Wealth Management
Difficult Outlook for Consumer Discretionary
Posted by Jeffrey Buchbinder, CFA, Equity Strategist
Wednesday, May 25, 2022
While the S&P 500 Index has not yet fallen into bear market territory (a decline of more than 20% based on closing prices), there are a number of areas of the market that have already endured bear market declines. The technology-heavy Nasdaq is already there, with its near-30% decline since November 19, 2021. The average S&P 500 stock is down about 24% from the highs. The small cap Russell 2000 Index has fallen 28% since its record high back on November 8, 2021.
“While the S&P 500 Index has not officially entered bear market territory, plenty of areas of the market have,” noted LPL Equity Strategist Jeffrey Buchbinder. “The consumer discretionary sector is one of them with a 35% drop from its November 2021 high. And as we heard from some of the biggest retailers during earnings season, the outlook is only getting tougher as energy prices soar and supply chain problems persist.”
The LPL Chart of the Day illustrates just how difficult earnings season was for the consumer discretionary sector. No sector saw its earnings estimates for the next four quarters cut more during reporting season than consumer discretionary. Retailers have struggled with the transition from pandemic to reopening and intensifying cost pressures. The LPL Research Strategic and Tactical Asset Allocation Committee (STAAC) maintains its negative view of the sector.
The impact of inflation and snarled supply chains on retailers, the biggest piece of the discretionary sector, is widely understood. But we would argue that it’s not quite priced in.
The next chart shows the price-to-earnings ratio (P/E) for the discretionary sector relative to that of the S&P 500 Index. The sector still trades at a 34% premium to the market, compared to the 10-year average of 26%. That’s certainly a lot more reasonable than the 100% premium valuation the sector reached last summer, but we would argue that the sector still does not warrant valuation support. This market has not been friendly to richly valued stocks, and consumer discretionary still has a good amount of them despite the more than 30% decline.
From a technical standpoint, our analysis doesn’t get any more optimistic. The sector was one of the top performers off the market low, outperforming the S&P 500 by more than 10% in the first year following the COVID-19 driven bear market. However, since then relative performance has significantly deteriorated and the sector now sits at its lowest level relative to the S&P 500 since January 2015. And while the sector is one of the most concentrated, with biggest components Amazon and Tesla accounting for an eye-popping 46% of the sector, the weakness has been broad based as only 2 of the 60 stocks in the index remain above their respective 200-day moving averages.
The sector has a lot going against it right now but there is a silver lining. The hotels, restaurants, and other travel & leisure categories are getting a boost from the reopening. It hasn’t been enough to offset the other headwinds mentioned above, but once the the inflation and supply chain headwinds ease further, the sector could be poised to rebound. The potential for interest rate stability should eventually help higher priced growth stocks like those that make up the bulk of consumer discretationary sector. It’s just too early in our view.
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.
How Do Bonds Perform During and After Equity Bear Markets?
Posted by Lawrence Gillum, CFA, Fixed Income Strategist
Tuesday, May 24, 2022
The S&P 500 Index briefly touched bear market territory (down 20% from peak) intraday on Friday, May 20. While much will continue to be said about where equities are headed, what about bonds? How have bonds performed historically during equity bear markets (as measured by the S&P 500 index), and how have bonds performed historically six months following an equity bear market bottom?
As shown in the LPL Chart of the Day, bonds have historically performed well during equity bear markets, as measured by the Bloomberg US Aggregate Bond Index (Agg), returning over 6% on average. Of the three primary sub-components of the Agg, U.S. Treasuries bonds performed the best (+8.4% on average), living up to their safe haven profile, while corporate bonds, which introduce credit risk, have performed the worst (+2.6% on average).
This year shows a clear divergence in the positive performance from the Agg during equity bear markets (-9.2% as of 5/20). What likely caused this divergence? Compared to the periods shown in the chart below, 2022 is the only period where the 10-year Treasury yielded less than 2% at the start of the equity bear market and inflation was elevated (as measured by year-over-year core CPI). As of January 3, 2022, the 10-year Treasury yielded 1.63%, while core CPI measured 6% in January. Low starting yields and above average inflation has resulted in poor bond performance so far in 2022 as bond yields try to catch up to inflation. In fact, the 10-year Treasury yield has approximately doubled at its year-to-date peak of 3.20%. In contrast, in September of 1976, core CPI measured 6.8%; however, the 10-year Treasury yielded 7.5%.
