Wealth Management

Posted by Jeffrey Buchbinder, CFA, Chief Equity Strategist

Wednesday, December 6, 2023

The 2024 presidential election takes center stage next year, and of course we will all be monitoring the polls closely for any signs of a leadership change in Washington, D.C. It’s too early at this point to speculate on a potential winner, though polling and odds makers are pointing to a Biden-Trump rematch.

Regardless of who is in the White House in 2025, we do know the S&P 500 has generated an average gain of 7% during presidential election years dating back to the 1952 election. That’s a far cry from the average gain in year 3 of nearly 17%, but it should help calm fears that the election might derail the bull market.

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Source: LPL Research, FactSet 12/05/23 (1950 – 2022)
All indexes are unmanaged and cannot be invested into directly. Past performance is no guarantee of future results.
The modern design of the S&P 500 Index was first launched in 1957. Performance before then incorporates the performance of its predecessor index, the S&P 90.

Priming the Pump

Another angle worth highlighting is that during a re-election year such as 2024, the average S&P 500 gain jumps to 12.2%. We believe this pattern is partly due to the incumbent priming the pump ahead of the election with fiscal stimulus and pro-growth regulatory policies to stave off potential recession and encourage job growth. Every president who avoided recession two years before their re-election went on to win and every president who had a recession within two years before their re-election went on to lose.

This presents a tall hurdle for Biden given so many leading indicators point to some economic contraction next year. As you will see in the LPL Research Outlook 2024: a Turning Point (ETA 12/12/23), LPL Research forecasts a mild and short recession at some point next year, which could point the needle toward the GOP even though LPL Research expects a relatively muted market reaction.

Limited Pump-Priming Opportunities

With Republicans in control of the House, opportunities are limited for Biden to prime the pump next year. But keep in mind stimulus passed in 2022 will still be flowing through the economy throughout 2024, which is one of the reasons most economists underestimated growth this year. In fact, most of the spending from the Inflation Reduction Act passed in August 2022 will hit during fiscal years 2024-2026, providing support for the economy next year and bolstering the Democrat’s chances.

Still, we may see some actions that don’t require congressional approval like more student loan forgiveness and regulatory maneuvers that could potentially help support the economy ahead of the election, but they are likely to be limited in size and scope.

For those who might think this stock market angle is conspiracy theory, consider that three-month returns before an election have predicted 20 of the last 24 elections. In other words, when stocks are up three months before Election Day, the incumbent typically wins. Conversely, when stocks fall during the three-month period before Election Day, the incumbent tends to lose. It’s early to start thinking about that but rest assured we’ll be all over that come August.

Bottom line, history suggests that stocks will likely move higher next year despite policy uncertainty surrounding the election. LPL Research also expects the inflation, interest rate, and corporate fundamental backdrops to be supportive, as you will see in LPL Research’s Outlook 2024: A Turning Point next week. That said, an increase in market volatility leading up to the election in late summer/early fall would not surprise us and be consistent with history.

Much more to come on potential implications of the election for the economy and markets here and here in the months ahead.

IMPORTANT DISCLOSURES

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

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

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

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

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

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

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

Posted by Lawrence Gillum, CFA, Chief Fixed Income Strategist

Tuesday, December 5, 2023

After seemingly only heading in one direction (higher) as of late, U.S. Treasury yields tumbled in November on the back of softer economic data along with signs that the Federal Reserve (Fed) is likely done raising interest rates. Since touching 5% in October, the yield on the 10-year Treasury has fallen more than 0.75%, which helped core bonds (proxied by the Bloomberg Aggregate Bond Index) generate the best monthly return for the index since May 1985. After six straight months of negative returns, the positive monthly return was a nice reprieve. However, given the outsized fall in yields, some investors may be asking: Was that it? Was that the year for fixed income in one month? Of course not.

Despite falling meaningfully from the recent highs, yields for many fixed income sectors are still significantly above longer-term averages. And with that, the prospects for above-average returns remain high as well (no guarantees of course). Even after the big rally in bonds in November, given still high yields, it would not take much of a sustained drop in yields to generate high single digit/low double digit returns over a 12-month horizon for a number of high-quality fixed income sectors. For example, a 0.50% drop in yields would likely generate a 10% return (over 12 months) for AAA-rated agency mortgage-backed securities (MBS). Moreover, if the economy slows and the Fed cuts rates more than we expect next year, these high-quality fixed income sectors could generate 12%–13% type returns (again, no guarantees).

