Wealth Management

Posted by lplresearch

Monday, February 28, 2022

After weeks of intense multilateral diplomacy, the U.S., Canada, the European Union, and the U.K. unleashed powerful economic sanctions against Russia over the weekend that have sent its economy reeling. As shown in the LPL Chart of the Day, the Russian ruble has collapsed in response to the economic pressure, just one sign that the sanctions are working.

“The impact of the sanctions has been both immediate and dramatic, and the pressure will only increase over time,” said LPL Financial Asset Allocation Strategist Barry Gilbert. “There may be some broader economic damage from the conflict via more protracted inflation, tighter financial conditions, and some drag on global growth. It’s a fluid situation but we think fundamentals remain strong enough to support a rebound in equities.”

View enlarged chart.

Here are 6 key things to know about the sanctions and their potential impact on financial markets:

• The sanctions took two main forms. On Saturday the U.S. and its allies announced they would cut Russia’s most important banks off from SWIFT, a secure messaging system that facilitates most international transactions. While this would apply considerable financial pressure, Russia has put together a vast war chest of about $630 billion in foreign exchange reserves over the years to help insulate itself from sanctions. But the U.S. and its allies have announced that they are also cutting Russia’s central bank off from international markets, severly limiting Russian’s ability to respond to the sanctions.
• The sanctions’ bite was immediately felt, with offshore trades in the Russian ruble declining sharply, a downgrade of Russian debt by one rating agency from investment grade to junk status, and lines forming at Russian ATMs to withdraw currency.
• The economic pressure will likely push Russia toward recession and will put considerable pressure on the stability of the Russian banking system.
• In an extreme move, the Russian central bank increased its key interest rate to 20% from 9.5%, in an attempt to support the ruble. This is now above the 17% last seen when Russia illegally annexed Crimea from Ukraine in 2014. Authorities also told export-focused companies to be ready to sell foreign currency to support the ruble.
• Corporations are initiating restrictions as well. BP, United Parcel Services, and FedEx have either cut or limited exposure to Russia, with many more expected to follow suit.
• The sanctions have also put pressure on dollar funding markets and central banks may need to step in to help provide liquidity. The European Central Bank (ECB) governing council is meeting on March 10 and will likely communicate a less hawkish stance as rising risks from the East could put a damper on western Europe’s growth path. Although the U.S. will likely feel less ripple effects from Russia, the Fed will be less likely to “shock and awe” the market with an  overly aggressive hike on March 15-16.

Our main market takeaways:

• The energy sector is a beneficiary of the conflict, with WTI Crude approaching $100 per barrel and the U.S. poised to fill some of the Russian supply gap.
• Europe, with its heavy dependence on Russian energy supplies, is taking on the most risk with sanctions. Germany may be entering a recession due to the added economic pressure. The U.S. dollar is also seeing safe haven flows, weighing on international equity returns.
• Emerging markets are likely to underperform, at least in the short term, on dollar strength and Russian weakness, though Russia only composes about 2% of the MSCI Emerging Markets Index. China may be more resilient.
• Gold may be an effective hedge in this environment despite potential U.S. dollar strength. The technical setup is favorable.
• We continue to recommend an overweight equities allocation given the still-solid U.S. economic and corporate profit backdrop, coupled with low interest rates but volatility is likely to remain high until there is some sort of resolution in Ukraine and inflation moderates.

While a significant step in supporting Ukraine, sanctions do little to directly mitigate the humanitarian crisis on the ground. The hope is the added pressure will shorten the conflict while preserving Ukraine’s national sovereignty and make future conflicts less likely. We’ve been able to see some immediate effects on Day 1 and it’s not something Russian President Vladamir Putin can ignore.

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

Stock markets go up and, as many newer investors are discovering in the turbulent start to this year, down. The frequency and magnitude of these price changes is known as volatility and the most frequently used measure for U.S. stock market volatility is the Cboe (Chicago Board Options Exchange) Volatility Index, commonly referred to as the VIX.

“The VIX is often referred to as the “fear gauge” because it spikes in times of market worries and when stocks go down,” explained LPL Financial Quantitative Strategist George Smith. “The escalating Russia-Ukraine conflict, combined with ongoing inflation and rate-hike concerns, are driving the VIX to the highest levels since 2020.”

