Wealth Management

Posted by Lawrence Gillum, CFA, Fixed Income Strategist

Tuesday, November 29, 2022

With the Federal Reserve (Fed) embarking on the most aggressive rate hiking campaign since the 1980s, the risks of an economic slowdown have increased. With inflationary pressures continuing to run hotter than the Fed would like, many Fed officials have stated they are willing to continue to keep increasing interest rates—even to the point of sacrificing economic growth—in order to get aggregate demand and aggregate supply back in balance. Although the timing of when interest rates will peak—and its effect on certain asset classes—is uncertain, the Fed’s tight monetary policy is already having an impact on the most sensitive areas of the economy, such as housing and consumer spending. And with less consumer spending, the outlook for corporate borrowers may be challenged in the near term. Muni bonds, however, have proven to be resilient in challenging economic times.

Shown below, is the default rate of muni securities versus their corporate counterparts. As shown, the annual default rate for muni securities (blue line), in aggregate, is significantly below what has historically occurred in the corporate credit markets (grey line). Additionally, muni defaults during economic contractions (grey shaded region) have been relatively benign. According to Moody’s Investors Service, a rating agency, the average five-year municipal default rate between 1970 and 2020 was just 0.08%, which compares to an average five-year corporate default rate of 6.9% over the same period.

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Muni bonds are having their best month in decades as signs of inflationary pressures are easing. Muni debt has gained 4.3% in November (through 11/28), on track for the biggest monthly advance since August 1986. The rally has pared the muni market’s loss this year to 9.1%, which would be the largest annual drop since 1981. With the influx of pandemic-related stimulus money, healthy tax collections, and prudent savings practices, we think the fundamental back drop for many borrowers remains strong. And with the risk of recession increasing, muni securities could be a good area to weather an economic storm.

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.

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

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

Wednesday, November 23, 2022

Now that the dust has largely settled on the 2022 midterm elections, with the Democrats retaining control of the Senate and the Republicans taking a narrow majority in the House, we take a look at some of the historic market trends relating to the election cycle.

We continue to view the midterm result of a mixed government as market-friendly overall. Markets don’t react well to uncertainty so political gridlock is normally a favorable outcome as new measures from the administration are thwarted by the opposing party. We explored some of the market data and how it relates to mixed government in our earlier blog, found here.

In addition to the political makeup of the government being supportive for stocks, as shown in the chart below, we are also approaching a stage in the presidential cycle that has also been historically supportive. Year three of the presidential cycle has returned almost 17% and been positive 89% of years since 1950, more than any other year of the cycle.

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Analyzing quarterly performance data tells a similar story with 4Q of year two of the presidential cycle the second strongest quarter, behind only the subsequent quarter, Q1 of year three. Q4 2022 has already seen a return of over 11% following the trend of historic strength during this period. Q1 of year three of the presidential cycle has seen a positive return in over 94% of all occurrences since 1950, the highest of any quarter. It also has the highest average return of all quarters. The average returns do noticeably drop later in year three, with Q3 average returns barely positive.

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Looking at the monthly market data for midterm years, November has been the second strongest month, and November 2022 has followed this trend. While a lot weaker than the returns seen historically in October and November, when political uncertainty is often resolved, December of a midterm year has still been fairly strong. December is the third strongest midterm year month but caution should be taken as only two-thirds of historic occurrences have been positive.

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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 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 Lawrence Gillum, CFA, Fixed Income Strategist

Tuesday, November 22, 2022

The shape of the U.S. Treasury yield curve is often looked at as a barometer for U.S. economic growth. More specifically, it reflects how the Federal Reserve (Fed) intends to stimulate or slow economic growth by cutting or raising its policy rate. Each tenor on the curve is roughly the expected policy rate plus or minus a term premium (the term premium represents the expected compensation for lending for longer periods of time). In “normal” times, the yield curve is upward sloping, meaning longer maturity Treasury yields are higher than shorter maturity Treasury yields. However, when, like now, inflationary pressures are apparent and the Fed wants to slow aggregate demand, shorter maturity securities could eventually out-yield longer maturity securities, inverting the yield curve.

