Wealth Management

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.

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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

Posted by Adam Turnquist, CMT, VP Chief Technical Strategist

Friday, September 22, 2023

Key Takeaways:

• Stocks are struggling this month against a backdrop of higher interest rates and monetary policy uncertainty. Benchmark 10-year yields have surged around 40-basis points, surpassing resistance off the October 2022 highs. The recent breakout raises the question of how high yields will go—an important question that could continue to weigh on risk sentiment.
• The S&P 500 is down nearly 4% on the month, and technical damage is beginning to mount. The index has broken to the downside of a symmetrical triangle formation after taking out support at the 20- and 50-day moving averages (dma). Additional downside support below 4,330 comes into play in the 4,200 to 4,300 range, followed by the 200-dma at 4,189.
• The recent selling pressure has turned most momentum indicators bearish. Breadth is deteriorating as only 45% of S&P 500 stocks remain above their 200-dma. The two-year cumulative advance-decline (A/D) line for the S&P 500 has also pulled back to an inflection point after violating an uptrend.
• Despite the recent pullback in stocks, there have been no major signs of a sustainable flight to safety. The uptrend on the equal weight consumer discretionary vs. consumer staples ratio chart remains intact.
• Overall, the market is down but not out. Pullbacks are entirely ordinary within the context of a bull market, and while the jump in rates is concerning, the S&P 500 remains in an uptrend and above its rising 200-dma.

While September is living up to its reputation as being a weak month for stocks, seasonality cannot take all the blame for the selling pressure. In addition to a rally in crude oil, a nine-week winning streak in the dollar, and a ‘hawkish pause’ from the Federal Reserve this week, stocks have had to contend with nearly a 40-basis point surge in 10-year yields this month, which are now trading near 4.50%. Once again, the move in rates has proven to be too much too fast for equity markets to handle. And as LPL Research highlighted in August (Yields on the Rise—Too Much Too Fast?), a breakout on the 10-year Treasury yield above the October 2022 highs at 4.34% would be a “warning sign for a potentially deeper pullback in stocks.”

Technical Damage

The S&P 500 is down nearly 4% on the month, and technical damage is beginning to mount. The index has broken to the downside of a symmetrical triangle formation after taking out support at the 20- and 50-dmas. Yesterday’s session-low close at 4,330 landed right at support from the June 2023 lows and August 2022 highs. Additional downside support comes into play at the 4,200 to 4,300 range—a likely spot for a rebound—followed by the 200-dma at 4,189 (also near a key Fibonacci retracement level).

The recent selling pressure has turned most momentum indicators bearish. The Moving Average Convergence/Divergence (MACD) indicator—a trend-following momentum indicator that shows the relationship between two exponential moving averages—recently rolled over into a sell position. Given that the S&P 500’s uptrend is still intact, and price remains above its rising 200-dma, we view the sell signal as a shorter-term signal pointing more toward a pullback than a market top.

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Market Breadth

Breadth is deteriorating based on the declining percentage of stocks trading above their 200-dma. As of September 21, only 45% of S&P 500 stocks remained above their 200-dma, falling from 76% near the end of July. On a slightly more positive note, the more offensive or cyclical sectors are holding up better than their defensive counterparts. Financials have also bucked the trend of bad breadth this month as 49% of sector stocks are now trading above their 200-dma, as opposed to only 33% one month ago.

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Advance-Decline Line at an Inflection Point

The two-year cumulative advance-decline (A/D) line for the S&P 500 has pulled back to an inflection point after violating an uptrend. Technically, a break below support off the August lows would check the box for a lower low and suggest a new downtrend is underway. For reference, the A/D line is calculated by taking the difference between the number of advancing and declining stocks on the index for a given trading day and adding that difference to the prior day’s value. A rising A/D line is indicative of positive market breadth as the number of advancing stocks is outpacing the number of declining stocks, and vice versa for a declining A/D line.

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No Major Flight to Safety…Yet

Despite the recent pullback in stocks, there have been no major signs of a sustainable flight to safety. As shown below, the S&P 500 Equal Weight Consumer Discretionary (SPXEWCD) vs. S&P 500 Equal Weight Consumer Staples (SPXEWCS) ratio chart continues to generate higher highs and higher lows, indicating the equal weight consumer discretionary sector is outperforming the equal weight staples sector. Why is this important? Given the economic implications between discretionary spending on things consumers want vs. spending on things consumers need, relative performance between the two sectors is often used to identify offensive (consumer discretionary outperforming) or defensive (consumer staples outperforming) leadership trends. For now, offense remains on the field.

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SUMMARY

The S&P 500 is down nearly 4% on the month, and technical damage is beginning to mount. While weak September seasonality is capturing the blame, selling pressure has primarily been driven by a jump in interest rates. Benchmark 10-year Treasury yields have climbed roughly 40 basis points, surpassing resistance off the October 2022 highs. The recent breakout raises the question of how high yields will go—an important question that could continue to weigh on risk sentiment.

Technically, the S&P 500 has broken to the downside of a symmetrical triangle formation. Additional downside support below 4,330 comes into play in the 4,200 to 4,300 range, followed by the 200-dma at 4,189. Momentum has turned bearish, and breadth is also deteriorating. However, despite the recent pullback, there have been no major signs of a sustainable flight to safety. Overall, we believe the market is down but not out. Pullbacks are completely normal within the context of a bull market, and while the jump in rates is concerning, the S&P 500 remains in an uptrend and above its rising 200-dma.

