Wealth Management

Kristian Kerr | Head of Macro Strategy

Byron Wien recently passed away. He was a true Wall Street icon. I had the good fortune of meeting Mr. Wien once when I was seated behind him at an investment conference during the depths of the Great Financial Crisis (GFC). Mr. Wien was probably best known for his annual top ten list of surprises for the year ahead. He defined a surprise on his list as something that the average investor would only assign about a one-in-three chance of occurring, but that he thought was closer to 50/50.  I always thought this was a useful exercise. Markets have a way of habitually surprising us and proving the conventional thinking wrong, so having an idea of where the potential forks in the road may come just makes us better prepared and informed as investors. 

Below is my compilation of five potential surprises for markets in 2024. Mr. Wien would do 10, but I reduced it to five for the sake of brevity. Please remember these are not all meant to be seen as forecasts or base-case views, but rather a thought exercise around potential risks and opportunities that the markets might be overly discounting in 2024. 

Five Surprises for 2024 (in no particular order)

• Inflation doesn’t ride off into the sunset. Perhaps the most consensus opinion out there at the moment is that inflation has been defeated. Lingering butterfly effects from the COVID-19 years, severe neglect in commodities-related capital expenditures, significant fiscal stimulus still percolating through the system, and an escalating geopolitical situation warn inflation might not be so easily tamed. Inflation historically happens in waves, so another impulse would not be out of character with the historical precedence.   
• AI optimism takes a breather. The move in Artificial Intelligence (AI) stocks has been relentless and has drawn many comparisons with the dot.com boom. It is almost impossible to handicap the proliferation of a new technology, but assuming AI is the real deal and using the 1990s and other historical examples as a guide, then the likely path is to get an initial boom followed by a material correction of some sort. The next advance that then follows is where the real winners of the new technology are determined. The current first wave in AI is arguably long in the tooth, but admittedly these things can last longer than anyone thinks possible, so maybe it is more of a 2025 story, but there are certainly some risks that the first wave finishes this year, and the AI theme enters a winter period.     
• Chinese equities surprise to the upside. The economic situation in China is clearly not good, but everyone knows that, and a lot of the negatives have already been priced in. Chinese policymakers are not at all incentivized to pursue a laissez-faire approach here. As the old trading floor saying goes, “markets stop panicking when policy makers start to panic.” That moment probably happens sooner than later, and Chinese equities could get a decent tailwind.   
• U.S. longer-term bond yields bottom quicker than most would expect. The secular bear market in bond yields looks to have ended in 2022. As a result, yields shouldn’t be as predisposed as they once were to head for levels much lower than 3% in the 10-year, even in the event of recession. If a multi-year trend higher is emerging as the charts suggest, then the risk is that longer-term Treasury yields find a floor sooner than later (months instead of years) and fiscal/supply concerns come back into focus as soon as the second half of this year.    
• The U.S. dollar continues to confound.  On paper, the dollar should be lower. Historically, rich valuations, shrinking interest rate differentials, internal U.S. political strife, and growing fiscal concerns are just a few of the reasons people give for why the dollar should be weaker. However, what makes currencies different is they are priced relative to each other, and in many ways the dollar is still the “least dirty shirt in the laundry basket” when viewed from this perspective.  Being the world’s reserve currency comes with many privileges, not least of which is the favored destination of global capital during times of geopolitical and global economic uncertainty. 

IMPORTANT DISCLOSURES

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

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk.

Indexes are unmanaged and cannot be invested into directly. Index performance is not indicative of the performance of any investment and does not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

This material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.

Unless otherwise stated LPL Financial and the third party persons and firms mentioned are not affiliates of each other and make no representation with respect to each other. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services.

Asset Class Disclosures –

International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.

Bonds are subject to market and interest rate risk if sold prior to maturity.

Municipal bonds are subject and market and interest rate risk and potentially capital gains tax if sold prior to maturity. Interest income may be subject to the alternative minimum tax. Municipal bonds are federally tax-free but other state and local taxes may apply.

Preferred stock dividends are paid at the discretion of the issuing company. Preferred stocks are subject to interest rate and credit risk. They may be subject to a call features.

Alternative investments may not be suitable for all investors and involve special risks such as leveraging the investment, potential adverse market forces, regulatory changes and potentially illiquidity. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses.

Mortgage backed securities are subject to credit, default, prepayment, extension, market and interest rate risk.

