Wealth Management

Posted by Jeffrey J. Roach, PhD, Chief Economist

Thursday, November 2, 2023

Additional content provided by John Lohse, CFA, Senior Analyst

In a unanimous decision yesterday, The Federal Reserve (Fed) left interest rates unchanged following its Federal Open Market Committee (FOMC) meeting. This marks the second straight meeting in which a rate hike was skipped, however, Chair Jerome Powell, didn’t rule out future increases. For now, the target rate remains at 5.25%-5.50%. Markets reacted positively to the news as stock prices rallied and bond yields fell.

Leaving the Door Open

The FOMC’s November Statement maintained the possibility of future rate hikes as they remain “highly attentive to inflation risks”. The Committee is still determining the lagged effects of the current monetary policy, as Powell stated, “the full effects of our tightening have yet to be felt”.

It believes both the financial and credit conditions will likely weigh on overall economic activity for households and businesses. As mortgage rates recently reached 8%, and the average credit card rate sits at over 20%, high borrowing costs are omnipresent for consumers and businesses alike. A broader measure of the Fed’s monetary policy stance can be gleaned from the Proxy Funds Rate, which takes into account wider measures of financial conditions that aren’t necessarily tethered to the fed funds rate. The chart below shows a divergence in the fed funds rate and the Proxy Funds Rate, indicating more strain on financial market conditions than would otherwise be measured by the fed funds rate.

View enlarged chart

Wage Growth

While Wednesday’s Fed statement remained largely unchanged from the prior meeting, Powell did make a surprisingly positive statement on wage growth during the post-meeting press conference. Referencing Tuesday’s release of the Employment Cost Index (ECI) Powell noted that “If you look at the broad range of wages, the wage increases have really come down significantly over the course of the last 18 months to…where they’re substantially closer to that level that would be consistent with 2% inflation over time”. The ECI data showed private industry employment costs rose 4.3% year-over-year, compared with 5.2% the same month last year. Committee members expect to see some deterioration in the labor market before inflation reaches the long run target and would warmly welcome continued gradual moderation in wages.

View enlarged chart

Risks Balancing Out

At the start of the rate hiking campaign over 18 months ago, the predominant concern was targeting an appropriate interest rate level to prevent inflation from becoming entrenched. As we stand today, that predominant concern has become more balanced with a competing concern if they’re doing “too much”. The Committee is proceeding carefully, with the risks of higher interest rates becoming more two-sided. Although the economy grew at 4.9% annualized in Q3, the Atlanta Fed’s GDPNow growth tracker is projecting 1.2% for Q4. As inflation continues to moderate, albeit still not at its long-term target, the Fed now has the luxury of more heavily considering the economic growth outlook, as witnessed by a second straight pause.

Bottom Line

The Fed will continue to try to determine the proper level of interest rate policy as it goes “meeting-by-meeting”. We’ve seen dot plot projections deteriorate over longer periods. Members’ forecasts are fluid, as they search for unambiguous and decidedly consistent data relating to inflation, employment, and overall economic health. It may lean towards a hiking bias in the December meeting as they’re still not assertively confident that the current policy is restrictive enough, but incoming data will heavily influence the next move.

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 George Smith, CFA, CAIA, CIPM, Portfolio Strategist

Wednesday, November 1, 2023

Even after a red October provided more trick than a treat for stock market investors, we continue into what has historically been one of the strongest periods for stock market seasonality.

A red October was the third consecutive month in a row that the S&P 500 was lower. August and September have never been good for stock market seasonals but historically, and especially in recent years, October has had a fairly solid track record for stocks—not the case in 2023 as the S&P 500 fell 2.2% during the month. The good news is that from a seasonality perspective, looking at data back to 1950, November has been the strongest month and the start of both the strongest two-month, and six-month periods for stocks.

November is the best performing month since 1950 and second best month over the past five and 10 years.  Furthermore,  only one of the past 11 Novembers has the S&P 500 been down over the month (in 2021), though in the midst of overall impressive average returns (+1.7% monthly return since 1950) November has also had its share of big down months, notably in 2008 (-7.5%), 2000 (-8%), 1987 (-8.5%) and 1973 (-11.4%).

