Wealth Management

Posted by Jeffrey J. Roach, PhD, Chief Economist

Thursday, October 12, 2023

Key Takeaway: The rise in shelter costs in September was the largest contributor to headline inflation but will not likely show up in upcoming months as rent prices moderate. Annual core inflation decelerated to 4.1% in September from 4.3% the previous month.

Highlights from the September Consumer Price Index (CPI) Report:

• Annual headline inflation was 3.7%, unchanged from August as firms are still able to pass along higher wholesale prices.
• Core inflation decelerated to 4.1% in September, slightly below the previous month’s rate of 4.3%.
• Shelter was the largest contributor to the monthly increase in consumer inflation, accounting for over half of the increase, but this category should not be as impactful in the coming months as softer rent prices work their way into the official government metrics.
• Costs of medical care services fell -2.6% from a year ago, indicating that some categories are getting less sticky.
• Used vehicle prices fell in September for the fourth consecutive month, pulling the annual decline down to -8%.
• Markets are still processing the implications of the latest report. Some shorter duration yields spiked up to the levels reached after the strong payroll report last week.

Bottom Line: Core inflation less shelter is not as sticky as it had been last year or earlier this year. Market expectations are unchanged for what the Federal Reserve (Fed) will do at the November meeting. However, investors should be carefully watching oil prices for insight into how the Fed will act at the December meeting.

Inflation Coming Down, Remains Above Fed’s Target

The September CPI data provides an updated view of the inflation situation in the United States. While certain components of the report indicate inflation is slowing, there are underlying variables that continue to influence the total rate. According to the September CPI report, consumer prices rose by 3.7% year over year, the same annual rate recorded in August. Although this is a reduction from the high levels seen in 2022, it is crucial to remember that inflation remains above the Fed’s long-run 2% target.

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Shelter Costs and Headline Inflation

The large rise in shelter costs was a key factor in September’s consumer inflation report. This surge was the main driver of headline inflation for the month, contributing more than half of the increase. Although shelter prices were significant this month, their impact is not anticipated to be as strong in the following months. Rent prices are off their peak according to industry reports, and investors should also know that there is a sizable lag in time between a reported movement in industry rental data and the official government metrics.

Core inflation excluding shelter was unchanged from the previous month and up only 1.9% from a year ago. Clearly, the inflation experience on homeowners is quite different than the experience felt by renters.

Deceleration in Core Inflation

The September figures reveal several noteworthy trends, one of which is the apparent slowdown in annual core inflation. This measure dropped to 4.1% from 4.3% in the previous month, showing a moderating trend in core inflation rates. Core inflation excludes the volatile components of food and energy, providing a more stable gauge of price movements in the economy. This moderation in core inflation could be attributed to several factors, including a decline in durable goods such as used cars and lower prices for medical care services.

Inflation will likely lose more of its stickiness in the coming months as the official rent component eases in line with industry observations.

Insights from the September CPI Report

In September, we saw price declines in a number of industries, including airfare, pre-owned cars, and clothing. Apparel prices fell the most in September since the middle of the pandemic. Perhaps now is the time to update the wardrobe but look for alternative ways to watch Leo Messi, the superstar of the Miami soccer team. Tickets to sporting events rose the fastest pace since mid-2021 as fans were eager to see arguably the best soccer player of all time. These patterns highlight how consumer tastes and the overall economic environment are always changing and can impact the real economy. As a side note, the “Taylor Swift” effect is real.

When excluding housing-related costs, consumer inflation showed a 1.9% increase from a year ago (See Inflation Dashboard below). A potential fall in consumer demand for travel-related services may suppress some categories in the coming months. Certain businesses, such as hospitality and tourism, will be impacted by this changing consumer behavior.

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Concluding Thoughts

Markets are still processing the implications of the latest report. Some shorter duration yields spiked up to the levels reached after the strong payroll report last week. Core inflation less shelter is not as sticky as it had been last year or earlier this year. Market expectations are unchanged for what the Fed will do at the November meeting. However, investors should be carefully watching oil prices for insight into how the Fed will act at the December meeting.

