With tensions running high in Eastern Europe, we’ve had many questions come in asking what could happen to stocks if Russia indeed did attack or invade Ukraine.
“As devastating as a major conflict could be between Russia and Ukraine, the truth is stocks likely will be able to withstand the geopolitical struggle,” explained LPL Financial Chief Market Strategist Ryan Detrick. “In fact, looking back at other major geopolitical events throughout history reveals stocks usually take them as a nonevent.”
As we share in the LPL Chart of the Day, the great majority of geopolitical events going back to World War II didn’t put much of a dent in stocks, with any losses made up quite quickly. JFK’s assassination is one of the best examples of this, as the next six months were one of the strongest and least volatile periods in stock market history, something no one could have ever expected that fateful day. We’d like to thank Sam Stovall of CFRA for sharing some of the data below.
Our thoughts go out to anyone potentially impacted by this event and we will continue to monitor the situation carefully, as near-term volatility on a major event like this could always be possible. But at this time, with the U.S. economy strong, earnings healthy, and corporate America in great shape, in our view, the stock market should be able to withstand this potential event.
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
How Did Stocks Do The First Year Under President Biden?
President Biden took over the Oval Office a year ago yesterday, on January 20, 2021. So how did things go for the stock market? Let’s dive into it.
“The Dow gained 12.3% the first year under President Biden, which is right about the average first year return of 12.1%,” explained LPL Financial Chief Market Strategist Ryan Detrick. “But where things really stand out is how many new highs were made, with a very impressive 43 new highs, the third most ever.”
As we share in the LPL Chart of the Day, the Dow gained 12.3% during his first year in office, which ranks 9th out of all the first years for all Presidents since 1900.
Breaking it down a little more, stocks historically have done much better under a Democrat that first year than under a Republican, although that 91% gain under FDR had a lot to do with that. Still, stocks rose more than 30% during both President Obama’s and President Trump’s first years, breaking with the historical trend.
And of course, let’s not forget that stocks did amazingly well right after President Biden won the election in November 2020, so you could say some of those gains were pulled forward perhaps. Here’s a chart we shared a year ago on this. It was the best Election Day to Inauguration Day return ever.
All in all, the economy and stocks did quite well the first year under President Biden. Given this is a midterm year and emotions will run high, we want to remind investors to separate your politics from your investments. Many people have not liked past Presidents, only to miss out on big gains. A strong economy (and we expect it to be this year) matters a lot more to your investments than the makeup of Congress or who is in the White House.
For more on midterm years and why this year could be quite volatile, 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
Similar to the U.S. Leading Economic Index (LEI) from the Conference Board, we believe global leading indicators can provide useful insight into where economies around the world may be headed in the near term. Specifically, we track the global Composite Leading Indicators (CLI) from the OECD. The latest data for December was released on January 17.
As you can see in our LPL Chart of the Day, leading indicators moderated slightly overall in December. Europe stands out with higher overall levels, but nearly all major economies around the world saw their growth outlooks slow at the end of last year and the post-pandemic growth peak has likely passed.
The good news here is that the 100.5 number for the total global OECD CLI is consistent with the solid overall economic growth we expect in the near term (these indicators look out six to nine months). Maturing expansions slow so this is normal and to be expected. Beyond that, the month-over-month dip was only 0.1 (from 100.6 to 100.5), while much of Europe and Japan were over the 100 level.
“The global growth trajectory moderated in December in large part due to Omicron,” according to LPL Financial Equity Strategist Jeffrey Buchbinder. “Global leading indicators do however show some relative stability in the United States and Europe, though the outlook for China’s economy has weakened further.”
To get a better sense of momentum in these leading indicators, we also like to look at the six-month change, as we’ve done in the chart below. There you can see that the strongest momentum is found in Europe, despite ongoing challenges managing the pandemic. Economies in India and Japan have been hanging in there relatively well, while China has been a big outlier to the downside.
The pronounced weakness in China over this time period makes sense as it captures both the effects of the government’s regulatory crackdown and debt crisis among property developers, both key factors in the underperformance of emerging market equities during the second half of 2021, as well as their authoritarian zero-COVID policy that has led to periodic strict lockdowns in some major cities.