View enlarged chart

November-December is also the strongest two-month period on average looking at all periods back to 1950 but this two-month pairing has been often been relying on November in recent years as December’s “Santa Claus Rally” returns have been mixed.

View enlarged chart

Looking at six-month return windows, November-April is also the strongest of these looking at all periods back to 1950 and over the past 20 years. In recent history over the past five and 10 years, this pattern has broken down somewhat with the November-April returns more middle of the road and the strongest six-month period being March-August. Over all periods since 1950 the old stock market adage of “Sell in May” appears to have some credence as the May-October does have the weakest returns of all six-month periods, but in recent years this has also shifted somewhat and September-February has been the weakest six-month stretch over the past five and 10 years.

View enlarged chart

When studying the proportion of positive monthly returns since 1950 November has posted a positive return around 69% of the time.  The only months that have historically finished in the green more often are April and December.

View enlarged chart

October’s negative return meant stocks finished down three months consecutively for the first time since the midst of the COVID-19 outbreak at the start of 2020, and prior to that in 2016. Taking a look at how stocks performed after such occurrences the good news is that if October turns out to be the end of the run of negative months, then the S&P 500 return one year out following such an inflection is well above average with a 17.9% rebound versus an average of 8.9% for all periods. If the negative run of monthly returns continues past three months, then the returns a year out are below average (perhaps unsurprisingly given this period includes at least one negative month to start) but are still positive more often than not and have a healthy median return. If the run of negative months stops at four or five, then the returns a year out are still strong as on average stocks bounce back over the following 12 months. The longest run of consecutive down months since 1950 was 9, occurring from January to September 1974 (during which time the S&P 500 was down 35% but went on to recover 32% over the next 12 months).

View enlarged chart

In summary, though somewhat mixed, overall historic stock market seasonals are still pointing to a supportive environment for stocks coming into the year-end. Three consecutive months of selling pressure may have also exhausted sellers and left stocks approaching oversold levels. We do maintain our outlook of a slight preference for fixed income over equities in our recommended tactical asset allocation (TAA), but this is more a function of fixed income valuations remaining relatively favorable over equities due to their attractive yields. We see this as a reason to temper enthusiasm for equities, but not to be bearish, remaining neutral, sourcing the slight fixed income overweight from cash, relative to appropriate benchmarks.

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

Friday, October 27, 2023

Key Takeaways:

• Adjusted for inflation, consumers increased spending in each of the last four months while real disposable income fell over the same period. Clearly, this can’t last much longer.
• Auto incentives brought in buyers last month as real spending on goods was driven by spending on autos, both new and used. The use of incentives obviously has implications for profit margins in the near future.
• Not surprisingly, international travel was the largest contributor to the increase in real services spending in September. Airlines should not expect this level of spending in coming months.
• The annual core inflation metric decelerated to 3.7% from 3.8% in August and 4.3% in July.
• Markets will likely struggle with processing the sharp 0.8% monthly rise in restaurant and hotel prices, the highest rate since October.
• Bottom Line: Although consumer prices rose faster than expected from a month ago, core inflation continues to lose speed and this report will not likely change the Fed’s view that inflation will slow in coming months as demand slows. Eventually, spending will moderate after consumers spend more than they earn for several more months.

Where is Inflation Most Nagging?

The Federal Reserve’s (Fed) preferred inflation metric taken from the personal income and spending report is decelerating but some components seem to defy the odds. The price deflator for both headline and subcomponents are definitely improving. The headline deflator rose 0.4% month over month and kept the annual rate at 3.4% in September.

But, restaurant and hotel prices seem to be the most nagging, especially hotel prices. Given the incredible demand for travel and the accompanying rise in hotel occupancy rates, markets see inflation as sticky in this sector.

