Wealth Management

Posted by Jeffrey Buchbinder, CFA, Chief Equity Strategist

Friday, November 17, 2023

Additional content provided by John Lohse, CFA, Analyst

Following its post-summer malaise, the S&P 500 has sternly gained steam, bouncing 9.5% off the October 27 low. Fueled by a softening CPI print, surging performance from top-heavy constituents, and a favorable technical backdrop, the index has its January 2022 all-time highs in sight.

It’s been 471 trading days since the S&P 500 reached its all-time high of 4,796.56 on January 3, 2022. This marks the 11^th time since 1950 that it’s traded below a previous all-time high for over a calendar year on a total return basis; the last time being March 2012, which lasted for 1,128 trading days. The longest streak since 1950 occurred between September 2000 and October 2006 when the index (total return) traded below its previous high for a staggering 1,541 days. The chart below shows the duration of such occurrences.

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To date, this period marks the seventh longest without a new high since 1950 and has experienced the fourth smallest drawdown. Since the January 3, 2022 high, the index met its trough of -25% on October 12, 2022, and we’re still not back at those highs nearly 23 months later! The largest drawdown we saw was a 55% decline during the Great Financial Crisis (GFC). In the year following the recovery from the GFC (April 2012 to April 2013) we saw a 14% total return from the S&P 500, which lands right at the average of these periods. There was only one period in this study in which the total return of the index was negative one year after the recovery, albeit at -1% from July 1976 to July 1977. The chart below shows peak drawdowns of the previous 10 instances and their subsequent one-year returns post recovery.

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As of this writing the index sits just about 6.5% below the January 2022 all-time highs. While LPL Research maintains a year-end fair value of 4,300–4,400 based on an estimated $230 in earnings per share next year, it’s important to note where the market stands relative to history. Technical evaluations show a recent breakout above resistance at 4,400 and a possible re-test of a key 4,600 level. The next six weeks are among the best seasonally for stocks on the calendar. And although breadth remains relatively underwhelming, technology-oriented names continue to be a propellant.

As we get closer to the end of the year and the two-year anniversary of the January 2022 highs, consider what history tells us about the timetable for recovering bear market losses. It suggests that a new record high may not be far off.

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, November 16, 2023

Key Takeaways:

• Benchmark 10-year Treasury yields have plunged over 50 basis points (bps) after briefly surpassing 5% in late October. Reduced longer-term debt auctions, cooling inflation, slowing economic activity, and rising expectations for an end to the Federal Reserve’s (Fed) rate hiking campaign contributed to the pullback.
• Yields are now trading below their 50-day moving average (dma), and a potential head and top shoulders top has formed. Technically, a close below 4.42% would break the neckline and leave 4.35% (prior highs/key Fibonacci retracement level) as the next key area of downside support.
• After forming a negative divergence from yields, the Relative Strength Index (RSI) has dropped back into bearish territory, raising the odds for the highs on the 10-year being set last month.
• Elevated short positions in 10-year Treasuries could trigger a short covering rally and/or increased volatility in the Treasury market.

This week’s cooling inflation data has supported the case for ending the Fed’s rate hiking campaign. October headline Consumer Price Index (CPI) decelerated from 3.7% to 3.2% annually, while core CPI—which excludes the often-volatile food and energy components—eased from 4.1% to 4.0%. Rate hike expectations disappeared following the news, while expectations for a rate cut were pulled forward to May. However, with inflation still running well above the Fed’s 2% target, it is too early for a victory lap, although the “trajectory is encouraging,” according to LPL Chief Economist Dr. Jeffrey Roach, who dug deeper into the CPI report in yesterday’s blog (Yields Plummeted on Benign Inflation Report | LPL Financial Research (lplresearch.com).

Another encouraging trajectory for equity markets can be found on the chart of 10-year Treasury yields, which pulled back through several areas of support following the CPI news. Yields are now trading back below their 50-dma for the first time since May, and a potential head and top shoulders formation has developed. The key word here is ‘potential’ as a close below 4.42% would be required to break the neckline. Additional downside support sets up at 4.35% (prior highs/key Fibonacci retracement level). From our perspective, a completed head and shoulders top formation followed by a break below 4.35% would significantly raise the odds of a top being set for 10-year yields.