For the United States, capturing the hits from the Delta and Omicron variants during this six-month period led to a 0.4 point drop in its CLI, bigger than the 0.24 drop in the overall global reading during the same period. We maintain our 4 to 4.5% forecast for U.S. gross domestic product (GDP) growth in 2022 while acknowledging slight risk to the downside.
So what does this mean for investors? First, we continue to recommend investors focus their regional allocations on the United States among developed markets, though the market’s increasing interest in value-style stocks and the relatively similar economic growth outlooks in Europe and the United States have increased the attractiveness of developed international equities. Moreover, the U.S. dollar has started to roll over which has helped recent international performance. We maintain our neutral view of developed international for now while considering a more positive view.
We maintain our negative view of emerging markets due primarily to the slowing Chinese economy. Regulatory risks remain but have begun to diminish.
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
Have we reached the peak in new COVID-19 cases in the United States linked to the Omicron variant, and how is its rapid spread affecting U.S. consumer behavior? We look to high-frequency data for early clues and see that Omicron appears to be moderating behavior in a similar way that Delta did in the fall of 2021.
“High-frequency data shows that the Omicron variant surge has already taken an economic toll on many vulnerable service-oriented industries, such as airlines, theaters, and restaurants,” explained LPL Financial Quantitative Strategist George Smith. “But there is light at the end of the tunnel as based on the experiences of South Africa and the United Kingdom we could see U.S. Omicron case counts declining as sharply as they rose, potentially paving the way for the economic recovery to continue at a solid pace in 2022.”
“High-frequency data shows that the Omicron variant surge has already taken an economic toll on many vulnerable service-oriented industries, such as airlines, theaters, and restaurants,” explained LPL Financial Quantitative Strategist George Smith. “But there is light at the end of the tunnel as based on the experiences of South Africa and the United Kingdom we could see U.S. Omicron case counts declining as sharply they rose, potentially paving the way for the economic recovery to continue at a solid pace in 2022”
As shown in the LPL Chart of the Day, South Africa and the United Kingdom (U.K.), both of which identified the Omicron variant earlier than the U.S., have seen significant declines in cases since peaks on December 17 and January 5, respectively. The number of new cases in South Africa (where testing rates are lower than in the U.K. and U.S., hence overall lower numbers) are down 80% from the peak a month earlier. U.K. cases, which have tracked the U.S. closely during prior waves, have subsided to half of the peak in just two weeks. While it is hard to say for sure, especially as many states are at different stages of Omicron infection, if this is the peak in U.S. cases at a national level, it could be a great step toward eventually easing strain on healthcare systems, labor supply shortages, and supply chain disruptions.
High-frequency data from the U.S. Transportation Security Administration (TSA) shows that air traffic passengers traveling through U.S. airports peaked at Christmas and Thanksgiving 2021, recovering to almost 90% of the pre-pandemic levels. Since the Christmas peak, the number of passengers has dropped by over 30% in absolute terms, half of which can be attributed to a normal seasonal reduction after the holidays and the remainder due to increased passenger concerns around Omicron leading to canceled or delayed travel plans.
Data on U.S restaurant diners from OpenTable shows a similar recovery had occurred right back to pre-pandemic levels by Thanksgiving 2021. Since then diner concerns over Omicron, and the increased local restrictions in response to it, appear to be dampening demand for eating out as bookings are now down a little over 27% versus the same period in 2019. The national data continues to hide wide discrepancies in the data between different states and cities. Many cities in Florida and Texas are still seeing moderate increases versus 2019 bookings, even as New York and San Francisco show declines of 62% and 65%, respectively, versus the same period (after getting to within 34% and 37% of pre-pandemic levels at Thanksgiving 2021).