For context, total hotel occupancy in September was 66.2%, higher than occupancy rates in 2019. Investors should know that hotel companies are reaping the benefits—revenue per available room (RevPAR) is up roughly 3% from a year ago.

View enlarged chart

Auto Incentives Drove Sales

Auto incentives brought in buyers last month as real spending on goods was driven by spending on autos, both new and used. The use of incentives obviously has implications for profit margins in the near future so expect to see some chatter in the markets on this topic.

Incentives averaged over $2,000 in September, the highest in over two years and close to 5% of the average transaction price. As a side note, this morning’s report is important for several reasons. It provides a snapshot on consumer spending, consumer income, and consumer prices. All three topics are worth digesting.

How Sustainable is This?

For several months now, spending grew faster than disposable income which is clearly not sustainable in the long run. As shown in this second chart, investors have seen a few recent periods when real monthly spending grew faster than real income. From yesterday’s GDP report, we saw that consumer spending contributed over half of the quarterly growth but it looks like consumers are starting to wind down their spending splurge as they head into the end of the year.

View enlarged chart

Bottom Line

Investors should not be surprised that the consumer was spending in the final months of the summer. The real question is if the trend can continue in coming quarters and we think not. Markets are still expecting no change in target rates at the upcoming Fed policy meetings. Yields on the 2-year Treasury fell on the recent news in the last few days. It’s too early to be dogmatic about the final quarter of the year but investors should expect some deceleration in momentum. Although consumer prices rose faster than expected from a month ago, core inflation continues to lose speed and this report will not likely change the Fed’s view that inflation will slow in the coming months as demand slows. Eventually, spending will moderate after several months of consumers spending more than they earn.

Investment Takeaway

LPL Research’s Strategic and Tactical Asset Allocation Committee (STAAC) maintains its recommended neutral equities allocation as the Committee views the risk-reward trade-off between stocks and bonds as relatively balanced. The Committee continues to favor the energy and industrials sectors and rates consumer discretionary and communication services as neutral, but with a positive bias toward the latter. A combination of generally favorable technical analysis trends, a solid earnings growth outlook, and quite reasonable valuations are some of the reasons why the STAAC is warming up to the sector even as the mixed reception to results from Alphabet/Google (GOOG/L) and Meta (META) creates a tougher path to outperformance in the near term. On the flip side, STAAC suggest caution toward consumer staples and real estate and maintains negative views of those sectors.

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 George Smith, CFA, CAIA, CIPM, Portfolio Strategist

Thursday, October 26, 2023

Additional content provided by Kent Cullinane, Analyst

Earnings season for the third quarter of 2023 is underway, as 86 constituents of the S&P 500 reported results last week and 160 more are reporting this week, totaling nearly half of the S&P 500. As of October 25, 2023, earnings for the S&P are projected to increase 0.75% year-over-year, a slight increase from the 0.3% gain projected at the end of the September. So far, 78% of companies have reported earnings that have surpassed estimates, a bit higher than the 5-year average of 77% and 10-year average of 74%. The average earnings beat stands at 7.5%, slightly above with the 10-year average.

When looking at earnings by sector, 8 of the 11 sectors within the S&P are projected to report positive year-over-year earnings growth, with the communications services and consumer discretionary sectors expected to rise 32.1% and 21.5%, respectively. At the other end of the spectrum, the energy, materials, and health care sectors are expected to report earnings declines of more than 20%

View enlarged chart

Strong year-to-date performance. The communications sector has been the best performing sector year-to-date, driven mainly by strong earnings growth and price-to-earnings multiple expansion. The sector is up 37% this year, roughly 3.5% ahead of the next closest sector (technology at 33.5%) and nearly 30% ahead of the broader market (S&P at 9%). This is in stark contrast to 2022 when the communications sector was the worst performer in the S&P, tumbling 40% compared to the S&P’s 19.4% decline (excluding dividends).

Focus on the big hitters in this concentrated sector. Today we focus on the communications sector as two of the largest components of the sector, Alphabet/Google (GOOG/L) and Meta/Facebook (META), representing roughly 50% of the sector’s market capitalization (cap), reported results this week.