The predictive record of yield curve inversion depends on which parts of the yield curve are inverted. Two popular yield curve indexes are the differences between the 2-year Treasury yield and the 10-year Treasury yield (2Y/10Y) and the 3-month T-Bill and the 10-year Treasury yield (3M/10Y). Of these two, the 2Y/10Y is the most popular within the financial media (likely because it tends to invert before the 3M/10Y), but the predictive signal of the 3M/10Y has been more robust.

The past six times the 2Y/10Y part of the yield curve inverted, a recession followed, on average, 18 months later. However, the length of time between the quickest time to recession (6 months) and the longest time until recession (nearly 36 months!) complicates the signal and in the Fed’s words, the relationship is probably spurious. As such, we (and the Fed) tend to put more credence on the 3M/10Y, which has had a better track record in predicting recessions with a lead time of about four to six quarters, but as few as two quarters ahead.

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The 3M/10Y signal has predicted essentially every U.S. recession since 1950, with only one “false” signal, which preceded the credit crunch and slowdown in production in 1967. There is also evidence that the predictive relationships exist in other countries, notably Germany, Canada, and the United Kingdom. Further, a signal that lasts only one day may be dismissed, but a signal that persists for a month or more should be looked at carefully. The current 3M/10Y inversion began in earnest in October, so using historical data as a guide and according to this quantitative metric, we’re likely at least two quarters away from recession. Finally, it’s also important to note that yield curve inversion does not provide much evidence in terms of length and/or magnitude of a potential recession. Over time, we’ve seen deep inversions with shallow recessions and shallow inversions with deep recessions. The signal only provides information on if a recession is likely over the next few quarters. We think any economic contraction will likely be a shallow one due to the continued strength of the consumer.

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, November 18, 2022

LPL Research explores point and figure analysis and how it can be utilized to define market conditions. Despite recent overbought readings, history suggests buying pressure may not be over.

Background

Point and figure (P&F) analysis dates back to the 19^th century. In an era with no computers to record stock prices every day, filtering price based only on a predefined box size (consisting of columns of X’s or O’s) became a popular solution to track price action for investors. In general, rising prices equate to a column of X’s and declining prices are represented by a column of O’s. Based on the composition and position of these columns, objective buy and sell signals can be easily generated.

Jeremy du Plessis, widely considered an expert on the subject, considers P&F charts the ‘mouthpiece of the market’ as the “‘chart moves only when the market moves and only where there is significant movement in the price” (Jeremy du Plessis).’

Example

The P&F chart below shows the S&P 500 based on data over the last year. The box size is 50 points and reversals of a column require a price move of at least three boxes. For example, in order to add a new column of O’s right now, the S&P 500 would need to close below 3,900. Similar to the S&P 500 price chart, you can also depict a clear price downtrend despite some near-term breakouts.

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Applying P&F Analysis to Define Broader Market Conditions

The Bullish Percent Index (BPI) evolved P&F analysis into a market breadth tool. This indicator ranges from 0% to 100% and represents the percentage of stocks within an index that have a current P&F buy signal. Readings above and below 50% are considered bullish and bearish, respectively. The BPI can also be utilized to identify overbought (readings above 70%) and oversold conditions (readings below 30%).

The chart below highlights the S&P 500 and its BPI. The current reading shows 70.2%, which is generally considered overbought. However, in a strong uptrend or bull market, overbought conditions should develop as momentum builds.

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Historical data supports our thesis that overbought does not always mean the buying pressure is over. The bar chart below highlights forward S&P 500 returns after the BPI crossed above 70 filtered for trade signals at least 10 trading days apart (since 1996). For comparison, we also analyzed when BPI crossed below a bottom 95^th percentile reading, which equates to 32 (same 10 trading day filter applied).

BPI Signal Performance

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In summary, the recent overbought BPI reading does not mean the recovery off the October lows is over. Forward 12-month returns following an overbought reading averaged 11.3% with 82% of signals producing positive returns. This data also resonates with an old technical analysis axiom, “The most bullish thing a market can do is get overbought and stay that way.”

