Wealth Management

Posted by Jeffrey Buchbinder, CFA, Chief Equity Strategist

Friday, December 8, 2023

Additional content provided by Colby Hesson, Analyst

Market-watchers have been intensely focused on the Federal Reserve (Fed) this year. Recently, they’ve mostly opined on when the first rate cut might be coming and, generally, making the assumption that a rate cut would be good for stocks. It could be good, but our analysis peels back the onion to help make an important point. Once the cut comes, typically the Fed has gone too far and recession is near (or already started). Further, markets tend to get jittery ahead of the cut, suggesting investors right now might be better off rooting for “higher for longer.”

An examination of Fed rate cycles since the 1970s (table below) reveals that investors don’t have much to look forward to when looking at how stocks do during the first six months following the first Fed rate cut. Keep in mind that the sample size is relatively small, with only 9 rate cycles studied. It is also worth noting that the time from the first rate hike to the first rate cut has more than doubled since 1985 as business cycles have generally lengthened.

While average gains don’t look great (2% over the subsequent six months and 5-6% over the next 12), they aren’t bad either. The dispersion is where this gets more interesting. During challenging economic environments such as the early 1980s, early 2000s, and pre-Great Financial Crisis, stocks suffered mightily after the Fed easing cycle began. Simply put, performance varies quite a bit across these periods.

We see the same thing when analyzing the period between the final rate hike and the first rate cut, with mixed returns; in addition, negative returns outnumber positives.

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The Fed will cut rates because it worries monetary policy is too restrictive for a weakening economy. The central bank’s goal remains a soft landing, and their spotty track record in achieving that goal does not mean a hard landing is necessarily in the cards. Some things have already broken, by the way, including Silicon Valley Bank and First Republic Bank. And many think the U.S. economy already experienced a recession with the two straight GDP declines in the first half of 2022 (it was a technical recession, not an official one).

Today, consumer and corporate balance sheets are in great shape, with many corporate executives having already prepared for recession. And don’t forget the cause of the presumed recession, high inflation, has sharply reversed. Bottom line, if a recession comes in 2024, it will likely be too mild to disrupt the market meaningfully.

So now 135 days into the rate pause—assuming no addition hikes are forthcoming—be careful what you wish for. Higher for longer and a “muddle through” economy without cuts might be best for stocks in 2024. More on these topics in our Outlook 2024: A Turning Point, due out on December 12 on lpl.com.

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.

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 Adam Turnquist, CMT, VP Chief Technical Strategist

Thursday, December 7, 2023

Key Takeaways:

• An impressive November rally left the S&P 500 overbought and hanging just below key resistance at 4,600.
• Cyclical sectors have led the charge higher and are the most overbought. LPL Research views this as a constructive sign for a healthy and sustainable bull market recovery.
• While overbought does not mean over, the degree of overbought conditions reached this month is historically rare, and based on forward returns from comparable periods, stocks could be subject to underwhelming short-term performance but impressive longer-term gains.

Last month’s 8.9% rally on the S&P 500 repaired a lot of technical damage across the broader market and left the index just below key overhead resistance at 4,600—a level tracing back to the early 2022 highs and a spot where the summer rally struggled. The sharp rate of change off the October 27 low, including nearly a 12% rally in 24 days, also created widespread overbought conditions. On December 1, roughly one-third of the S&P 500 was overbought based on a Relative Strength Index (RSI) reading of 70 or higher. For reference, RSI measures the velocity of price action by comparing cumulative average gains/losses over a select timeframe. The momentum indicator oscillates between zero and 100, with 70 and 30 generally considered overbought and oversold readings, respectively.

The chart below illustrates the S&P 500 stalling at the 4,600 overhead resistance level. The index’s RSI climbed back above 70 on December 1 along with 32% of its constituents, a rare occurrence as +30% overbought readings have occurred in only 0.6% of all trading days since 1990.

Overbought Conditions Meet Overhead Resistance

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Overbought Does Not Mean Over

Overbought conditions are a good sign in a bull market as they represent periods of building momentum, increased investor confidence, and elevated levels of sustained buying interest. Understanding where the buying pressure is concentrated is also important to determine if the rally is more offensive or defensive-driven. The table below breaks down the degree of overbought conditions across sectors as of December 1, along with each sector’s S&P 500 weight. Regarding the latest rally, the more cyclical or offensive-oriented areas of the market have the highest percentage of overbought stocks, a constructive sign for the health of this recovery.

