Wealth Management

Posted by Barry Gilbert, PhD, CFA, Asset Allocation Strategist

Friday, January 6, 2023

There was good news for those saving for retirement in the recent appropriations bill passed to fund the government, signed into law by President Biden on December 29, 2022. The larger bill included a set of retirement reforms called SECURE 2.0. A kind of sequel to the SECURE Act passed by the Trump Administration in 2019, SECURE 2.0 makes it easier to save for retirement, easier to preserve savings in retirement, and easier for businesses to provide retirement benefits. While there was normal debate about individual provisions, SECURE and SECURE 2.0 were both jointly sponsored by Democrats and Republicans and had broad bipartisan support.

We do not expect the new law to have a direct impact on markets, but it is very likely to have an impact on how people save for retirement and how businesses provide retirement benefits. Here are highlights of some of the more important provisions in the bill. Note that this is just a high level overview and many provisions go into effect at various times over the next few years or may have specific requirements or limits.

• SECURE 2.0 raised the age at which retirement plan minimum distributions must begin from 72 to 73, effective in 2023, and eventually to 75 (in 2033), allowing retirement plan participants who do not need distributions immediately to have a longer period to potentially accumulate tax-deferred gains.
• For those generally younger workers who may be missing out on employer matching funds because they need to prioritize student loan payments over saving, employers may now make matching retirement contributions based on student loan payments.
• Catch-up contribution limits for those near retirement have been increased.
• Steep penalties for missing required minimum distributions, often a result of oversight rather than an intention to abuse the law, have been decreased, especially in cases where the mistake is redressed quickly. Self-correction of inadvertent mistakes also won’t require submission to the IRS.
• The law also establishes a national database of retirement accounts so that no one has to worry about forgetting about an old account, already a problem and one that is likely to increase as people switch jobs more often.
• The law makes it possible to create emergency savings accounts within a 401(k) that will allow limited withdrawals of up to $1,000 without penalty.
• Certain unused assets in 529 plans, a tax-advantaged plan used to pay for educational expenses, will now be allowed to be rolled over into a Roth IRA.
• New plans will have auto-enrollment and automatic increases over time. However, there is no requirement to start a plan.
• The law has several provisions that make it easier for businesses to provide retirement benefits, including enhancing tax credits for small businesses starting and maintaining a retirement plan.
• Opportunities to save on a Roth basis in several types of retirement accounts have been expanded.

Making it easier to save for retirement is a solid win and the law does an effective job addressing the challenges faced by those at different stages of saving for retirement as well as those already in retirement. Please consult a financial professional to understand how SECURE 2.0 might affect you and how you might be able to take advantage of the new provisions.

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.

Posted by Jeffrey Buchbinder, CFA, Chief Equity Strategist

Thursday, January 19, 2023

Investors often talk about how earnings drive stock prices. But that begs the question how so many strategists and pundits expect earnings to fall in 2023 and stocks to rise? That’s our view in LPL Research.

Let’s look at the histories of earnings growth and price performance for the S&P 500 Index on a scatterplot graph to see how often this dynamic has occurred. The LPL Chart of the Day below shows S&P 500 performance on the vertical axis and S&P 500 earnings growth on the horizontal axis.

View enlarged chart

You can see in the chart that in years when earnings fall, found on the left side of the graph, stocks are actually more likely to rise than fall (more dots are in the upper left quadrant than in the lower left one). This may be surprising to many of you, but when earnings fall, stocks are more than twice as likely to rise as they are to fall.

Some of the earnings declines were so marginal, and so long ago, that you could argue the odds of gains for stocks, if earnings drop this year, are potentially three to one (stocks have been up 71% of all years since 1950). Since 1970, of the 12 years that saw earnings declines, just 4 were accompanied by falling stock prices: 1990, 2001, 2008, and 2015—and in 2015, earnings and stocks both fell just 1%.

This may seem counterintuitive, but it makes sense when we remind ourselves that markets are forward looking. The markets generally price in earnings declines well before they happen—maybe two or three quarters ahead. By the time earnings declines are in the books, stocks have move higher in anticipation of the next earnings upcycle.