Given the anticipated easing in rent prices in the upcoming months, core inflation, which increased 4.1% from a year ago, will likely decelerate further this year.

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

Wednesday, October 11, 2023

Rating agencies have been busy lately. While one of the big three (Fitch) made headlines recently when it downgraded U.S. government debt, the other two (Moody’s and S&P) have been busy quietly downgrading U.S. corporate debt at an elevated pace. With the increase in Treasury yields over the past few years, corporate interest payments are set to increase as well. And while the health of the corporate landscape is generally positive, rating agencies are starting to adjust their outlooks based upon, among other things, the expected increase in debt payments.

The ratings environment remains relatively calm for companies across investment grade as the asset class has enjoyed an upgrade-to-downgrade ratio well above lower-rated peers. High yield has taken the brunt of downgrades and will likely continue to in the coming quarters. September marked the 15th straight month with a negative combined upgrade-to-downgrade ratio, as the measure between S&P and Moody’s finished the month at -1.2x (meaning there were 20% more downgrades than upgrades). Moody’s remained more pessimistic, with the ratio at -1.4x. S&P had an upgrade-to-downgrade ratio of -1.1x. Year to date, S&P has downgraded its outlook and the outright rating on 787 companies versus only 492 upgrades, which makes 2023 already the worst year for downgrades since 2020 (Moody’s has downgraded 568 companies this year vs. 427 upgrades).

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With the higher for longer narrative coming from the Federal Reserve (Fed), it’s likely corporate debt payments will continue to increase as well. And while many corporate borrowers took advantage of low interest rates and issued a lot of debt, debt refinancings are set to pick up with nearly 30% of debt issued by CCC-rated companies coming due over the next few years (as outlined in this blog post). As such, we remain cautious on corporate credit broadly but think the short-to-intermediate part of the investment grade corporate credit curve offers compelling risk/reward. However, despite the recent sell-off in high yield, we still don’t think the risk/reward is very attractive for that asset class given the broader macro and refinancing risks, which will likely keep rating downgrades and defaults at an elevated pace.

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

Tuesday, October 10, 2023

Additional content provided by Kent Cullinane, Analyst

On Saturday, Hamas, a Palestinian militant group designated as a terrorist organization by the U.S. government, launched an attack on Israel, killing hundreds of civilians and taking dozens more hostage. In response to the attack, Israel launched a counteroffensive on Hamas positions in the Gaza Strip (one of two Palestinian territories, the other being the West Bank), a territory home to 2.3 million Palestinians under Hamas rule.

While volatility initially impacted markets to start the week, investors seemingly shrugged off the tragic geopolitical turmoil in the Middle East, with the S&P 500 closing up 0.3 percent Monday. This market reaction may reflect the view that the conflict will remain focused on just Gaza and Israel, rather than spreading into oil producing regions throughout the Middle East. The market response is also likely looking at any potential for a slowdown in the global economy as increasing the likelihood of a pause in the Federal Reserve’s (Fed) interest rate hiking cycle.

Stock Market Performance Following Prior Geopolitical Events

So, how have markets historically reacted to geopolitical crisis events, including wars and terrorist attacks? We look back at two dozen or so such events going back to World War II in the table below:

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As you can see above, the average one-day return at the onset of a geopolitical event is -1.1%. The S&P’s 0.3% gain Monday was unusual compared to history, as a positive one-day return only occurred four out of the 23 events we studied.

While the total drawdown related to this tragic event and recovery timetable are unknown, based on prior geopolitical events, the average drawdown is -4.7%, while the average time to reach market bottom is 19 days, and the average time to fully recover losses is 42 days. In other words, equities have historically held up well during geopolitical shocks, including wars and other military conflicts going back decades, with the average recovery taking roughly two months. Even the market recovery from 9/11 took only 31 days.

Looking at a slightly wider list of events that also includes major non-war related historical events and how stocks performed over the next year after the event it seems that the main determinant of returns is not the severity of the event but whether the event coincided with, or caused, a recession. Assuming no imminent recession, LPL Research’s base case scenario currently, history shows that markets are roughly flat over the next month following an event but on average recover in the following three, six, and 12-month periods. In the case of an event near a recession however stocks are down on average over all the time periods studied (one, three, six and 12-months).

