Wealth Management

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

Friday, August 12, 2022

The latest weekly data from the American Association of Individual Investors (AAII) showed a continued increase in the percentage of individual investors who are bullish about short-term market expectations (32.2%), and a continued reduction in the number of bears (36.7%). This puts the spread between the bulls and the bears at -4.5%, still slightly bearish overall but at the lowest level of pessimism since the end of March 2022.

“Bullish investor sentiment seems to be re-appearing in the AAII survey data as the equity markets have rallied from the June lows” said LPL Financial Portfolio Strategist George Smith “This could be most reflective of the strong bounce in some of the more speculative growth names favored by many retail investors.”

As shown in the LPL Chart of the Day, investor sentiment, as measured by the spread between bulls and bears in the AAII data, has been recovering, along with the stock markets, since mid-June. So far in 2022 the spread only veered into bullish territory once (at the end of March) but we suspect if the market manages to hold this current rally we may see a positive number again next Thursday.

View enlarged chart.

We tend to view the AAII as a contrarian indicator with extremes in negative sentiment tending, on average, to be bullish for near-term stock market returns and that extreme optimism tends to be bearish for the near-term outlook for stocks. This indicator can be a bit early; as shown in the table below, 3-month returns after the spread gets very bearish are only just above average but the average stock returns 6 months and 1 year out are better than average. This trend appears to be continuing in 2022 with extreme pessimism, as measured by a bull-bear spread more than two standard deviations below average, occurring early in the bear market, from mid-January onwards. If the S&P 500 doesn’t recover above those January levels (4400s) by the same point in 2023 it will be the first time since mid-2008 that an extreme in AAII data pessimism will have yielded a negative return one year out. For the time being on this signal we are into no-man’s-land, where it no longer provides strong future guidance either way other than to expect average returns, but we will be continuing to monitor for divergences to extreme levels.

View enlarged chart.

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

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

Posted by Jeffrey Buchbinder, CFA, Equity Strategist

Thursday, August 11, 2022

The U.S. dollar is getting a lot of attention these days. It’s up about 10% year to date, which is a big move for currencies. The dollar matters for a number of reasons and we would argue probably deserves the attention it gets.

10 Things to Know About the US Dollar

1) S&P 500 companies that have a global footprint have to contend with a stronger dollar denting their revenue growth. Approximately 30% of S&P 500 companies’ revenue is earned in markets outside the US. During the second quarter earnings season many companies noted that the strength of the dollar hindered their top line revenue growth. We estimate currency took perhaps 2 to 2.5 percentage points out of S&P 500 revenue in the second quarter.

2) As shown in the LPL Chart of the Day, the “twin deficits” of the U.S. economy—the combination of the budget deficit and the current account (or trade) deficit—have been relatively accurate predictors of long-term trends of the US dollar. While the deficit has come down some in recent quarters, this relationship suggests the dollar is more likely to weaken over the next year or two.

View enlarged chart.

3) An aggressive Fed rate hike campaign to curtail inflation would likely be bullish for the US dollar. Should inflation remain stubbornly high, the Federal Reserve may have work to do. In this scenario, the dollar may appreciate against the currencies of our key trading partners.

4) Emerging markets, in general, react negatively when the dollar climbs higher, as many have dollar-denominated debt with holdings of corporate and sovereign bonds. A stronger dollar makes it more difficult to service that debt. Many emerging market countries export commodities, so the strength of the dollar affects those sales. If emerging market countries import oil that’s priced in US dollars, it becomes more expensive.

5) Interest rate differentials affect currencies. When US interest rates are higher than those in other major economies, it tends to provide support for the U.S. dollar. The Fed’s aggressive rate hiking campaign has been supportive of the dollar to date, but Wednesday’s cooler inflation reading caused the market to pull back some on its rate hike expectations, causing the dollar to sell off.

6) A strong dollar is deflationary. As a historical net importer, the U.S. has usually carried a trade deficit (leading to a broader current account deficit in the process). As a result, the strong dollar is welcomed now with inflation being the biggest challenge for the U.S. economy.

7) International investments benefit from a weaker dollar. Most foreign-domiciled investments generate profits in foreign currencies. For U.S.-based investors those profits are worth less in a rising dollar environment.

8) Commodities tend to benefit from a weaker dollar. Because many commodities such as oil and gold are priced in US dollars and sold globally, a weaker dollar provides a boost for prices, and vice versa.

9) A strong US dollar tends to correspond to tightening financial conditions. As monetary policy in the U.S. gets tighter, we would expect the US dollar to experience some upward pressure. As such, the strong dollar has done some of the Federal Reserve’s work for them in tamping down inflation.

