Wealth Management

Posted by ryandetrick

Wednesday, April 20, 2022

Inflation continues to soar, dominating conversation and stretching consumer wallets. Last week’s inflation data saw consumer prices up 8.5% year over year, the most since the early 1980s, while producer prices were up 11.2%, the most ever. What can the Federal Reserve (Fed) do? Will it ever stop? Is this the 1970s all over again? There are many question, but we do see some potentially good signs.

“Although many fear the light at the end of the tunnel is indeed an oncoming train, we think there are some clues that inflation could be near a major peak and the move lower could be sudden, at least for durable goods” said LPL Financial Chief Market Strategist Ryan Detrick.

View enlarged chart.

Here are three reasons inflation could be near a peak.

First up, cars and trucks. Few industries have been hit by the pandemic and supply chains issues as hard as the auto industry. The chip shortage has made getting a new car nearly impossible, so the price of used car and trucks has soared. Just two months ago the price of a used car was up nearly 45% year-over year (Manheim Used Care Value Index), but the past two months it has come down to ‘only’ 24.8%. In fact, the month-over-month decline the past two months has been 2.1% and 3.4%, showing some signs the excessive used car pricing could finally be cracking. Given used cars and trucks make up four percent (ok, 4.038% to be precise) of CPI (Consumer Price Index), this could be a big clue inflation is nearing a major peak.

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Next up not all inflation is equal. The Atlanta Federal Reserve breaks inflation down into ‘sticky’ and ‘flexible.’ As the name would suggest, sticky inflation is a weighted basket of items that change price relatively slowly. Think things like motor vehicle fees, education, public transportation, and motor vehicle insurance. Whereas flexible inflation contains things that move more often, like motor fuel, apparel, dairy, and jewelry.

As the LPL Chart of the Day shows, during the 1970s we saw both sticky and flexible core inflation soar, but thus far only flexible core inflation has moved significantly higher during this bout of inflation. Could this mean that flexible inflation could come back down just as quickly?

View enlarged chart.

The final reason inflation could be near a major peak is the major backlogs we’ve seen at various ports is finally thawing. The ports of Los Angeles and Long Beach backlogs are nearing September 2021 levels, while the cost of shipping is also coming down and very quickly.

In fact, shipping rates from Shanghai to LA, New York, or Rotterdam are down 28% on average from the peak last year. Shipping rates were between $1,000 and $3,000 pre-pandemic, so there could be a long ways for this to continue to fall and it won’t happen overnight, but this is another very positive clue that inflation could be nearing a major peak.

View enlarged chart.

For more on why inflation may be near its peak and what we see happening this earnings season, please watch the latest LPL Market Signals podcast with Jeff Roach 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.

Posted by lplresearch

Tuesday, April 19, 2022

The unrelenting move higher in U.S. Treasury yields continued last week making it the 15^th week (out of the past 16 weeks) that the yield on the 10-year U.S. Treasury security ended the week higher. Moreover, 10-year Treasury yields have increased by 130 basis points (1.3%) this year with a 110 basis points (1.1%) increase in yields since March 3. And the selloff has impacted all yields on the Treasury yield curve. From a historical perspective, the change in yields has been extraordinary: 2-year Treasury yields have risen by 170 basis points year to date, an amount that has only been materially exceeded during the 1994 Federal Reserve (Fed)  hiking cycle (over the whole year), and in the 1970s. The near-term uncertainty regarding the inflation outlook as well as the Fed’s expected response to stubbornly high increases in consumer prices have driven yields higher this year. This largely one-way move higher in yields has caused returns for most fixed income indexes to be among the worst to start the year in decades.

“No doubt, this year has been painful for fixed income investors,” noted LPL Financial Fixed Income Strategist Lawrence Gillum. “However, the silver lining in this historic selloff is that higher yields generally mean higher potential returns. And with interest rates higher than they’ve been over the past few years, now could be a good time to revisit fixed income as an investment.”