GOOG/L reported earnings after close on Tuesday, and while they beat both consensus sales and earnings estimates, sentiment on the advertising behemoth soured due to underwhelming results from their cloud-computing segment. Analysts were expecting the cloud segment, considered to be one of the largest drivers of growth for GOOG/L, to be stronger. Despite the investor reaction to the disappointing cloud segment, GOOG/L increased revenue by double-digits after four quarters of single-digit expansion.

META reported better-than-expected results after the close on Wednesday, beating on both the top and bottom line, highlighted by 23% growth in revenue. The impressive sales growth number comes after a dismal 2022 in which revenue shrank for three consecutive quarters. META has weathered the challenging digital advertising market fairly well, while also cutting costs and driving engagement across platforms, but the digital media giant’s shares sold off in after-hours trading following cautious comments about the macro outlook.

Elsewhere in the communications sector, traditional telecommunications companies AT&T (T) and Verizon (VZ) reported encouraging earnings results, while streaming giant Netflix (NFLX) surged more than 12% following impressive subscription growth numbers.

Communication services offers good growth for the price. From a valuation perspective, the communications sector looks cheap relative to the broader market, with an average PE-to-Growth ratio of roughly 0.8 (for reference, the S&P is near 1.5), making it the cheapest sector relative to projected growth in the S&P. For more on how communication services offer the best bang for your P/E buck, see here.

Finally, although the negative market reaction to Alphabet and Meta results will do some technical damage to the sector’s chart, we would note that LPL Research rates the sector’s relative trend as positive, the sector remains in an uptrend, and has among the better breadth readings among S&P sectors.

Top Sector Picks

LPL Research’s Strategic and Tactical Asset Allocation Committee (STAAC) continues to favor the energy and industrials sectors and rates communication services neutral, but with a positive bias. A combination of encouraging technical analysis trends, a solid earnings growth outlook, and quite reasonable valuations are some of the reasons why STAAC is warming up to the sector even as these mixed results from Google and Meta create a tougher path to outperformance in the near term. On the flip side, STAAC suggest caution toward consumer staples and real estate and maintains negative views of those sectors.

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, October 25, 2023

Good investments generally offer investors an opportunity to buy growth at an attractive price. Slower growth investments can work at lower prices, just as higher growth investments can work at higher prices. What you pay for the earnings (or dividend) stream matters, not just how fast those streams are flowing. Here we take a look at price-to-earnings ratios (P/E) by sector to see where the price of that growth may be most attractive.

Communication services valuations look attractive despite the mega-cap technology allocation

The accompanying figure compares P/Es to earnings growth using what is commonly called the PEG ratio (P/E divided by growth). For growth in the chart we use consensus earnings in 2024 over 2023. The first thing that jumps out is communication services looks like a good value at a PEG ratio of 0.9. Historically, anything below one is considered quite attractive. The sector trades at a 6% discount to the S&P 500 on 2024 estimates, reflecting 19% growth. That 19% growth rate may not be sustained for much more than a year or two, but investors looking ahead a year will see an attractive relative opportunity there if estimates are realized and artificial intelligence (AI) provides the boost many anticipate for Alphabet/Google (GOOG/L), Meta/Facebook (META), and others in the digital media space.

View enlarged chart

Warming up to communication services. LPL Research’s Strategic and Tactical Asset Allocation Committee (STAAC) maintains a neutral view on communication services but has warmed up to the sector in recent weeks on a combination of improving technical analysis trends, a solid earnings growth outlook (despite Google’s disappointing cloud results last night), and quite reasonable valuations. Well-received results from Netflix (NFLX), Verizon (VZ), and AT&T (T) have also been encouraging over the past week.

Healthcare also looks cheap on this metric. The healthcare sector, rated neutral by STAAC) has been a huge disappointment this year with its 4.9% year-to-date decline compared to the roughly 10% year-to-date gain in the S&P 500. Earnings season has been disappointing as the COVID-19 demand dissipates and some key drugs come off patent. But on a technical basis, the sector may be near a trough. As the economy slows over the next several quarters, the defensive characteristics of healthcare could become more attractive to market participants.