10) The US dollar, as the global reserve currency, typically experiences safe haven demand when global economic and financial market conditions deteriorate. The dollar surged during the COVID-19 recession in the spring of 2020 and was strong from June 2021 up until just the past few weeks as markets increasingly priced in more Fed rate hikes and pushed Treasury yields higher.

So where does the dollar go from here?

Our best guess is once the market begins to worry less about inflation and gets visibility into the end of the Fed’s rate hiking campaign, that the dollar will weaken. The deficits have come down but they remain structural forces pushing the dollar lower.

At the same time, the challenging international economic environment, particularly with the energy crisis in Europe, and heightened U.S.-China tensions, may lead to periodic safe haven demand for the dollar. The U.S. economy still looks to be in better shape than Europe or Japan with much higher interest rate levels. As a result, it may not be prudent to position portfolios aggressively for a weaker dollar.

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, August 10, 2022

Headline CPI eased in July to 8.5% year-over-year from 9.1% in June. Still above the Federal Reserve’s (Fed) long-run target rate, the annual rate of inflation seems to be cooling. As shown in the LPL Chart of the Day, inflation is easing as durable goods prices continue their descent from recent highs. For example, prices for appliances have declined for three out of the last four months and used vehicle prices declined four out of the last six months. “The July inflation report should change market expectations about future Fed activity,” explained Jeffrey Roach, Chief Economist for LPL Financial. “As inflation eases, the Fed can now tighten monetary policy at a slower pace.” The Fed still has a lot of work to do, but pricing pressures seem to be easing.

View enlarged chart.

The latest inflation report is welcomed news and could add support for the Fed to raise rates at a slower pace in September. However, the headline measure of inflation may be too good to be true because of the nagging price increases to rental costs.

Watch Out for Rent

Recent pricing trends for rent of primary residence is alarming. Since November 2020, monthly changes in rental costs have accelerated. Last July, rental costs rose 0.2% month-over-month and then inched up to 0.7% month-over-month in July 2022. The booming 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.

Fed Could Hike 50

As inflation rates slow, the Fed could revert to a 50 basis point (or 0.5%) increase at the next meeting of the Federal Open Market Committee (FOMC) in September. Inflation is the primary concern for policy makers. Although the employment situation is the other mandate for the central bank, inflation is currently the greater risk. The labor market is a key variable for investors as they anticipate future moves by the Fed. A slowing job market is a risk, especially since firms are announcing more layoffs. For more on the labor market and its relationship with Fed policy, be sure to watch our latest Econ Market Minute, where Chief Economist Jeffrey Roach gives more economic insights.

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.

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The Case For Recession Weakens

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

August 8, 2022

The most watched, and arguably the most exciting, soccer league in the world kicked off this weekend across the pond: the English Premier League (EPL). It’s set to be an enthralling season for the many EPL fans around the world as some of the world’s biggest soccer (or football as it’s called over there) teams battle it out for supremacy, in what is also the most lucrative soccer league in the world for its constituent teams.

As of the latest United Kingdom (U.K.) government estimates, the premier league is estimated to contribute over $10 billion per year to the UK economy. Much of the financial success of the league has come from selling the television broadcast rights both domestically but also increasingly outside of the U.K. (including the $2.7 billion that NBC just paid for rights to broadcast in the US for the next 6 years, extending its current deal that has been in place since 2013, out to 2028). Worldwide an estimated 3.2 billion viewers watched at least one EPL match during the 2019-20 season, in almost a billion separate households. Perhaps it’s the accessibility of the games being broadcast in the English language but the EPL has left its rivals, Germany, France, Spain and Italy, who often get the better on the field, in its dust off it. The EPL brings in over $3.5 billion in TV money per season; almost double the Spanish “La Liga” league and more than the Italian, German and French leagues combined.

“U.S audiences watching premier league soccer have increased massively as TV coverage has increased and we anticipate this ramping up even more as we build up to the U.S hosting the FIFA world cup in 2026,” said LPL Financial Portfolio Strategist George Smith “Of course, we’d never suggest investing based on this, but the superstitious amongst you would not be surprised to hear that a team wearing red winning the premier league has historically been a poor sign for stocks”

Just for fun we took a look at which EPL teams the stock market, as measured by the S&P 500, seemed to cheer. Going back to the start of the premier league era in the 1992-93 season (prior to this it was known as the English Football League Division 1) seven different teams have won the league. The stock market looks like it likes one hit wonders as it has never been down in the calendar year in which a team won the EPL for the first time. The average best return, +34%, has occurred when Blackburn Rovers won, for the only time in 1995, but unfortunately for those of us hoping for such an omen for 2023 Blackburn was relegated out of the EPL in 2012 and has been struggling in the lower divisions ever since. Manchester City won the season that just ended in May 2022 but finishing this year with a 15% calendar year return may be a stretch after the historically bad first half we saw. It will also not surprise Arsenal fans that their team is bad luck and that their team winning coincides with a measly 4% average return and sub-par batting average.