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Impact on the Path of Interest Rates

The weekend attacks on Israel affected markets’ expectations for the path of interest rates. On Monday the market implied probability of an increase in the fed funds target rate next month fell below 14% (after being almost 50% at the start of September and 30% last week) as investors anticipate the conflict has the potential to put a brake on the global economy this quarter. Despite a strong headline payroll report on Friday, wage pressures eased, adding support to markets’ view that the Fed will keep the target rate unchanged when the FOMC meets on November 1. Recent comments from Fed officials have also pointed in that direction by acknowledging the markets have done some of the Fed’s work by pushing yields on the intermediate and long parts of the Treasury curve higher. Interest rate sensitive sectors such as technology, communication services and utilities were amongst the bigger outperformers on Monday as expectations for further hikes in 2023 diminished.

Impact on the Energy Sector

Crude oil prices are on hyper-alert for any indication the conflict is poised to spread into the oil producing regions in the Middle East, particularly with regard to Iran. Initial reports suggested Iran supported and helped with logistics of the attack on Israel, but Iran denies having any role. Iran is suspected to be wary of recent progress that had been made toward a historic peace deal between Israel and Saudi Arabia that would reshape political power dynamics in the Middle East. The U.S. is involved in a broad reaching diplomatic effort to keep the conflict contained. Oil prices, however, may move dramatically higher if it appears the diplomatic effort is failing, and Iran is brought into the conflict.

Crude oil prices had been oversold coming into this week, but with a headline driven market sometimes filled with rumors and inaccurate reporting, oil prices can be subject to significant swings. Any chatter that Israel, now seemingly focused on shutting down Hamas’s operations, is preparing to strike beyond the immediate conflict, will escalate upward pressure on prices.

The first place markets will see the impact of fighting in Israel will undoubtedly be the increased risk premium embedded in oil prices, which would be expected to support the energy sector as markets assess the likelihood that Iran is brought into the conflict. Unsurprisingly the energy sector had the largest outperformance on Monday with a daily return of over 3.5%. LPL Research maintains its overweight recommendation on the energy sector.

Impact on Equity Positioning

The potential impact on the broader equity markets is difficult to predict because the risk of a wider conflict involving Iran or other countries in the region is still difficult to assess. Still, that risk, especially if it did materialize, could push volatility higher (although the volatility index, or VIX for short, actually ended Monday only marginally higher than Fridays close), sending stocks lower, and perhaps shift market leadership more toward defensives (utilities, gold, Treasuries, etc.). To be clear, this is not our base case.

If conflict remains contained to Israel and Gaza, while the humanitarian impact will still be devastating, the market impact will likely be very limited as Israel contributes only about 0.5% of world gross domestic product (GDP) and not a major producer of crude oil.

Defense stocks should catch a bid as defense spending will likely increase if this news provides a catalyst for Congress to act to bolster supplies of munitions and air defense systems that are now being supplied to both Ukraine and Israel.

The Strategic and Tactical Asset Allocation Committee (STAAC) maintains its neutral stance on equities but will continue to watch developments in the Middle East closely to determine potential impact on the energy sector, the broader equity markets, and the path of interest rates.

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

Wednesday, October 4, 2023

U.S. Treasury yields have seemingly been moving in one direction lately (higher) with news overnight that the 30-year Treasury yield touched 5% for the first time since 2007. The move higher in yields (lower in price) has been unrelenting with intermediate and longer term Treasury yields bearing the brunt of the move. The large move in yields is naturally generating several questions from investors such as:

• How much higher can rates go? Certainly, this is the $64,000 question, but in our view Treasury yields are moving on both fundamental and technical reasons (more on this later) but the momentum is clearly higher yields. Our Chief Technical Strategist, Adam Turnquist, has identified 5.25% to 5.50% on the 10-year yield as possibilities now that we’ve broken above 4.7% (although the next level of resistance is at 4.9%). Moreover, the Treasury yield curve remains inverted so as the probabilities of a recession continue to get priced out, we could continue to see the prospects of a more normal, flat, or even upward sloping yield curve, which would mean 10-year yields could get to those 5.25% levels. Our base case is the economy slows towards the end of the year and into 2024 so that could take pressure off yields, but in the meantime, momentum is in the driver’s seat.
• What is driving yields higher? There are a number of reasons we’re seeing higher yields, but rates are moving higher alongside a U.S. economy that has continued to outperform expectations, pushing recession expectations out further, and by the unwinding of rate cut expectations by the Federal Reserve (Fed) to be more in line with the Fed’s “higher for longer” regime. Additionally, the U.S. government is expected to run meaningful deficits over the next decade, which means the Treasury department is going to have to issue a lot of Treasury debt to cover those deficits at the same time the largest owners of Treasury securities are reducing their holdings (LPL advisors: we wrote about America’s debt problem and the supply/demand dynamics in the most recent Rate and Credit View). This supply/demand problem is causing fixed income investors to demand additional compensation for owning longer maturity Treasury securities, which is pushing up yields.
• Some are predicting 10% or even 13% on the 10-year; is that realistic? While we aren’t ruling anything out at this point, we think it would take a significant reacceleration in inflation and thus a significantly higher fed funds rate than what we currently have. Perhaps lost within these double-digit predictions that take us back to Treasury levels last seen in the 1980s, is that Treasury yields, by and large, tend to be tethered to the fed funds rate. So, to get back to 10% or 13% Treasury yields, the fed funds rate would need to be in double digits as well. And with inflationary pressures trending in the right direction (albeit slower than expected) we don’t think the Fed needs to take the fed funds rate up to double digit levels.

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• But what if that does happen and we see 10% Treasury yields? Treasury yields are viewed by many as the risk-free rate and as such are used as the base rate for a number of consumer and corporate loans. So, when Treasury yields increase, the costs to borrow increases as well. For example, the recent increase in the 10-year Treasury yield has pushed mortgage rates to 7.5%—levels last seen in 2000. Credit card rates, new auto loan rates, and newly issued corporate debt are all now more expensive than they were a year ago because of rising Treasury yields. That is likely going to impact consumer spending. Paradoxically perhaps, as the bond market prices out a recession with higher yields, the chances of a recession could actually be increasing due to higher borrowing costs.
• What about the credit markets? Are cracks emerging there as well? The corporate credit markets, particularly the high yield market, have been surprisingly resilient in the face of one of the most aggressive rate hiking campaigns in decades, tightening of lending standards, and the increase in defaults (we wrote about the high yield market in a recent blog post here) but we are starting to see signs, albeit small ones, that the credit markets may be turning. It’s too early to call this a trend but over the past few weeks we have seen spreads (the additional compensation for owning risky debt) increase. Now to be fair, spreads are still below historical averages but the speed with which the spread widening has taken place is a yellow flag that we’re watching closely. The riskier credit markets have been priced to perfection so we haven’t liked the risk/reward for those markets and if the economy does slow we could see spreads widen from current levels as well.
• I’m ok with the near-term volatility so how do I take advantage of these higher yields? With yields back to levels last seen over a decade ago, we think bonds are an attractive asset class again. There are three primary reasons to own fixed income: diversification, liquidity, and income. And with the increase in yields recently, fixed income is providing income again. Right now, investors can build a high-quality fixed income portfolio of U.S. Treasury securities, AAA-rated Agency mortgage-backed securities (MBS), and short maturity investment grade corporates that can generate attractive income. Investors don’t have to “reach for yield” anymore by taking on a lot of risk to meet their income needs. And for those investors concerned about still higher yields, laddered portfolios and individual bonds held to maturity are ways to take advantage of these higher yields (LPL advisors: make sure you check out the corporate credit focus list for individual credit names that may be worth a look).

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 the prospects for the asset class have improved and the longer yields stay at these elevated levels, the more enduring the asset class becomes.

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.

Any forward-looking statements including the economic forecasts herein may not develop as predicted and are subject to change based on future market and other conditions.

