Wealth Management

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

Friday, November 10, 2023

Additional content provided by Kent Cullinane, Analyst

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

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

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

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

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

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

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

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

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

IMPORTANT DISCLOSURES

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. For more information on the risks associated with the strategies and product types discussed please visit https://lplresearch.com/Risks  

References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

Unless otherwise stated LPL Financial and the third party persons and firms mentioned are not affiliates of each other and make no representation with respect to each other. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services.

All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

Securities and advisory services offered through LPL Financial, a registered investment advisor and broker-dealer. Member FINRA/SIPC.

Not Insured by FDIC/NCUA or Any Other Government Agency | Not Bank/Credit Union Deposits or Obligations | Not Bank/Credit Union Guaranteed | May Lose Value

Posted by Adam Turnquist, CMT, VP Chief Technical Strategist

Thursday, November 9, 2023

Key Takeaways:

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

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

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

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

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How Long Could These Winning Streaks Last?

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

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

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Where Could the Market Go From Here?

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

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SUMMARY

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

IMPORTANT DISCLOSURES

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. For more information on the risks associated with the strategies and product types discussed please visit https://lplresearch.com/Risks  

References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

Unless otherwise stated LPL Financial and the third party persons and firms mentioned are not affiliates of each other and make no representation with respect to each other. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services.

All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

Securities and advisory services offered through LPL Financial, a registered investment advisor and broker-dealer. Member FINRA/SIPC.

Not Insured by FDIC/NCUA or Any Other Government Agency | Not Bank/Credit Union Deposits or Obligations | Not Bank/Credit Union Guaranteed | May Lose Value

Posted by Jeffrey J. Roach, PhD, Chief Economist

Wednesday, November 8, 2023

Key Takeaways:

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

What is Different This Time Around?

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

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

So What Does this Mean?

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

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

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Conclusion

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

IMPORTANT DISCLOSURES

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. For more information on the risks associated with the strategies and product types discussed please visit https://lplresearch.com/Risks  

References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

Unless otherwise stated LPL Financial and the third party persons and firms mentioned are not affiliates of each other and make no representation with respect to each other. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services.

All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

For a list of descriptions of the indexes and economic terms referenced in this publication, please visit our website at lplresearch.com/definitions.

Securities and advisory services offered through LPL Financial, a registered investment advisor and broker-dealer. Member FINRA/SIPC.

Posted by David Matzko

Tuesday, November 7, 2023

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

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

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

View enlarged chart

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

IMPORTANT DISCLOSURES

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. For more information on the risks associated with the strategies and product types discussed please visit https://lplresearch.com/Risks  

References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

Unless otherwise stated LPL Financial and the third party persons and firms mentioned are not affiliates of each other and make no representation with respect to each other. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services.

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

All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

For a list of descriptions of the indexes and economic terms referenced in this publication, please visit our website at lplresearch.com/definitions.

Securities and advisory services offered through LPL Financial, a registered investment advisor and broker-dealer. Member FINRA/SIPC.

Posted by Adam Turnquist, CMT, VP Chief Technical Strategist

Friday, November 3, 2023

Key Takeaways:

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

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

S&P 500 Recaptures its 200-dma

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Crossover Performance

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

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Seasonal Tailwinds Return

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

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SUMMARY

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

IMPORTANT DISCLOSURES

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. For more information on the risks associated with the strategies and product types discussed please visit https://lplresearch.com/Risks  

References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

Unless otherwise stated LPL Financial and the third party persons and firms mentioned are not affiliates of each other and make no representation with respect to each other. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services.

All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

Securities and advisory services offered through LPL Financial, a registered investment advisor and broker-dealer. Member FINRA/SIPC.

Not Insured by FDIC/NCUA or Any Other Government Agency | Not Bank/Credit Union Deposits or Obligations | Not Bank/Credit Union Guaranteed | May Lose Value

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.

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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.

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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%).

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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.

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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.

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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.

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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).

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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.

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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.

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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%

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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