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Equally important, these still high yields serve as a “hurdle rate”, or a yield cushion, that will need to be eclipsed before losses are realized. As such, these higher hurdle rates may decrease the probability of losses due to an increase in interest rates while at the same time these higher starting yields increase the probability of annual gains (as noted above). Yields would need to increase by 1% or more to offset current levels of income, which we think is unlikely given our expectations that the Fed is done with its aggressive rate hiking campaign.

The rally over the past month has been a nice break from the challenging return environment for fixed income investors over the past few years. However, given LPL Research’s view on interest rates, we think there is still room for Treasury yields to fall further in 2024, which would help support bond prices. And while we don’t expect November-type returns every month, we do think core bonds could potentially generate high single digit/low double digits 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.

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

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

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

Thursday, November 30, 2023

November lived up to its reputation as a strong month for stock market seasonality with the November “Turkey Rally” delivering outsized returns for stocks. Now as we look ahead to December, investors are asking the question: Is the Santa Claus Rally still coming to town?

November broke a streak of three consecutive down months for the S&P 500 and did so in style. With almost a 9% gain, this November ranks as the 18th best overall month since 1950, and fourth best month in the past 10 years (only beaten by July 2022 and November and April 2020). Historically, December has been a good month for stock market seasonals, with the strong returns often loaded into the second half of the month, hence the Santa Claus Rally axionym. But in recent years December has disappointed.

December is the third best performing month since 1950 but over the past five and 10 years December hasn’t been full of seasonal cheer for markets, with average returns negative for both of those periods. Only six of the last 10 and three of the last five Decembers have been positive with a drawdown of over 9% in 2018 dragging down the average returns for both periods.

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Longer term seasonals move weaker in the December-January two month window, these two months combined are in the lower performing half of all two-month return windows over shorter time periods, though the fourth strongest in all years since 1950. Over six-month return windows, as shown below, there is also a dichotomy between more recent and historic periods, with December to May being the worst six-month window over the past five and 10 years but the third best over all periods since 1950.

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When studying the proportion of positive monthly returns since 1950, December does deliver a present to investors with the highest proportion of positive monthly returns, at around 74%.

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Given the Santa Claus rally axionym, it’s perhaps not surprising that the stronger returns in December have typically been seen in the second half of the month. Based on all the periods studied since 1950, the second half of December was significantly stronger than the first half. Stocks were flat or even fell in value on average during the first half of the December, before, on average, rallying in the second half of the month (though on average the rally failed to appear at all in the past five years.)

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So, have positive stock market returns been “pulled forward” after the very strong month we just had? December, on average, is not as strong when it follows a positive November (0.83%), compared to when it follows a negative November (2.78%). However, based on historical returns, stock market strength begets strength when it comes the next 12 months following strong monthly returns. Looking at all periods back to 1950, there have now been 31 occasions where the S&P 500 has gained over 8% in a month. The average return a year later, from the end of the strong month, is almost 16%. This is significantly higher than the average for 12-month periods that followed months where stocks returned less than 8%. The instance of positive returns for the year following a strong month was also higher compared to following a less exceptional month.

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In our recent analysis of seasonals, we examined the performance of stocks after breaking a three-month losing streak.  November did indeed snap that streak and the good news for stock investors is the S&P 500 return one year out following such an inflection is well above average. Even including the exceptional return in November there is still plenty of upside over the next 11 months if stocks manage to reach the average 17.9% rebound following such occurrences.

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In summary, after an incredible November, overall stock market seasonals are still supportive for stocks coming into year-end. We maintain our slight preference for fixed income over equities in our recommended tactical asset allocation (TAA), but this is more a function of fixed income valuations remaining relatively favorable over equities due to their still attractive yields (even after recent declines). Stabilizing inflation, the likely end of the rate hiking cycle, lower long-term interest rates, and lower energy prices are all positives for stocks, but contrarian signals of sentiment and market positioning moving from very bearish to slightly bullish are now slight headwinds to further progress. We remain neutral equities, sourcing the slight fixed income overweight from cash, relative to appropriate benchmarks.

