Wealth Management

Kristian Kerr | Head of Macro Strategy

I like to study the past. While having a good understanding of market history isn’t the be-all and end-all for investment analysis, it can often offer valuable insights by giving a window into the thinking that others before us had when facing similar circumstances and situations. After all, we are all only humans, and that is why patterns and episodes in the market tend to repeat in some form or another. Things like market structure and trading technology will always be evolving, but human behavior remains largely constant. 

Over the last year or so stock market index returns have been heavily influenced by just a handful of stocks. This intense bifurcation of the stock market is unusual, but not at all unprecedented. Many have likened the current environment to the late 1990s and there are certainly many similarities. Another potentially analogous period is the early 1970s and the rise of the so-called “Nifty Fifty” stocks. In response to the relatively brief yet painful bear market of 1968–1970, investors flocked into a group of around 50–75 high-quality growth stocks with exciting prospects that had held up well during the downturn. Initially, the move into the Nifty Fifty was driven by a search for safety and a desire to avoid speculation after a period of market pain. However, as is often the case when momentum takes over, the narrative morphed alongside the rapid rise in price. Prior to the peak of the Nifty Fifty phenomenon in early 1973, after a significant increase in share prices (many Nifty Fifty stocks doubled and some even tripled from their 1970 lows), and with roughly 30% earnings growth for the group in 1972, many investors had come to believe that these companies were impervious to the economic cycle, that their growth trajectories could continue indefinitely and that valuations were largely irrelevant.   

The irony, looking back, is that many of these companies are still around today, and a significant portion achieved impressive earnings growth over the following decades. However, this didn’t prevent their stocks prices from experiencing significant drawdowns (most over 40%) from 1973 to 1974 and underperforming the S&P 500 for the rest of the 1970s.  Just because a company is good doesn’t mean it is a good investment at that particular point in time. Price and valuation do matter over time. When everyone piles into the same stocks, they are often just chasing a theme, and themes can change quickly.

Will the current infatuation with just a handful of good companies eventually follow a similar path as the Nifty Fifty? And if so, are we currently only at the equivalent of 1971, or are we already in late 1972? Only time will tell, but this episode from the early 1970s serves as a reminder that myopically chasing growth stocks with exciting themes is probably not some magic formula for achieving above-average returns into perpetuity as much as the current market zeitgeist may try to convince us otherwise.

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

Lawrence Gillum | Chief Fixed Income Strategist

Additional content provided by Colby Hesson, Analyst, Research

The Federal Open Market Committee (FOMC) faces a tough decision in 2024 as it is no longer a question of ‘if,’ but rather ‘when’ rate cuts will occur. The FOMC is not expected to cut rates at their upcoming March meeting, but according to recent market pricing, may instead opt for a rate cut in June. Since their last meeting in January, surprisingly elevated inflation readings have cast a shadow of doubt over those expectations. Premature rate cuts from the Federal Reserve (Fed) risk reigniting inflation, which they have been diligently trying to bring down to 2%. Even if rate cuts get priced out again, we expect fixed income to still provide utility to portfolios. 

Treasury yields have generally increased over the last month, while the Bloomberg Aggregate Bond Index (AGG) has declined by nearly -0.30%. However, we think yields could fall to the high 3s, potentially resulting in high-single-digit returns for core bonds. Moreover, reviewing the Hypothetical Returns table, while we think yields will end the year below current levels, even if rates rise, many core fixed income sectors are still likely to eke out positive returns.  

Hypothetical Returns: Interest Rate Scenario Analysis

*Assumes 3% default rate and 30% recovery rate.
Source: LPL Research, Bloomberg 02/23/24
Disclosures: Past performance is no guarantee of future results. All indexes are unmanaged and can’t be invested in directly.

Conclusion

The market got ahead of itself late last year in pricing in aggressive rate cuts, so the back-up in yields is warranted, in our view.  Starting yields for many fixed income markets are still at levels last seen over a decade ago, so the return prospects for fixed income remain favorable as well, in our view. However, increased Treasury supply in the coming quarters could exert upward pressure on yields. And while we do not expect the Fed to cut rates in March, we still expect cuts this year. As such, our year-end 2024 range for the 10-year Treasury yield remains 3.75% to 4.25%, and we expect fixed income to outperform cash in 2024. 

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