While 2022 has thus far been a historically painful bond environment based on performance, how have bonds performed the next six months after an equity bear market has bottomed? As shown in the chart below, if the S&P 500 bottoms soon, bonds may be poised to recover some of the 2022 losses. On average, the Agg returned 5.8% during the six month period after equity markets bottomed. And the story reverses looking at the three primary sub-components of the Agg; Treasury bonds performed the worst (+3.6% on average), while corporate bonds performed the best (+10.2% on average). It should be noted that bonds historically provided positive returns following an equity bear market even as equities (S&P 500 index) rallied during the periods shown below. As such, it is not surprising to see corporate bonds outperform Treasuries as risk assets rally broadly given a higher historical correlation to equities.
However, if equities continue to decline, LPL Research believes the rapid rise in rates so far in 2022 will allow bonds to act as a better diversifier to equity volatility moving forward (discussed here). Additionally, if history is an indication of future performance and equities bottom soon, bonds may perform better the second half of 2022 and recover some of this year’s losses. This could be a good time for investors with a meaningful underweight to core bonds to reevaluate their allocations to the asset class.
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.
Do Investors Think The Fed’s Hammer Works Like A Screwdriver?
Posted by Jeffrey J. Roach, PhD, Chief Economist
Friday, May 20, 2022
“Our tools don’t really work on supply shocks.”
The quote above was one of the most important statements Chair Jerome Powell made at the recent press conference after the Federal Open Market Committee (FOMC) decided to raise the federal funds rates and reduce the size of the Fed’s balance sheet. At the press conference, Chair Powell reminded the audience that monetary policy cannot directly impact supply imbalances but instead, is a tool to affect imbalances in the demand side of the economy. The Fed is equipped with blunt instruments – like a hammer – to address their dual mandates of price stability and full employment through various means. The Fed does not have a precision tool – like a screwdriver – to control supply chains. “Asking the Federal Reserve to fight supply chain problems is a misguided question,” explained Jeffrey Roach, Chief Economist at LPL Financial. “But, demand and supply are interrelated and there lies the Fed’s conundrum. The sooner the market comes to grip with this, the better for investor sentiment.”
A Business Cycle Like None Other
In previous business cycles, policy makers talk about sectors “overheating” from strong aggregate demand, driven by robust consumer spending. And as the economy starts to overheat, policy makers attempt to slow the economy by removing accommodative monetary policy through tightening financial conditions. What made this most recent business cycle different was the centrally planned nature of stopping and then abruptly re-starting economic activity. Given this unusual experience, the “overheating” mentioned above started almost immediately. The sudden onslaught of consumer demand created shortages in items like toilet paper, semiconductor chips, household appliances and used cars.
Supply Chain Kinks Are Inflationary
The St. Louis Federal Reserve tested the relationship between global supply chain disruptions and inflation.[1] They found supply bottlenecks created large inflationary pressures, especially in the technology equipment sector and automotive and parts sector. As we share in the LPL Chart of the Day, consumer price changes lagged 4 months are 72% correlated with the New York Fed’s Supply Chain Pressure Gauge. Given the improvement in supply chains, inflation pressures should subside. And as inflation eases, the Fed will not likely need to increase rates above neutral. Our base case is the FOMC hikes rates by 50 basis points in June and then moves to 25 basis point increments, reaching 2.50% by the end of this year.
[1] https://research.stlouisfed.org/publications/review/2022/02/07/global-supply-chain-disruptions-and-inflation-during-the-covid-19-pandemic
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.