View enlarged chart

The lower panel of the chart highlights RSI. This momentum oscillator measures the velocity of price action to determine trend strength, overbought and oversold conditions, and divergences. Over the last several weeks, RSI has generated a series of lower highs as yields continued to climb, creating a negative divergence indicative of fading upside momentum. Divergences often—but not always—overlap with major market tops and bottoms.

Short Squeeze Risk

The potential end to the uptrend in 10-year Treasury yields could be a significant problem for short positions (investors who are short Treasuries in anticipation of higher yields). According to the latest Commodity Futures Trading Commission (CFTC) data shown below, leveraged funds (typically hedge funds and other speculative asset managers) reported near-record net short positions in 10-year U.S. Treasuries. Asset managers, including institutional investors such as pension funds, endowments, mutual funds, and insurance companies are on the other side of the spectrum, holding long positions near record highs.

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The Basis Trade

Part of the extremes in short Treasury positions can be explained by the ‘basis trade,’ an arbitrage strategy that profits from pricing discrepancies between the cash bond market and futures market (basically selling expensive bonds in one market to buy cheaper bonds in another market). So, while short positions are running historically high, many are likely hedged with corresponding long positions in the cash market. However, hedged does not mean risk-free, as the basis trade is subject to liquidity and leverage, with financing for these positions typically done via borrowing in the repo market. As shown in the second panel above, Secured Overnight Financing (SOFR) volume has climbed (in tandem with short positions) to record highs, highlighting the jump in overnight Treasury repo activity.

In the event of liquidity drying up, leveraged funds may be forced to unwind their positions, sparking a potential jump in Treasury market volatility that could snowball as funds race to the exit door. According to a recent Bank for International Settlements report on the topic, “The current build-up of leveraged short positions in US Treasury futures is a financial vulnerability worth monitoring because of the margin spirals it could potentially trigger,” while adding that “margin deleveraging, if disorderly, has the potential to dislocate core fixed income markets.” Source: Margin Leverage and Vulnerabilities in US Treasury Futures

SUMMARY

Easing inflation and slowing economic activity have reset expectations for future Fed tightening. Both equity and fixed income markets have welcomed this news with consistent buying pressure this month. Treasury yields have pulled back sharply, and the 10-year has formed a potential head and shoulders top formation. A break below support at 4.35% would complete the formation and also take out support from the October 2022 highs—significantly raising the odds for the highs on the 10-year being set last month. Downside pressure in yields could be accelerated by the covering of historically high short positions among leveraged funds. Furthermore, in a liquidity event, the potential unwind of the basis trade could lead to elevated fixed income and equity market volatility.

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 J. Roach, PhD, Chief Economist

Wednesday, November 15, 2023

Key Takeaways:

• Investor risk appetite could increase in the near-term after the October inflation report, similar to the market reaction after the jobs report from a few weeks ago.
• Headline consumer prices in October were unchanged month over month, pulling the annual rate of inflation down to 3.2% from 3.7% last month.
• Core inflation rose 0.2% from a month ago as housing costs, insurance, and medical care increased in October.
• Hotel prices fell in October, likely on the heels of declining demand for travel.
• Air fares fell in October as fuel costs declined and competition among airlines put downward pressure on tickets.
• Bottom Line: The annual rate of core inflation decelerated to 4%, the smallest rate since mid-2021 and should keep the Federal Reserve (Fed) from raising interest rates at next month’s meeting. Despite the deceleration, the Fed will likely continue to speak hawkishly and will keep warning investors not to be complacent about the Fed’s resolve to get inflation down to its long-run 2% target.

No Inflation in October

The October Consumer Price Index (CPI) showed inflation was unchanged from the previous month, indicating markets may finally get a reprieve from the nagging pressures of inflation. In October, CPI increased by 3.2% from a year ago, a decent deceleration from the 3.7% annual rate registered in September. Following the release, both equity and bond markets responded favorably as the official metrics showed some improvement with inflation.

Digging a Bit Deeper

Energy prices fell 2.5% and was the biggest contributor to the unchanged headline stat. Gas prices fell 5%, the biggest monthly decline since May. Falling energy prices will provide a bit of a reprieve for consumers, especially lower income families more sensitive to gas prices. Other categories are also showing some encouraging signs. Both new and used vehicle prices declined in October. Used vehicle prices have declined now for five consecutive months, although used vehicle prices are up over 30% since the onset of the pandemic.

Airfares also declined in October. In fact, the price index for airline tickets is below 2019 levels and could indicate a cooling off in demand for travel.