Energy is cheap on cash flows. Energy looks expensive through this lens but given the sector’s capital intensity, cash flow metrics that remove depreciation are better. On a cash flow basis, energy remains attractively valued in our view.

Real estate looks expensive. Similar to energy, real estate is more appropriately valued on cash flows (funds from operations, or FFO) excluding depreciation, but looks expensive to us given the risk of further deterioration in commercial real estate markets. It would not surprise us if real estate did not generate any earnings or cash flow growth in 2024.

Current Sector Views

LPL Research’s Strategic and Tactical Asset Allocation Committee (STAAC) continues to favor the energy and industrials sectors and rates communication services neutral, but with a positive bias. On the flip side, STAAC suggest caution toward consumer staples and real estate and maintains negative views of those sectors

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 Lawrence Gillum, CFA, Chief Fixed Income Strategist

Tuesday, October 24, 2023

The move higher in Treasury yields (lower in price) has been unrelenting, with intermediate and longer term Treasury yields bearing the brunt of the selloff recently. Since the end of July, 10-year yields are up over 0.90% and 30-year yields up 1.0%. While most of the move can be explained by the changing expectations of Federal Reserve (Fed) rate hikes, an increase in the Treasury term premium has pushed yields higher as well.

Economic theory suggests that each security on the Treasury yield curve can be thought of as the expected fed funds rate over the maturity of the security, plus or minus a term premium. The Treasury term premium is the additional compensation required by investors for owning longer maturity Treasury securities. The term premium, which is unobservable and thus has to be estimated, takes into consideration things like Treasury supply/demand dynamics, foreign central bank expectations and the potential for higher inflation in the future, to name a few. And since the end of July, which is when the last Treasury quarterly refunding announcement (QRA) was made that surprised markets because of how much new debt would be coming to market, the term premium has increased dramatically. The next QRA is October 30, so if the Treasury department surprises markets again with the amount of debt coming to market, we could continue to see the term premium move higher.

View enlarged chart

The term premium had largely been negative (since 2016) until recently. That time period coincided with steadily falling inflation as well as central banks that were actively owning large amounts of Treasury bonds. If those two conditions are fading, along with a supply/demand picture that remains tenuous, then the bond term premium may indeed be headed higher. How high? Getting back to normal would imply around a 1% term premium or nearly double from current levels, which could continue to pressure yields higher.

So what does this mean for fixed income investors? A positive term premium will likely keep longer term interest rates elevated and could reduce the diversification benefits of core bonds. Regarding the former, while monetary policy expectations are still going to be the primary driver of changes in interest rates, as the Fed starts to cut rates, longer term interest rates likely won’t fall as much as they otherwise would have absent a positive term premium. And as for the latter, while we still think Treasury securities will be the safe haven choice in the event of a broad macro equity market sell-off, they may not be the defensive choice for garden variety equity market selloffs. With cash rates at levels last seen in 2007, cash and cash plus alternatives could be good defensive options for portfolios. But, with yields on most fixed income asset classes at levels last seen over a decade ago, the longer term return potential for fixed income is the best it’s been in quite some time as well. Starting yields are the best predictor of future returns (over longer time horizons) so if Treasury yields remain elevated that of course means yields for other bond asset classes will be higher as well which means fixed income returns will likely be higher too.

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 Jeffrey J. Roach, PhD, Chief Economist

Friday, October 20, 2023

Key Takeaways:

• The Federal Open Market Committee (FOMC) is proceeding carefully, something we highlighted here almost a month ago.
• Geopolitical tensions post key risks to the outlook, something that could ensure the Federal Reserve (Fed) takes a wait-and-see approach with further tightening.
• Additional hikes are in the cards only if there is additional evidence of a strong economy.
• The Fed is not yet convinced where inflation will settle over the next few quarters, which means the committee will not pre-commit. Each meeting will be a live meeting.