In terms of oversold signals, they historically outperform after 1, 3, and 6 months, although overbought signals notably have positive performance during these timeframes.

Works Cited

Jeremy Du Plessis. The Definitive Guide to Point and Figure a Comprehensive Guide to the Theory and Practical Use of the Point and Figure Charting Method. Petersfield Harriman House Publishing, 2006.

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

Thursday, November 17, 2022

Were Retail Sales Too Good?

Nominal retail sales in October rose 1.3% from a month ago, strongly beating expectations. Market watchers like to transform this nominal report into an inflation-adjusted estimate, which better corresponds to other real economic gauges. Deflated by the Consumer Price Index (CPI), real retail sales rose 0.8% in October, the highest real monthly rate since February.

Investors negatively interpreted the report, likely focusing on the risk that the Federal Reserve (Fed) may have to keep tightening monetary conditions. However, momentum is slowing as the economy transitions to a new year. Consumers will have less tailwind from surplus savings, which increases the risk that 2023 could be a tough year for economic growth.

Was this report too good for central bankers who are trying to stifle demand to tamp down inflation? Probably not, but they need to wait until the comprehensive spending report is released next month.

A Slowing Trajectory

Consumer spending is slowing, and investors will get a better view on the consumer when the Personal Consumption Expenditure (PCE) report is released on December 1. As shown in the chart below, annual growth rates for both real retail sales and real PCE have slowed for most of this year. Retail sales focus mostly on goods, whereas the full spending report includes both goods and services.

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Nominal online retail sales rose 1.2%, as the shift to ecommerce during the pandemic is likely a permanent change in consumer buying preferences. This shift has long-term ramifications for business planning and could be especially relevant for equity analysts who are preparing to sift through upcoming holiday sales reports. The rise in the control group suggests the economy was off to a good start in the third quarter. The control group is the category the Bureau of Economic Analysis (BEA) uses for Gross Domestic Product (GDP) calculations.

Excluding autos and gas, nominal retail sales rose 0.9%, demonstrating that the consumer sector is not currently in recession.

Conclusion

Strong real retail sales in October suggest consumers are likely turning to credit to support spending as wage growth lags inflation and high prices are eating away from the stock of savings. Overall debt rose $351 billion in Q3, putting the total debt burden for households at $16.5 trillion according to data released by the New York Fed.

The economy is slowing, but we are not yet in recession. However, rising credit demand implies recession risks are rising for the first half of 2023. This latest report was good but not too good for the Fed to downshift the pace of rate hikes in upcoming meetings.

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 George Smith, CFA, CAIA, CIPM, Portfolio Strategist

Wednesday, November 16, 2022

We look, through an economic lens, at the biggest sports event on the planet that kicks off on Sunday November 20 in Doha, Qatar – the soccer World Cup. We take a lighthearted look at some of the eye-popping financial costs coming out of this World Cup and some correlations, some non-spurious, some fun, relating to World Cup data. Do countries with more World Cup experience have more valuable squads of players? Is global warming leading to more penalty shootouts? Will higher bond yields yield more hat-tricks?  Do global markets perform better if a team from South America or Europe wins the cup? We explore these and more in these excerpts from our upcoming LPL Research “World Cup-onomics 2022” Report.

Taking place in a tiny fossil fuel rich country in the Middle East (that is smaller than Connecticut, and has a population less than Kansas) it had virtually none of the stadiums or infrastructure needed to host the games and the million plus fans expected to attend. As a result it has turned into the most expensive World Cup ever by a huge margin. In fact, it’s costing Qatar over four and a half times the total cost of the prior 8 World Cups combined, as they have built 7 new stadiums, a new airport, a new metro system, 100 hotels, multiple new highways, and even a whole new city to host the final match:

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First a correlation that makes logical sense, the estimated current value of the World Cup squads appears to have a fairly strong positive correlation to the prior number of appearances that teams have made at the World Cup. Teams with more World Cup history have had more time to develop the sport, leading to development of better, and hence more valuable players. A few anomalies in the data appear to be the elevated values of the England and Portugal squads, perhaps influenced by outsized global popularity of the English Premier League inflating player values (25 of England’s 26 man squad play in the English Premier League, as do 10 of Portugal’s squad). The Mexico squad shows a relative lack of value compared to the team’s 16 prior World Cup appearances, probably a consequence of only 4 of their players plying their trade in one of Europe’s top domestic leagues (England, Germany, Spain, Italy, Portugal).