Too Early to Declare Victory

The Fed will by no means declare victory since the annual core inflation rate in October was 4.0%, double the long-run target rate set by the Fed. However, the trajectory is encouraging.

View enlarged chart

As shown in the chart above, the annual rate of headline inflation is 3.24% and will likely decline further from here. Despite inflation running above the Fed’s target, the Fed will likely hold rates steady at the next few meetings as policy makers—and investors too, for that matter—remain concerned about the lagged effects of monetary policy. Given the speed of the past rate hikes, many argue the economy and markets have not yet felt the full impact of the policy tightening.

From an investment standpoint, we saw an increase in risk appetite after this report and we could see some encouraging moves in the near-term. Overall, the Strategic and Tactical Asset Allocation Committee (STAAC) remains neutral on equities, maintains a positive bias towards growth stocks, and favors large caps over small caps. High valuations, tight financial conditions, and the potential for a recession (albeit mild) make the STAAC wary of taking on additional risk as investors prepare to enter the New Year. With the Fed likely done hiking rates and yields at attractive levels, bond returns have become increasingly competitive with 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 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.

Posted by Lawrence Gillum, CFA, Chief Fixed Income Strategist

Tuesday, November 14, 2023

Late Friday afternoon, rating agency Moody’s announced that it had downgraded is credit rating outlook on U.S. government debt from stable to negative. Moody’s cited wide budget deficits and political polarization as reasons for the downgraded view. Further, Moody’s noted amid higher interest rates, without measures to reduce spending or boost revenue, fiscal deficits will likely “remain very large, significantly weakening debt affordability”.

Moody’s is the last of the three main rating agencies with a top rating on the U.S. debt after Fitch downgraded the U.S. government in August following the latest debt-ceiling battle. S&P Global Ratings was the first to cut the rating for the U.S. in 2011 amid that year’s debt-limit crisis. Since the announcement though, Treasury yields are generally lower (prices higher) across the curve.

In our view, the bond market’s collective shrug for the outlook change affirms that rating agencies are only catching up to the fiscal policy challenges that the bond market has been pricing in for several quarters. In fact, until recently, the market has been trading primarily on the expected increase in Treasury supply to fund budget deficits expected over the next several years. Per the Congressional Budget Office, the U.S. government is expected to run sizable deficits over the next decade in the tune of 5%-7% of GDP each year, which means a lot of Treasury issuance is coming to market.

That is obviously a lot of supply that needs to find demand. However, since we know the U.S. rarely (if ever?) actually pays its debts off, there is also a lot of existing debt that needs to be rolled over as well. Over the next 13 months, the U.S. will need to refinance over $9 trillion of debt with over $3 trillion due this year. The additional supply comes at a time when price-insensitive buyers are stepping back from the Treasury market. The supply/demand imbalance will likely mean interest rates are going to be higher than they otherwise would be absent sizeable deficits.

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These refinancings will take place with interest rates among the highest in over a decade. So, with the recent announcement that interest expense on existing debt hit $1 trillion, interest expense is likely only headed higher—concerns that were outlined by Moody’s (and Fitch in August). So, frankly, it’s no surprise that rating agencies, in general, have started to sound the alarms that fiscal risk is rising. Importantly though, in our view, the downgrades do not suggest the U.S. will have trouble paying its debts; we think there is currently a very low probability of default. But, until the U.S. government gets its fiscal house in order, we’re likely going to see additional downgrades and likely higher interest rates in the Treasury market.

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.

Posted by George Smith, CFA, CAIA, CIPM, Portfolio Strategist

Friday, November 10, 2023

Additional content provided by Kent Cullinane, Analyst

With earnings season winding down, having more than 450 of the 500 S&P constituents (or roughly 90%) reporting earnings by end of week, we take a look at the results thus far, while also highlighting the ‘Magnificent 7’ and how this basket of securities, making up nearly 30% of the S&P by market cap weighting, has driven earnings and performance this year.

As of November 3, 82% of companies in the S&P 500 reported earnings that surpassed expectations, well above the 10-year average of 74%. Results so far point to a 4.4% year-over-year gain, which would mark the first quarter of year-over-year earnings growth since Q3 2022. The consumer discretionary sector has produced the biggest average upside surprise (22%) among sectors, followed by communication services, financials, and tech with average upside surprises of 9-10%.

