Wealth Management

Posted by lplresearch

Tuesday, March 15, 2022

With most equity and fixed income markets down to start the year, a traditional 60/40 portfolio has come under pressure. Moreover, seeing both markets down simultaneously may cause investors to question the validity of a 60/40 portfolio broadly and core bonds specifically. For us, the value proposition for core bonds is that they tend to provide liquidity, diversification (to equity market risk), and positive total returns to portfolios. Unfortunately, none of those values are 100% certain all the time. Like all markets, fixed income investing involves risks and at times, negative returns (although negative fixed income returns tend to be much smaller than negative equity returns). That said, as painful a start to the year as it has been for equity and core fixed income investors, it isn’t all that uncommon to experience negative returns for both equity and fixed income markets at the same time. In fact, since 1995, nearly 15% of monthly returns have had both negative equity and fixed income returns. Again, it doesn’t make the experiences of a diversified portfolio any less painful this year but it also doesn’t change, in our view, the argument to own core bonds in a portfolio.

“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 likely improved. The ‘buy the dip’ mentality works for fixed income investors as well.”

Core bonds, and more specifically, U.S.Treasury securities continue to be the best diversifier to broad-based equity market sell-offs, which tend to happen when the economy slows or there are macroeconomic shocks. The LPL Chart of the Day shows the monthly returns of the S&P 500 index in months it was down at least 3% versus Treasury index returns during the same months. When we look at how Treasury securities have performed during periods of equity market selloffs, we can see that Treasury security returns have been mostly positive—although not every time. But in every situation, Treasury securities outperformed equities, which means an allocation to Treasury securities would have both improved portfolio returns and reduced portfolio volatility.

View enlarged chart.

The big story this week is the Fed will likely start a series of short-term interest rate hikes to try and arrest stubbornly high consumer price increases. This shift in monetary policy (from accommodative to less accommodative) adds risks to the economic recovery. And while we don’t think the U.S. economy is headed into a recession over the next 12 months, recessionary risks are increasing (albeit from very low levels). Moreover, when you consider that broad macro shocks happen periodically and, unfortunately, often without warning, it makes it incredibly difficult to know when to own Treasury securities. So we think it’s best to have that potential portfolio protection in place before it’s needed.

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, March 11, 2022

Consumer inflation hit a 40-year high according to data released yesterday; however despite the increased levels of inflation, interest rates have stayed stubbornly low. In fact, despite rising about 26 basis points (0.26%) since the beginning of March, the yield on the 30-year US Treasury is basically unchanged over the past year. But could all that be about to change? Our technical analysis says yes.

As shown in the LPL Chart of the Day, a more long-term look at 30-year Treasury rates appears to show a base three years in the making. Not only that, but yields are currently closing in on a breakout that would target a move towards 4.0%, a level that hasn’t been seen since late 2013.

View enlarged chart.

“Investors have been conditioned to think that interest rates can only go lower,” said LPL Financial Technical Market Strategist Scott Brown. “However, we have seen these large bases in long-term sovereign yields resolve higher in multiple other countries including Germany and Japan so far this year, and it appears that the US could be next.”

We believe this may be one of the most overlooked stories in the market right now. The Bloomberg average economist forecast sees the 30-year yield ending the year at just 2.58%, less than 20 basis points above current levels. This complacency shows that investors may not be positioned for such a move, acting as a contrarian tailwind in our view.

To be clear, we are not saying that it would be a straight line to 4% or that we may even see that level in 2022. However, bonds are already under pressure this year with the Bloomberg Aggregate Bond Index down more than 4% and on track for consecutive negative yearly returns for the first time ever. A decisive move up above 2.5% for the 30-year yield may seal that fate and we would recommend investors keep fixed income interest rate sensitivity below benchmark levels for that reason.

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, March 10, 2022

The Bureau of Labor Statistics released the February Consumer Price Index (CPI) data this morning, showing headline CPI climbed 0.8% month-over-month while core CPI, which excludes volatile food and energy prices, rose 0.5% month-over-month, both around consensus estimates. The one-year increase in headline CPI, at 7.9%, is the highest since early 1982, reflecting ongoing supply challenges in the face of continuing strong demand and the increase in commodity prices (which started to spike towards the end of the month as a result of the Russian invasion of Ukraine).

