraordinary day.

• The S&P 500 Index was down 4% at the intraday lows, but finished higher. Only two other times in history has it done that (both in October 2008).
• It rallied 4.4% off the lows, the largest reversal since March 26, 2020.
• It was one of the fastest 10% declines for the S&P 500 Index to start a year ever (on an intraday basis).
• Volume was huge as well, consistent with a potential bottom forming. This can take time, but the reversal was a positive step.

Volatile markets are nerve racking, but history suggests that they should not derail investors from sticking with their long-term plan. In fact, overreacting to volatile markets can create greater risks to achieving financial goals than underreacting for investors positioned with diversified portfolios aligned with their risk tolerance.

Despite the comeback, geopolitics has become an added market concern in early trading today. For some added thoughts on the potential market impact of geopolitical risks in Ukraine, see our blog posted earlier today.

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