This is similar to the explanation for why stocks have historically been little changed, on average, during recessions. It’s because the big declines tend to come before the recession occurs, in anticipation of the downturn. That is essentially what stocks were doing in 2022—pricing in a downturn in 2023 from Federal Reserve over-tightening.

The lesson here seems clear. Despite a likely slight earnings decline in 2023—at least that’s our view in LPL Research—we expect a solidly positive year for stocks (our thoughts on earnings season here). That doesn’t mean the S&P 500 won’t retest the October lows in the short term—about 9% below current levels—before the next bull market gets underway. But the LPL Research Strategic and Tactical Asset Allocation Committee (STAAC) believes the risk-reward trade-off this year is positive enough right now to support an overweight equities recommendation. Our year-end S&P 500 fair value target range of 4,400-4,500 is based on a price-to-earnings ratio of 18–19 and a $240 forecast for S&P 500 earnings per share in 2024.

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.

Posted by Jeffrey J. Roach, PhD, Chief Economist

Wednesday, January 18, 2023

Trajectory Is Weakening

 The U.S. economy weakened in December. Overall spending in December fell over 1% month over month after a downwardly revised 1% decline in November. Lower sales on autos and at gas stations contributed over half of the decline in total retail sales.

The control-group sales fell 0.7% in December, revealing the economy slowed down in the final month of last year. The control group is the category the Bureau of Economic Analysis uses for gross domestic product (GDP) calculations.

Nominal online retail sales fell 1.1%, as online retailers discounted products to clear bloated inventories.

Investors like to transform this nominal report into an inflation-adjusted estimate that better corresponds to other real economic gauges. Deflated by the Consumer Price Index, real December retail sales fell 0.4% from a year ago, the second consecutive annual decline.

Momentum is slowing as the economy transitions into the new year. Consumers will have less support from surplus savings this year, which increases the risk that 2023 will be a tough year for economic growth. Furthermore, industrial production declined in December and was revised downward for November. However, if the job market does not materially deteriorate, a potential recession should be short and shallow.

A Slowing Trajectory

Consumer spending is slowing but investors need to wait until a more comprehensive spending report is released on January 27. Retail sales focuses mostly on goods, whereas the full spending report includes both goods and services. As shown in the chart below, annual growth rates for both real retail sales and real personal spending have slowed for most of this year.

View enlarged chart

Conclusion

The consumer is feeling the weight of slow wage growth and nagging price pressures. Weak retail sales in December shows consumers are likely retrenching during a time of economic uncertainty. Declining consumer demand and periodic discounting for some goods pushed down control-group sales, the category that directly feeds into the official GDP estimate. The trajectory for the U.S. economy is weakening and recession risks are rising for 2023. However, a potential recession would likely be shorter than average. The weak retail sales report does not change expectations that the Federal Reserve will likely increase rates by 0.25% at the February 1 meeting.

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.

Posted by Barry Gilbert, PhD, CFA, Asset Allocation Strategist

Thursday, January 12, 2023

We received our final reading on Consumer Price Index (CPI) inflation for 2022 this morning, which gave us the inflation numbers for December 2022. Helped by declining energy prices, the index fell 0.1% in December, in line with economists’ consensus expectation and the largest monthly decline since April 2020. Consumer inflation advanced less than 1% over the second half of 2022, although the fight against inflation is far from over.

Year over year, inflation fell to 6.5% in December, down from 7.1% in November, in line with the consensus expectation. But as seen in the LPL Chart of the Day below, most of that advance came over the first half of the year, which will roll off the year-over-year number as we advance into 2023. The index only advanced 0.9% over the last six months of the year, the lowest six-month reading since late 2020.

However, just as inflation readings were lifted in the first half of the year by rising energy prices, they have been pulled lower by falling energy prices. Core inflation, which excludes food and energy, also slowed over the second half of the year, but less dramatically. Core inflation climbed 0.3% in December and overall slowed from 3.4% over the first half of 2022 to 2.2% over the second half.