Data on U.S theater box office returns show that after a dismal 2020 and first half of 2021 theaters got a much needed Christmas boost with the release of “Spider-Man: No Way Home.” The movie took in an impressive $250 million on its opening week, which occurred before the start of the Omicron surge. So far, Spider-Man has grossed $702 Million (73% of all domestic theater tickets sold since release), making it the 4th highest-grossing movie in U.S. theater history and the first to even break the top 150 since pre-COVID-19. The number of moviegoers has quickly dropped off since the Christmas peak and the 4-week rolling average high is 22% lower than Christmas 2019, but still an impressive 1,372% higher than 2020. Looking back to Delta it took a further month after the peak of COVID-19 cases for ticket sales to start picking up again so there could be more disappointing numbers until at least the next expected blockbuster release: “The Batman” expected March 4.
We continue to keep a close watch on how the Omicron variant unfolds across the U.S. and believe that it will likely have a drag on the economy in Q4 2021 and into 2022. Economic growth will take a slight hit both from the immediate moderations in consumer behavior shown by the high-frequency data but also from the potential for Omicron to extend labor shortages and resulting supply chain disruptions as well. Slower economic growth won’t likely slow the rate of Federal Reserve rate hikes expected this year as Omicron has pushed further demand from services onto goods, while also weakening the supply side, both factors that could contribute to higher inflation sticking around for longer than expected before the latest surge. Persistently high inflation however is not our base case, and we still believe that one-year inflation should peak by around mid-2022, as the economic impacts of Omicron fade.
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
Corporate Credit Markets are Healthy but Remain Expensive
Like other core fixed income sectors, investment grade corporate credit has had a tough start to the year. After losing 1.0% last year, investment grade corporate debt is off another 2.4% (through January 14) in 2022. However, the paper losses this year (and last year frankly) are not due to declining credit fundamentals or deteriorating credit conditions. To take advantage of low interest rates, shore up balance sheets and extend maturities, corporate CFOs have issued record amounts of debt over the last two years. By doing so though, corporate borrowers have increased the interest rate sensitivity of those securities. The interest rate sensitivity of the corporate credit markets (as measured by duration) remains near all-time highs and is higher than even the U.S. Treasury index. As such, the increase in Treasury yields has pushed yields on investment grade debt higher as well (blue line below).
“Corporate credit markets have come under pressure this year,” noted LPL Financial Fixed Income Strategist Lawrence Gillum. “And while higher yields make the sector a bit more attractive, we think valuations still aren’t very compelling given the increased interest rate risk.
The positive take on the performance of the investment grade bond market so far this year, and as seen in the LPL Research Chart of the Day, is that spreads (orange line) are unchanged despite a big jump in Treasury yields, heavy new corporate issuance and weaker equity markets. The lack of movement in spreads speaks to the overall favorable credit conditions supporting valuations. Moreover, as mentioned, corporate credit fundamentals and companies’ ability to service debt have improved. Revenue, free cash flow, profit margins, debt, leverage, and interest expense all have shown improvements during 2021. Unfortunately all these positives are already priced in, in our view.
Valuations should remain well contained as there are a number of large price indiscriminate investors that need to own corporate debt (banks, insurers, pension funds, etc.) and foreign investors can still pick up additional yield in our markets. However, despite higher yields we remain neutral on investment grade corporate credit. The increased interest rate risk and lack of additional compensation for holding corporate credit limit the attractiveness, in our opinion.
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
Busting Two Myths: Why Higher Yields And Rate Hikes Aren’t Always Bad
Lately we’ve seen two things swirling that some investors think could hurt them down the road. The idea that higher yields and rate hikes are bad is all over the place, but it all might not be so simple. In fact, looking back at history, neither are necessarily true.
First up, the 10-year Treasury yield has soared to start this year, with many high flying tech stocks falling as a result. But is this bad for all stocks? “Higher yields usually mean the economy is growing, not slowing,” explained LPL Chief Market Strategist Ryan Detrick. “For this reason, when yields go higher, stocks tend to do quite well, quite opposite from what you’ll hear happens when watching tv.”
As shown in the LPL Chart of the Day, the past six times we saw an extended period of a higher 10-year Treasury yield, stocks also rose. In fact, some of those periods saw gains well over 30%. Should the 10-year continue to move higher, this could actually support a higher trending bull market, much different than what most think.