High yield/junk bonds (grade BB or below) are below investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors.

Precious metal investing involves greater fluctuation and potential for losses.

The fast price swings of commodities will result in significant volatility in an investor’s holdings.

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

Not Insured by FDIC/NCUA or Any Other Government Agency | Not Bank/Credit Union Deposits or Obligations | Not Bank/Credit Union Guaranteed | May Lose Value

Jeff Buchbinder | Chief Equity Strategist

Key Takeaways

• After over two years and 512 trading days, the S&P 500 has finally broken out above its previous high.
• Last Friday’s close of 4,839.81 was the first day the index finished above 4,796.56 since January 3, 2022.
• The elongated stretch between highs historically suggests above-average returns going forward.

How it Unfolded

After stumbling out of the gate to start the year, the S&P 500 has found its footing and broken out to levels never reached before. These new highs might seem a bit sweeter to equity investors considering the notably bumpy ride they endured to get here. We recently explored the historical implications of this arduous path to new highs and what it could mean for future returns. Now, we can officially timestamp the date of the record high, the 512-day duration, and its 25.5% maximum drawdown, displayed in the chart below.

Periods With at Least One Year Between New S&P 500 Highs

Source: LPL Research, Bloomberg 01/22/24
Disclosures: Past performance is no guarantee of future results. All indexes are unmanaged and can’t be invested in directly. The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1950 incorporates the performance of the predecessor index, the S&P 90.

In somewhat ironic fashion, the same cohort of stocks that torpedoed the index into the 2022 doldrums were the ones that helped lift them out. Mega-cap names propelled the S&P 500’s recovery throughout 2023 and into the start of this year. From December 31, 2021, through January 19, 2024, the NASDAQ 100 Index (NDX) beat the S&P 500 (SPX) by just over 3% cumulatively (7.97% vs 4.96%). However, from the SPX low on October 12, 2022, through Friday, the NDX beat it by over 24% (62.3% to 38.1%)! The graph below highlights the NDX (left-hand side) and SPX (right-hand side) price levels from the start of 2022 through Friday.

NASDAQ 100 Pulls Down, Then Snaps Back Vs. the S&P 500

Source: LPL Research, Bloomberg 01/22/24
Disclosures: Past performance is no guarantee of future results. All indexes are unmanaged and can’t be invested in directly. The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1950 incorporates the performance of the predecessor index, the S&P 90.

Digging into the 512-day drought for the S&P 500, we find there were 263 days of negative returns, and 249 days of positive returns. The longest consecutive daily losing streak during that period was six trading days, which happened twice, the second occurrence culminating on the October 12, 2022, low. The longest winning streak was eight trading days, which started on October 30, 2023, coinciding with the Federal Reserve (Fed) signaling a pivot on interest rate policy. The chart below illustrates the dispersion of winning and losing streaks, with marked sustained outperformance precipitating the new all-time high.

S&P 500 Pulls Together, Leading to New All-Time Highs

Source: LPL Financial, Bloomberg, 01/22/24
Disclosures: Past performance is no guarantee of future results. All indexes are unmanaged and can’t be invested in directly.

Summary

While the breakout by the S&P 500 to fresh record highs is certainly welcome news, we’ll continue to keep an eye on the overall backdrop of the economy and equity markets. The fourth quarter earnings season has begun, and we expect earnings to drive the market higher from here. We forecast $235 and $250 in S&P 500 earnings per share (EPS) in 2024 and 2025, which puts a fair value range on the S&P 500 of 4,850–4,950 based on a price-to-earnings ratio between 19 and 20. LPL Research currently recommends a neutral weight to equities, an overweight to domestic versus emerging markets, an up-market cap exposure, and a tilt toward large cap growth equities.

IMPORTANT DISCLOSURES

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

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk.

Indexes are unmanaged and cannot be invested into directly. Index performance is not indicative of the performance of any investment and does not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

This material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.

Unless otherwise stated LPL Financial and the third party persons and firms mentioned are not affiliates of each other and make no representation with respect to each other. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services.

Asset Class Disclosures –

International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.

Bonds are subject to market and interest rate risk if sold prior to maturity.

Municipal bonds are subject and market and interest rate risk and potentially capital gains tax if sold prior to maturity. Interest income may be subject to the alternative minimum tax. Municipal bonds are federally tax-free but other state and local taxes may apply.