Earnings from the ‘Magnificent 7’—comprised of Apple/AAPL, Amazon/AMZN, Alphabet/GOOG/GOOGL, Meta/META, Microsoft/MSFT, Nvidia/NVDA, and Tesla/TSLA—were largely positive this quarter, with five of the stocks reporting results that exceeded expectations. TSLA was the lone constituent that reported a negative earnings surprise this quarter, as price cuts across its lineup of cars weighed on results. While NVDA has yet to report (November 21), investors are bullish on NVDA given their blowout earnings report last quarter and position within the budding artificial-intelligence (AI) industry.

Optimism surrounding the ‘Magnificent 7’ may be warranted, given their dominance in megatrends such as AI and cloud-computing. However, from a valuation perspective, these companies are trading at significant price-to-earnings (PE) multiples when compared to the rest of the world. The chart below shows the aggregate PE ratio of the ‘Magnificent 7’ compared to other asset classes.

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You can see in the chart above that when compared to the S&P 500 equal weight index, the ‘Magnificent 7’ is trading at nearly twice the PE multiple. We consider this rich even when considering the double-digit earnings growth this group is generating at a time when earnings for the rest of the market are down slightly. When looking abroad, the PE appears nearly three times larger than the MSCI EAFE Index and the MSCI Emerging Markets (EM) Index, though these markets may be value traps because of weakening earnings outlooks.

We also looked at the free-cash-flow yields of the S&P 500 and split the constituents into quintiles. The free-cash-flow yield is a financial solvency ratio, comparing a company’s free cash flow per share to the market value per share. A high free-cash-flow yield means a company is generating cash that can be quickly used to service its debt and other obligations, or can be returned to shareholders as dividends or share buybacks. The chart below shows the free-cash-flow yields of the S&P 500.

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You’ll notice the dispersion between the top quintile (blue) and bottom quintile (orange), when compared to the median (gray). While the ‘Magnificent 7’ appears to generate significant free cash flow, when considering the free-cash-flow yield, nearly all constituents of the ‘Magnificent 7’ fall into the bottom quintile, again highlighting the potential overvaluation of these stocks.

Given the growth characteristics of these companies in a year in which growth stocks have outpaced value stocks by a significant margin, it’s no surprise they have outperformed the broader market this year.

From an asset allocation perspective, the Strategic and Tactical Asset Allocation Committee (STAAC) remains neutral on style, with a positive bias towards growth stocks. Strong earnings thus far, coupled with attractive technical trends, position growth well in the near and medium-term. However, high valuations, tight financial conditions, and the potential for a recession (albeit mild) makes the STAAC wary to upgrade the position.

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, November 9, 2023

Key Takeaways:

• The S&P 500 and Nasdaq Composite are riding respective eight- and nine-day winning streaks into Thursday. Oversold conditions, solid earnings, and a sharp pullback in interest rates have been the primary drivers of the rebound.
• How long will the streaks last? History implies roughly 50% odds the indexes will extend their winning streaks in today’s session.
• And while all winning streaks eventually end, the degree of consistent buying pressure in U.S. equity markets suggests investor confidence is improving and momentum is building.
• Furthermore, winning streaks of this magnitude are not only rare, but they are also associated with solid forward returns over the next 12 months.

The S&P 500 and Nasdaq Composite are enjoying their longest winning streaks in two years. The S&P 500 has strung together eight straight days of gains, while the tech-heavy Nasdaq Composite has been up for nine consecutive sessions. Oversold conditions, solid earnings, and a sharp pullback in interest rates have been the primary drivers of the rebound.

From a technical perspective, the S&P 500 has climbed back above its 50- and 200-day moving averages, closing on Wednesday just below key resistance at 4,400. A breakout above this level would reverse the S&P 500’s current downtrend and check the box for a higher high, raising the probability that the correction lows were set last month. A similar technical story has developed on the Nasdaq Composite, which needs to clear 13,660 to break its October highs.

The S&P 500 & Nasdaq Composite have Rebounded Back to Inflection Points 

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How Long Could These Winning Streaks Last?

For the S&P 500, just over 50% of eight-day winning streaks turn into nine, while the longest run of consecutive gains is 14 days since 1950. As of November 8, the S&P 500’s 6.4% gain amid its current eight-day winning streak is also well above the average 4.5% gain generated during other exclusive eight-day winning streaks.

History implies roughly the same 50% odds for the Nasdaq Composite extending its current nine-day winning streak into 10, while the index’s longest streak of daily gains stands at 19.