The VIX is calculated by aggregating the weighted prices of put and call options placed on the S&P 500 index and can be considered a measure of expected 30-day volatility in the U.S stock markets.

As shown in the LPL Chart of the Day, volatility as measured by the 1-month rolling average VIX has risen sharply in the past few weeks. It spiked twice, initially in response to worries over the pace of potential Federal Reserve rate hikes and now the Russian invasion of Ukraine (as well as continuing inflation concerns).

As markets have digested the military escalation in Ukraine, the closing price for the VIX for the past two days has been close to 3 standard deviations above the 12-month average. At the January and February peaks, the VIX hit intraday highs of around 38 which if it had closed at those levels would been almost 5 standard deviation events.

Like many other measures of market sentiment that we monitor extreme levels of volatility have historically had the potential to be contrarian signals when it comes to predicting stocks prices over the short term. When the VIX has closed more than 3 standard deviations above its 12-month rolling average the forward returns for the S&P 500 have tended to be well above average, and within the 3- to 6-month timeframe have been more likely to be positive than on average. This extreme level on the VIX last occurred on 1/25/2022.

The VIX closing greater than 50% higher than its 1-month moving average has also been a reliable contrarian indicator – as long as it has occurred outside of recessionary periods – and this last occurred on 1/25 as well. The major caveat with this indicator is that we often don’t know that we are in a recession until after the fact so caution should be used considering the prevailing economic environment (which we don’t expect to be recessionary at the present time).

After an extremely quiet 2021, in which the VIX was declining throughout the year, we did expect higher volatility in 2022 as often occurs at this stage of the business cycle. However, like most of the world, outside of the kremlin, we did not expect that one of the reasons for a rise in volatility would be the largest conflict in Europe since World War Two. We do expect further market volatility as the situation unfolds and elevated uncertainty may persist for several weeks depending on how the conflict develops, but as long as the conflict is contained to Ukraine, we do not expect long-lasting contagion to broader markets. Looking back at historic geopolitical shocks stock market drawdowns average about 5% with recoveries taking less than two months, but larger conflicts in sensitive regions have led to deeper and longer lasting drawdowns.

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, February 24, 2022

Global stock markets are selling off hard after Russian military forces attacked a broad range of targets across Ukraine last night while Russian President Putin vowed to replace Ukraine’s government. What does it all mean for stocks and the economy? “Russia invading Ukraine has added to an already tense year, with investors selling first and asking questions later,” explained LPL Financial Chief Market Strategist Ryan Detrick. “But it is important to know that past major geopolitical events were usually short-term market issues, especially if the economy was on solid footing.”

Here we list 11 things you need to know.

• While the market reaction is likely to be more acute than the response to Russia’s illegal annexation of Crimea in 2014, the attack on American interests is less direct than Iraq’s invasion of Kuwait in 1990.
• Speaking of 2014, stocks and bonds in the U.S. both took that event in stride, while European stocks were considerably weaker for several weeks. Interestingly, crude oil spiked initially, then quickly sold off.

Source: LPL Research, StockCharts.com 2/24/2022

All indexes are unmanaged and cannot be invested into directly. Past performance is no guarantee of future results.

• Broader questions of the long-term impact on U.S. and European diplomatic and geopolitical goals, as well as the conflict’s impact on U.S. national interests, are significant but not in themselves market moving.
• Stock market drawdowns from geopolitical shocks average about 5% with recovery taking under two months, but larger conflicts in sensitive regions can be deeper and last longer.

• We do expect further market volatility as the situation unfolds and elevated uncertainty may persist for several weeks, but if the conflict is contained, we do not expect long-lasting contagion to broader markets.
• As shown in the LPL Chart of the Day, if the economy avoids a recession after (or during) a major geopolitical event, stocks usually do just fine. “We looked at 37 major historical or geopolitical events since World War II and found that if there is no recession then stocks gain nearly 11% a year later,” explained Ryan Detrick. “The flipside is if there is a recession, stocks are down more than to 11% a year later. Given we simply don’t see a recession on the horizon due to a strong consumer and corporate earnings backdrop, this recent weakness could be an opportunity for investors.”