When it Comes to Earnings, Buy American
Posted by Jeffrey Buchbinder, CFA, Equity Strategist
Thursday, May 19, 2022
This is a macro driven market. So even as the S&P 500 Index nears a bear market, until we get better news on the macro front, volatility will likely continue. There is a long list of macro worries right now, including sky-high inflation, rising interest rates, an aggressive Federal Reserve, a possible U.S. recession, China’s ongoing COVID-19 lockdowns and resulting supply chain disruptions, and war in Ukraine. So while LPL Research believes that stocks generally offer good value relative to companies’ earnings power with the S&P 500 Index near 3,900, that value may unfortunately take more time to be realized.
Once economic conditions begin to improve, earnings will start to matter again. The combination of growing earnings and more attractive valuations can be powerful. Companies have broadly demonstrated that they can grow earnings at a solid pace despite these intense cost pressures, even though there have been signs that the environment has been getting more challenging for certain industries, particularly retail. When those pressures start to abate, earnings will strengthen and get more attention. For longer-term investors, that earnings power will provide a solid foundation for higher stock prices.
“The bears might say that stock valuations are not attractive because the earnings may not come through,” noted LPL Equity Strategist Jeffrey Buchbinder. “But corporate America has a profit margin problem, not a revenue problem. And the causes of those margin pressures are likely to abate in the second half of the year.”
U.S. earnings continue to stand out globally
U.S. stocks are trading at more expensive valuations than their international counterparts, as they have been for quite some time. However, the LPL Chart of the Day illustrates the continued earnings superiority of the U.S. equity market, which suggests that U.S. outperformance over the past year has been justified. While international stocks have outperformed the U.S. over the past couple of months as the selloff in domestic tech stocks has accelerated, we would expect U.S. equities to lead the rebound on the other side.
While earnings estimates for U.S. equities have continued to rise in recent months, albeit gradually, expectations for international earnings in both developed and emerging markets have been reduced. Stronger earnings growth potential and less impact from the Russia-Ukraine conflict still support our preference for U.S. equities over Europe, which makes up the majority of the developed international markets benchmark. We are watching for more geopolitical stability and a weaker US dollar to potentially get more interested in international equities from a tactical perspective.
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.
Six Things To Know About Bear Markets
Posted by Ryan Detrick, CMT, Chief Market Strategist
Wednesday, May 17, 2022
It has been a historically bad year so far for stocks, with many names in bear markets. Thus far though, the S&P 500 Index has avoided a bear market (classified as a 20% decline from recent highs), as it was down 18.1% as of last week.
Here are six things to know regarding bear markets.
1) There have been 17 bear (or near bear markets) since World War II. The average drop was nearly 30% and lasted nearly a full year.
2) Breaking down bear markets with recessions and without recessions shows an interesting development. Should the economy be in a recession, the bear markets get worse, down 34.8% on average and lasting nearly 15 months.
3) Whereas as shown in the LPL Chart of the Day, should the economy avoid a recession, the bear market bottoms at 23.8% and lasts just over seven months on average. Even more interesting is we’ve seen multiple near bear markets bottom near 19%, close to where stocks bottomed last week.
“Going back more than 50 years shows that only once was there a bear market without a recession that lost more than 20% and that was during the Crash of 1987,” explained LPL Financial Chief Market Strategist Ryan Detrick. “With other near bear markets without a recession bottoming near 19% corrections in 1978, 1998, 2011, and 2018, not far from the recent lows.”
4) Midterm years can be quite volatile with the average year down 17.1% peak to trough, so a bear market during this year isn’t out of the ordinary. Knowing that helps put this year’s drop of 18.1% in perspective. The good news is a year off those lows, the S&P 500 has gained 32.0% on average, something most investors would likely take right about now.
5) Here are the fastest bear markets ever. Not surprisingly, the pandemic related bear market of March 2020 was the fastest ever, going from a new high to down 20% in only 16 trading days.
6) This is the third year of the current bull market and the third year tends to see somewhat muted returns, up barely 5% on average. In fact, there have been 11 bull markets since World War II and three of them ended during their third year.
So those are six things to know about bear markets. Lastly, speaking of six, the S&P 500 is down six weeks in a row currently, the longest losing streak since 2011. It hasn’t been down seven in a row since 2001. What stands out about this data is if the six week losing streak is down more than 10% (like this one was), then the future returns can be quite strong. Up a median of 9.9% six months later and 29.2% a year later.
