Wealth Management

DAILY INSIGHTS

Last week’s slide continues. US stocks opened about 2% lower this morning amid rising concerns of a second wave of COVID-19. The pullback in the S&P 500 Index since June 8 has only reached 6% and may have further to go. Europe held up slightly better on healthcare sector resilience, while Asian markets fell broadly, with Japan losing 3.5%.

Stocks still appear ahead of fundamentals. We continue to believe stock prices reflect an overly optimistic view of the US economy. As we wrote here last week, our belief is that the next leg of recovery will be gradual as efforts to contain COVID-19 continue and the economic damage takes time to heal. The S&P 500 also was up over 44% from the March 23 low as of June 8 and significantly overbought, suggesting a pullback was overdue.

The week ahead. This week’s economic calendar features retail sales for May, which are expected to show an 8% increase from April’s historic 16.4% drop (source: Bloomberg). Federal Reserve Chairman Jay Powell will testify before Congress on Tuesday and Wednesday. The Bank of Japan policy announcement is slated for Tuesday, followed by the Bank of England on Thursday—both are expected to add stimulus.

Green shoots. Real-time data continues to provide valuable insight into the current state of the US economy as traditional economic data is too slow to pick up changes that are occurring. Today on the LPL Research blog we revisit some of these real-time data points that we are monitoring that indicate the US economy is on the road to recovery.

COVID-19 news. Confirmed US cases rose 0.94% yesterday, up from 0.92% on the same day last week, as testing rose about 9% and the percentage of positive tests remained steady slightly below 5%. Attention remains on about 20 states seeing increases since the Memorial Day holiday, particularly in the Sun Belt and Texas. An outbreak in Beijing tied to a food market led to China’s biggest daily increase in cases since mid-April (57) (Source: COVID-19 Tracking Project).

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 are 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

DAILY INSIGHTS

The day after. Stocks in the United States opened higher on the day after the S&P 500 Index lost 5.9%. Spikes in new COVID-19 cases, worries over a cautious Federal Reserve, small retail traders’ excitement over weak balance sheet companies, and historically overbought conditions were all factors. Europe is up nicely, and Asia was mixed. Calm is in the air, as there are no major new events moving markets so far today.

Worst day since March. Stocks sold off hard Thursday, with the S&P 500 having its worst day since March 16 and its first three-day losing streak since early March. After a 44% rally, we think a pullback would be well deserved. We show why historically overbought markets tend to occur near the start of bull markets, not the end, in today’s LPL Research blog.

COVID-19 news. Confirmed US cases rose 1.14% yesterday, matching the week-ago total and giving evidence that the downward trend may be flattening out. The biggest week-over-week increases came from Arizona (4.7%), Arkansas (4.3%), and Alabama (3.9%). Houston may re-impose stay-at-home orders after Texas reported its highest one-day tally of new cases. Cases in Germany are rising while falling steadily in the United Kingdom. Tokyo has moved to the final stage of its reopening plan (Source: COVID-19 Tracking Project).

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.

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.

Value investments can perform differently from the market as a whole. They can remain undervalued by the market for long periods of time.

All index and market data are 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

The economic data keeps getting worse, yet stocks have been in the midst of one of the greatest multi-week rallies ever. As the LPL Chart of the Day shows, the S&P 500 Index gained 27.2% in the 15 days after the March 23 lows, the greatest three-week rally since 1933. Take note, this rally took place amid millions of initial jobless claims, while consumer confidence, retail sales, and manufacturing crashed.

View expanded chart.

“As scary as the headlines have been, stocks are doing well, as they could be trying to sniff out potential better times ahead,” explained LPL Financial Senior Market Strategist Ryan Detrick. “We’ve found that stocks have tended to bottom about five months before a recession ends, so it is actually normal to see stocks improving amid poor economic data.”

In this week’s LPL Street View video, LPL Financial Senior Market Strategist Ryan Detrick discusses these points.

Stocks posted solid gains for the week, on the heels of the largest weekly gain for the S&P 500 Index since 1974. While participation was led mostly by growth stocks early in the week, reports of a drug from Gilead Sciences that showed positive results in treating COVID-19 fueled broad-based gains on Friday. Ultimately, the S&P 500 gained modest ground for the week, while the Nasdaq outperformed as growth stocks bested value by the widest margin since April 2001.

Large caps led small caps, with the Russell 2000 Index declining slightly. Consumer discretionary was the top-performing sector as Amazon broke out to record highs, while financials lagged as earnings reports began to roll in. Equity investors were unfazed by economic data that continued to paint the picture of an economy firmly in the depths of a recession. More than 5 million new people filed for unemployment insurance for the third consecutive week, and retail sales for March showed an 8.7% month-over-month decline, more than double the previous record drop.