• Upward pressure on commodity prices, already impacted by COVID-19-related supply chain disruptions, may see a more sustained impact as economic sanctions play out and will probably be the main source of risk for possible broader economic repercussions.
• European equities have done well relative to U.S. counterparts so far this year as U.S. megacaps have stumbled, but the relative performance may stall as the crisis plays out.
• There may be some market opportunities for very active traders during the crisis, but for most investors we believe understanding the typical market response to geopolitical risks and focusing on where we’re likely to be at the end of the year rather than at the end of next week or month is likely the best response.
• Building on the note above, past market corrections of 10-15% have been followed by rather strong future performance.

• From a purely technical perspective, we continue to see near-term opportunities in commodity-exposed equities.

This is a very fluid situation and one that we are watching very closely. Please continue to follow LPL Research for any updates.

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, February 23, 2022

For the first time since March 2020, the S&P 500 Index officially moved into a correction, down 10.3% from the recent highs. Of course, many stocks have already been in a correction, with some even in bear markets. This is yet another potential worry for investors, but should it be?

“Let’s remember the S&P 500 averages about one 10% correction a year. Given it has been nearly two years without one, you could make the argument stocks were definitely due,” explained LPL Financial Chief Market Strategist Ryan Detrick.

View enlarged chart.

What now? The good news is stocks do quite well after corrections. As shown in the LPL Chart of the Day, this is the 33^rd correction or bear market for the S&P 500 since 1950. “As uncomfortable and frustrating market corrections can be, investors need to remember that future returns after such pain can bring a lot of gains,” added Ryan. In fact, after previous corrections and bear markets, the S&P 500 rose nearly 90% of the time a year or two later, with very strong returns.

View enlarged chart.

With the economy still strong and many signs of over-the-top negative sentiment, we doubt the S&P 500 will move into a bear market (down 20% or more), with a major low likely coming fairly soon. Here we show all the 10-15% corrections since 1980. Again, strong future returns are normal.

View enlarged chart.

For more on the recent market volatility, inflation, monetary policy, and some favorite charts, please watch the latest LPL Market Signals podcast with Scott Brown 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, February 22, 2022

The municipal market was a relative bright spot within the fixed income markets last year despite higher U.S. Treasury yields. Strong investor demand and fewer investment opportunities (due to less debt issuance) provided a tailwind to muni returns. Moreover, improving tax receipts and strong federal support provided additional reasons for the municipal market to outperform Treasury securities during a rising rate environment. And while some of these tailwinds remain (most notably the improved fundamental picture for many state and local governments), performance this year has been roughly in line with taxable markets. That said, and as shown in the table below, municipal markets have tended to outperform Treasuries (as defined by the Bloomberg Treasury Index) during rising rate environments. In fact, since 2004, investment grade munis (as defined by the Bloomberg Municipal Index) have outperformed Treasuries 12 of the last 13 times when the 10-year Treasury yield moved meaningfully higher. The non-investment grade segment of the municipal market (Bloomberg Municipal High Yield Index) has outperformed 11 of the last 13 times as well.

“While no one likes negative returns, the path to higher returns is through higher yields,” noted LPL Financial Fixed Income Strategist Lawrence Gillum. “With better fundamentals and improving valuations, future returns could potentially be more attractive.

A silver lining to the negative returns for munis this year is that returns are negative due to price pressures and not because of downgrades and/or defaults. In fact, the fundamental picture for the municipal market remains broadly in good shape and negative returns are due to higher Treasury yields. This is important as the value proposition has improved as yields have increased. So how much have valuations improved? As seen in the LPL Chart of the Day, when looking at the ratio between AAA munis and similar-maturity Treasury yields, a common valuation metric, muni valuations are more in line with five year averages. After remaining in “expensive” territory for much of last year, high grade munis are much more reasonably priced.

We continue to favor municipal bonds as a high-quality option for taxable accounts and still think the high-yield segment could be appropriate for those investors that need additional tax-free income, but are comfortable with the higher risks associated with the high-yield muni market. The fundamental backdrop for many municipalities has improved over the last few years and while we don’t expect as robust investor demand this year, improving valuations make these markets more attractive on a forward-looking basis.