For more on how close stocks are to a low, the strong first quarter earnings season, and why the 60/40 portfolio isn’t dead, please watch the latest LPL Market Signals podcast with Jeff Buchbinder and Ryan Detrick, as they break it all down.
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.
Are Bonds Acting Like Bonds Again?
Posted by Lawrence Gillum, CFA, Fixed Income Strategist
Tuesday, May 17, 2022
One of the value propositions of owning core bonds is that they tend to act as a diversifier during equity market drawdowns. That is, core bonds have tended to outperform equities during equity market selloffs, which has helped cushion total portfolio volatility and helped mitigate losses (versus a 100% equity portfolio). However, that has certainly not been the case so far this year as equities (as defined by the S&P 500) and core bonds (as defined by the Bloomberg Aggregate index) have both experienced double-digit losses (at the time of this writing, however, core bonds have lost slightly less than 10%). With such deep losses for each asset class coming at the same time this year, investors may be left wondering if the diversification benefits of core bonds are over.
However, as shown in the LPL Chart of the Day, since 2000, the correlation between stocks and bonds has generally been negative, although there has been considerable variation with that relationship. And at times, the relationship between stocks and bonds has, in fact, been positive (from 1965 to 2000, correlation was actually slightly positive due to higher inflation and more frequent inflationary shocks). So, as was pointed out in our blog post on Friday May 13 (found here), the historical correlation between stocks and bonds is actually close to 0– meaning it’s generally noisy. So, in other words, it isn’t that uncommon to see equity and bond prices moving lower (or higher) at the same time.
That said, now that interest rates have moved off the all-time lows set back in August 2020, there is more of a cushion to act like a diversifier during equity market drawdowns, which is what we’ve seen during the most recent equity market stresses over the past few weeks. Since the start of May, equities are down over 3% whereas core bonds are slightly positive. And without any additional macroeconomic shocks driving the divergent returns, it’s comforting to see bonds providing that equity buffer, albeit over a very short time horizon. “The back-up in yields this year has certainly been painful, but the ability for fixed income to act as an equity buffer has increased, in our view,” noted LPL Financial Fixed Income Strategist Lawrence Gillum. “As bond and equity markets both move past the aggressive repricing of Fed rate hikes that have caused both markets to sell off this year and grapple with a potential slowdown in economic growth, bonds are likely to provide that safety net to portfolios again as we move through the year.”
So what does this say about core bonds? While we’re not saying yields can’t go higher from current levels, with improved valuations (see here) and the potential for core bonds to provide diversification to equity risk again, this could be a good time for investors with a meaningful underweight to core bonds to reevaluate their allocations to the asset class.
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.
Five Things You Should Know About the Traditional 60/40 Portfolio
Posted by lplresearch
Friday, May 13, 2022
It’s been a tough year so far for a traditional “60/40” portfolio, a portfolio of 60% stocks and 40% bonds. Using the S&P 500 Index and the Bloomberg U.S. Aggregate Bond Index (“Agg”) to represent stocks and bonds, the traditional 60/40 is down 14.0% as of market close on May 11 on a total return basis, which would trail only 2008 as the worst year on record if that’s where we ended the year, which is not our base case.
Historically, bonds have typically seen gains during periods of equity volatility, although not always. But low bond yields in 2020 and 2021 and steep bond losses due to rising rates in 2022 have led many to speculate that the 60/40 portfolio is dead. But there’s something of a silver lining in the declines. Recent stock and bond losses have actually helped valuations to improve for the 60/40 considerably, based on a combination of the price-to-earnings ratio for the S&P 500 and the yield for the Agg. Valuations aren’t a market timing mechanism, but they are an important consideration for longer-term return expectations and that picture has improved quite a bit.
“The time to talk about the death of the 60/40 was six months to a year ago and even then it was exaggerated,” said LPL Financial Asset Allocation Strategist. “We still probably won’t get back to the level of returns we’ve seen over the last several decades, but over the last year the 10-year outlook for the 60/40 has improved by about 2 percentage points annualized in our view, about as big a one-year improvement as we’ve seen at any time in the last 20 years.”