Bottom Line: As of this morning, markets were pricing in a roughly 20% chance the Fed will increase rates in December, and if not in December, then a higher likelihood of an increase in January. However, we believe the economy is slowing enough that the markets are overpricing the likelihood of more rate hikes.

Did He Calm Markets?

Fed Chairman Jerome Powell addressed the Economic Club of New York yesterday along with a brief—and unscheduled—presentation from a group aptly named Climate Defiance.[1] Despite the interruption, the Chair was going to continue with the theme developed earlier in the week from several other members of the FOMC. To wit, the Committee sees risks as roughly balanced between over- and under-tightening. If rates were too low, inflation could resurge and if rates get too high, the economy were more likely feel a hard landing. In an effort to calm markets, Powell reiterated his desire for the FOMC to proceed carefully in the next several months.

But, markets initially did not know how to process his comments. Yields on the 2-year Treasury initially dropped on the news and then reversed course only to dip several basis points again. (One basis point is 0.01%.) Markets eventually were able to process the new information and yields continue to fall this morning.

View enlarged chart

Is Inflation Easing or Not?

The temporary scare for markets was the confession that the FOMC is unsure where inflation will settle over the next few quarters. In our view, many aspects of inflation are getting less sticky, creating reasonable expectations that inflation will ease further in coming months. Rent prices are off their peak according to industry reports, and investors should also know there is a sizable lag in time between a reported movement in industry rental data and the official government metrics. By the end of the year, the inflation trajectory should be clearer for both policy makers and investors.

Recession or No?

From an investment standpoint, the “recession call” may end up being less relevant. A recession could still emerge as consumers buckle under debt burdens and use up their excess savings, but a Fed sensitive to risk management might provide the salve necessary for more risk appetite. Investing is a relative game, meaning the U.S. could experience the 3 D’s of an economic contraction—depth, diffusion, and duration—but at the same time, still outperform other markets and hence, still be an attractive option for investors looking for calculated risk.

A shallow recession would likely provide a boon for the domestic markets, as it would increase the odds of the Fed cutting rates and bring the labor market into better balance. History shows markets tend to rally as the Fed pivots away from a tightening bias.

Recent Asset Allocation Change

The Strategic and Tactical Asset Allocation Committee (STAAC) recently recommended reducing allocations to developed international equities and increasing allocations to the U.S. Growth estimates for Q3 will be released October 26 and will likely be better than expected in the U.S. and deteriorating technical analysis trends in Europe are the primary reasons for the change, while currency risk is elevated.

Conclusion:

Markets struggled to process Chairman Powell’s remarks yesterday. However, investors should take yesterday’s speech in the context of what they learned from the latest Beige Book in order to get a clearer picture on future interest rates. Investors learned earlier this week that business is slowing and delinquencies are picking up, indicating the economy is no longer on a strong growth trajectory. By the end of the year, markets will get a clearer view and policymakers will likely have more clarity on growth and inflation trajectories. Patience is a necessary trait for long-term investors.

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

Wednesday, October 18, 2023

Key Takeaways:

• The S&P 500 has made an impressive recovery after finding support near 4,200, a level that traces back to an uptrend off the October 2022 lows and the rising 200-day moving average (dma).
• Momentum is improving off deeply oversold levels. The S&P 500’s Bullish Percent Index (BPI) recently fell below 30%. Historically, oversold BPI readings of this magnitude have represented buying opportunities. The broader market has posted respective average one-, three-, and six-month returns of 2.7%, 6.1%, and 8.8% after the BPI crosses below 30%.
• Of course, the current recovery doesn’t come without risks, and we continue to view monetary policy uncertainty and the recent breakout in both the dollar and Treasury yields as major headwinds for continued equity market momentum.

October is off to an impressive start, with the S&P 500 trading up just over 4% as of October 17. The rebound follows a dismal September that left the market oversold and clinging to support near the rising 200-dma. However, buyers quickly came back into the market to take advantage of the dip, as earnings optimism, signs of a potential peak in Federal Reserve (Fed) tightening, continued economic resiliency, and easing oil prices helped offset concerns over building Treasury market volatility.