That said, the already historic selloff this year has provided potential fixed income opportunities not seen in years. As seen on the LPL Chart of the Day, yields for many of the core fixed income markets (U.S. Treasuries, mortgage-backed securities, and investment-grade corporate securities) are close to the highest levels since the beginning of 2010. Starting yield levels are the best predictor of future returns so with yields increasing meaningfully this year, future returns look more attractive than they have in years. With interest rates as low as they’ve been over the past few years, the back-up in yields could be an attractive opportunity for income oriented investors. And while we can’t guarantee that interest rates won’t go higher, at current yields, the risk/reward for owning fixed income has improved, in our opinion.

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

Posted by lplresearch

Thursday, April 14, 2022

Earnings season unofficially got underway yesterday with results from Blackrock, JPMorgan Chase, and Delta Airlines. The results were mixed, with JPMorgan Chase shares selling off on the results amid a sizable Russia-related writedown, Blackrock shares little changed, and Delta shares up 6% on its results.

Delta’s results are encouraging for the travel sector, though we would be careful to translate the news over to the very broad industrials sector and is further along in its recovery while facing a wide range of economic challenges.

The cool reception to financial services results on Wednesday may foretell what will be a challenging quarter. “Financial services companies, particularly the big global banks, faced a number of challenges in the first quarter,” noted LPL Financial Equity Strategist Jeffrey Buchbinder. “The flattening yield curve, Russian sanctions, and a difficult year-over-year comparison after significant loan loss reserve releases in the first quarter of 2021 almost certainly set the stage for lower earnings.”

As shown in the LPL Financial Chart of the Day, energy sector earnings will likely produce by far the strongest earnings growth in the quarter. But on the other end of the spectrum, financials earnings are expected to see a significant annual decline.

View enlarged chart.

The aforementioned macroeconomic challenges coupled with this expected earnings decline were among the reasons LPL Research’s Strategic and Tactical Asset Allocation Committtee (STAAC) downgraded its financials sector view to neutral earlier this month despite relatively attractive valuations. The sector has also experienced price weakness that, from a technical analysis perspective, the Committee thinks may signal continued near-term underperformance. Finally, negative earnings revisions in the month leading up to earnings season, shown in the chart below, suggest some caution is prudent ahead of reporting season, in our view.

View enlarged chart.

The STAAC also downgraded views of industrials and consumer discretionary to negative this month, a stance certainly supported by recent earnings revisions. Those two sectors are generally hurt by high energy costs, Russian sanctions, the China lockdowns, and ongoing supply chain disruptions.

So what sector might be winner this earnings season? The obvious answer is the natural resource sectors, i.e., energy and materials. But perhaps less obvious, we think utilities will be able to grow earnings double-digits. STAAC upgraded its utilities view to neutral this month. The sector may benefit from energy sensitivity and is less exposed to a potential slowdown in the economy.

STAAC’s view of healthcare, another potential earnings winner, is positive. Healthcare quietly generated a 7 percentage point upside surprise to earnings last quarter, is a reopening beneficiary, is relatively less economically sensitive, and is more insulated from supply chain issues and slower growth overseas than the cyclical sectors.

Finally, don’t fall asleep on technology. Our view of the sector is still just neutral but double-digit earnings growth in the first quarter looks likely, while estimates have held up well over the past month despite the global economic slowdown.

For a broader preview of earnings season, look for our newest Weekly Market Commentary, available here at 1pm E.T. on April 18.

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 lplresearch

Wednesday, April 13, 2022

One of the most prominent economic stories of the past year has been the supply shortage of semiconductors. As COVID-19 shut down chip making facilities across the globe, and consumers shifted their consumption from services to goods, the resulting combination created an unprecedented shortage of semiconductors that has affected everything from the automobile market to supply chains for refrigerator parts. And a reasonable person might think that this dynamic could create a highly profitable environment semiconductor companies. While that may or may not be true, when we study the supply-demand dynamics of semiconductor equities using technical analysis, we are seeing an overall lack of demand for a group that has been a market darling for much of the past decade.

As shown in the LPL Financial Chart of the Day, the PHLX Semiconductor Index broke down the 52-week relative lows vs. the S&P 500 this week, a characteristic we would typically associate with groups expected to underperform over the intermediate-term. The absolute chart (top panel) isn’t much better as the group is currently testing its mid-March lows after failing to eclipse resistance during its most recent rally.

View enlarged chart.