For the many investors whose experience this year has them questioning the value of the traditional 60/40, here are five things that provide perspective.
- What we’ve seen in 2022 so far is unusual. Since the inception of the Agg in 1976, the S&P 500 has been down over a calendar year eight times. The Agg was higher every single time (although only by 0.01% in 2018). Those are also the worst eight year for 60/40 performance. From the bond perspective, the Agg has been negative four times in its history. It’s a small sample, but the S&P 500 was higher every time with the average gain over 20%. Of course, neither case is holding this year so far.
The picture is a little more complicated when looking at quarterly data. Since 1976, the S&P 500 has had 50 negative quarters. The Agg has been lower in 16 of them. The worst quarter for the 60/40 was the fourth quarter of 2008, driven by stock losses. The Agg was actually higher that quarter. The worst quarter for the 60/40 in which the Agg was negative was the third quarter of 1981, with the 60/40 down 7.8%. As of May 11, the current quarter would be the worst for the 60/40 when the Agg had a negative quarter, but only the fourth worst overall due to prior quarters that saw heavy stock declines.
- Bonds can go down too, even when stocks do. Using quarterly data, the historical correlation between the S&P 500 and the Agg is close to 0. Stocks and bonds tend to each go their own way relative to average performance rather than moving in decidedly opposite direction. It’s also important to remember that bonds, just like stocks, are perfectly capable of losses. The S&P 500 has been lower 27% of all quarters over the lifetime of the Agg; the Agg, by comparison has been lower 23% of all quarters, a relatively small difference. The Agg is down more often than average when the S&P 500 is down for a quarter (32% of the time), which of course also means that when the S&P 500 was down the Agg has been higher 68% of the time.
- Stock valuations have improved dramatically. The forward price-to-earnings ratio (P/E) for the S&P 500 as of the end of April 2021 was 21.7 according to FactSet data. Yesterday it was around 16.6. As shown in the LPL Chart of the Day, that’s an improvement of 23%. (P/Es improve as they fall, since stocks are “cheaper.”) That decline translates into roughly a 2 percentage point improvement in the annual return expectation of the S&P 500 over the next 10 years, although many factors can strongly influence the actual outcome. That’s the fastest one-year improvement in the forward P/E since 2009. Even with the dramatic decline in P/E, S&P 500 valuations are still slightly above their historical average, but the improvement is meaningful.
- Bond valuations have improved dramatically too. The yield-to-worst for the Agg as of the end of April 2021 was 1.51%. Yesterday it reached 3.47%. This is the fastest one-year improvement in yields since 1995. That likewise represents an improved annual expected return of roughly 2 percentage points over the next 10 years. There are factors that can make the actual outcome differ from the expectation here as well, but the difference is less variable than for stocks simply because you know the price you’ll get for a bond at maturity.
- Dislocations create opportunities for strategic investors. This blog’s focus has been on the S&P 500 Index, perhaps the most well-known and widely used stock index in the world. But it’s not the only area of the market where stock valuations have improved, and some may offer even better value. Despite its improvement the S&P 500’s P/E is still in the 73rd percentile of all values going back 20 years, according to FactSet data, with higher percentiles representing less attractive valuation. But there are areas of the market that are in the 10th percentile or lower of all values over the same timeframe and sitting near levels only seen during the Great Financial Crisis and in March of 2020.
Similarly, there are pockets of the bond market seeing yield levels that have been relatively unusual in the last decade. For both stocks and bonds, times when valuations were most attractive were hard moments to have an optimistic investment outlook, but the most opportune moments often are. Where we see the best strategic opportunities is a blog for another day, but pockets of even more attractive, even extreme, valuations do suggest that for long-term investors there may be ways to further diversify a traditional 60/40.
Recent changes in valuations have improved the outlook for a traditional 60/40 portfolio considerably, in our view, both on the stock side and the bond side. We do think of the traditional 60/40 only as a starting point for an appropriate investor. And even if the traditional 60/40 is very much alive, as we believe, there may still be opportunities to improve the risk profile of a portfolio, whether through greater diversification within stock or bond holdings, active management, or investment opportunities outside of traditional stocks and bonds. It’s been a tough year for many investors and we don’t think we’re in a position yet to call a tactical bottom for either stocks or bonds. But looking out strategically, based on better valuations and still solid fundamentals, we think the long-term outlook has brightened quite a bit.