IMPORTANT DISCLOSURES

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

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

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

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

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

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

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

Posted by David Matzko

Wednesday, November 29, 2023

Key Takeaways:

• Consumers are contending with a confounding housing market. New home prices are down over 17% from a year ago but existing home prices continue to increase. This may provide some opportunities for homebuilders to meet demand.
• As prices for durable goods fall, consumers retained an appetite for purchasing major items, but the pace of spending will likely slow in the coming months.
• Economic data often gets revised downward as an economy downshifts, as we saw in the latest Conference Board report and the revised consumer spending estimates from Q3.
• The recent economic data are suppressing yields and stimulating the appetite for risk assets.

Homebuilders Look for Opportunities

One of the confounding experiences for consumers these days is within the housing market. Prospective buyers are reading the tale of two markets when it comes to residential real estate.        After a volatile 2022, the pace of new home sales has stabilized around the pre-pandemic rate. This is good news for homebuilders prepping for 2024, especially for companies such as PulteGroup (PHM) with a diversified portfolio. Median prices for new homes are down roughly 17% from last year as inflation pressures moderate. With supply of existing homes still below 50% of its pre-pandemic level, homebuilders stand ready to take advantage of any increase in demand. Currently, activity is strongest in the Midwest and West, with supply chain issues and inclement weather negatively affecting builds in the Northeast. Both permit issuances and new housing starts saw recent increases and beat their respective forecasts.

Amid low inventory of existing homes on the market, new home sales will likely remain stable to meet the demand. As mortgage rates fall and the Federal Reserve (Fed) pivots away from hiking rates, homebuilders might expect continued growth in business activity.

An Appetite Not Yet Satiated 

Confidence in November rose from last month, but only because of October’s significant downward revision. As prices for durable goods fall, consumers retained an appetite for purchasing major items such as automobiles, big appliances, and homes. Although, more respondents reported jobs were becoming harder to find, meaning a slowdown in spending is likely as the year wraps up.

Investors should remember that economic data often gets revised downward as the economy downshifts, as we saw in the Conference Board report. The three-month average for consumer confidence fell for the third consecutive month, reaching the lowest since August 2022. As we saw in the holiday sales figures, the consumer is still spending but much depends on the job market. All eyes should be on the upcoming jobs report on December 8. As the labor market cools, investors should expect consumer spending to slow down, but so far, it looks like a soft landing. All in, the data supports the Fed’s likely decision to keep rates unchanged at next month’s meeting.

Another Mixed Bag

This morning’s revised estimate for Q3 GDP was full of surprises. Revisions pushed headline growth to 5.2% annualized from 4.9%, but investors must look beneath the headlines.

Consumer spending was revised down to 3.6% annualized from 4.0% but government spending was revised up. Consumer data is often revised downward as the economy downshifts and we see this again in the latest GDP report. Looking ahead, we should expect inventories to subtract from Q4 growth and possibly see less support from consumer spending.

In addition to weaker consumer spending, markets are digesting Fed governor Christopher Waller’s apparent pivot, as he commented yesterday that the Fed could hold rates steady at the upcoming meeting. Investors know that Waller had been the most hawkish of Fed officials, so this is market-moving. Treasury yields and the U.S. dollar fell on the news.

The Bottom Line

The Fed could find themselves in a sweet spot. Inflation is trending lower, the consumer is still spending but at a slower pace, and the Fed could end its rate-hiking campaign without much pain inflicted on the economy. Looking ahead, markets will hotly anticipate the upcoming Beige Book release for anecdotal evidence on the state of the economy, but so far, the economic data are suppressing yields and stimulating the appetite for risk assets.

One additional item to watch is the U.S. dollar. As the Fed started to sound less hawkish, investors saw a decline in the dollar. A weaker dollar is often good for emerging markets, potentially providing an opportunity in the near future. LPL Research currently holds a negative view of emerging market equities but acknowledges valuations are attractive and that certain markets such as India and Brazil are intriguing.

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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.

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