“Nobody would argue that semiconductors aren’t an attractive fundamental story, and that chips are increasingly part of every aspect of our lives,” said LPL Financial Technical Market Strategist Scott Brown. “However, investors need to recognize that these fundamentals are well known and price is simply suggesting that there are more sellers than buyers for these stocks right now”.

Sell-side analyst ratings on the underlying equities also suggest that this group is still overly loved despite recent underperformance. The ratio of buys to sells on the underlying holdings of the PHLX Semiconductor Index is an astounding 20:1, more than double the ratio for the broader S&P 500. From a contrarian standpoint, this suggests that optimism may simply have become too widespread after years of outperformance and may be in need of a correction itself.

We believe a move below the March lows could be the catalyst for that sentiment correction, and would caution that it remains an elevated possibility in the near-term. While the index is now more than 20% off its late-December highs, corrections of larger magnitudes were regular occurrences prior to the past decade’s streak of consistent outperformance. At the very least, the relative chart suggests this isn’t an area we would focus on for alpha as we enter into the historically tougher summer months.

LPL Research’s Strategic and Tactical Asset Allocation Committee continues to recommend near-benchmark levels of exposure for the broader tech sector. Despite technical headwinds, the fundamental story suggests that the next move is more likely to be an upgrade than a downgrade and recent weakness has left valuations more reasonable. From a technical standpoint, semiconductor weakness may continue to act as a drag on the group, and we would focus on stronger technical trends within the sector, such as in technology hardware, as we wait for a better opportunity in the sector overall.

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 lplresearch

Tuesday, April 12, 2022

Inflation in March was mostly driven by categories already reverting in April

March 2022 inflation metrics soared to highs last seen in December 1981, when the S&P 500 Index was at 123 (versus a little under 4,500 now) and the 10-year Treasury yielded 13.9%. Unfortunately, geopolitical tensions were high back then too, especially in Beirut, Lebanon. After rising 1.2% from a month ago, prices are now 8.5% above last year and over 11% above March 2020.

Gas, shelter and food prices were the largest contributors to the monthly gains. Gas prices alone accounted for over half of the monthly increase, rising 18.3% in March, but this spike was temporary. As of April 11, the AAA national average of retail regular gas price already declined roughly 25 cents from the highs on March 10.

View enlarged chart.

What categories will lead the way in releasing pricing pressures?

Gas prices is one component already releasing price pressures. As growth expectations slow, Russian sanctions squelch Putin aggression, and oil supply recovers, we expect gas prices to moderate. Another category to revert will likely be new and used vehicles, but supply chains must unclog before a meaningful reversion in prices is sustained. Used car prices fell 3.8% in March but are still 35.3% above a year ago and over 48% from March 2020. As global trade and shipping ports improve, auto manufacturing could likely get a respite. As more cars come on the lots, consumers will have more available options and dealers will have more comfortable inventory levels, providing relief in the strained car market. As shown in the LPL Chart of the Day, starting in February 2016, new and used vehicle prices declined for over two years while the economy continued to grow. This is definitely a “goldilocks” scenario as prices cooled off without a hard landing.

Food prices have also historically led the way in periods of slowing inflation. Along with the period of declining vehicle prices, meat prices also moderated. Consumer confidence will improve as food prices moderate, providing a boost to the consumers’ budgets.

View enlarged chart.

Inflation is possibly at the top but the cool down period could be painfully slow.

Recent inflation pressures originated from Russian military action in Ukraine. As sanctions developed, prices rose in the energy and commodity markets and quickly trickled down to consumer goods. But in addition to these geographical conflicts, earlier pandemic lockdowns and subsequent reopenings contributed to the initial spike in prices in almost all categories, including food, recreational equipment, and household goods. “The cool-down period for consumer prices may take a long time. Supply chains are still clogged, consumers have pent up demand for services, and the pool of available workers is small,” explained Jeffrey Roach, Chief Economist at LPL Financial. The good news is historical pricing pressures have eased before in this country without pulling the entire economy into recession.