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.
Oh Great, Here Comes Friday The 13th
Posted by Ryan Detrick, CMT, Chief Market Strategist
Thursday, May 12, 2022
This is one of the worst starts to a year ever and now we have to worry about Friday the 13th. That’s right, tomorrow, May 13, will be the first Friday the 13th since August 2021. For most people, this is just another day, unless you suffer from triskaidekaphobia—the fear of the number 13. A fear of the actual day of Friday the 13th is called paraskevidekatriaphobia or friggatriskaidekaphobia.
“Fortunately, the unlucky nature of Friday the 13th hasn’t tripped up U.S. stocks recently. In fact, the past four times Friday the 13th came around saw gains,” explained LPL Financial Chief Market Strategist Ryan Detrick. “Now the bad news: May hasn’t been kind to this day, down the past three times.”
As shown in the LPL Chart of the Day, the S&P 500 Index has struggled some when a Friday the 13th takes place during the month of May.
Taking things a step further, do we all hate Monday? Turns out stocks would agree, as this is by far the worst day of the week, with Wednesday actually the best.
2022 has been bad pretty much all around, but it turns out Wednesday is once again the best day of the week, and it really isn’t even close, although it didn’t hold true yesterday.
If it feels like this year hasn’t had many green days, that is probably because that is quite true. In fact, in 2022 only 43.3% (39 out of 90) of the days have seen the S&P 500 Index finish higher. The good news is we expect this number to mean-revert and we’ll see more green days before 2022 is all said and done.
As rough as this year has been, how does this correction stack up with other corrections? Currently, the S&P 500 is down 18% from the January 2 peak and it has been 128 days. Looking at all the corrections since 1980 shows the average one ends at about 88 days, so this correction is getting long in the tooth and could be nearing its conclusion. Additionally, the good news is a year off the correction lows, stocks have been higher 22 out of 24 times with an average gain of 23.0%.
For more on if the Fed put is dead, the economy, and sentiment nearing extremes, please watch the latest LPL Market Signals podcast with Jeff Buchbinder and Ryan Detrick, as they break it all down.
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.
Moderating Inflation Should Provide Boost in Consumer Confidence
Posted by Jeffrey J. Roach, PhD, Chief Economist
Wednesday, May 11, 2022
Moderating Inflation Should Provide Boost in Consumer Confidence
A slight moderation in inflation will likely provide some needed boost in consumer confidence but we may have to wait another month. The April inflation report was not as soft as many hoped.
Inflation rose a bit higher than expected in April. Prices in April rose 0.3% from a month ago and 8.3% from a year ago. Prices in some of the service sectors spiked. For example, airfare rose over 18% after strong price increased in February and March. “Prices in the service sector added upward pressure last month as consumers pivoted from goods to experiences and this rise in services prices could happen again next month too,” explained LPL Chief Economist Jeffrey Roach.
Overall inflation has likely peaked, as base effects pushed the year-over-year metrics down in April relative to March. As we share in the LPL Chart of the Day, inflation is likely past peak but the cool down period may take a while as prices in the services sectors could stay elevated in the near term.
Fed Still On Track to Hike
April data will not likely change expectations that the Federal Open Market Committee (FOMC) will hike by 50 basis points at their next meeting on June 14-15. Investors and policy makers know inflation will likely stay above target for a while but both will focus on the direction of the change. If prices moderate in the coming months, the FOMC may have flexibility to move to 25 basis point increments later this year.
The Federal Reserve’s preferred inflation gauge is the Personal Consumption Expenditure (PCE) deflator and we could likely see a more definitive decline in the deflator when released on May 27. The Fed prefers the deflator metric because the CPI tracks a fixed basket of goods and services and does not account for product substitutions consumers make when prices change. Whereas, the PCE deflator tracks price changes of actual consumer purchases.
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.