View enlarged chart

Where Could the Market Go From Here?

Consistent buying pressure of this magnitude is not only rare—eight up days in a row have only occurred in 2.3% of all eight-day periods for the S&P 500 since 1950—but also a bullish sign for improving investor sentiment and market momentum. And while all winning streaks eventually end, history suggests the rally may not. The chart below highlights the average progression of the S&P 500 and Nasdaq Composite after generating eight and nine days of consecutive gains, respectively. On a 12-month basis, the S&P 500 has climbed higher by an average of 9.1% following an eight-day winning streak, with 72% of occurrences posting positive results. The Nasdaq Composite has posted an average gain of 11.0% 12 months after a nine-day winning streak, with 79% of occurrences producing positive results.

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SUMMARY

Stocks have staged a meaningful recovery off oversold levels. The S&P 500 is riding an eight-day winning streak that has left the index near key resistance at 4,400. A close above this level will be required to reverse its developing downtrend. And while all winning streaks eventually end, the degree of consistent buying pressure in U.S. equity markets suggests investor confidence is coming back and momentum is building. Furthermore, winning streaks of this magnitude are not only rare, but they have also been associated with respectable forward returns over the next 12 months.

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 J. Roach, PhD, Chief Economist

Wednesday, November 8, 2023

Key Takeaways:

• The number of individuals experiencing long-term unemployment is back down to pre-pandemic levels, indicating a market functioning like it did before the pandemic.
• A growing number of individuals are holding multiple jobs as rising costs of living put increasing pressure on households.
• Small businesses expect lower real sales in the next six months as the economy slows. See chart below.
• Despite the headwinds, the economy grew above trend last quarter but this growth path is not likely sustainable.

What is Different This Time Around?

The historic shutdown and reopening of the economy continues to torque financial markets and analyst expectations. This was a key point made by this week’s speech by Neel Kashkari, the president of the Minneapolis Fed and the most hawkish voting member of the Federal Open Market Committee (FOMC). Relationships that traditionally explained what was happening to the economy appear to be severed. For example, hybrid work opportunities seem to have structurally changed the labor market, so traditional models that relate metrics such as the unemployment rate to inflation could be less helpful. Due to the hybrid option, households are less inclined to consider where they work for where they live.

We have also seen that the economy has been less sensitive to interest rates. Many households took cash out from their home equity and can thereby, skirt the credit markets and avoid the pressure from higher borrowing costs.

So What Does this Mean?

One possible scenario is an economy that slows and potentially dips into recession yet the unemployment rate might stay lower than normal given the anomalies in the labor market. The unemployment rate is still historically low yet we see some emerging concerns such as a high number of individuals holding multiple jobs. In October, 5.2% of those employed were working more than one job and that’s likely due to households feeling the pressure from higher costs of living. Holding more than one job is a way to handle higher prices.

Because of these abnormalities, businesses find it difficult to manage inventories and find qualified workers. Practically, we see firms becoming more cautious about future revenues. Most small businesses expect real sales to be lower in the next six months as illustrated in the chart below. Investors could expect an increasing number of firms to lower guidance as sale projections weaken. One positive consequence is markets will expect the Fed to stop raising rates and eventually cut rates in the next 12 months.

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Conclusion

Most small businesses expect real sales to decline over the next six months as the economy slows. The rising number of individuals suffering from long-term unemployment implies that consumer spending will slow in the coming quarters. Despite the headwinds in the U.S., we think domestic markets pose a relatively lower risk than international markets.

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.

Posted by David Matzko

Tuesday, November 7, 2023

After over a decade of very low interest rates, the rapid rise in rates recently has been the primary reason most fixed income asset classes have generated negative returns. And while the losses for some asset classes have been steep (and historically awful), we think the risk/reward for fixed income has improved and think the probability of further losses has decreased. Why? Higher starting yields.

While not unique to fixed income per se, the asset class has a feature that makes negative price performance increasingly difficult to continue due to rising rates alone. Fixed income returns are a combination of price performance and income so as yields rise, the income component increases as well. The higher income component serves as a “hurdle rate”, or a yield cushion, that will need to be eclipsed before further losses are realized. As such, these higher hurdle rates may decrease the probability of losses due to an increase in interest rates.