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 lplresearch

Friday, April 8, 2022

Rising mortgage rates alone will not squash the housing market but will definitely slow exuberance

The historic spike in mortgage rates instigated chatter across the country that the housing market is a bubble that will soon pop. Mortgage rates made a steep climb recently as markets reacted to a newly-minted hawkish Federal Reserve (Fed). As seen in the LPL Chart of the Day, mortgage rates rose to levels last seen in 2011. “Our view is the housing market is not necessarily a bubble, but rising rates will no doubt slow some of the irrational exuberance,” says Jeffrey Roach, Chief Economist at LPL Financial. However, we don’t believe headwinds from higher rates will not fully negate the tailwinds of low inventory, pandemic reshuffling, and positive demographics. Other variables would have to turn over before the housing market materially declines.

A 150 basis point rise in mortgage rates is probably not enough to cause severe demand destruction

Several months ago, a prospective homebuyer would pay $1,347 for a $300,000 loan at 3.50%. If the buyer waited until this week to lock in a new rate at 5.00%, the borrower would pay $263 more per month. For most households, an additional cost of $263 per month will cut into discretionary spending, and prospective buyers will reconsider housing options. The initial response to higher rates will be most obvious for first-time prospective home buyers, who will bear the brunt of higher rates. This cohort will likely realign expectations or delay a home purchase altogether. But, those selling a current home could be more adaptable to higher rates, since this cohort can likely offset high costs with existing home equity. Higher cost of funds will likely mean a cut in discretionary items most sensitive to relative price changes. Inflationary periods with high mortgage costs will weigh on the consumer but if rates stay contained, our baseline expectation is the consumer will wade through it.

View enlarged chart.

Here come the Millennials

Long-term demographic trends will support housing. According to the latest data from the National Association of Realtors (NAR), the median age of first-time buyers has risen to 33.[1] The median age of repeat buyers is 55. The wave of millennials coming into peak buying age and high net worth of the boomers will help support the housing market even though mortgage rates and home prices are rising at an extraordinary pace. Wage growth from a tight labor market also provides support in the near-term. Rising median age of repeat buyers, strong household net worth and low financial debt obligations explain why all-cash sales were roughly 30% of U.S. home purchases in 2021. As borrowing costs increase, all-cash sales will likely rise in 2022.

View enlarged chart.

Years of underbuilding are suppressing housing inventory

Inventory of residential homes is at all-time lows according to Redfin Housing Market data. Other agencies corroborate: at the current sales rate of existing single-family homes, the entire inventory would deplete in less than two months. In some regions, inventory of homes is more scarce. Perhaps some seasoned builders are reluctant to build after experiencing the Great Financial Crisis, but the lack of labor and high cost of raw materials weigh on builders. Therefore, we expect inventory to remain extremely tight, adding support to housing even during times of rising mortgage rates.

[1] https://www.nar.realtor/blogs/economists-outlook/age-of-buyers-is-skyrocketing-but-not-for-who-you-might-think#:~:text=The%20number%20that%20has%20changed,to%20a%20number%20of%20factors.

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 lplresearch

Thursday, April 7, 2022

This year’s Masters Golf Tournament starts today at the Augusta National Golf Club in Georgia. As usual, the world’s top players will be competing for the coveted green jacket, but as often also seems to be the case all eyes will be on Tiger Woods. The five-time Masters winner has not played in an official event since a few months before he was involved in a horrible single car accident in February 2021. At the time, doctors considered amputating his right leg and suggested he would be lucky to walk again, let alone play golf, with the local sheriff in Los Angeles stating he was “lucky to be alive”. Just teeing off at 10:34 ET, on a course he probably knows better than any other player in the field, will perhaps his greatest comeback.

“Of course, we’d never suggest investing based on this but historically if Tiger wins the Masters returns have been below average that calendar year but above average the following year,” joked LPL Quantitative Strategist George Smith. “After such a roller-coaster career it’s perhaps no surprise that Woods winning the Masters hasn’t been a reliable stock market predictor and that he’s neither a bull nor a bear but simply a tiger.”

As shown in the LPL Chart of the Day, when Tiger has won the Masters the S&P 500 has gone on to close the year with a 5% average gain, compared to a 10% gain if anyone from the rest of the field wins. However, perhaps fitting the comeback nature of Woods’ later career the stock market story improves the year following a Tiger triumph, with a 12% average return the next year, compared to 7% for any other winner.

View enlarged chart.