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Can the Rally Continue?

The table below highlights S&P 500 performance after overbought conditions reached historically high levels. We defined ‘historically high’ as periods when the percentage of S&P 500 stocks with RSI readings of 70 or higher crossed above the 30% threshold (we filtered out overlapping signals occurring less than one week apart). Of the 18 previous overbought signals generated since 1990, average one- and three-month returns were underwhelming. However, over the next 12 months, the average S&P 500 return was 12.2%, with only one period generating a negative return.

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SUMMARY

Despite the recent overbought conditions, LPL Research believes the rally in stocks can continue next year. The technical setup for the broader market continues to improve, including the recent broadening of participation beyond the ‘Magnificent Seven’ stocks. The macro backdrop has also become less complicated with rates and the dollar rolling over and the narrative surrounding monetary policy shifting from rate hikes to rate cuts. While we remain impressed with this rally’s momentum and cyclical tilt, history suggests the market could be subject to some short-term pain/consolidation before any longer-term gains.

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.

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 Jeffrey Buchbinder, CFA, Chief Equity Strategist

Wednesday, December 6, 2023

The 2024 presidential election takes center stage next year, and of course we will all be monitoring the polls closely for any signs of a leadership change in Washington, D.C. It’s too early at this point to speculate on a potential winner, though polling and odds makers are pointing to a Biden-Trump rematch.

Regardless of who is in the White House in 2025, we do know the S&P 500 has generated an average gain of 7% during presidential election years dating back to the 1952 election. That’s a far cry from the average gain in year 3 of nearly 17%, but it should help calm fears that the election might derail the bull market.

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Source: LPL Research, FactSet 12/05/23 (1950 – 2022)
All indexes are unmanaged and cannot be invested into directly. Past performance is no guarantee of future results.
The modern design of the S&P 500 Index was first launched in 1957. Performance before then incorporates the performance of its predecessor index, the S&P 90.

Priming the Pump

Another angle worth highlighting is that during a re-election year such as 2024, the average S&P 500 gain jumps to 12.2%. We believe this pattern is partly due to the incumbent priming the pump ahead of the election with fiscal stimulus and pro-growth regulatory policies to stave off potential recession and encourage job growth. Every president who avoided recession two years before their re-election went on to win and every president who had a recession within two years before their re-election went on to lose.

This presents a tall hurdle for Biden given so many leading indicators point to some economic contraction next year. As you will see in the LPL Research Outlook 2024: a Turning Point (ETA 12/12/23), LPL Research forecasts a mild and short recession at some point next year, which could point the needle toward the GOP even though LPL Research expects a relatively muted market reaction.

Limited Pump-Priming Opportunities

With Republicans in control of the House, opportunities are limited for Biden to prime the pump next year. But keep in mind stimulus passed in 2022 will still be flowing through the economy throughout 2024, which is one of the reasons most economists underestimated growth this year. In fact, most of the spending from the Inflation Reduction Act passed in August 2022 will hit during fiscal years 2024-2026, providing support for the economy next year and bolstering the Democrat’s chances.

Still, we may see some actions that don’t require congressional approval like more student loan forgiveness and regulatory maneuvers that could potentially help support the economy ahead of the election, but they are likely to be limited in size and scope.

For those who might think this stock market angle is conspiracy theory, consider that three-month returns before an election have predicted 20 of the last 24 elections. In other words, when stocks are up three months before Election Day, the incumbent typically wins. Conversely, when stocks fall during the three-month period before Election Day, the incumbent tends to lose. It’s early to start thinking about that but rest assured we’ll be all over that come August.

Bottom line, history suggests that stocks will likely move higher next year despite policy uncertainty surrounding the election. LPL Research also expects the inflation, interest rate, and corporate fundamental backdrops to be supportive, as you will see in LPL Research’s Outlook 2024: A Turning Point next week. That said, an increase in market volatility leading up to the election in late summer/early fall would not surprise us and be consistent with history.

Much more to come on potential implications of the election for the economy and markets here and here in the months ahead.

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.

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