Next up, many are worried about the Federal Reserve Bank (Fed) hiking interest rates for the first time (to start a new cycle of hikes) since December 2015. Yes, history would say stocks could see more volatility after rate hikes, but this could be a function of the economy aging by the time hikes happen. An aging economy and bull market tends to see more big moves.
But Fed rate hikes by themselves don’t mean the bull market is approaching an end. In fact, a year after the first hike in the previous 8 cycles saw the S&P 500 Index higher a year later every single time. Yes, some of those returns were muted, but by no means was this a bearish event for investors.
There are many things to worry about, but in the end, if the economy is still humming along (it is) and earnings are still strong (they are), then continued higher equity prices are likely.
For more of what could upset the apple cart this year, be sure to watch the latest LPL Street View with Ryan Detrick, as Ryan breaks down 3 Things to Look Out For In 2022.
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
Inflation soared 7% in 2021 according to Consumer Price Index (CPI) data released this morning by the Bureau of Labor Statistics, as seen in the LPL Chart of the Day, its highest level since 1982. There was little consolation in the “core” reading (excluding food and energy). While a little tamer, it still rose 5.5% in 2021, its highest reading since 1991. Financial markets seemed to shrug off the result with the S&P 500 Index climbing in early trading and the 10-year Treasury yield declining.
“The headline inflation number this morning is eye-popping—a 7% increase in prices over the last year, the highest since 1982,” said LPL Financial Asset Allocation Strategist Barry Gilbert, “but it was largely expected. While it doesn’t change the Fed’s timeline, we could still see interest rate lift-off as early as March.”
We’ve been saying for a while that we didn’t expect the peak in one-year inflation numbers until early 2022 and further supply chain disruptions from the Omicron variant strengthen that case. But the more important question right now is the exact timing of when inflation might start to slow, since ultimately that will likely determine how aggressive the Federal Reserve (Fed) will be.
Vehicle sales continue to have an outsized impact on the inflation number, especially prices for used cars and trucks, which rose 3.5% in December and were up over 35% for the year. The Fed will also be closely watching shelter inflation, since it tends to be sticky. Prices for shelter (excluding energy) rose 0.4% in December, slightly slower than October and November at 0.5% but a faster trend than what the Fed likely wants to see. Apparel and household furnishings also saw a sizable jump.
The numbers will likely make for a lot of dramatic headlines this morning, but for markets the key to the report was that it remained in line with expectations. With inflation running hot, concerns about the impact of a meaningful upside surprise had increased, and simply remaining in line with expectations was practically a win.
Right now, markets are largely focused on inflation because of its impact on how quickly the Fed might tighten monetary policy. With inflation at 7% and the unemployment rate at a healthy 3.9%, it’s no surprise that the Fed has pivoted toward tightening. The Fed may want to signal that the process has begun by rising rates as early as March. We believe equity markets can easily absorb the first few rate hikes, as they typically have historically. But persistently high inflation, while not our base case, would bring a more aggressive Fed into play. For now, that’s not our expectation, and there isn’t anything that we saw in the December CPI data that shifted our view.
IMPORTANT DISCLOSURES
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.
References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
All index and market data from FactSet and 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
After negative returns for many fixed income sectors in 2021, the last thing fixed income investors wanted to see to start 2022 was more red, but that is unfortunately what happened. The Federal Reserve (Fed) meeting minutes were released last week and further confirmed the Fed’s recent hawkish shift and its desire to start removing monetary accommodation this year. While most of the information was known, that “some” members wanted to start to reduce the Fed’s $8.8 trillion balance sheet soon after the first rate hike surprised markets. Yields moved higher across the curve at the prospects of a quicker tightening timeline. For context, in the last tightening cycle, the Fed waited two years between the first rate hike and the beginning of balance sheet runoff.
“2022 hasn’t been the start fixed income investors were hoping for,” noted LPL Financial Fixed Income Strategist Lawrence Gillum. “But as interest rates move higher, certain fixed income sectors become more attractive and adding some interest rate risk to portfolios may be appropriate.”