View enlarged chart.

We know that some traders are very superstitious about the color red so we also decided to look at the predominant color of each team’s home uniform (or kit as they would say in England). So far no team has ever won the league that doesn’t have either a blue or red home uniform and it turns out that a red team winning does correlate to more red in the markets, with a lower average return, worse batting average and much worse drawdowns when they do occur:

View enlarged chart.

Lastly, we wanted to look at the nationality of the winning team’s head coach (or manager as its known out there). Amazingly, no team coached by an Englishman has ever won the premier league but seven other nationalities have. Spanish, German and Italian winning coaches posted well above average returns and the stock market has never been down in any of the four years that an Italian prevailed!

View enlarged chart.

If you haven’t yet chosen a premier league team to support and want some good luck for the stock market as well our calculations point to a team that doesn’t wear red, would be a first time winner and has an Italian manager: Tottenham Hotspur. Tottenham is the only member of the so-called “big 6” premier league teams, who dominate the league financially, that has never won the EPL. Leeds United, who wear white and are coached by the American Jesse Marsch, could be a fun, but very unlikely to succeed, selection.

LPL Research would like to reiterate that in no way shape or form do we recommend investing based on this data, but here’s to a great premier league season for all you soccer fans out there!

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 Jeffrey J. Roach, PhD, Chief Economist

Friday, August 5, 2022

The economy added 528,000 payroll jobs in July after a solid gain in June and May. The strong gains in the job market last month should further cement the claim that the U.S. is currently not in recession. As shown in the LPL Chart of the Day, both the three- and six-month moving averages rose in July since the last two months were revised higher. Job gains were broad-based and especially prominent in sectors such as education, health care, and government. Firms ramped up production and increased manufacturing payrolls by roughly 30,000 in July. New jobs in manufacturing are likely due to improved supply chains and this sector should continue to add jobs as remaining supply bottlenecks improve. Total employment has returned to pre-pandemic levels in February 2020 but not back to pre-pandemic trends. The participation rate dipped slightly to 62.1% as the labor force shrunk in July by 63,000 and the unemployment rate fell to 3.5%, a decline of 0.1% percentage point.

View enlarged chart.

Given the stability in the job market, especially considering rising borrowing costs and higher inflation, we do not expect the National Bureau of Economic Research (NBER) to call a recession at this point. The labor market is strong enough to offset the weaknesses in other parts of the economy such as real estate.

Growing Frustration
The decline in unemployment and the participation rate will frustrate central bankers since a tighter labor market adds inflation risk to the economy. So far, earnings have not kept up with inflation. Average hourly earnings rose 0.5% in July after rising 0.4% the previous month. As of July, average hourly earnings were 5.2% higher than a year ago.

Markets are having trouble digesting the implications of the strong labor market in July. The big headline gain in jobs was a surprise and could convince people like San Francisco Fed President Mary Daly that the economy needs another 75 basis point hike at the Fed’s next meeting. All eyes are now on inflation.

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, Equity Strategist

Thursday, August 4, 2022

Prospects for a burst of growth in China once the reopening occurs has been a tempting investment thesis for emerging markets (EM) as much of the rest of the world has already reopened. But as we wait for that event, it’s clear we may be waiting a while longer. Meanwhile, House Speaker Nancy Pelosi’s trip to Taiwan and ongoing war in Ukraine have made it more uncomfortable to advise investors to hold anything more than a small emerging market (EM) equities allocation in portfolios. Remember, China composes roughly one-third of the MSCI EM Index. Add Taiwan and the total is near half.

“We’re all for international diversification over a long-term strategic time frame,” according to LPL Financial Chief Equity Strategist Jeffrey Buchbinder. “But it’s really tough to advocate for that right now tactically as the economic and geopolitical environment worsens outside the U.S. The strong dollar doesn’t help.”

As shown in the LPL Chart of the Day below, the days of booming economic growth for emerging market economies have long passed. Historically, faster growth in EM countries has generally been accompanied by relatively good EM stock performance compared to developed markets (DM). COVID has been an unwelcomed equalizer, leading to very similar economic growth this year in all of these markets. Meanwhile, China’s economic transformation to more of a services economy and away from low-value manufacturing and massive infrastructure spending has also shrunk this gap.

Though an EM economic growth premium will likely return in 2023 with EM likely to outgrow DM by a fairly decent margin, the geopolitical risk that comes with EM investing suggests caution is prudent.

View enlarged chart.

The earnings outlook in EM isn’t particularly enticing for investors either. As shown in the next two charts, estimates for EM have been revised sharply lower since Russia invaded Ukraine. That leaves EM earnings growth lagging the U.S. and likely developed international as well over the next 18 months. The more than 10 percentage point haircut is not just Russian earnings coming out of the index (though that’s part of it). Also consider EM’s track record of meeting earnings estimates over the last decade has been spotty.