“The latest CPI numbers actually came in around consensus but showed a big 6.6% month-over-month spike in gasoline prices” explained LPL Financial Quantitative Strategist George Smith “The longer the Russia-Ukraine war and related commodity crunch continues the more likely it’s looking that headline inflation in March will be over 8% as the effects of higher prices continue to filter through.”

As shown in the LPL Research Chart of the Day, headline year-over-year inflation had already exceeded the inflation spikes seen in 2008 and early 1990s and is at the highest level since 1982 when the U.S. was recovering from the inflationary environment that peaked in 1980 at 14.8% year-over-year (while the fed funds rate peaked at 19%!). The real fed funds rate (the fed funds rate minus inflation, here as measured by trailing year CPI) is at a record low of -7.9% and well below what economists have historically considered a “neutral rate” of around 1.5% to 3.5%. We have been in an environment since the 2008-2009 Great Financial Crisis where inflation has generally been higher than the fed funds rate and we don’t expect that to end any time soon even after inflation slows and the Fed hikes rates.

View enlarged chart.

There was little consolation in the “core” inflation reading (which excludes the volatile, and Ukrainian invasion affected, food and energy components). While a little tamer, it still rose 6.4% year-over-year, its highest reading since 1982 as well.

Continued increases in the housing component of CPI, up almost 0.5% month-over-month, will be a particular concern for the Fed decision makers as this is one of the more ‘sticky’ components. Better news in the used vehicle category that saw a month-over-month decline (-0.2%) for the first time since September 2021; however prices are still up over 41% year-over-year. The only other category to decline month-over-month was electricity, which fell 1.1% but only following a large spike in January. The food at home category (groceries) saw a notable rise of 1.4% month-over-month, the largest increase since September 2021, as the higher input costs already started to translate to higher prices for consumers.

Increasingly large month-over-month CPI increases that occurred in the period of March to June 2021 will soon be providing a much friendlier comparison for year-over-year figures. For this reason we expect that the core CPI may be at, or nearing, its peak but the commodity price shock from the Russian invasion of Ukraine will likely see the March headline CPI even more elevated.

These CPI numbers will no doubt get a lot of attention given the multi-decade highs and how close this report is to the Federal Reserve’s (Fed) Federal Open Market Committee (FOMC) meeting next week, but we do not expect this report to meaningfully change the upcoming Fed rate decision. Fed Chair Jerome Powel has told Congress that he will get inflation “back under control” but also that considering all factors he favors a 25 basis point (0.25%) increase at the March FOMC meeting. Any outcome outside of this now would likely cause large market gyrations that the Fed is likely looking to avoid.

We continue to believe that as supply and demand are brought back into balance, price pressures should start to subside and that the long-term forces limiting inflation, such as globalization and more importantly technology, will prove stronger than the current inflationary pressures.

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, March 9, 2022

The obvious place to start when thinking about investment implications of the war in Ukraine is energy. Russia is the third largest oil producer globally (12% of total) and the second biggest global exporter of crude after Saudi Arabia (about 11%, as shown in the LPL Research Chart of the Day). Roughly one-third of European natural gas consumption and more than 25% of its crude imports are sourced from Russia. Significant disruptions to those energy exports are a really big deal.

View enlarged chart.

Oil’s roughly 70% rally year to date to over $120 per barrel, which clearly reflects market participants factoring in major disruption to those Russian energy exports, has powered very strong year-to-date gains for energy stocks. We’ve started to see some of that disruption already with the United States ban on Russian oil imports announced yesterday. The United Kingdom is following suit.

View enlarged chart.

“Energy could continue to be a solid hedge against oil and gas supply disruptions in Europe in the short term,” according to LPL Financial Equity Strategist Jeffrey Buchbinder, “Fundamentals look good at the moment but it’s not a “set it and forget it” type of investment.”

