After one of the worst starts to a year ever for stocks, March has seen a huge bounce. Incredibly, the S&P 500 Index is only about 4% away from new all-time highs. The big question is can the near-term strength continue?
“The good news is stocks really appear to love April. Not only is it the best month on average since 1950, but it has also been higher an incredible 15 of the past 16 years as well,” explained LPL Financial Chief Market Strategist Ryan Detrick.
As shown in the LPL Chart of the Day, the S&P 500 has indeed closed green in April in 15 of the past 16 years.
Taking a deeper look at April reveals that it’s not just the best month for stocks since 1950—it’s also the best month in the past 20 years and the second best month in the past decade. If there is one flaw, it is that in a midterm year it ranks only seventh and is barely positive.
For more on April seasonality and our latest views on stocks and the economy, 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
Despite our recent downgrade to U.S. GDP we did see risks to the downside and both data and events are confirming persistent concerns about some of those risks. We still think above-trend growth is very likely in 2022 and recession risks remain low, even though they have increased. Nevertheless, we have put our U.S. and global Gross Domestic Product (GDP) forecasts under review during our recent meeting of the Strategic and Tactical Asset Allocation Committee (STAAC).
Weekly Credit Card Spending Stalls
We look to higher frequency data to provide us with a perspective on the economy. Weekly data such as credit card spending and rail traffic help us shape our views on the economic environment.
Much of the hard economic data such as the latest monthly job figures and retail sales were collected before the economic impacts from the Russian invasion and before the subsequent sanctions imposed on Russia; therefore, market and economic watchers must be resourceful for finding helpful insights in economic activity. One such data are weekly snapshots into credit card spending.
Slower weekly credit card spending during March points to slower growth and demonstrates the heavy burden on consumers from rising prices. Consumer spending is roughly 70 percent of GDP in the United States so as the consumer goes, so goes the economy.
As shown in the LPL Chart of the day, spending on many categories are still below pre-pandemic levels. After the rough patch in January when the Omicron variant suppressed consumer activity, the data showed a modest improvement. But instead of keeping the improving trend developed last quarter, weekly consumer activity flat lined and stayed below pre-COVID-19 levels of spending.
“We think spending on restaurants, recreational activity and travel-related accommodations give us a unique look at discretionary spending and right now, the consumer is likely holding back on discretionary spending as persistently high prices put a drag on incomes,” explained LPL Financial Chief Economist Jeffrey Roach.
Weekly data from the Association of American Railroads showed some improvements in shipping across the country. Intermodal rail traffic improved in recent weeks, as firms such as CSX in the east and Union Pacific in the west saw strong demand for transporting grains, lumber and metallic ores. Carloads of petroleum products are still suppressed from 2019 levels, most likely from an overall downward shift in demand rather than a result of the Russian invasion of Ukraine. Rail traffic is a leading indicator for business investment. In our base case, we still think business investment will provide a boost to 2022 economic growth.
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 Bloomberg, FactSet or 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
Stocks are only down about 6.5% from record highs in January based on the S&P 500 Index. While hardly cause for celebration, in the face of war in Ukraine, surging inflation, and tighter monetary policy by the Federal Reserve, it’s fair to say stocks have been resilient in the face of those challenges. So why haven’t stocks fared worse? Well, there are two ways stocks can rise, either more earnings or higher valuations. This year has been all about earnings and we must look no further than interest rates to see why.
Higher interest rates tend to correspond to lower valuations, as shown in the LPL Research Chart of the Day which plots sixty years of data comparing the S&P 500’s price-to-earnings ratio relative to 10-year Treasury yields. Year to date, the S&P 500 Index price-to-earnings ratio based on consensus earnings estimates for the next 12 months has fallen from 22 to 19 as the 10-year U.S. Treasury yield has risen by about 80 basis points (0.8%). Meanwhile, the consensus estimate for S&P 500 earnings per share has risen by about 2% to over $227 per share, above our current $220 estimate.
“Clearly the market hasn’t forgotten about the relationship between interest rates and stock valuations,” explained LPL Financial Equity Strategist Jeffrey Buchbinder. “With rates higher, not to mention more inflation, the path for the S&P 500 to return to prior high valuations is getting tougher.”
Looking ahead, we see opportunities for stocks to break out to new highs later this year on a combination of earnings gains and some recovery in valuations. But inflation is going to be a key determinant on both fronts. Corporate America must continue to manage cost pressures effectively while markets must see light at the end of the inflation tunnel.