The early reaction to the largely in line numbers from both stock and bond markets was muted, with market participants already pricing in expectations for further slowing over the last few trading days. But it can take time for markets to fully digest the report and we’ve seen large swings on CPI day over the last year. According to Bloomberg analysis, the S&P 500 moved an average of 1.9% on CPI day in 2022, about three times the average over the prior five years. A line-up of Federal Reserve (Fed) speakers today may also shape the reaction over the rest of the day.

View enlarged chart

Some other highlights from this morning’s report:

• Energy prices fell 4.5% in December, the fifth decline in the last six months. Because energy prices are volatile, changes don’t provide a strong picture of underlying inflation trends, but it still provides some relief for consumers.
• Monthly increases in shelter prices, up 0.8% in December, continue to be a large contributor to core inflation. But as noted by Fed Chair Jerome Powell, shelter prices tend to react to the real-time price environment with a lag and can be somewhat discounted when looking at underlying trends.
• While food costs overall increased 0.3% in December, prices for dairy and fruits and vegetables fell.

While inflation has slowed, the Fed is still fighting several important battles to make sure we don’t experience the yo-yo inflation of the 1970s. Inflation expectations can impact prices and some of the Fed’s steadfast inflation-fighting rhetoric has been to keep inflation expectations well anchored, something they’ve largely succeeded at thus far. Labor markets also remain fairly tight despite slow economic growth. While the Fed doesn’t want to unnecessarily damage the economy, getting inflation levels sustainably back toward their long-term trend will probably require wage gains to slow further. Finally, a strong dollar helped control inflation for U.S. consumers by making goods from abroad less expensive. A weaker dollar may create some added inflationary pressure.

The Fed will continue to have a lot of leeway to focus on inflation as long as labor markets remain relatively strong. The Fed’s “dual mandate” is low and stable prices and maximum employment. While growth has slowed, labor markets remain strong. Job creating has slowed but labor demand is still adding to wage pressure and the unemployment rate remains quite low at 3.5%. But bottom line, the weakening trend of inflation should convince the Fed to further downshift the pace of rate hikes in the upcoming meeting. The Fed will likely hike rates by 0.25% on February 1. The labor market must significantly cool before the Fed could appease markets by cutting rates the latter half of this year. Our base case is the economy will slow enough for the Fed to consider cutting rates sometime in the second half of this year.

IMPORTANT DISCLOSURES

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.

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 company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities. 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.

All index and market data from FactSet and MarketWatch.

This Research material was prepared by LPL Financial, LLC.

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

Insurance products are offered through LPL or its licensed affiliates.  To the extent you are receiving investment advice from a separately registered independent investment advisor that is not an LPL affiliate, please note LPL makes no representation with respect to such entity.

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

Posted by Jeffrey Buchbinder, CFA, Chief Equity Strategist

Wednesday, January 11, 2023

The consensus sees a U.S. recession coming in 2023, though opinions vary widely on how significant it might be. LPL Research acknowledges that a recession this year is probably more likely than not at this point, and the risk of another tough year for stocks shouldn’t be ignored. But what if the U.S. economy muddles through on the back of a resilient consumer who is still flush with cash? Dare we say, what if it is different this time?

Looking back at recent growth scares, we see the odds do favor recession. One way to look for a scenario in which markets feared recession that did not occur is by using the Institute for Supply Management (ISM) Manufacturing Index. The index has leading characteristics because it is based on a survey of purchasing managers’ expectations for the future.

As shown in the LPL Chart of the Day below, this indicator did signal economic contraction in the mid-1980s, mid-1990s, and 2011-2012 while the economy avoided (another) recession:

• After the double-dip recession in the early 1980s, stocks were flattish in 1984 before the S&P 500 rallied 26% in 1985 (likely helped by a merger wave and perhaps some tax cut speculation).
• Aggressive Federal Reserve (Fed) rate hikes in 1994 that triggered the Mexican peso crisis later that year, held stocks back in 1994 before four consecutive years of solidly double-digit gains from 1995-1999.
• The U.S economy avoided recession after the Standard & Poor’s downgrade of the U.S. credit rating in August 2011 and European debt crisis in 2011-2012. After a flat 2011, the S&P 500 gained 13.4% in 2012 and 29.6% in 2013.