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.

The market value of corporate bonds will fluctuate, and if the bond is sold prior to maturity, the investor’s yield may differ from the advertised yield. Bond yields are subject to change. Certain call or special redemption features may exist which could impact yield.

Government bonds and Treasury bills are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.

Mortgage backed securities are subject to credit, default, prepayment, extension, market and interest rate risk.

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, September 29, 2023

Key Takeaways:

• The drop in U.S. equity markets this month created technical damage and oversold conditions. Despite the widespread selling pressure, the S&P 500 managed to hold up above its rising 200-day moving average (dma).
• Oversold conditions of this magnitude are rare during an uptrend and historically point to a buying opportunity based on positive forward returns during commensurate periods.
• So long September—seasonality trends improve into year-end. The fourth quarter is historically the best quarter for the S&P 500, with average gains of around 4.2%.

It may be an understatement to say it has been a rough month for stocks. Barring a 0.5% or better advance today, the S&P 500 will post a fourth straight weekly decline, marking its longest weekly losing streak since December 2022. Volatility has also resurfaced right on cue, with the CBOE Volatility Index climbing by as much as 40% intra-month before pulling back over the last few sessions. However, in terms of performance, nothing really qualifies as out of the ordinary. Since 1950, the S&P 500 has historically declined in September 55% of the time, posting an average loss of around 3.8%. The VIX historically peaks on the year around week 40, suggesting next week could be a top for implied volatility.

While this month has caused a growing list of technical damage, the seasonality setup improves into year-end. As we highlighted on our blog yesterday (October Stock Market Seasonals: Trick or Treat?), October and November have been historically one of the best two-month periods for the S&P 500. The fourth quarter is also historically the best quarter for the S&P 500, with average gains of around 4.2%.

Oversold Conditions Spreading

Stocks reached oversold levels this week. As shown below, the S&P 500 dropped back to support at 4,300 after falling over 4% this month. A break below this level leaves 4,275 (September low) and 4,200 as the next major areas of downside support. The latter support level traces back to prior highs and lows, the rising 200-day moving average, and is near a key Fibonacci retracement level (4,181).

The sharp drop this month created oversold conditions. The Relative Strength Index—a momentum oscillator used to measure the speed and magnitude of price action—slid to 30.3 on Tuesday, marking its lowest reading in 12 months. Furthermore, oversold conditions within the index have become widespread. Earlier this week, over 20% of S&P 500 stocks reached oversold levels based on RSI readings below 30. At the sector level, defensive sectors such as utilities, real estate, and consumer staples were the most oversold, suggesting (along with sector breadth and relative performance) that there has been no major discernable shift from offensive to defensive sector positioning.

S&P 500 Technical Setup

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Given the degree of selling pressure across the S&P 500 this month and the fact the index is still holding up above its 200-dma, we screened for historical comparisons of widespread oversold conditions within an uptrend. Specifically, we filtered for periods when: 1) The S&P 500 was above its 200-dma and 2) when the percentage of constituents with an RSI reading below 30 crossed above the 20% threshold. Since 1990, we found 14 other unique occurrences after filtering out signals occurring less than two weeks apart.

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While the dataset is limited, it suggests that selling pressure of this magnitude when the S&P 500 is above its 200-dma is rare and historically a buying opportunity based on positive forward returns over the next 12 months. The market was up by an average of 7.6% six months later, with 12 of the 14 occurrences producing positive results.

SUMMARY

September has lived up to its reputation as being a weak seasonal period for stocks. The S&P 500 is coming into month end with a loss of over 4% and a decent amount of technical damage. Despite the widespread selling pressure, the index has managed to hold up above its rising 200-dma. The degree of oversold conditions reached this week is rare during an uptrend and historically points to a buying opportunity based on positive forward returns during commensurate periods. The market is also oversold and entering a strong seasonal period, as the fourth quarter has historically been the best quarter for the S&P 500.