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

As COVID-19 cases in the United States linked to the Omicron variant have fallen dramatically during the past month we look once more to high-frequency data for signals on how quickly the economy is reopening and what this could mean for the inflation outlook.

“With everything going on recently with market volatility, rate-hike expectations, and Ukraine, it has been easy to overlook the fact that getting Omicron in the rear view mirror is a huge step toward a fully functioning economy,” explained LPL Financial Quantitative Strategist George Smith. “The end of the Omicron surge should eventually reduce inflationary pressures by providing a much needed boost to labor supply shortages and reducing disruptions to domestic supply chains.”

As shown in the LPL Chart of the Day, just as in the experiences of South Africa and the United Kingdom (U.K.), where the Omicron variant was identified earlier, U.S. Omicron case counts fell from the Jan 13^th peak just as rapidly as they had risen:

Two of our favorite high-frequency, daily data points to get a real-time view on the pace of reopening are the numbers of air travelers and restaurant bookings. As concerns over Omicron have subsided, both of these have seen recoveries, but only around halfway toward their pre-Omicron levels.

The data on U.S restaurant diners from OpenTable (via Bloomberg) shows that bookings had recovered to 2019 levels as the World Health Organization (WHO) designated Omicron as a variant of interest. Omicron concerns and closures led bookings falling 30% by the time Omicron cases peaked mid-January. After a strong initial recovery to 85% of 2019 levels, bookings have stalled since the end of January. So far in February there has been a further 2% decline as falling consumer confidence (the Bloomberg Weekly Consumer Comfort Index is now at its lowest level since June 2020) and inflation worries have potentially deterred people from eating out. Food away from home, as eating out is known in the Consumer Price Index (CPI) measure of inflation released by the U.S. Bureau of Labor Statistics, saw a 0.7% month-over-month increase in January as restaurants struggled with availability and cost of staff, as well as rising food input costs.

The latest data from the U.S. Transportation Security Administration (TSA) shows that the number of air traffic passengers travelling through U.S. airports has increased off the Omicron low at the end of January. Compared to the same period in pre-pandemic 2019 about 28% fewer people were travelling, about half a million less per day, as Omicron hit passenger confidence and left U.S. airports at their quietest since May 2021. Now that Omicron concerns are waning, passenger numbers are back up to 82% of pre-Covid-19 numbers but still lag 2019 by around 350,000 passengers per day (Bloomberg). Any continued recovery in passenger numbers will likely put upward pressure on ticket prices, another component of CPI. It is worth remembering however, that, per CPI data, airfares had been falling since 2013, had dropped a further 28% at the onset of the pandemic, and that even following recent increases, prices have only recovered to 1999 levels (www.BLS.gov).

With high-frequency data showing only a partial recovery up to this point, the Omicron variant will likely be a drag on the economy well into Q1 2022 (the Atlanta Fed is currently estimating only 0.7% real economic growth in the quarter (www.atlantafed.org)). Nevertheless, the swift nature of the surge should mean related labor shortages and supply chain disruptions improve as the year progresses. Omicron worries fading into the background should also shift some demand from goods to services, while also strengthening the supply side. Both of those potential developments could help control inflationary pressures; although, it is very unlikely any effects will be noticed before the Federal Open Market Committee (FOMC) starts its cycle of rate hikes, that we expect to occur in March.

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, February 11, 2022

Stocks are off to a rocky start this year, with the S&P 500 Index beginning a correction almost immediately at the turn of the calendar year. The benchmark index fell nearly 12% from its January 4 record closing high through its intraday low on January 24, roughly double the worst pullback it saw in all of 2021. But is the volatility over, or is there more to come? Today’s blog takes a technical-focused look at key levels for the S&P 500 and what we will be looking for to call the all-clear.

First up, the chart. As shown in the LPL Research Chart of the Day, the post-correction rally reached its high point on February 2, stopping at 4595, which was not only resistance from a mid-January intraday low, but also happens to be the 61.8% Fibonacci retracement of the correction decline. Fibonacci retracements are common levels that traders look to for rallies or bounces to stall, and while they certainly aren’t expected to work every time, it may be more than a coincidence that this is where the latest rally found it’s high point.