View enlarged chart

There are other ways to measure growth scares. One that suggests the odds of recession in 2023 are very high is the Leading Economic Index. This index, composed of 10 indicators that when combined offer clues about where the economy might be headed, is currently telling us recession is inevitable based on how much it has dropped over the past six months. Like the ISM, there have been some recession signals, albeit not strong ones, that were not followed by an official downturn. The accompanying chart shows mid-1960s, late-1980s, mid-to-late 1990s (there’s that time frame again), and 2016.

• The S&P 500’s 13% decline in 1966 (-13.1%) was followed by a 20% rally in 1967.
• Stocks rallied double-digits in 1988 and 1989, rebounding nicely after the 1987 crash despite the oncoming savings & loan crisis in 1990 that saw stocks dip 6%.
• And while muddling through doesn’t do it justice, the late 1990s stock market boom—on the back of the internet buildout—occurred partly because recession was avoided despite currency crises in Russia, Southeast Asia, and Latin America.

View enlarged chart

One constant during these periods discussed above was consumer spending grew through most of these growth scares. The chart below highlights the 2010 and 2011 period, where resilient consumers prevented the economy from a double-dip recession and helped spark the stock market’s strong rebound in 2012. Consumer spending did stall in the mid-1980s in a mid-cycle pause but grew solidly throughout the bull market of the 1990s, despite those growth scares.

View enlarged chart

Finally, it’s worth again reminding our readers that stock market rebounds following bear markets have been powerful historically. The S&P 500 has bounced back an average of more than 20% within 12 months of coming out of bear markets.

Looking at just the last seven bear markets since the 1987 crash, we have seen the market bounce back an average of 43.6% after dropping 33.1%. LPL Research expects the S&P 500 to produce double-digit gains in 2023, which seems quite reasonable based on this analysis.

View enlarged chart

Conclusion

Should this economy just be experiencing a growth scare, stocks should have nice upside from current levels. As discussed in Outlook 2023: Finding Balance, LPL Research maintains a positive stock market view. Inflation should continue to decline, leading to an end to Fed rate hikes this spring, keeping interest rates in check, and buoying corporate profits. Two consecutive down years for the S&P 500 is quite rare, having occurred only three times in the past 80 years (1973-74 and 2000-01-02). The year after midterms has seen stocks rise every time since 1950 (average S&P 500 gain of 14.7%). LPL Research continues to see double-digit gains for the S&P 500 this year. Beyond inflation and the Fed, geopolitics remain a key risk.

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.

Posted by Lawrence Gillum, CFA, Fixed Income Strategist

Tuesday, January 10, 2023

Last November we noted that the shape of the U.S. Treasury yield curve is often looked at as a barometer for U.S. economic growth. Moreover, we noted that the spread between the 3-month T-Bill yield and the 10-year Treasury yield (3M/10Y) has been a fairly reliable recession signal, having correctly predicted essentially every U.S. recession since 1950, with only one “false” signal, which preceded the credit crunch and slowdown in production in 1967. Recently, however, the finance professor that pioneered the use of the yield curve as a recession signal has cautioned that this time may in fact be different—something we have noted in prior missives as well.

View enlarged chart

Complicating the signal this time around is twofold: the Federal Reserve (Fed) is in the midst of one of its most aggressive rate hiking campaigns in history and interest rates are still at fairly low levels (thus the starting spread between the two tenors was fairly tight). The front-end of the Treasury yield curve has moved higher in concert with the Fed’s hiking campaign that took the fed funds rate to 4.5% (upper bound). Thus, the 3-month T-bill is roughly anchored at those elevated levels. However, the 10-year Treasury yield, which is influenced more by economic growth and inflation expectations, has fallen roughly 0.75% from its peak in October at 4.24%. Most of the fall in yields, though, has been due to declining inflation expectations along with falling inflation uncertainty and not concerns about slowing economic growth. So, with the 3M anchored, the fall in the 10-year has pushed the 3M/10Y spread to its deepest levels since the 1980s and thus indicating a recession is almost a certainty. In fact, the probability of recession, according to the 3M/10Y signal, is greater than before the global financial crisis, the dot com bubble and the COVID slowdown. We think that may be overstated.