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, September 28, 2023

As another scary September for stock markets draws to a close with what will almost certainly be a second consecutive monthly loss for the S&P 500 Index, we take another look at what clues seasonality data may give us for stock market performance during October and the remainder of 2023. So far September has lived up to its reputation, especially in recent years, as being one of the worst months for stocks. In fact, the S&P 500 is on track for its worst monthly return since December 2022. The light at the end of the tunnel is that October has proved far from spooky for investors historically, demonstrating strong monthly seasonals for stocks.

October has been a solid month for stocks with the sixth best monthly returns over the past five years, and third and fourth best over the past 10 and 20 years respectively. Over all periods since 1950 it ranks seventh. 10 of the last 11 Octobers have finished with positive returns, with a slight 0.8% decline in 2021 the only trick among a bunch of Halloween treats for stock investors.

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Looking out further the October-November two-month period is on average the strongest of all the monthly pairings over the past five and 10 years and is second strongest over 20 years and all periods back to 1950.

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Looking at the proportion of positive monthly returns, at 60.3% October comes in almost right at the long-term average of 60.9% of all months. This statistic also demonstrates strong seasonals to close out the year with November and December showing the highest and third highest proportions of positive monthly returns, while the average month in the fourth quarter is higher 68% of the time compared to months in the remainder of the year at 58%.

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Another slice of data that we have studied is how stocks do the year after a large annual loss of greater than 15%, as we experienced last year with the 19.4% annual drawdown. The good news is that in three of the four occasions since 1950 that there have been calendar year losses this large, the next year’s returns have been well above average. The one huge caveat to this is that 1973 was followed by an even worse year in 1974 before the market bounced back in 1975. Though we acknowledge the small sample size, overall this data demonstrates that the strong returns we have seen year to date, even after the recent pullback, are normal following last year’s losses.

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As we have also previously mentioned, the current stage of the presidential cycle is also still supportive for stocks with returns a year out from midterm elections finishing positive every time since 1950, with an average gain of 16.8%.

In summary, after a weak September, seasonals are pointing to a more supportive environment for stocks coming into the year-end. We maintain our slight preference for fixed income over equities in our recommended tactical asset allocation (TAA) as even after the recent equity sell off stock valuations are elevated relative to very attractive bond yields. We continue to see this as a reason to temper enthusiasm for equities, but not to be bearish, remaining neutral equities. We continue to source 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 Lawrence Gillum, CFA, Chief Fixed Income Strategist

Wednesday, September 27, 2023

With the Federal Reserve (Fed) aggressively raising short-term interest rates in an effort to arrest generationally high inflation, interest rates across the U.S. Treasury yield curve have moved higher in concert. The move higher in Treasury yields has put upward pressure on most other business and consumer interest rates including residential mortgage rates. Last week the 30-year fixed national average rate for U.S. borrowers jumped to 7.41%, which is the highest level since 2000. Higher rates have certainly impacted the demand for housing. The release of today’s MBA mortgage applications index showed that home purchases and refinancing activity continue to fall with the broader index at its lowest level in decades. Moreover, purchase activity is down 27.3% year over year and refinancing activity lower by 21.4% year over year.

View enlarged chart

Within the fixed income markets, mortgage loans that are bundled and sold to investors are a big component of the core bond universe. Agency mortgage-backed securities (MBS) are the second largest sector (behind Treasury securities) so a slowing housing market impacts the MBS market as well, specifically the amount of new MBS supply coming to market. Gross issuance has fallen significantly from the elevated levels seen back in 2021 and even 2022. Furthermore, seasonality trends would suggest overall issuance should slow further into the fall. The lack of supply should be supportive of existing MBS prices.

We continue to think the risk/reward for Agency MBS is attractive, particularly relative to lower rated corporate credit. Yields and spreads (or the additional compensation for owning debt riskier than U.S. Treasuries) remain elevated relative to historical averages and with the Fed close to the end of its rate hiking campaign, falling interest rate volatility could be a tailwind to the asset class. And while the Fed will continue to reduce its $2.5 trillion MBS ownership stake (the Fed is currently allowing up to $35 billion of MBS to passively roll off its balance sheet), we’ll likely see traditional MBS investors (mutual funds, banks, foreign investors) re-enter the market as they were crowded out due to Fed purchases. Moreover, the relative attractiveness of MBS versus high-grade corporates has improved to the point that investors may choose the AAA-rated paper with very little credit risk over the BBB-rated corporate paper that may experience elevated risks during an economic slowdown. As such, we remain overweight MBS in our recommended tactical asset allocation for fixed income.