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Now one that’s not so logical: there’s spurious correlation between the average 10 year U.S. treasury yield and the number of hat-tricks (three goals in a game by one player) scored at the World Cup finals. Yields had been falling since the early 1980s, as have the number of World Cup hat-tricks (there were actually none in 2006). Though it’s still trending upwards, the average 10-year yield for 2022 so far is actually pretty similar to 2018 when we saw a slightly above-trend two hat tricks, so one or possibly two looks to be the prediction for the 2022 edition that is spurious correlation yields!

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If you are stuck for a team to support this time round (or want to know who to support once (if!) your favorite gets eliminated) we took a look at global stock market returns and how they do in the four calendar years after a team’s World Cup win. The average post World Cup annual return when France are champions has been under 1%, compared to an average for all teams of 6.5%. France managed to catch the Dotcom Bust, Covid-19, and 2022 equity bear markets during their time as defending champions. Overall the best market performance followed Spain’s win in 2010, at just over 9% annual returns. Brazil is not far behind, with annual returns just under 9% following their wins in 1970, 1994 and 2002, and a South American win on average is followed by better returns than a win from a European team.

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For more light-hearted entertainment as well as a touch of economic insight please check out the full LPL Research “World Cup-onomics 2022” report that will be released later this week. It includes a closer look at the hosts Qatar, a look at whether the World Cup really is the biggest sporting event, more spurious correlations, a full preview of all the World Cup groups and teams (from an economic and sporting perspective), and our attempts to predict the winner of the 2022 World Cup by applying our investment based analysis to the World Cup data.

Good luck to all of our advisors and their clients whichever team you will be cheering for.

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 Adam Turnquist, CMT, VP Chief Technical Strategist

Friday, November 11, 2022

The S&P 500 has been stuck below its 200-day moving average (dma) for a statistically long time. History suggests the path to recapturing the 200-dma may require more time with additional downside risk. However, after the index has been contained below the 200-dma for extended periods comparable to today, forward 52-week returns for the S&P 500 have historically been bullish.

Background

The 200-dma is one of the most commonly used tools in technical analysis. It provides investors with a longer-term perspective on trend direction as it helps smooth out the day-to-day volatility of price action. In general, if price is above the 200-dma, a security is considered in an uptrend, especially if the 200-dma is rising. On the flip side, if price is below the 200-dma, a security is considered in a downtrend, especially if the 200-dma is declining. The 200-dma can also be utilized as a risk management tool given its dynamic support and resistance attributes.

Applying these general rules to the S&P 500 implies the broader market has been in a downtrend for most of the year. The last time the S&P 500 crossed below its 200-dma was on April 8, 2022, leaving the index below the 200-dma for 149 consecutive trading days (as of November 9, 2022). For historical context, a streak of this duration or longer represents nearly a 95^th percentile reading.

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While understanding the S&P 500 has been below its 200-dma for a long period provides context on the underlying trend, it does not help answer the important question of what may happen next. To answer that question, we used history as a guide and researched prior periods when the S&P 500 held below its 200-dma for at least 149 trading days. The table below provides a summary of our research.

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Summary

Acknowledging the data is limited, comparing the current period to the historical data above suggests the S&P 500 may require more time to recapture the 200-dma. In addition, the current max drawdown of 19.6% is roughly 5%-6% below the average and median drawdowns recorded during the prior timeframes. This does not imply history will repeat, but it does highlight the potential for additional downside risk.

Finally, longer-term returns after the index has been contained below the 200-dma for 149 days suggest there is a light at the end of the tunnel. Average and median 52-week forward returns for the S&P 500 have been 13.6% and 17.8%, respectively, with nine out of 12 periods generating positive results.