Currently, the highest hurdle rates reside in the short-to-intermediate categories but have improved in most sectors. For example, in order for the short Treasury category (1-5 year Treasury securities) to generate a loss over the next 12 months, interest rates would need to increase by more than 2.56% from current levels. Similarly, given the increase in yields for the intermediate corporate credit category, interest rates would need to increase by 1.5% from current levels to offset current levels of income. However, while hurdle rates are the highest for shorter maturity sectors, the increase in yield cushion for (most) longer maturity sectors has improved as well. Taking on some duration risk makes more sense now than it did a few years ago. That said, it would only take a 0.33% increase in yields to offset current levels of income for the long Treasury category—something that is within a likely distribution of outcomes. And while we can’t rule out the possibility of still higher rates at this point, we think it would take a steep resurgence in inflationary pressures to get to the levels needed to generate further losses on most fixed income asset classes.

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The move higher in yields recently has been unrelenting but we think we’re closer to the end of this sell-off than the beginning. Over the past decade, interest rates were at very low levels by historical standards. Now, the recent sell-off has taken us back to longer term averages. That is, at current levels, yields are back to within normal ranges. And while the transition out of the low interest rate environment to this more normal range has been a challenging one for fixed income investors, we think, given higher starting yield levels, the chances of further negative returns over the next year have declined.

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.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

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.

Posted by Adam Turnquist, CMT, VP Chief Technical Strategist

Friday, November 3, 2023

Key Takeaways:

• Oversold conditions and tumbling interest rates have brought buyers back into equity markets this week. The S&P 500 has recaptured its closely watched 200-day moving average (dma).
• Historically, index returns following a move back above the 200-dma have yielded positive but underwhelming returns, suggesting crossovers should be used more as a confirmation of trend than a binary trading signal.
• Seasonal tailwinds could keep this recovery moving forward. The S&P 500 has generated an average return of 7.0% from November through April, marking the best six-month return period for the market since 1950.
• While the comeback in stocks this week has been constructive, there is more technical work to do before considering that the correction is complete. Specifically, we are watching for the S&P 500 to clear resistance at 4,400, for market breadth to expand, and for 10-year yields to reverse their current uptrend.

What a difference a week makes! The S&P 500 has strung together four straight days of gains and is set to snap a two-week losing streak. Oversold conditions, solid earnings, hope for an end to the Federal Reserve’s rate-hiking campaign, and a sizable pullback in interest rates have brought buyers back into the market this week. Thursday’s 1.9% rally—powered by above-average volume and broad-based buying—pushed the index back above its closely watched 200-dma at 4,248. While we view this as a step in the right direction, a close above 4,400 would be required for the index to reverse its emerging downtrend. Furthermore, market breadth has been underwhelming amid the latest bounce, as less than half of the stocks within the S&P 500 are trading above their 200-dma.

S&P 500 Recaptures its 200-dma

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Crossover Performance

What does this mean for stocks going forward? Of the 216 times the S&P 500 crossed back above its 200-dma since 1950, forward three-, six-, and 12-month returns have averaged only 2.3%, 3.0%, and 4.7%, respectively. While these returns are a bit underwhelming, the latest crossover occurred after the index spent six days below the 200-dma, placing it in the third quintile group based on the number of days spent below the 200-dma before a crossover. Historical returns in this group have been higher on a 12-month basis, averaging 6.5%. Overall, we believe this data suggests price crossovers above the 200-dma should be used more as a confirmation of trend than a binary trading signal.

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Seasonal Tailwinds Return

Seasonal tailwinds could provide an additional boost to stocks into year-end. The S&P 500 finished the ‘Sell in May’ period this week with a modest 0.6% price gain. Historically, this six-month stretch has been the weakest for the index, averaging only a 1.6% gain. Fortunately for investors, the next six months look much better from a seasonal standpoint. The S&P 500 has generated an average gain of 7.0% from November through April, marking the best six-month period for the market since 1950. Furthermore, the S&P 500 has finished higher during this timeframe 77% of the time, marking the highest positivity rate across all other six-month periods (the second is December to July at 71%).

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SUMMARY

While the recent technical progress should help restore market sentiment, and the S&P 500’s move back above the 200-dma is clearly a step in the right direction, more technical evidence is required to affirm the lows of this correction have been set. Specifically, we are watching for: 1) the S&P 500 to reverse its emerging downtrend with a close above 4,400, 2) breadth to expand with at least half of the index constituents getting back above their 200-dma, and 3) for 10-year yields to reverse their current uptrend with a move below 4.35%.

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