High oil prices from solid reopening-driven demand and tight supply, along with producers’ improved capital discipline should help support energy stocks in the near term. But there is a lot uncertainty beyond the very short term. We don’t know how much Russian energy will be taken off the market and for how long. We don’t know how much of the gap the U.S. and OPEC can fill and how quickly. These are big questions for an overbought oil commodity from a technical perspective with very optimistic sentiment based on the lack of short interest in crude oil futures and the oil futures crowd sentiment poll by Ned Davis Research.

Prior to the Russian invasion we had maintained a positive bias toward the energy sector as the stocks and oil prices broke out from a technical analysis perspective. With inflation at 40-year highs, the economy reopening, and interest rates rising, the environment had appeared favorable for cyclical value stocks even before the massive geopolitical premium was priced into oil.

All of this suggests a market weight or even a slightly positive near-term bias toward energy is probably fine but we would urge caution (the sector only makes up 4% of the S&P 500 Index). A significant geopolitical risk premium is built into the price of crude right now (probably more than $30) that could come out quickly and from a technical perspective the sector looks significantly stretched and poised for a pullback.

We continue to pray for the safety of the Ukrainian people and peaceful resolution to the conflict.

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, March 8, 2022

Short and intermediate-term inflation expectations, as measured by 2-year and 5-year breakeven inflation rates, reached their highest levels last week since 2005. Breakeven rates are the difference between inflation-linked bond yields and nominal bond yields of the same maturity; if actual inflation equaled the breakeven rate, an investor would be indifferent between holding an inflation-linked bond or a nominal bond. As shown in the LPL Chart of the Day, 2-year and 5-year breakevens have reached 4.3% and 3.3%, respectively. Longer term inflation expectations rose last week as well (10-year breakevens reached 2.72%), but did not surpass previous highs seen in November 2021.

The rise in “front end” or shorter-term inflation expectations are primarily due to two factors:

1. Commodity price disruption. A sharp rise in oil prices (crude oil surpassing $120 a barrel) due to Russian sanctions and possible bans on importing Russian oil is pushing inflation expectations higher, but disruption in other Russian exports may impact more than just energy prices. Russia is a major exporter of wheat and metals (platinum and palladium), and recent events suggest upside risk to food prices and metal dependent goods, such as vehicles.

2. Monetary policy. The Federal Reserve’s (Fed) monetary tightening expectations have declined given concerns over potential negative growth impacts from higher oil prices. The market’s expectations of an aggressive rate hike path forward have dropped meaningfully over the last month. At the start of February, there was a 30% chance of a 50 basis point (bps) rate hike this month (per CME Group); however, today that percentage has dropped to zero as market participants expect a 25 bps hike. A less hawkish Fed may result in higher inflationary pressures for longer.

During Chair Powell’s testimony in front of the House Financial Services Committee last week, Powell noted that the impact of Russia’s invasion of Ukraine is highly uncertain, and the Fed will “proceed carefully.” While recent geopolitical events have driven short-term inflation worries higher, Powell reassured Congress last week that the Fed will get inflation “back under control.”  Powell also reiterated the Fed’s plan to raise rates this month given the health of the U.S. economy and a strong domestic labor market.

These potential short-term inflationary pressures and flight to safety dynamics have fueled strong relative returns in the Treasury Inflation Protected Securities (TIPS) market over the last month, with the Bloomberg U.S. TIPS index returning over 3%. The Russia / Ukraine conflict adds a layer of complexity to inflation forecasting and expectations. However, we continue to believe long-term inflation will be limited by structural forces such as technology and demographic trends.

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, March 4, 2022

The U.S. economy added 678,000 jobs in February and this strong report exceeded consensus forecast of 423,000. The unemployment rate fell to 3.8 percent from 4 percent in January, edging closer to pre pandemic levels. In February 2020, the unemployment rate was 3.5 percent.

The survey period for this report closed before Russia invaded Ukraine so no geopolitical impacts are in these data.

February jobs gains were broad based but mainly in the services sector as pandemic effects wane. Restaurants alone added 124,000 and the return to schooling pushed education jobs up by 112,000. Professional and business services added 95,000 jobs.