On earnings, besides inflation, companies are dealing with slower economic growth, particularly in Europe, and COVID-19-related supply chain disruptions that are far from over. At the same time, Wall Street’s earnings estimates continue to hold up well and companies are generally enjoying pricing power.
Bottom line, we anticipate a combination of some recovery in valuations and solid mid-to-high single digit earnings gains from corporate America will get stocks back to record highs over the next quarter or two. That optimism rests on our belief that interest rates will soon stabilize and inflation will soon peak. But no doubt the path forward for stocks has gotten tougher.
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
The bear market ended two years ago today and the subsequent bull market has clearly been an amazing ride. For some context, it was the fastest bull market to double ever, at just under 18 months.
Here’s where it ranks against the other bull markets that have doubled. You can see it is currently up 102%, making it the best bull market on its second birthday ever. 2009 was up 95%, coming in second.
At the recent peak in early January, the S&P 500 Index was up 114%, making it the seventh bull market to double. The annualized return of 53.4% shows just how explosive this move was off the lows and does imply some type of break could be warranted.
Here’s another way to look at this bull market as it starts year three. Previous strong bull markets saw modest gains and really spent much of the third year consolidating the previous big gains.
“As this bull market reaches the third year of life, investors need to remember that year three of bull markets tend to be a little tamer, with the larger gains happening in year one and two,” explained LPL Financial Chief Market Strategist Ryan Detrick. “In fact, out of the 11 bull markets since World War II, we found that three of them ended during year three, while the ones that didn’t end saw an average gain of only 5.2%.”
As shown in the LPL Chart of the Day, year three of bull markets have returned only 5.2% on average for the S&P 500, versus first year gains of 41.8% and second year gains of 12.8%, while three bull markets outright ended in year three.
We expect the bull market to continue, but some bumps in the road are normal. As the bull ages, year three could provide some of those bumps.
For more on the bull market turning two and what could happen next, 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
Core fixed income returns are off to one of the worst starts to a year ever. With fixed income markets quickly repricing the prospects of accelerated Fed rate hikes this year, yields across the U.S. Treasury curve have moved higher, putting downward pressure on bond prices across most fixed income sectors. However, one of the positive characteristics of many fixed income investments is that we have a fairly good idea what to expect out of prospective fixed income returns and that is starting yields. Absent defaults, starting yields represent the best expectation for future returns regardless of what interest rates do in the interim. So, as seen on the LPL Chart of the day, after broad based selloffs, bonds have historically bounced back because starting yields, and thus future returns, have become more attractive to investors.
“It has certainly been a rough start to the year for core fixed income investors,” noted LPL Financial Fixed Income Strategist Lawrence Gillum. “But higher yields mean there is now an opportunity to invest at better valuations, which may mean future returns for bonds have improved.”
An important point about the negative returns we’re seeing this year is that yields are moving higher because of the expectations of higher short-term interest rates and not an increase in credit risk. This is a huge distinction because higher credit/default risks could represent permanent impairments of capital. That is, if you buy and hold a fixed income investment, the short-term volatility you experience due to changing interest rate expectations is just volatility. It has very little bearing on the actual total return if held to maturity (or if held to the average maturity of a portfolio of bonds).
Moreover, if you consider the historical returns of the Bloomberg Aggregate Bond Index, the overwhelming majority of returns came from coupon income and not price returns (which is generally the opposite of equity investments). For example, over the last five years the index returned 12.52%, on a cumulative basis, of which price volatility only detracted by -0.75% over the entire 5 years (which includes this year as well). Coupon and principal payments are much more important than price volatility.
With yields moving higher recently in most fixed income markets, future returns for fixed income investors have likely improved. We’re seeing increasing investment opportunities in a number of shorter maturity securities (since yields on shorter maturity securities have moved up the most) such as short maturity investment grade corporates and Treasury securities and lower rated corporate credit. While there’s no guarantee that yields can’t go higher, at current levels, which are above pre-COVID levels in most markets, valuations for many fixed income assets are starting to look interesting again.
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
Three Things That Happened Last Week That Have Bulls Smiling
Last week was quite the week for stocks, as the S&P 500 Index gained 6.2% for its best week of the year and best weekly gain since the week of the US election in early November 2020.
In the process there were some very positive signs for the bulls.
First up, a bad start to a year isn’t always a bad thing. In fact, on the 50th trading day of the year (Tuesday, March 15) the S&P 500 was down 10.6% for the year, for the sixth worst start to a year ever. “A bad start to a year isn’t a death sentence,” explained LPL Financial Chief Market Strategist Ryan Detrick. “Actually, we’ve seen some enormous bounces in previous years after bad starts, with 2009 and 2020 some recent examples, so don’t lose hope yet.”