Given Tiger is currently a VERY long shot to win his sixth green jacket, we thought we would also take another lighthearted look whether the nationality of the Masters winner had any predictive power for the stock market. Spoiler alert: the answer is no as our model has firmly found the bunker in prior years, but we are confident we might make it to the fairway, or even the green, this year!

We first looked at this in 2020 when American Dustin Johnson won which our model predicted would have seen an 8% annual return; however, the market scored an eagle with a 16% calendar year return (in our defense this was an odd Masters tournament as it was played in November due to COVID). Then in 2021 Hideki Matsuyama broke our model becoming the first Japanese player to win the green jacket and the market posted a hole-in-one-like 27% annual return.

We looked at the nationalities of all Masters winners since 1974, when South African Gary Player won, and how the S&P 500 Index performed that calendar year. The 2021 Matsuyama win and impressive stock market returns propelled Japan near to the top of the leaderboard, but Australia is still a few strokes ahead. Fiji and South Africa look to be bogeys or even double bogeys for stock market returns – clearly not making the cut – while a U.S. winner normally coincides with average returns.

View enlarged chart.

Based on this data, we are going to throw our irons behind Australia’s Cam Smith. He is one of the favorites coming into the tournament due to his recent scintillating form –two victories and a fourth place in his last five tournaments – and the course may play similar to the sandbelt courses that he grew up on in Australia. The only previous time an Aussie triumphed was in 2013 when Adam Scott stunned the field to take the trophy and the S&P 500 stormed into the clubhouse with a calendar year 30% return! Given the sample size of one, which would make any statistician wince, we certainly would not base any investment decisions on this data, but at least it should make the next few days of golf a fun watch.

Let’s go Cam! (and Tiger!)

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 lplresearch

Wednesday, April 6, 2022

One of the biggest stories over the past few weeks has been the inversion of various points on the U.S. Treasury yield curve. The more well-known 2-year/10-year yield curve spread inverted on April 1, 2022 for the first time since 2019, while the 5-year/30-year inverted for the first time since 2006 on March 28.

What is a yield curve? The yield curve plots the yield of different maturity bonds, usually Treasuries. In normal times, a longer dated bond should have a higher yield than a shorter dated bond. Historically, after key parts of the yield curve invert, the economy eventually has moved into a recession. This is why these signals are quiet important.

Here are ten things to know about the yield curve.

• Yes, past recessions have been proceeded by an inverted yield curve, but by no means does it happen right away. Another way to put it is yield curve inversions have preceded all recessions, but not all inverted yield curves lead to a recession. Historically, when the 2-year/10-year yield curve inverts, a recession has taken place an average about 19 months later.

View enlarged chart.

• What about stocks? “One of the bigger surprises for investors is that stocks historically have actually done quite well after previous inversions,” explained LPL Chief Market Strategist Ryan Detrick. “In fact, the S&P 500 Index gained another 29% on average and peaked nearly 17 months later after the previous four inversions.” The bottom line is a yield curve inversion is a warning sign, but by no means does that mean trouble is coming immediately.

View enlarged chart.

• In the LPL Research Chart of the Day (shown below), here is how the S&P 500 has done after all the 2-year/10-year inversions going back to the mid-1960s. Once again, some of the more recent performance has been quite impressive.

View enlarged chart.

• One thing investors seem to be ignoring lately though is the short-end of the curve. In fact, the Federal Reserve Bank (Fed) came out recently saying as much in Don’t Fear the Yield Curve. They concluded that the 2-year/10-year yield curve wasn’t a good indicator for recessions; instead the near-term spread between the 3-month/18-month forward yield curve has been much better. Take note that the 3-month/18-month forward yield curve has steepened significantly the past few months, reducing the chances of a recession. Speaking of the Fed, Chairman Powell said last month that the economy was on firm footing and would be able to withstand rate hikes. In other words, the Fed isn’t worried about a recession quite yet.
• Along these lines, the 3-month/10-year yield curve recently was at its steepest level in 5 years! This has been our personal favorite part of the yield curve to use as a signal for a pending recession (as the 2-year/10-year has given false signals before) and if and until this curve inverts, we believe the odds of a recession on the horizon is limited.

View enlarged chart.