As shown below, the pullback off the July 31 high found support just above 4,200 earlier this month. This key support area coincides with previous highs and lows, an uptrend off the October lows, and the rising 200-dma.

The middle panel of the chart shows the BPI for the S&P 500. The BPI represents the percentage of stocks within the S&P 500 with a current Point & Figure buy signal—a field of technical analysis that utilizes filtered price movements to generate buy and sell signals. BPI readings above and below 50% are considered bullish and bearish, respectively, while the BPI can also be utilized to identify overbought (readings above 70%) and oversold (readings below 30%) conditions. Earlier this month, the BPI fell to only 28.2%, marking over a two-standard deviation move below its average since 1996.

Finally, the bottom panel shows the Moving Average Convergence/Divergence (MACD) indicator. MACD combines momentum and trend following into a single indicator using convergences and divergences between a long- and short-term exponential moving average. The indicator has recently rebounded from its lowest level since October 2022, triggering a buy signal early last week.

View enlarged chart

Bullish Percent Index Signals

The big question among investors now is whether the stock rebound will continue. To help answer this question and quantify the impact of oversold conditions, we back-tested several BPI signals, including:

• When BPI crosses below 30%—indicative of washed-out market breadth/extreme oversold conditions.
• When BPI crosses back above 30%—indicative of improving market breadth/oversold conditions.
• When BPI crosses back above 30% when MACD is in a buy position—indicative of oversold conditions and market breadth improving with a bullish momentum shift.
• A minimum 10-day filter was applied to eliminate overlap in signals.

As shown below, oversold BPI readings of this magnitude have historically represented buying opportunities for stocks. The S&P 500 has posted respective average one-, three-, and six-month returns of 2.7%, 6.1%, and 8.8% after the BPI crosses below 30%. Returns generally skew higher for BPI crosses above 30%, especially on a six- and 12-month basis when a MACD buy signal accompanies the crossover.

View enlarged chart

SUMMARY

Technical evidence is building for a sustainable S&P 500 recovery off the 4,200 area of support. Momentum has turned bullish after reaching historically oversold levels earlier this month, and historical comparisons to similar inflection points point to above-average market gains over the next 12 months. Of course, the recovery doesn’t come without risks, and we continue to view monetary policy uncertainty and the recent breakout in both the dollar and Treasury yields as major headwinds for continued equity market momentum. While the overall technical backdrop has improved for stocks, interest rate stabilization (at minimum) will likely be key for continued upside in the fourth quarter.

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 Lawrence Gillum, CFA, Chief Fixed Income Strategist

Tuesday, October 17, 2023

The move higher in Treasury yields (lower in price) has been unrelenting, with intermediate and longer term Treasury yields bearing the brunt of the move. Rates are moving higher alongside a U.S. economy that has continued to outperform expectations and not due to higher inflation fears. As such, the move higher has been largely driven by an increase in “real” yields, or inflation-adjusted yields or just TIPS (Treasury Inflation-Protected Securities).

TIPS are Treasury securities whose principal and interest payments are adjusted for inflation. Unlike other Treasury securities, where the principal is fixed, the principal of a TIPS can go up or down over its term. So, when the TIPS matures, if the principal is higher than the original principal amount, you get the increased amount. If the principal is equal to or lower than the original principal amount, you get the original amount. So, since these securities are government guaranteed, TIPS investors who hold the individual bonds to maturity receive, at a minimum, the original investment back plus coupons (paid semiannually) but could get more than the original investment if inflation surprises to the upside.

So, after spending years in negative territory, TIPS yields are decidedly positive again for 5-year, 10-year, and 30-year maturities and value has been restored in the TIPS market. Moreover, since 2007, TIPS yields have rarely been higher.