Looking at the five years to start off worse than 2022 shows that a potential big bounce is possible, with the rest of the year up nearly 25% on average, versus the average return of less than 7%. Yes, 2001 and 2008 both had numbers in the red the rest of the year, but those years were recessions, something we don’t see happening in 2022, although the risks for 2023 have increased recently.
As shown in the LPL Chart of the Day, the S&P 500 gained at least 1% on four consecutive days last week, a very rare occurrence indeed. “This was only the fifth time in history the S&P 500 gained at least 1% on four straight days,” explained Detrick. “And the good news is future returns have been spectacular, up more than 20% a year later every single time and up an average of 28.0%. In other words, blasts of strength like we saw last week aren’t the middle or the end of bullish moves; they are usually the beginning.” Anytime you can say the last two signals were in 1982 and the US election in November 2020 we don’t want to ignore it, as both of those times kicked off strong extended returns.
Lastly, volatility was quite high recently, but it has calmed down now, another bullish signal. Not surprisingly, investors were on edge due to a more hawkish Federal Reserve Bank, 40-year highs in inflation, and war in Eastern Europe. That brought with it a higher CBOE Volatility Index (VIX), with the VIX closing above the high water mark of 30 for 11 consecutive days. The rally last week saw a big drop in the VIX, as fears calmed.
Looking at previous times the VIX was above 30 for at least two weeks and then had a subsequent close back beneath 30 showed quite impressive future returns. The S&P 500 Index was higher a year later 11 out of 12 times with an average return of nearly 22%, something that could indeed have bulls smiling.
After the rough start to 2022, last week’s move higher was a nice change. By no means is this an all clear signal, but the action last week could be a clue that better times could be coming.
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
Policy makers often talk about a “Goldilocks scenario” which is when inflation and economic growth are neither “too hot” nor “too cold”, allowing the economy to advance at just the right temperature. If the economy is at trend growth and is not experiencing exogenous shocks, central bankers will have a reasonable chance of achieving price stability and maximum employment. For the Federal Reserve, the policy objective is inflation humming around 2 percent and the labor market producing a natural rate of unemployment, which is the rate where wage inflation is minimal and labor markets are healthy enough to allow for normal gyrations within the labor force.
After the March 15-16 meeting, the Federal Reserve published the Summary of Economic Projections and within this report, FOMC participants’ baseline forecast is a soft landing over the next few years and by the end of 2024, the FOMC is expecting a typical “Goldilocks scenario.” But in the near term, the largest risk to their outlook is their projected inflation path. To understand their projections, we need to understand some of the main drivers of inflation, which are introduced later in this blog post.
“Shrinkflation”
The Fed is rightfully concerned about the nefarious effects of inflation on the consumer. Rising prices put a squeeze on discretionary spending and real wages. Additionally, businesses must cope with rising input costs, a challenge for firms protecting profit margins and also market share. In response to these challenges of rising input prices, some suppliers find product downsizing less offensive to customers than outright price increases. Product downsizing – or shrinkflation – is often the preferred choice for manufacturers in highly competitive markets where individual firms do not have pricing power. Rather than risk losing market share or risk retooling the input process, firms shrink the package and deliver less product to the consumer. So expect to get more air and less chips next time you buy a snack. This scenario is likely when the economy is experiencing cost-push inflation which is described below.
Cost-push or Demand-pull?
Drivers of inflation can come from multiple sources. When input prices rise or the cost of labor rises and demand remains unchanged, the overall price level rises from the higher cost of inputs. Cost-push inflation is typically associated with a price shock in raw materials or increased costs of production. For example, when a natural disaster inhibits the supply of a raw material, the economy will experience cost-push inflation.
Whereas, demand-pull inflation historically accompanies a strong economy and rising wages. As an economy grows and consumer income grows, demand for goods and services increase, perhaps faster than firms can respond with higher output. Demand-pull inflation is somewhat related to Milton Friedman’s description of “too many dollars chasing too few goods” although Friedman often ascribed this notion to overly loose monetary policy.
So is the Fed forecast achievable?
Many global economies are reeling from inflationary pressures which came from a combination of both cost-push inflation and demand-pull inflation. As economies reopened after the depth of the pandemic, inventories were depleted and firms did not have the labor to ramp up production to meet demand. Concurrently, consumers had stimulus checks to spend, diverting funds normally spent on services like vacations and buying durable goods such as recreational equipment and home furnishings. But, cost-push and demand-pull inflationary pressures can revert quickly, which the Fed is expecting.