Preferred stock dividends are paid at the discretion of the issuing company. Preferred stocks are subject to interest rate and credit risk. They may be subject to a call features.

Alternative investments may not be suitable for all investors and involve special risks such as leveraging the investment, potential adverse market forces, regulatory changes and potentially illiquidity. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses.

Mortgage backed securities are subject to credit, default, prepayment, extension, market and interest rate risk.

High yield/junk bonds (grade BB or below) are below investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors.

Precious metal investing involves greater fluctuation and potential for losses.

The fast price swings of commodities will result in significant volatility in an investor’s holdings.

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

Not Insured by FDIC/NCUA or Any Other Government Agency | Not Bank/Credit Union Deposits or Obligations | Not Bank/Credit Union Guaranteed | May Lose Value

Posted by Lawrence Gillum, CFA, Chief Fixed Income Strategist

Tuesday, May 23, 2023

• U.S. Treasury yields are generally higher over the past week with the two-year trading around 4.4%. The 0.50% increase in the two-year yield since last Monday is largely due to markets pricing out rate cuts later this year. Our view was that the market was too optimistic for the amount of rate cuts being priced in. Markets now expect one cut this year, which may still be too optimistic, unless financial conditions deteriorate. That said, we think we’re close to the end of the recent rise in Treasury yields.

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• News reports suggested there was “optimism” surrounding the debt ceiling negotiations but still no deal. Treasury market pricing suggests the greatest risk of delayed payment will occur for those securities that mature on or after June 6. Currently, the Treasury Department has around $60 billion in its operating cash account. For context, the Treasury’s cash balance got to around $11 billion in 2011. Our base case remains a deal gets done in time, but the clock is ticking.

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• Moreover, the Treasury Bill (T-bill) market is fairly disjointed currently with T-bills that mature on May 30 yielding 2.89% (the fed funds rate is 5.25%) and those that mature in June 8 yielding 5.81%. The difference in yields between the two securities is at extreme levels as more market participants are avoiding those securities that could be negatively impacted by a delay payment from the Treasury. The longer the negotiations drag out, the more it is likely we’ll continue to see higher yields for the securities maturing in June.

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• Interest rate volatility (as per the MOVE index) remains elevated relative to the last decade but in line with the periods before central banks’ quantitative easing. We think interest rate volatility will remain elevated as long as the Federal Reserve (Fed) remains committed to reducing the size of its balance sheet. The most interest rate sensitive fixed income assets are likely at higher risk of volatility. But buy and hold investors should remember that bonds pay back principal at par regardless of intra-period volatility.

View enlarged chart

• After the recent back-up in yields, core fixed income sectors are trading close to levels last seen in early March and above longer-term averages. We think the risk/reward is more favorable for core bond sectors over plus sectors with the exception of the preferred securities market. As such, we think the recent move higher in yields is an attractive opportunity for investors to add to high quality fixed income.

View enlarged chart

IMPORTANT DISCLOSURES

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

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

References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

Unless otherwise stated LPL Financial and the third party persons and firms mentioned are not affiliates of each other and make no representation with respect to each other. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services.

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

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

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

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

Jeffrey Roach, PhD, Chief Economist, LPL Financial

Jeffrey Buchbinder, CFA, Equity Strategist, LPL Financial
Lawrence Gillum, CFA, Fixed Income Strategist, LPL Financial

Market Blog Posted by lplresearch

Tuesday, September 28, 2021

The municipal market continues to be a relative bright spot for core fixed income investors. While most of the other “safe” parts of the core fixed income universe have generated negative returns this year, the national muni market is up for the year (through September 24). With state and local governments flush with cash due to better-than-expected tax receipts along with generous amounts of federal aid, many municipalities are in good shape. Moreover, a combination of increased demand due to an expectation of higher individual tax rates and a dearth of new issuance over the summer months have kept muni bond prices largely range bound. Now, there is a question of whether the upcoming infrastructure legislation can provide additional support to the investment-grade municipal market.

“If passed, the infrastructure bill will likely help muni credit fundamentals,” noted LPL Financial Fixed Income Strategist Lawrence Gillum. “But current valuations likely reflect the slimmed down proposal. As such, we don’t think the legislation, when passed, will be market moving”

In August, the Senate passed a $1 trillion, bipartisan infrastructure proposal that would increase new spending towards transportation and “other infrastructure” initiatives by $550 billion, spread out over five years. Roughly $340 billion would flow to municipal issuers. Importantly, the deal calls for investing $110 billion in roads, bridges and major infrastructure projects and $40 billion for bridge repair, replacement, and rehabilitation. Additionally, the bill would invest $65 billion to rebuild the electric grid and $55 billion to upgrade water infrastructure. The House of Representatives is set to consider the plan this week, with a vote scheduled for Thursday. If passed, the Infrastructure Investment and Jobs Act would mark the largest federal investment in more than 10 years.