View enlarged chart

Looking at trailing returns, however, investors may be surprised to see the negative returns generated by the TIPS index (Bloomberg U.S. TIPS Index) despite generationally high inflationary pressures. The challenge for TIPS, has not been the inflationary environment (and thus the adjustment), but rather the aggressive rate hiking campaign by the Fed to arrest those high inflation pressures. And while TIPS provide a hedge against inflation, they do not provide a hedge against higher interest rates. So, with the Fed close to the end of its rate hiking campaign, the volatility experienced in TIPS over the last few years may be coming to an end as well. And with yields at levels last seen in over a decade, TIPS could provide an attractive real return for particularly those investors who can buy and hold individual bonds to maturity.

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  

Treasury inflation-protected securities (TIPS) help eliminate inflation risk to your portfolio as the principal is adjusted semiannually for inflation based on the Consumer Price Index – while providing a real rate of return guaranteed by the U.S. Government.

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 Adam Turnquist, CMT, VP Chief Technical Strategist

Friday, October 13, 2023

Key Takeaways:

• The S&P 500 wrapped up the first year of the bull market yesterday. While the 21.6% gain was historically underwhelming, it is understandable given the challenging backdrop of global tightening, surging interest rates, elevated equity valuations, sticky inflation, and imminent recession calls.
• History suggests this bull market could have more room to run. Average and median 12-month returns for the S&P 500 have averaged around 13% to 14% during the second year of a bull market, with all 14 occurrences posting positive results.
• Don’t expect a linear path higher as maximum drawdowns during the second year of a bull market vary greatly, ranging from -6.2% to -33.9%.

Yesterday marked the one-year anniversary of the bull market. The S&P 500 has come a long way since the October 12, 2022 closing low and faced a lot of skepticism along the way. Continued global monetary tightening, surging interest rates, elevated equity valuations, sticky inflation, and a steady stream of headlines pointing to an imminent recession have been just a few of the headwinds for stocks to overcome. Nonetheless, the S&P 500 prevailed and posted a 21.6% price gain over the last 12 months.

While investors have applauded the transition to a bull market, performance during the first year points to more of a golf clap than a standing ovation. The chart below highlights the S&P 500’s average and median progression off all bear market lows going back to 1957—when the modern design of the 500-stock index was first launched. One standard deviation bands around the average progression are also included to highlight the variance in performance.

View enlarged chart

From a historical context, the first year of this bull market has underwhelmed in terms of upside. The 21.6% price gain ranks as an outlier year and the second-lowest 12-month gain off a bear market low since 1957. For additional context, average and median 12-month returns for the S&P 500 off a bear market low have been 39.6% and 33.7%, respectively.

Second-Year Bulls

With the bull market’s one-year anniversary party now over, we looked ahead to see how the S&P 500 has historically performed during the second year of a bull market. The table below— ranked by lowest-to-highest first-year returns—highlights the index’s average and median returns during the second year of a bull market.

View enlarged chart

History suggests this bull market could have more room to run. Average and median 12-month returns for the S&P 500 have averaged around 13% to 14% during the second year of a bull market, with all 14 occurrences posting positive results. Of course, do not expect a linear path higher as maximum drawdowns during the second year of a bull market vary greatly, ranging from -6.2% to -33.9%, averaging out to -16.3%.

In terms of progression, the S&P 500 has some catching up to do in the second year of this bull market. As shown below, the S&P 500 is currently tracking below the one-standard-deviation band of the historical progression off a bear market low. The index would have to climb another 35% over the next 12 months to reach the average and median two-year bull market returns of around 57%.

View enlarged chart

SUMMARY

The S&P 500 has wrapped up the first year of the bull market with a gain of 21.6%, underwhelming from a historical context but respectable given the challenging macro backdrop over the last 12 months. While some of these headwinds are still blowing, we expect them to recede as the bull market progresses into its second year. Notably, the Federal Reserve is expected to end its rate-hiking cycle as inflation cools, taking some upside pressure off interest rates, which have been in the driver’s seat for stocks all year. History also suggests this bull market may have more room to run. Average and median 12-month returns for the S&P 500 have averaged around 13% to 14% during the second year of a bull 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.

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