U.S. Treasury yields rose sharply with the 10-year yield up 25 basis points (0.25%) last week. Most fixed income markets were negatively impacted, with the Bloomberg Aggregate index down over 1.5% for the week, matching the total return for the index for all of 2021. Moreover, long Treasury securities lost over 4% for the week, which would have been the sixth worst entire year on record for the index (going back to 1976).
Treasury inflation-protected securities (TIPS) were one of the worst performing sectors last week. TIPS were the best performing sector last year and with inflation concerns still elevated and a Consumer Price Index release expected to show one-year price increases over 7% in December, demand for TIPS should have helped buffer interest rate risks. However, inflation-protected securities were hit hard. As seen in the LPL Research Chart of the Day, last week’s -2.2% drawdown was among the worst since the taper-tantrum in 2013 (aside from the Covid-19 lockdowns in 2020).
But keep in mind that while these price moves can be painful to experience, absent defaults, they are not permanent impairments of capital. That is, unlike in equities, investors that hold bonds until maturity are guaranteed their principal back and any contractually obligated coupon payments. As for TIPS, yields are still deeply negative (-1.3% for 5-year TIPS and -0.78% for 10-year TIPS), so as the Fed contemplates exiting the Treasury and mortgage markets, we’re likely to see additional price pressures for TIPS. Moreover, with inflation expected to moderate over 2022 and with Fed rate hikes likely this year as well, we could see TIPS underperform nominal Treasury securities.
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
In this week’s Weekly Market Commentary (click here) we shared some lessons investors may have learned—or re-learned—in 2021 (LPL Research strategists included). One of those lessons was about how valuations are rarely good timing tools. That lesson was particulary relevant for global asset allocators last year who were constantly tempted by attractive stock valuations outside the U.S.
We were tempted as well, to the point where we upgraded our negative view of developed international markets in June to neutral in our Global Portfolio Strategy report. The (too early) upgrade was about more than just some of the lowest valuations compared with the U.S. in decades. We also thought the pandemic was coming under control and that the global economy was on the cusp of an elusive synchronized recovery. Unfortunately, because of the latest variants of COVID-19, that call was too early and we’re still waiting. The MSCI EAFE Index, the benchmark for developed international equities, lagged behind the S&P 500 by nearly 14 percentage points from June through December of last year.
We liked the valuation story in emerging markets (EM) too, enough to come into 2021 with a positive view. But China’s regulatory crackdown scared us off, while technical analysis (market insight derived from price and sentiment anaysis) was telling us something was amiss. So we downgraded EM equities to neutral in June, and to negative in August. Our EM call turned out better, as EM underperformed the S&P 500 by about 24 percentage points from June through December, including 12 percentage points after our August downgrade.
“We’re still waiting for that elusive synchronized global economic recovery to provide a catalyst for better international stock market performance,” said LPL Financial Equity Strategist Jeffrey Buchbinder. ”It could come in 2022 but the world needs to get closer to the end of the pandemic.”
That doesn’t mean the global economy isn’t growing. Far from it. We expect global gross domestic product (GDP) to have grown at a nearly 6% pace in 2021 followed by 4.5% in 2022. Our LPL Chart of the Day shows continued steady growth in global manufacturing activity with a December Purchasing Manager’s Index (PMI) for global manufacturing solidly in expansionary territory at 54.2. But this measure of manufacturing sentiment has fallen from its summer highs due to the latest waves of COVID-19 (mostly Delta with a little bit of Omicron mixed in) and has gone nowhere the past few months.
Peeling back the onion reveals some good news underneath the mixed headline. Part of the lack of improvement in PMIs is for a good reason, as easing of supply chain bottlenecks is being reflected in falling supplier delivery times that mechanically drag down the headline index.
That’s not all the good news. The prices components of the global PMI dipped a bit in December, signaling global inflation pressures have eased some.
The global economy is clearly not yet firing on all cylinders, which we believe reduces the potential for international stocks to outperform the U.S. in the near-term. But global PMI data suggests solid and steady growth in global manufacturing activity along with some easing of supply chain bottlenecks and related inflation pressures. That elusive synchronized global economic expansion probably has to wait for more progress toward ending the pandemic but progress is being made.
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All index and market data from FactSet and MarketWatch.
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