That 4595 level showed its significance again this week, as stocks were rejected there on both Wednesday and Thursday, an especially important period as the market anticipated and then digested yet another hot inflation report and the bond market moved to price in a 50 basis point rate hike at the March Federal Reserve meeting.

So is a retest of the lows forthcoming? “There’s no rule that says we have to revisit the late-January lows,” said LPL Financial Technical Market Strategist Scott Brown. “But with longer-term market internals questionable and this week’s rejection at resistance, it seems that bears still have the upper hand. We see first support for the index at 4450, but a move below that could set up the classic retest many investors have been conditioned to expect”.

Midterm years have a reputation for volatility, and while so far the action seems limited to factors outside the world of politics, 2022 is certainly living up to its reputation. We believe it is important for investors to remember that price action like we have seen so far this year is far more normal than the straight line higher that we experienced in 2021. On any move lower, we will be looking for positive divergences in the number of stocks making new lows to signal a buying opportunity, while a move through 4595 on a strong breadth would be a positive step for equity bulls.

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

February 10, 2022

Should we be surprised at inflation surprises at this point? The Consumer Price Index (CPI), the most well known measure of inflation, climbed 7.5% over the last year through January, its highest reading since 1982, according to data released this morning by the Labor Department. The Bloomberg-surveyed economists’ consensus was for a reading of 7.3%, and while small in absolute terms this is a meaningful upside surprise. As shown in the LPL Chart of the Day, the three-month annualized run rate for inflation is still running higher than the one-year number, as it has 18 of the last 19 months. Seeing that reverse will be an important sign that inflation is coming under control.

“This CPI reading was all about the Fed for markets, and the surprise was big enough to keep an aggressive rate hike path in play,” said LPL Financial Asset Allocation Strategist Barry Gilbert. “While inflation may start getting better from here, market anxiety about potential Fed overtightening won’t go away until there are clear signs inflation is coming under control.”

S&P 500 futures sold off following the release, the 10-year Treasury yield climbed, and Federal Reserve (Fed) rate hike expectations tilted more aggressive. Market-implied expectations are about even money for a 50 basis point (0.5%) rate hike at the Fed’s March policy meeting, although several Fed members have said it’s not their base case and economists’ expectations are more muted.

If there’s a positive takeaway from the report, it’s that new vehicle prices were flat. There are still some components of CPI that have seen extreme price gains over the last year that are not expected to persist, with new and used vehicle prices having the largest impact. Those categories alone could account for about a 0.5% decline in core CPI in the long run as they normalize, and even more temporarily if they see price declines before leveling out.

The “core” inflation reading, which excludes the more volatile food and energy components, also continued to climb, hitting 6.0% year over year, also a small surprise to the upside.

We believe inflation is near or at its peak and will start settling down as supply chain constraints loosen and the labor pool expands, but the key question is how long it will take to happen. Part of the Fed’s concern has been that more transitory elements of inflation have started to flow through to stickier contributors, such as housing, wages, and inflation expectations, as inflation has persisted. Much of the aggressive Fed “pivot” has been in response to this shift.

The Fed’s goal now is to convince markets it can get inflation under control without overtightening. It’s a delicate balance and one that the Fed has historically had trouble getting right in real time. However, mistakes have usually come when we’re deeper into the cycle and early rate hikes are rarely a problem. The Fed will get one more look at CPI inflation next month before its March 15-16 meeting.

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, February 9, 2022

The Super Bowl Indicator suggests stocks rise for the full year when the Super Bowl winner has come from the original National Football League (now the NFC), but when an original American Football League (now the AFC) team has won, stocks fall. We would be the first to admit that this indicator has no connection to the stock market, but “data don’t lie”: The S&P 500 Index has performed better, and posted positive gains with greater frequency, over the past 55 Super Bowl games when NFC teams have won.

It was originally discovered in 1978 by Leonard Kopett, a sportswriter for the New York Times. Up until that point, the indicator had never been wrong.

A simpler way to look at the Super Bowl Indicator is to look at the average gain for the S&P 500 when the NFC has won versus the AFC—and ignore the history of the franchises. As shown in the LPL Chart of the Day, this similar set of criteria has produced an average price return of 10.8% when an NFC team has won, compared with a return of 7.1% with an AFC winner. An NFC winner has produced a positive year 79% of the time, while the S&P 500 has been up only 65% of the time when the winner came from the AFC.