International markets were little changed for the week. Both the MSCI EAFE and MSCI Emerging Markets Index were slightly negative through Thursday’s close, though both European and Asian stocks rallied strongly on Friday following news of the potential effectiveness of Gilead’s antiviral drug.

Fixed income markets continued to flex their resiliency despite strong returns from equities. Investment-grade (IG) and high-yield (HY) corporate bonds led as credit spreads for both sectors contracted further, now down significantly from their March 23 highs. Treasuries also continued to rally with 2-year yields reaching new all-time lows, undeterred by increasing discussion of plans to reopen the US economy.

After a brief yet strong rally following a brutal first quarter, WTI crude oil briefly slumped below $18 per barrel to its lowest price since 2001 as concerns over falling demand have painted a bleak outlook for energy commodities, which remain oversupplied. The US dollar was firmer on the week although currency market headlines were dominated by volatility in the Australian dollar as it shrugged off disappointing first quarter growth in China.

The economic calendar is light early next week; however, Thursday will see the release of Markit Purchasing Managers’ Index data for April in addition to another initial jobless claims report. Friday’s reports include durable goods for March and the April edition of the University of Michigan Consumer Sentiment Index.

Stock returns get all the headlines, and with US equities entering their first bear market since 2008, there is good reason for that. However, fixed income may account for a significant portion, or even a majority, of many investors’ portfolios, making bond returns just as important for those investors.

While we believe stock returns can offer similar upside to their history and that the current decline in prices will ultimately prove to be an opportunity, the same may not be true for fixed income.

As the LPL Chart of the Day shows, future long-term returns of bonds have been primarily determined by the starting yield. In other words, the coupon may be the most significant factor in your total return over the long term. Through Wednesday’s close, the Bloomberg Barclays US Aggregate Bond Index returned 4.8% year to date, following last year’s nearly 9% return. But because yields fall as bond prices rise, the yield on the benchmark bond index recently hit its lowest level ever, implying that total returns over the next 10-year period could be less than 2% annualized for fixed income based on that particular bond benchmark.

View expanded chart.

“Bonds have once again proven themselves a reliable ballast to equity market volatility,” said LPL Financial Senior Market Strategist Ryan Detrick. “However, investors may be underappreciating what the recent decline in yields means for the future of fixed income returns and an already tough search for yield.”

For more information on all our views, including why we currently rate equities “overweight” and fixed income “underweight” please view our latest Global Portfolio Strategy.

We continue to follow our Road to Recovery Playbook for help determining where the market is in its bottoming process.

Today we are making two changes. The first is to Signal #1, which we upgraded from “monitoring daily” to ”almost there.” We aren’t ready to check this one off completely, based on the latest data from Johns Hopkins, but we may be able to declare the peak with confidence over the next week (though we acknowledge a second wave cannot be ruled out).

View expanded chart.

The other change we have made is to Signal #4. Recent gains have removed oversold conditions. With stocks having just staged one of their strongest three-week rallies ever, more sellers may emerge. Measures of market internals, such as the percent of S&P 500 Index constituents stocks above their 200-day moving average at 23%, no longer reflect such intense pessimism as in late March, when this statistic fell below 5%, below the lowest levels in 2008.

Our last change to the playbook on April 3 was to downgrade Signal #3 because of the strength of the latest stock market rally—stocks are no longer pricing in a recession with the S&P 500 Index’s bear market decline of 34% having been cut in half. The S&P 500 has lost 16% since its February 19 high and 11.9% year to date through Tuesday’s close. That signal remains “Almost there.”

The last two signals remain unchanged. The historic surge in unemployment gave investors visibility into the severity of a US recession (Signal #2). Today’s retail sales report for March provided more evidence of just how deep this economic contraction will be.

Finally, the policy response from the Federal Reserve and policymakers in Washington, DC, was more than enough to check off Signal #5 in late March. But more stimulus may be on the way in the form of funds for small business, state and local governments, and the healthcare system.

With only two of our five signals now in place, we believe stocks may be ripe for a pullback. “Stocks may now be pricing in more of a V-shaped recovery, and less of the U-shape that we are likely to see,” according to LPL Equity Strategist Jeffrey Buchbinder. “We don’t know for sure if the March 23 lows will be durable, but given stocks’ tendency to retest lows after waterfall declines, a pullback from current levels seems more likely than not in the short term.”

The near-term risk-reward trade-off has become less favorable, and we think a more attractive entry point may emerge soon. However, even with the S&P 500 27% off the lows, we continue to like the opportunity for long-term investors and maintain our overweight equities recommendation.