And while we aren’t ignoring the signal completely we think the level of yield curve inversion is perhaps steeper/deeper than actual economic conditions may warrant. We think the odds are roughly a coin toss that the U.S. economy falls into a recession in 2023 but it is no sure thing. The consumer is still spending and with businesses still hiring at an elevated clip, there is a chance that we can skirt by with an economic slowdown and not an outright contraction—although if the economy does contract, we think it will be a shallow contraction due to the aforementioned reasons.  It’s also important to point out that the last time the 3M/10Y yield curve was inverted, the economy fell into a recession because of a global pandemic—something we would argue was not priced into the inversion yet it still gets “credit” for the signal. Economic models help simplify a complex world but it’s important to remember that the signal isn’t always accurate and sometimes things, are in fact, different.

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 or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.

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 company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

All index and market data from FactSet and MarketWatch.

This Research material was prepared by LPL Financial, LLC.

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

Insurance products are offered through LPL or its licensed affiliates.  To the extent you are receiving investment advice from a separately registered independent investment advisor that is not an LPL affiliate, please note LPL makes no representation with respect to such entity.

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

Posted by Adam Turnquist, CMT, VP Chief Technical Strategist

Friday, January 6, 2023

Investors have gladly hit the reset button after last year’s downhill ride on the S&P 500. What started with a champagne record high on the first trading day of 2022, fizzled out into a volatile bear market by June and nearly a 20% decline by year-end, marking the fourth worst year for the index since 1950.

Given the degree of last year’s decline and abnormal path of price action, including a single record high on the first trading day of the year, we analyzed correlation data to find years that most closely resemble 2022. More specifically, we calculated the daily return progression of the S&P 500 for every year going back to 1950 and then ran a correlation analysis comparing each year to 2022. The bar chart below provides a breakdown of each year’s correlation to 2022.

View enlarged chart

As you may notice in the chart above, very few years have a high correlation to 2022, which makes sense considering the average annual price return for the S&P 500 is 9.1% during this time frame. The year 1962 stands out with the highest correlation at 0.82, along with a few other years that have a relatively high correlation coefficient. The table below provides a deeper breakdown of these years, including how the market performed over the following year.

View enlarged chart

In order to provide historical context beyond correlation coefficients, we included some additional macro insights for each year above. A few key highlights:

• The highest correlation years to 2022 generally have higher annual returns over the following year.
• Of the 11 years observed above, seven included a recession, which spilled over into the following year during six of the seven periods.
• Of the 4 years without a recession, there were no recessions recorded over the following year.
• Annual price returns over the next year for all periods highlighted above averaged 11.7%, with only two years generating negative returns.

In terms of analogs to 2022, 1962 checks the box as the closest comparison based on the data above (highest correlation coefficient, higher trajectory of federal funds rate, and no recession occurring within the year). The chart below compares the price of the S&P 500 during 1962 and 2022. We also included the 1963 period for the S&P 500 along with its price return progression during the year to project a hypothetical path for the S&P 500 in 2023. Under this scenario, the S&P 500 would finish the year at 4,565 (+18.9% off the December 31 close).

View enlarged chart

Of course, this projection and correlation data comes with the major asterisk of correlation does not imply causation. And while history may not repeat or imply causation, it often rhymes, which would be welcomed by investors for 2023. Subsequent S&P 500 annual returns for years that closest correlate to 2022 tend to be above average and positive. History also suggests high correlation years that do not include a recession typically avoid one over the following year.

IMPORTANT DISCLOSURES

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

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

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

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

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

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

Posted by Barry Gilbert, PhD, CFA, Asset Allocation Strategist

Friday, January 6, 2023

There was good news for those saving for retirement in the recent appropriations bill passed to fund the government, signed into law by President Biden on December 29, 2022. The larger bill included a set of retirement reforms called SECURE 2.0. A kind of sequel to the SECURE Act passed by the Trump Administration in 2019, SECURE 2.0 makes it easier to save for retirement, easier to preserve savings in retirement, and easier for businesses to provide retirement benefits. While there was normal debate about individual provisions, SECURE and SECURE 2.0 were both jointly sponsored by Democrats and Republicans and had broad bipartisan support.