The participation rate is 62.3 percent, still 1.1 percentage points below February 2020. Participation rates are still lower than before the pandemic as individuals with young children may struggle to find childcare. The composition of the labor force is also changing as some baby boomers are taking early retirements.

In February, 13 percent worked remotely because of the pandemic, down from 15.4 percent last month. This percentage will likely continue to decline as more offices across the country loosen restrictions.

Another encouraging sign is the decline in people unable to work because of COVID-19-related business declines, either from closed or lost business. In February, 4.2 million reported inability to work because of business disruptions, down from 6 million last month.

“The February jobs numbers are encouraging but overall, this does not change expectations for how the FOMC will set interest rates at the next meeting. The big conundrum for policy makers right now is how to relieve inflation fatigue yet still protect the economy from geopolitical stress,” said LPL Financial Chief Economist Jeffrey Roach.

Wage growth is slowing. February average hourly earnings were unchanged from January and up 5.1 percent from a year ago. Looking ahead, wages may begin to moderate as the labor market loosens. Participation rates should continue to increase to pre-pandemic levels by the end of this year.

As shown in the LPL Chart of the Day, February posted one of the strongest reports in the last 12 months. The reopening process is supporting the services sector and hiring in services industries like leisure and hospitality strongly contributed to the headline gain in employment. This latest release from the Bureau of Labor Statistics will not likely change the minds of the FOMC in the upcoming meeting. Chairman Powell already revealed his preference for a 25 basis point hike in rates and this is the most likely action.

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, March 3, 2022

With all eyes on the war in Ukraine, we continue to pray for the safety of the Ukrainian people and the sovereignty of their nation. It’s a tough time to talk economics and markets, but that’s what you come here for so we’ll continue to do our best to help investors make the best possible decisions during these difficult and uncertain times.

Today we wanted to highlight three basic but important points. First, the U.S. economy has negligible direct exposure to the Russian economy. Second, the weakness in the Russian stock market has minimal impact on the MSCI Emerging Markets Index. And third, some domestic sectors have more international exposure than others, which should be factored into sector allocation decisions given rising recession risk in Europe.

But first, we focus on the direct impact of Russia on the United States economy. The amount of trade between Russia and the United States is negligible, as you can see in our LPL Chart of the Day. The U.S. imports almost nothing from Russia (or Ukraine, for that matter). We estimate that the percentage of revenue generated by S&P 500 companies in Russia is even lower. This doesn’t dismiss the fact that high oil prices will take a bite out of consumers’ pocketbooks, which we will discuss in a future post.

View enlarged chart.

Next, the impact of the collapse of the Russian equity market will be minimal on the emerging market equities universe. The allocation to Russia in the MSCI Emerging Markets (EM) is just 1.47% and, therefore, should not dissuade investors from allocations to that asset class, in our view (note that MSCI plans to drop Russia from its indexes so it looks like this number may effectively go to zero).

View enlarged chart.

“Europe overall, including Russia, Poland, Hungary, and Turkey, makes up only about 3% of the MSCI Emerging Markets Index,” according to LPL Financial Equity Strategist Jeffrey Buchbinder. “That means Asia, notably China, Taiwan, India, and Korea, will continue to drive the direction of emerging market equities and Russia’s economic and financial hardship is not enough of a reason to sell.”

Our EM equities view remains neutral, while we are becoming increasingly cautious on the European equity markets within the international developed market universe. The continent’s heavy reliance on Russian energy exports is concerning and, in fact, Germany may be headed into recession. For EM, key risks remain China’s economic slowdown and regulatory crackdown, as well as tightening monetary policy globally. And don’t forget the markets of big commodity producers in the EM universe such as Brazil, Saudi Arabia, and South Africa, are thriving in this environment.

Finally, given the increasing risk of economic weakness throughout Europe, we highlight the sectors in the U.S. market that have the most international exposure. High energy costs sparked by the Russia-Ukraine war and subsequent sanctions introduce significant economic risk to Europe, which could take some of the juice out of a potential rebound for the U.S. technology sector, the most global of all S&P 500 sectors. On the flip side, utilities are well insulated with virtually no exposure to international markets and are generally able to pass along higher natural gas prices. See the chart below for international revenue exposure by S&P 500 sector.