Additional federal dollars allocated to transportation, electric utility, and water municipal sectors should be supportive of municipal valuations. However, the significantly slimmed down bill won’t be nearly as supportive to the municipal market as was expected earlier in the year. As such, we’ve seen a slight repricing in muni credit over the past few months. As seen in the LPL Research Chart of the Day, yields on municipal credit bonds, across the credit quality spectrum, have fallen this year but have recently risen. The back-up in yields since August likely represents the significant reduction in infrastructure spending as well as the uncertainty surrounding the timing of the legislation passing. President Biden’s original proposal was for $2.3 trillion so the additional $550 billion in new infrastructure spending has likely already been priced in.

Additionally, complicating the House’s ability to vote on the smaller bipartisan infrastructure plan is the larger $3.5 trillion reconciliation bill that some Democrats want to pass before the infrastructure plan is considered and vice versa. Progressive House Democrats have said they won’t vote on the infrastructure bill until the reconciliation bill passes, and moderate Democrats have said they won’t vote on a reconciliation bill unless the infrastructure bill passes. While we think the infrastructure bill ultimately passes, it’s unlikely going to be a catalyst for lower yields/higher prices but it could be another reason yields remain range bound. Moreover, with the economy continuing to recover and the prospects for higher tax rates, muni investment-grade credit should continue to perform well.

View enlarged chart.

IMPORTANT DISCLOSURES

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.

References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

All index and market data from FactSet and MarketWatch.

This Research material was prepared by LPL Financial, LLC.

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

Insurance products are offered through LPL or its licensed affiliates.  To the extent you are receiving investment advice from a separately registered independent investment advisor that is not an LPL affiliate, please note LPL makes no representation with respect to such entity.

• Not Insured by FDIC/NCUA or Any Other Government Agency
• Not Bank/Credit Union Guaranteed
• Not Bank/Credit Union Deposits or Obligations
• May Lose Value

Economic Blog Posted by lplresearch

Thursday, June 24, 2021

As recent economic data shows, the robust post-COVID recovery has brought about a historic rebound in U.S. manufacturing activity. Pent-up demand and low inventories of capital goods have caused companies to fire up their machines at record levels, and manufacturing supply management professionals have responded with relative delight in recent surveys. Both the IHS Markit and Institute for Supply Management (ISM) Manufacturing Indices have been robust across the board, as new order growth, hiring plans, and the backlog of orders point to better health in the sector. The downside…higher prices, as purchasing managers’ queried in the survey pinpointed high levels of input cost inflation brought about by a broad-based spike in raw materials prices. The latest survey results show the June IHS Markit U.S. Manufacturing PMI at a new all-time high of 62.6, which compares to the Bloomberg consensus estimate of 61.5 and May’s reading of 62.1.

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“The demand for goods and the rebound in manufacturing activity have been remarkable as folks seem determined to get on with their lives. We know that U.S. consumers like to spend, and it seems like they are more than willing to make up for lost time.” explained LPL Financial Director of Research Marc Zabicki.

We believe the latest IHS Markit manufacturing readout may foretell a good result for the ISM benchmark’s expected release on July 1. That index series has also been near record levels, although just below its all-time high. The long-term ISM chart paints a fairly good picture of past peaks and troughs and the roller-coaster of activity that can occur in the manufacturing sector. In fact, the recent highs in the two manufacturing indicators we have mentioned have us looking ahead to an eventual deceleration in activity, which could come later this year. This deceleration could be brought about by the ultimate slowing of demand for some of the hottest items of late: automobiles, appliances, and technology devices. This doesn’t mean we are souring on the prospect for economic growth in the U.S….only that peak activity, as we are witnessing now, which is usually followed by an eventual slowdown in demand. We should see some of this become visible via U.S. gross domestic product (GDP) growth that is expected to advance at a slower pace in late 2021 and early 2022.

View enlarged chart.

IMPORTANT DISCLOSURES

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.

References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

All index 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