• Yield curves are one part of the bond market, but what the credit markets are saying is another (think of them as bond investors take on financial conditions) and we see a much different opinion here. Lately, high yield bonds have outperformed Treasuries ( Bloomberg US Corporate High Yield index and the Bloomberg US Treasury index), a clue the credit markets weren’t very worried about economic growth going forward. In the past, trouble starts brewing when high yield underperforms Treasuries.
• Adding to this, spreads on high yield and investment grade corporates have both come back significantly the past few weeks. “To see credit markets showing major signs of improvement the past few weeks is a great sign that financial conditions are probably better than most think,” explained Detrick. “Yes, the yield curve is flashing some warnings, but overall the credit markets are saying don’t get overly worried just yet.”

View enlarged chart.

• Real rates (rates adjusted for inflation) are negative. With the 10-year breakeven rate, what the bond market thinks inflation will average over the next 10 years, currently near 2.8% and the 10-year Treasury yield currently near 2.5%, real yields are actually negative. Historically, negative real rates have been quite bullish for risk assets. The Roaring 1920s, then during the 1940s and 1950s, were the last time we saw an extended period of negative real rates. As history told us, those decades saw explosive growth and stock market gains.
• Real yield curves (adjusted for inflation) are still upwardly sloping. Take note, we’ve seen real yields invert ahead of recessions in the past along with nominal yield curves (2006 and 2019 most recently), yet another clue a recession might not be as close as some fear. Meanwhile, Goldman Sachs noted that nominal curves tend to invert more easily in high inflation environments (we can check this box now), suggesting it would take a deeper inversion than recent cycles to trigger a recession signal.

View enlarged chart.

• Lastly, the Fed owns nearly $9 trillion in bonds and 25% of the entire Treasury market. Who knows where yields would be if they didn’t own any, but most agree longer-term yields would likely be much higher. So maybe various yield curves wouldn’t be inverted or even that close to inverting? This concept is mere conjecture, but it is a note we’ve seen lately that is at least worth pointing out.

There is a lot to digest here and this isn’t an easy subject, but the bottom line is the takeaway isn’t as simple as an inverted yield curve means a recession is imminent.

For more on what the yield curve could be saying and a fun look at the Final Four of things that matter to stocks, 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 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 lplresearch

Tuesday, April 5, 2022

The shape of 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 the economy is growing too quickly, inflationary pressures are apparent, and the Fed wants to slow growth, shorter maturity securities could eventually out-yield longer maturity securities, inverting the yield curve.

“Yield curve inversion is likely going to be the phrase of the year in 2022,” noted LPL Financial Fixed Income Strategist Lawrence Gillum. “However, we don’t think recession is in the cards for this year. If the Fed follows through with the expected rate hikes however—a big if—we’re likely going to see the 3 month/ 10 year close to inversion by the end of the year, which would likely mean recession could be a 2023/2024 event.”

When we look at the yield curve currently, we see two different signals. As seen on the LPL Chart of the Day, the 2-year yield is currently out-yielding the 10-year Treasury yield and is thus inverted. However, when we look at shorter maturities, such as the difference between the 3-month Treasury yield and the 10-year Treasury yield, the curve is still very steep, which makes sense since the Fed has only raised interest rates by 25 basis points (0.25%) this year. The difference in the 2-year Treasury yield and the 10-year Treasury yield measures market expectations of what the Fed may do—not what it has already done. Using shorter parts of the yield curve, which is what the academic research supports, measures what the Fed has already done and may be a better indicator of near-term recession risks. Fed rate hikes are used to slow economic growth so it’s the reality of these hikes that leads the economy to contract—not the threat of rate hikes.

View enlarged chart.

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. Additionally, the signal may not be as robust as it once was as central banks around the world have implemented aggressive quantitative easing programs that have likely impacted market signals. In the U.S., for example, the Fed owns more than 25% of Treasury securities outstanding and continues to reinvest coupon and principal payments into the Treasury market.

That said, we don’t think investors should ignore the 2Y/10Y signal altogether. We acknowledge that given the nuances surrounding current economic dynamics and with the Fed likely to respond more aggressively than previous rate hiking campaigns to arrest stubbornly high consumer price increases, recessionary risks have likely been pulled forward into 2023/2024. That said, we still expect the economy to grow above trend this year given underlying consumer strength.

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