The Personal Consumption Expenditure (PCE) Price Index is the preferred inflation measure for the Fed and is forecast to come back to below 3 percent by the end of 2023. As shown in the chart, prices can quickly fall back to a range more comfortable for policy makers. Historically, the PCE Price Index reverted to lower levels after supply and demand came back into balance and the Fed is expected this time will be no different.
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 Bloomberg, FactSet or 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
The Federal Reserve (Fed) ended its two-day Federal Open Market Committee (FOMC) meeting yesterday and, as expected, the Committee voted (not unanimously however) to increase the fed funds rate by 25 basis points (0.25%) and signaled further rate increases were appropriate. Highlighting the disparate views on the Committee (also seen on the dot plot below), there was one dissenting vote (St. Louis Fed President Jim Bullard) who wanted a 50 basis point rate hike. Today’s rate hike was the first since 2018 and launches the first new rate hiking campaign since 2015.
“While the rate hike was expected, the revised dot plot showed the Committee is serious about bringing inflationary pressures back down,” noted LPL Financial Fixed Income Strategist Lawrence Gillum. “The Fed’s job, especially from this point forward though, is to prove that it can manage the removal of monetary accommodation without slowing the economy too much. It’s a tall order given the number of expected interest rate hikes this year.”
Also released was the updated “dot plot”, which provides the individual member’s projections on the future path of interest rates. As shown in the LPL Research Chart of the Day, there were some notable changes from the previous version. Now, the median dot of the Committee, in aggregate, reflects seven interest rate hikes in 2022, bringing the policy rate up to 1.9%. Three months ago, the Committee was expecting three rate hikes this year and a policy rate below 1%.
During the press conference Fed Chairman Jerome Powell mentioned that each meeting was “live” and a 50 basis point hike could be appropriate, depending on the path of inflationary pressures. Also, interestingly, the Committee expects to hike interest rates above its long-term neutral rate in 2023, holding rates steady in 2024 and then cutting rates thereafter.
Also of note, four times a year, the Fed updates its economic projections for the next several years as well as its longer-term forecasts. The Fed now sees 2.8% GDP growth in 2022 (down from 4.0% in December), and higher inflation expectations with PCE headline and core metrics, their preferred inflation measures, at 4.3% and 4.1% (up from 2.6% and 2.7% in December), respectively. The Committee sees inflation falling back to 2.7% headline and 2.6% core in 2023. The conflict in Eastern Europe was cited as providing uncertainty to the near term outlook for inflation and growth expectations but “the invasion and related events are likely to create additional upward pressure on inflation and weigh on economic activity”.
Finally, Powell noted, during the press conference, that the Committee made good progress on a plan to cut bond holdings and expects to start to reduce the size of the Fed’s nearly $9 trillion balance sheet in the coming months—with an announcement potentially coming as early as May. According to Powell, balance sheet runoff, depending on how it’s structured, could act as an additional rate hike. Powell also hinted that additional details for balance sheet runoff will be outlined in the meeting minutes, set to be released in three weeks.
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
Today the Federal Reserve is widely expected to hike rates for the first time since December 2018 and we expect them to kick things off with a 25 basis point hike (0.25%), with three or four more hikes coming later this year.
What could happen next? “Investors need to remember that Fed rate hikes usually happen near the middle of the economic cycle, with potentially years left of gains in stocks and the economy,” explained LPL Financial Chief Market Strategist Ryan Detrick. “In fact, a year after the first hike in a cycle has been fairly strong, higher a year later the past six times.”
Although last month a 50 basis point hike was priced in by more than a 90% chance according to fed funds futures (it has come down significantly), we remained in the camp the first hike would only be 25 basis points. Look again at the chart above and you’ll see the Fed rarely kicks off a new cycle of hikes with a 50 basis point hike. It is later in the cycle that tends see 50 basis point hikes or larger.
As we share in the LPL Chart of the Day, during periods of extended rate hiking cycles, stocks have done quite well.
Four or five hikes this year sounds like a lot, but expectations are currently for more than six. Remember that we’ve seen many years that saw many rate hikes, as shown in the chart below, even as recently as 2018.
Lastly, here’s how stocks have done in years with a lot of rate hikes. The mid-2000s cycle is what has our attention, as there were 17 total rate hikes in 2004, 2005, and 2006, yet the S&P 500 managed to gain in every year.
The bottom line is rate hikes usually aren’t bearish events and we don’t expect this cycle to be any different.
For more on rate hikes and the latest with Ukraine and Russia, 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