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

https://www.youtube.com/watch?v=isvJih-qE9Y

Posted by lplresearch

Wednesday, March 02, 2022

Within the fixed income markets, the corporate credit markets can, at times, act like a canary in the economic coalmine. The return distribution for credit investors is asymmetrical, which means the potential for losses can be magnitudes larger than the potential for gains. So, credit markets tend to react quickly when economic conditions or corporate credit conditions start to deteriorate. And while fixed income markets broadly are down on the year, corporate credit markets (both investment grade and non-investment grade) are among the worst performing markets in the U.S. this year. Should investors take this as a sign that corporate credit markets are showing signs of stress? We don’t think so.

“U.S. corporate credit markets have underperformed this year but not because of increased credit risks, in our view,” noted LPL Financial Fixed Income Strategist Lawrence Gillum. “That we’re seeing broad based negative returns across most fixed income asset classes is largely due to higher Treasury yields and not deteriorating credit fundamentals.”

A Credit Default Swap Index (CDX) is a benchmark index that tracks a basket of U.S. corporate credit issuers and tends to act like an insurance policy in the case of an issuer’s default. In essence, credit default swaps strip out most of the interest rate risk of an issuer/security and measures just the credit risk. As seen in the LPL Chart of the Day, credit default swap indexes have increased this year but remain well within normal ranges.

As inflationary pressures have broadened this year, Treasury yields, across the curve, have increased due to expectations of Federal Reserve (Fed) interest rate hikes. That’s been the main driver of broad-based bond losses and we don’t think it should raise concerns about credit fundamentals. Moreover, we’re seeing the costs to insure the higher rated cohorts (the investment grade issuers) increase at a faster pace than the more default prone, non-investment grade cohort, confirming for us that the increase in cost is due to higher Treasury yields and not a deterioration in corporate credit conditions.

From a fundamental perspective, corporate balance sheets are still in good shape. Leverage ratios have increased recently, but net debt ratios (debt minus cash on the balance sheets) remain within historical norms. Also, due to the record amount of issuance over the last few years, companies were able to refinance debt at very low interest rates and push back when that debt was set to mature. As such, interest expenses have come down and now many corporations don’t need to access the capital markets anytime soon. We do continue to watch how these companies manage capital allocation decisions. Increases in M&A activity, share buybacks, and outsized dividends are all risks to bondholders and things that may lead to deteriorating credit fundamentals.

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, March 1, 2022

Good riddance to February. It was another negative month for stocks, but the clear headline was Russia invading Ukraine and the potential impacts that would have on the global economy and stock market.

First things first, this means the first two months of 2022 have been in the red for the S&P 500 Index. “Seeing the first two months of a new year in the red isn’t a great feeling, but the good news is lately it hasn’t been a major warning sign,” explained LPL Financial Chief Market Strategist Ryan Detrick. “The first two months of 2016 and 2020 were both negative, but stocks were able to claw back and finish higher those years.”

It is important to remember that this is a midterm year and early in midterm years, stocks tend to have some trouble. That has played out once again in 2022, but don’t forget later in these years tend to see a very strong rally.

Another angle on this is looking at how stocks do each quarter, but broken up by the four-year presidential cycle. Again, investors need to know that this quarter and the next two are some of the weakest out of the entire four-year cycle.

Although midterm years tend to see overall weakness until late, be aware that March is one of the best months of the year.

Lastly, looking purely at March based on seasonality shows that this is a solid month. In a midterm year, it is the fourth best month and the past 20 years it is fifth best. Since 1950, it is more in the middle at the sixth strongest. Of course, it would have been better, but the 12.5% drop in March 2020 is skewing things.

Clearly headlines will move stocks in the near-term, but we continue to expect the overall economic growth in the U.S. to remain quite strong and likely push stocks back up to our fair value target of 5,000 on the S&P 500 by year-end.

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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.

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All index and market data from FactSet and MarketWatch.

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