So should the bulls be rooting for the Rams? Maybe not. Stocks have actually done just fine lately when the AFC has won. In fact, the S&P 500 Index gained 10 of the past 11 years after an AFC Super Bowl champ.

“Interestingly, there have been 55 Super Bowl winners, yet only 20 teams account for those wins,” said LPL Financial Chief Market Strategist Ryan Detrick. “Of course, we’d never suggest investing based on this, but history would say that lately AFC teams have been quite good for stocks, but I’m also a Bengals fan, so I’m clearly biased.”

Here’s a breakdown of the 20 Super Bowl winners and how the S&P 500 has done following their victories. The author’s favorite team, The Cincinnati Bengals, isn’t on this list just yet. Hopefully that changes this time next week.

Lastly, Tom Brady won’t be in this Super Bowl and won’t be in any more now that he has retired. He played in a record 10 Super Bowls and won a record 7 of them. Maybe something he should be known for is the Brady Indicator, as when he won the big game stocks did well and when he lost, they didn’t.

LPL Research would like to reiterate that in no way shape or form do we recommend investing based on this data, but here’s to a great game and safe Super Bowl weekend everyone!

For more on the Bengals and Rams, earnings, and a look at the global 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
• Not Bank/Credit Union Guaranteed
• Not Bank/Credit Union Deposits or Obligations
• May Lose Value

Posted by lplresearch

Tuesday, February 8, 2022

Since the beginning of the COVID-19 pandemic, the Federal Reserve (Fed) has been supporting financial markets by buying $120 billion of U.S. Treasury and mortgage-backed securities (MBS) each month. Currently, the Fed is in the process of reducing (tapering) the amount of asset purchases but is still adding to its balance sheet. However, meeting minutes from the December 2021 Fed policy meeting indicated that the Fed may begin to reduce the size of its balance sheet in 2022. Balance sheet runoff, or quantitative tightening (QT) as it’s also called, is how the Fed plans to reduce the size of its balance sheet. Currently, as bonds mature, the Fed reinvests those proceeds back into Treasury or mortgage securities. However, the Fed plans to forgo reinvestment and allow the bonds to mature and not replace them. While the Fed has not made a decision on when QT would begin, it is largely expected that runoff would likely begin in the second half of 2022.

“Fed balance sheet runoff is something we’re likely to hear a lot about over the next few months,” noted LPL Financial Fixed Income Strategist Lawrence Gillum. “It’s only happened one other time and the Fed didn’t get too far before having to reverse course. But with one episode under its belt and additional tools at its disposal, we think this time will go more smoothly.”

As seen in the LPL Chart of the Day, the Fed’s balance sheet has ballooned to nearly 40% of U.S. GDP recently from under 20% pre-pandemic. Fed Chair Jerome Powell has stated that the Committee would like to get the balance sheet back to around 20% of GDP. As such, the Fed would need to reduce its balance sheet by several trillion dollars over the next few years to get back to that 20% level. So should fixed income investors be concerned?

We only have one recent data point we can leverage- the Fed reduced the size of its balance sheet from 2018 to 2019. The Fed announced intentions to reduce its balance sheet in June of 2017, with the reduction taking place from January 2018 through September of 2019.  In March 2019, the Fed announced this runoff would conclude in September of that year. The table below examines how broad fixed income sectors performed immediately after Fed’s intentions were announced, during the full balance sheet runoff period, and after the Fed informed market participants that this runoff would end. With less monetary accommodation, one would assume that fixed income returns would be negative. However, as the table indicates, these indices produced strong positive returns during all periods. The Fed’s exit as a buyer of Treasuries and MBS did not result in negative performance for these sectors during the previous episode.

While many market factors are at play, based on the 2018-2019 Fed balance sheet runoff period, fixed income returns may not be that negatively impacted by the looming balance sheet runoff. However, there is still considerable uncertainty on how balance sheet runoff will be structured and implemented. Best case scenario is that balance sheet runoff commences in the background with little impact on markets (with interest rate hikes still being the primary tool for reducing monetary support). Unfortunately, Fed balance sheet decisions are likely to add to market volatility over the next few years.

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