We do not expect the new law to have a direct impact on markets, but it is very likely to have an impact on how people save for retirement and how businesses provide retirement benefits. Here are highlights of some of the more important provisions in the bill. Note that this is just a high level overview and many provisions go into effect at various times over the next few years or may have specific requirements or limits.

• SECURE 2.0 raised the age at which retirement plan minimum distributions must begin from 72 to 73, effective in 2023, and eventually to 75 (in 2033), allowing retirement plan participants who do not need distributions immediately to have a longer period to potentially accumulate tax-deferred gains.
• For those generally younger workers who may be missing out on employer matching funds because they need to prioritize student loan payments over saving, employers may now make matching retirement contributions based on student loan payments.
• Catch-up contribution limits for those near retirement have been increased.
• Steep penalties for missing required minimum distributions, often a result of oversight rather than an intention to abuse the law, have been decreased, especially in cases where the mistake is redressed quickly. Self-correction of inadvertent mistakes also won’t require submission to the IRS.
• The law also establishes a national database of retirement accounts so that no one has to worry about forgetting about an old account, already a problem and one that is likely to increase as people switch jobs more often.
• The law makes it possible to create emergency savings accounts within a 401(k) that will allow limited withdrawals of up to $1,000 without penalty.
• Certain unused assets in 529 plans, a tax-advantaged plan used to pay for educational expenses, will now be allowed to be rolled over into a Roth IRA.
• New plans will have auto-enrollment and automatic increases over time. However, there is no requirement to start a plan.
• The law has several provisions that make it easier for businesses to provide retirement benefits, including enhancing tax credits for small businesses starting and maintaining a retirement plan.
• Opportunities to save on a Roth basis in several types of retirement accounts have been expanded.

Making it easier to save for retirement is a solid win and the law does an effective job addressing the challenges faced by those at different stages of saving for retirement as well as those already in retirement. Please consult a financial professional to understand how SECURE 2.0 might affect you and how you might be able to take advantage of the new provisions.

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.

Posted by Jeffrey J. Roach, PhD, Chief Economist

Wednesday, January 4, 2023

Multifamily Construction Rising, Bucking Trend of Single Family

It’s no surprise that residential activity is slowing. The housing market is coming off a euphoric run during the post-pandemic period of historically low interest rates. But, the slowing housing activity does not look as bad when compared with 2019. Still, housing starts were over 6% above the November 2019 levels, illustrating this unique cool-down period amid a nationwide housing shortage. Rising borrowing costs and hesitant home builders could make the nationwide housing shortage worsen in the near term as activity likely cools further.

Higher mortgage rates and uncertain economic prospects impacted the housing market and will continue to depress housing in the months ahead. As home sales stalled in recent months, housing starts and permits have also stalled. But that’s just at the aggregate level. Can we uncover any other trends in the details?  Yes. Housing activity for multifamily dwellings improved in November and has been growing for the past few years as builders respond to the acute shortage in this sector. Single-family construction spending has consistently shrunk for the last several months. (See chart below.)

View enlarged chart

Rising Multifamily Construction Will Likely Suppress Rents

Building activity for 5+ units maintains its uptrend and an increase in supply of units should put a damper on future rent prices. November construction spending rose 0.2% from a month ago, supported by strong multifamily building projects. Multifamily construction spending is up over 8% from three months ago, as building activity for 5+ units remains strong.

Construction spending on manufacturing plants has also grown considerably over the last year. Firms are building manufacturing plants as reshoring is attractive, despite rising labor costs. This building activity, which helped contribute to solid performance for the industrials sector in recent months, should support job creation in the construction space amid a broader slowdown.

Conclusion

It’s the tale of two residential construction economies. Construction activity for single family homes is shrinking but apartment and condo construction spending is on the rise. The diverging trends will likely attract investors’ attention. Construction firms with a diversified portfolio should be able to weather any upcoming economic storm better than firms focused on single family home building. The recent trends will also affect inflation this year. Roughly one million apartments were under construction in November, roughly four times the amount from ten years ago. Increased supply in multifamily construction should ease future rent prices as vacancy rates rise.

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.