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 Jina Yoon, CFA, Chief Alternative Investment Strategist

Thursday, September 21, 2023

‘Normalization’ of Capital Raising Activity

After a record setting year in 2021, capital raising activities in private markets have shown signs of slowing down. Some might wonder if this is just the beginning of a secular cool down of the space. And our answer is, it is not. We believe what we are seeing is a ‘normalization’ back to the long-term private market growth trajectory after the exceptional last couple of years. Also, with a greater number of funds expected to close in the near future and some of the markets and participants’ conditions improving, it is reasonable to expect the capital raising activities to remain healthy, albeit in varying degrees by sector.

In the first half of 2023, $502 billion was raised by global private markets. That is below what had been raised during the same time periods in the past couple of years—$639 billion in H1 2022, $545 billion in H1 2021—but is still above what had been raised during the first half of each year in 2020 and before. In addition, it is worthwhile to note the lighter capital raising activity was not a broad-based phenomenon. Sectors like Private Credit and Secondaries showed resilient and growing investor demand, while Venture Capital within Private Equity continued to see lighter activities. This is not surprising given how Private Credit remains the direct beneficiary of tighter bank lending and higher base rates (related LPL Research blog post here) and Secondaries—a strategy focused on buying and selling of fund shares / assets in existing funds—has gained popularity as it continued to grow with broader coverage of sectors and more buyers/sellers with various motivations flocking in.

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What Drove the ‘Normalization’ of Capital Raising Activities?

First, we can attribute some of the slow down to the denominator effect. The drop in public markets in 2022 left many investors’ portfolios over-allocated to private markets because they did not re-value lower as much as their public market counterparts. This meant investors had to scale down their future private market commitments, be selective about which sectors and managers they would allocate to, and look to reduce their existing private market holdings, if needed.

Second, some private market sectors faced a more difficult market environment than others, resulting in lighter capital raising activities. After enjoying one of the strongest years in 2021, macro uncertainties, higher funding rates, and banks pulling back from financing large scale levered transactions resulted in Private Equity facing a drought of deals and exit opportunities. This meant investors perceiving the strategy to be relatively less attractive than others as well as them having to wait longer for their locked in capital to come back to their hands to invest in new opportunities. Real Estate was another sector where investors took a more cautious stance as they saw re-valuation slowly taking place since late 2022.

What Are We Seeing Now?

Whether it is economic conditions, policy action, or market performance, divergence remains the keyword for the remainder of 2023, and private markets are no exception. We expect sectors such as Private Credit and Infrastructure to continue to show resilience, while others, such as Venture Capital, wait for more stars to align before re-gaining strength.

That said, we see some constraints easing. With the public equity markets recovering in 2023, investors now have less pressure to rebalance out of their private market positions to bring their portfolios in line with their target allocation between public and private. We see Private Equity and Real Estate valuations stabilizing after the steep re-valuation that took place last year and early this year, closing the gap against their public market counterparts, while providing better entry points for both primary and secondary investors. Especially for secondary markets, we see the market slowly finding better supply/demand balance and narrowing the bid/ask spread, a positive signal for both sellers looking for liquidity and buyers looking to capitalize the discounted pricing in certain sectors that have been beaten down.

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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.

Alternative investments may not be suitable for all investors and involve special risks such as leveraging the investment, potential adverse market forces, regulatory changes and potentially illiquidity. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses.

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.

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

Asset allocation does not ensure a profit or protect against a loss.
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.
Not Insured by FDIC/NCUA or Any Other Government Agency | Not Bank/Credit Union Deposits or Obligations |Not Bank/Credit Union Guaranteed | May Lose Value

Posted by Jeffrey Buchbinder, CFA, Chief Equity Strategist

Tuesday, September 19, 2023

Additional content provided by John Lohse, CFA, Analyst

The specter of a U.S. federal government shutdown continues to loom this week as Congress has just 12 days to agree on a budget before the October 1 deadline. House Republicans released a temporary measure on Sunday which could push the deadline out another month, with the hopes of a final solution coming in the interim. However, that proposal has encountered pushback even from within their own ranks, not to mention from across the aisle, and has yet to be voted on. The bad news is it looks like the government is headed for another shutdown; the good news is the stock market has seen this before.

The government has had 20 shutdowns since 1976. The average length of those shutdowns was eight days. The most recent, which started in December 2018, and extended into 2019, was the longest in history and lasted 34 days. The chart below, with data provided by Strategas Research Partners, shows the duration of each shutdown since 1976.

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As it has a reputation of doing, the stock market has been able to shrug off this gridlock in Washington. In fact, according to Dan Clifton, Policy Strategist at Strategas, during the 34 days of the most recent shutdown the index managed to return a whopping 10.27%. The simple average return of the S&P 500 during those 20 government shutdowns is 0.04%. The chart below shows the performance of the S&P 500 during each period.

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Not only does the market usually hold up while lawmakers dither, but history also shows it bounces higher shortly after a resolution has been reached. During the one- and three-month periods following a budget being passed the average returns for the S&P 500 are 1.17% and 2.64%, respectively. Investors have been able to look past budget speedbumps as corporate earnings, the overall economic outlook, and other more impactful macroeconomic events took precedent. That said, certain segments of the market that rely on government contracts can be more susceptible to shutdowns. Typically, segments such as defense and life sciences pull back as their revenue sources become less clear; however, they tend to outperform once the spigots are turned back on.

While history has shown the stock market can weather such events, it remains to be determined if other secondary impacts will be felt (barring the unlikely event that a compromise is made before the deadline). Heightened political divisions, a slim majority in The House of Representatives, and intra-party factions could potentially prolong negotiations. An extended shutdown would put economic data aggregation in jeopardy as many government entities responsible for collection and dissemination would be dormant. This would put the data dependent Federal Reserve in an unenviable position as the market awaits its signals. While LPL Research maintains a neutral weight to equities, we view any outsized declines as an opportunity to buy-the-dip, based on the strength of historical patterns.

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