Additional Facts Related to the S&P 500’s 200-dma, based on data since 1950:

• The S&P 500 has traded above the 200-dma during 71% of all trading days.
• The S&P 500 has traded at an average premium to the 200-dma of 3.2% across all trading days.
• When the index is above the 200-dma, it has historically remained above it for an average of 131 trading days. During this time, the S&P 500 has traded at an average premium to the 200-day of 7.0%.
• When the index is below the 200-dma, it has historically remained below it for an average of 80 trading days. During this time, the S&P 500 has traded at an average discount to the 200-dma of -6.3%.
• There have been 209 bullish crossovers, classified as price closing back above the 200-dma. Forward six and 12-month returns following each crossover averaged 4.8% and 7.7%, respectively. When filtering for crossovers above a rising 200-dma, the average six and 12-month returns were 4.0% and 5.7%, respectively.
• There have been 213 bearish crossovers, classified as price closing back below the 200-dma. Forward six and 12-month returns following each crossover averaged 4.3% and 6.9%, respectively. When filtering for crossovers below a declining 200-dma, the average six and 12-month returns were 5.4% and 11.3%, respectively. While these statistics may appear counterintuitive, a declining 200-dma also implies investors have likely already discounted a large degree of downside risk. It is also important to remember the market’s long-term tendency to advance over time.

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

Thursday, November 10, 2022

Finally, an Encouraging Report

After many months of inflation coming in above expectations, investors finally got a more favorable report with the October Consumer Price Index (CPI) data and are cheering it with a big stock market rally on the news.

Both core and headline inflation rose less than forecasted, pushing the annual rates down considerably from the previous month. In October, the annual headline inflation rate eased to 7.7% from 8.2% in September. Core CPI, which excludes food and energy, rose 6.3% from a year ago. The economy is still finding its balance after multiple supply shocks from a pandemic and a war, but we may soon see a more broad-based deceleration of consumer prices.

Sticky

Shelter costs rose in October and contributed to over half of the rise in total inflation this month. As the housing market cools, this category will also ease but we may have to wait until next year before it meaningfully dampens headline inflation. Shelter costs, along with other services prices, are generally stickier than goods prices and will take time to reverse the previous year’s trend. But some services categories have turned over – medical care prices declined for the first time since the middle of last year and total services prices, excluding rents, fell in October from a month ago, the first time since May 2020. These are encouraging signs as these recent moves have pulled the annual growth rate down (see light blue line in chart below).

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No Surprise Here

Goods prices continue to lead the way downward. Used car prices declined for the fourth consecutive month, adding downward pressure on goods prices. Clothes prices declined month over month for the second consecutive month as general merchandise stores manage bloated inventories. Furniture and appliance prices also declined as the housing market slows. Demand for housing-related items should continue to soften in the coming months.

Rising Rents Continue

Rents will likely peak very soon since some of the industry data show falling monthly prices. As of October, rent prices are up 7.5% from a year ago, the fastest annual rate since the early 1980s. The massive reshuffling in the housing market explains most of the rise in rental costs. During the recent period of unusually low mortgage rates, housing demand skyrocketed and home price appreciation reached new levels. High housing costs pushed many homes out of reach for would-be millennial buyers and for first-time buyers with no pre-existing home equity. High demand for homes and low supply created insurmountable hurdles and pushed many to be renters instead of home buyers.

Conclusion

Headline inflation is likely past its peak, but the Federal Reserve (Fed) still has work to do. The easing inflation measures give the Fed some leeway as it begins to downshift from the recent aggressive pace of rate hikes. As policy makers get convincing evidence that inflation is easing, the Fed will likely be on track to increase the fed funds rate by 0.50% on December 14. The October price deflator, the Fed’s preferred inflation metric, will be released on December 1 and will also play a role in the expected path of the rate hikes. Most importantly, the Fed will release updated projections after their meeting, which will likely include revisions to growth and inflation. As import prices and producer prices ease, the inflation outlook should improve. As policy makers have publicly indicated, inflation is the primary concern and for now, the Fed is willing to sacrifice economic growth in the near term to get inflation back to the long-run rate of 2%. But in the near term, investors should respond favorably to these encouraging moves in consumer prices.

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