View enlarged chart.

View enlarged chart.

Lastly, technical analysis also tells us that the outlook for EM may be weakening. Not only is the index setting lower lows and lower highs, as shown in the top panel of the chart below, but relative strength of the MSCI EM Index compared with the S&P 500, shown in the bottom panel, is also in a downtrend that is at risk of breaking below prior lows.

View enlarged chart.

So what is there to like about EM? Besides a possible but long-awaited reopening in China, valuations are the big positive here. EM is trading at a 37% discount to the S&P 500 Index on forward price-to-earnings ratio (P/E) basis (using the consensus earnings per share estimate for the next 12 months). The 15-year average discount is just 23%. Valuation is not enough to recommend an investment in our view but it sure helps in this case.

View enlarged chart.

In summary, the lack of a big economic growth advantage, earnings weakness, and deteriorating technical analysis signals suggest being on the cautious side of neutral despite attractive valuations and an eventual reopening in China. Add to that heightened U.S.-China tensions and war in Ukraine and the risk-reward in EM is not as attractive to us as it was earlier this year. For those who wish to allocate to EM equities, we would encourage using active management to help navigate geopolitical and governance risks.

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.

Second quarter earnings season is rolling and, after a bit of a slow start, the numbers have been pretty much as we anticipated.

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

Wednesday, August 3, 2022

LPL Financial held its FOCUS conference at the Colorado convention center in Denver, CO from July 24-27 for over 4 thousand financial advisors. Today we bring you the second part of the most frequently asked questions that LPL Research received at the conference. “FOCUS is such a great event because it allows LPL Research to connect with so many advisors and understand their most pressing questions about the state of the markets,” said LPL Financial Asset Allocation Strategist Barry Gilbert. Following on from yesterday’s blog where we looked at the FOCUS 2022 questions relating to the economy below we share some of the most frequently asked questions we received on the stock and bond markets:

• What would it take for the S&P 500 to break down below the 2022 lows?

The bottoming of stock markets is a process so while we have a positive view on equities a retest of the June S&P 500 low would not surprise us. Around the June S&P 500 lows we did not see the levels of market capitulation or fear to believe that all potential sellers have been flushed out, so it’s entirely possible for there to be another wave of selling after this bounce. We did however see more of the market signals that typically occur around, or after, market lows. We discussed this in more detail in our recent “Was That The Bear Market Low Part 2” blog. On a more fundamental level a lot of uncertainly remains in the markets and while none of these are our base case risks remain. The primary risk is the Federal Reserve (Fed) overtightening, whether due to a policy mistake or an appropriate response to inflation not cooling as expected and more importantly inflation expectations becoming untethered. Overtightening could push the economy into recession with significant job losses and damage to companies’ earnings. Military conflict spilling into Europe outside of Ukraine or a Chinese aggression towards Taiwan are also non-zero risks that would provide negative shocks to global financial markets. Although, as shown in the below chart, when we look back at historic events the S&P500 has recovered relatively quickly (average 42 days) from the mild drawdowns that have accompanies past geopolitical shocks (average -4.7%).

View enlarged chart.

• Does LPL Research believe the rebound in growth stocks will continue?

The rebound in growth stocks, from somewhat oversold conditions, has been strong over recent trading sessions but we believe a slight tilt toward the value style is still prudent for now. Renewed confidence in economic and earnings growth and stable interest rates would set the stage for the growth rebound to continue, as these conditions would allow growth stocks superior earnings power to shine. At the present time however there is a lot of uncertainty and we believe growth stocks are still relatively expensive and could still be susceptible to valuations compression if inflation continues to put upward pressure on interest rates.

• Which stock sectors does LPL research currently favor?

LPL Research recommends a modest tilt toward defensive sectors and away from cyclicals as the second half begins with uncertainty still elevated. Our favored defensive sectors include healthcare and real estate, while the near-term outlook for the energy sector remains positive on both a fundamental and technical basis. The aforementioned conditions for a style shift toward growth (falling inflation, stabilizing economic growth and interest rates) may also drive a turnaround in some sectors with technology, the most important, so that is one to watch for the second half of the year.

• What is LPL Research’s view on bonds? Is the worst over?

Despite the historically poor start to the year, the value proposition for bonds has actually improved year-to-date, although the 10-year Treasury yield is now well of its 2022 highs. Even after the recent pullback the yield on most fixed income asset classes is still close to the highest levels we’ve seen in a decade and since starting yield levels are the best predictor of future returns this could still be an attractive opportunity for income-oriented investors. And while we certainly can’t guarantee that interest rates won’t return to 2022 highs, even at current yields, the risk/ reward for owning fixed income has improved dramatically, in our opinion.

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