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 Buchbinder, CFA, Chief Equity Strategist

Tuesday, September 26, 2023

Additional c0ntent provided by Kent Cullinane, Analyst

The government is likely to shut down on October 1, as Congress has failed to agree on some type of funding legislation for the 2024 federal fiscal year. Lawmakers are supposed to pass 12 different spending bills to fund agencies across the government, a laborious and very time-consuming process. If there is no resolution before October 1, the first day of the federal fiscal year, a full shutdown will occur, the first since 2013. Here are seven things to know about government shutdowns:

1) What is a government shutdown?

A government shutdown occurs when Congress fails to pass funding legislation for the upcoming federal fiscal year. Congress is required to pass 12 appropriation bills that need to be signed into law by the president to continue funding the government. If any of the 12 appropriation bills do not pass, then the government shuts down—effectively the federal government must stop all non-essential functions until funding is approved by Congress and signed into law.

2) What is a Continuing Resolution (CR)?

A CR temporarily funds the government in the absence of appropriation bills being passed, typically continuing funding levels from the year before. Historically, CRs were utilized to give lawmakers a short period of time to complete their appropriation bills while preventing the government from shutting down. Congress has used CRs to fund the government in recent years, with the entire 2011 fiscal year funded through multiple CRs.

3) How many times has the government shutdown before?

Since 1976, there have been 21 government shutdowns, with the most recent shutdown occurring in late 2018 and into early 2019. Historically, government shutdowns have lasted for a short amount of time, with only four “true” shutdowns where operations were affected for more than one business day. The last true shutdown was only a partial shutdown, as almost half of the 12 appropriations were previously enacted.

4) What services are affected in a shutdown?

Essential services—mainly those tied to public safety—continue to operate, with payments covering any obligations incurred only when appropriations are. Historically, border protection, in-hospital medical care, air traffic control, law enforcement, and power grid maintenance have continued to operate, as they are deemed “essential” services.

5) Does a government shutdown save money?

The answer is no, unfortunately. Did you know that federal workers are guaranteed back pay? So even though the workers are forced to be idle during a shutdown, they do get back pay when things reopen. And more importantly, a shutdown is far from money saving, because there is a sizable cost to the economy as some businesses often forego hiring and investment decisions because those firms can’t get federal permits or access to federal business loans.

6) How does a government shutdown differ from a default?

In a government shutdown, the federal government temporarily stops paying workers who perform some type of government service. In contrast, a default occurs when the government exceeds the statutory debt limit and is unable to pay some of its creditors. Now, when a government is unable to pay its bills, markets get a lot more nervous. Don’t worry, we’re a very long way from that.

7) How do markets respond to government shutdowns?

Historically, markets were not materially impacted by a shutdown. For example, in 2013, the House and Senate were in a standoff over funding for the so-called Affordable Care Act and the government was shut down for 16 days during the first part of October. The S&P 500 had some down days but overall, the equity market took all the political drama in stride with a 3.1% advance during those 16 days. In this case, we think there would be minimal damage: the U.S. postal service is unaffected since it does not depend on Congress for funding; the Social Security Administration would keep issuing benefits and payments and Medicare and Medicaid would continue payments since many aspects of these programs are not subject to annual appropriations. If we had to highlight a downside risk, it would be if FEMA runs out of disaster relief should a major storm impact the country.

There you have seven things to know about government shutdowns. If we added one more thing to know to this list, it might be how have these shutdowns ended historically. Though each case is different, it’s safe to say that voters expressing their dissatisfaction to politicians is a common theme. So, if you are affected, or even if you are not and are just dissatisfied with the dysfunction in Washington, contact your representative. More squeaky wheels could lead to a quicker oil delivery.

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