Market Commentary

Revisiting Energy

April 15th, 2024 | LPL Research
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As global central banks appear poised to begin easing monetary policy sometime this year, the so-called “Reflation Trade” is gaining prominence. The momentum in commodities has embraced the future of lower rates, a weaker dollar, and a more solid global manufacturing and consumer landscape.

However, as in any major moves higher, especially the parabolic nature of the recent climb in crude oil prices, overbought conditions set in, most likely necessitating a pullback, or sideways trading to burn off the froth.

The overarching fundamentals of quality names within the energy sector, representing a reflationary cycle, include strong cash flows, with a focus on reducing debt levels, and solid positioning to return shareholder value with prominent share repurchasing programs and increasing dividends.

Additionally, valuations are exceptionally attractive given steady and reliable cash flow margins in most quarters.

Inflows into the sector remain muted as the price of crude oil continues to be the key driver for investors rather than strong corporate fundamentals. As a result, the sector remains under-owned, or in the market’s parlance, “unloved.”

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What To Watch This Earnings Season

April 8th, 2024 | LPL Research
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Estimates have been remarkably resilient over the past several quarters as the economy has surprised to the upside. Given the continued resilience of the economy, executives are unlikely to find much of a reason to cut their outlooks — especially after holding estimates in January and February, a logical time to lower the bar at the start of the new year. If estimates hold up again this quarter, markets are likely to react positively to results. AI spending should help prop up estimates, though currency headwinds have stiffened.

So, for now, we’ll keep our 2024 and 2025 S&P 500 EPS estimates at $235 and $250, respectively, both reflecting growth in the mid-to-high single digits and below current Wall Street consensus estimates at $242 and $275. However, we recognize that corporate America could do better, and our bias is to likely raise those forecasts pending final results. Earnings growth rates are getting a boost from inflation-driven pricing power, ongoing fiscal stimulus, healthy job growth, AI investment, and easy comparisons in the healthcare and natural resources areas.

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IPOs as a Market Tell

April 1st, 2024 | LPL Research
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Hope for the 2024 IPO season still suggests optimism, and the performance of early entrants into the public market could assuage the host of concerns that hover over the market at large. Certainly, a more defined market consolidation, coupled with indications that inflation remains too markedly stubborn for the Fed to initiate an easing cycle, would temper enthusiasm for a successful 2024; however, hope springs eternal as investment bankers outwardly maintain that 2024 will be the year IPOs finally emerge from hibernation. The improved performance by these offerings last year and so far in 2024 offers an encouraging sign.

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Navigating the Strategic Investing Landscape

March 25th, 2024 | LPL Research
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The STAAC continues to expect below average economic growth over the next few years due to structural factors (e.g., slow population growth, deficit spending, and increased cost of debt) but does anticipate inflation falling back to the Fed’s target rate. Coupled with full valuations currently (that’s probably being a bit generous), the equity markets do not currently offer much perceived value relative to fixed income over a long-term strategic time horizon.

Bottom line, akin to the winds that drive a ship forward in good times, we advise trimming equities back in the SAA to around neutral due to rich valuations relative to fixed income, removing the overweight allocation that had been in place for the past several years. This adjustment reflects a cautious stance in the face of evolving market conditions, emphasizing the importance of balancing and managing risk and reward over a three-to-five-year horizon. Fixed income, like a sturdy anchor that can prevent drifting off away in turbulent waters, sees increased core holdings recommended for diversification and income stability amidst competitive yields.

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A Busy (and Perhaps Historic) Week for Central Banks

March 18th, 2024 | LPL Research
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Japan’s largest union group announced stronger-than-expected annual wage increases last Friday. Rengo, a federation of unions, said its members have so far secured deals averaging 5.3%, a figure that far outpaces the initial 3.8% tally from a year ago — itself the biggest in 30 years. Many of Rengo’s affiliated groups had already announced agreements to hike wages by 5% or more. The challenge for Japan over recent decades has been a lack of consumption stemming from low wage growth. BOJ officials, including BOJ Governor Kazuo Ueda, have recently stressed the timing of a shift away from negative rates would depend on the outcome of this year's annual wage negotiations between workers and employers. Thus, improved wage negotiations likely provide the BOJ with more confidence to finally take interest rates out of negative territory.

Since 2016, the main policy rate for the BOJ has been stuck at -0.10%. But with improved wage negotiations, markets are expecting a 0.10% rate hike this week from the BOJ, the first hike since 2007. Additionally, markets expect the main policy rate to climb to 0.25% by year-end.

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Gold Shines Brighter Than Ever

March 12th, 2024 | LPL Research
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Price action in gold over the last six months has been a bit paradoxical when considering the market backdrop of receding inflation and aggressive risk-on positioning. However, as investors have become more confident in the Fed’s transition from rate hikes to rate cuts, gold has done very well. Like most decisions in investing, it is all relative, so as interest rates moved lower on the back of a potential Fed policy pivot, both nominal and real yields became less attractive relative to gold, which offers no yield. Furthermore, the dollar has followed interest rates lower, providing another tailwind for the precious metal.

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Super Six Drives Solid Earnings Season

March 4th, 2024 | LPL Research
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The S&P 500 has reported 4.2% sales growth, a full percent above initial estimates. Some of the resilience reflects companies managing expectations, i.e., setting the bar low. Some was reflected in consumer inflation outpacing producer inflation, which is generally good for profit margins. But some of it also reflects companies’ ability to control costs and maintain pricing power in a disinflationary environment.

Consumers may increasingly push back on price increases in the quarters ahead, but for now, corporate America is doing an excellent job preserving margins, while demand from consumers and businesses has been strong enough to generate respectable sales gains.

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Buybacks Are Back

February 26th, 2024 | LPL Research
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A resilient U.S. economy, easing inflation pressures, and expectations for an eventual shift to interest rate cuts have given corporate America confidence to boost authorized share repurchases. These companies have a history of outperforming the broader market and tend to have more exposure to momentum, value, and growth factors. While buybacks also reduce share count and help support earnings growth and valuations, they can also help limit downside volatility during periods of selling pressure.

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Treasuries: Who’s Buying and Why it Matters

February 20th, 2024 | LPL Research
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With global central banks not as active, auctions are increasingly dependent on private buyers who are more price-sensitive than central banks. Household investors and mutual funds have both been increasing their ownership in Treasuries and will likely need to keep increasing shares to keep up with expected supply. Historically, neither has been an overly large buyer of Treasuries, but with yields at levels last seen over a decade ago, households, in particular, have been adding Treasury bills and bonds to portfolios. They will certainly need to keep adding Treasuries to portfolios to help offset supply. And with demographics shifting and baby boomers retiring, higher-yielding Treasuries will likely continue to remain attractive.

Without fiscal spending curtailed, the sale of Treasuries at a reasonable price and yield will become the barometer by which to evaluate how well the U.S. economy and financial markets are functioning. There is apprehension regarding how long buyers — foreign and domestic — can support the U.S. with attractive yields and whether they will demand better prices with ultimately higher yields.

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Outlook for U.S. Economy Continues to Brighten

February 12th, 2024 | LPL Research
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In other fiscal news, a tax bill cleared the House on January 31 and is now being considered by the Senate. Provisions in the bill have been scored by the Joint Committee on taxation at roughly $120 billion in 2024. Strategas policy strategist Dan Clifton estimates $136 billion in fiscal stimulus from the bill, though passage is far from assured, especially considering these dollars could influence voters in swing states which may cause Republicans to balk. The same can be said for the defense (Ukraine, Israel, Taiwan, and Red Sea) and southern border deals that came out of the Senate and face uncertain futures. Should these bills get through Congress, the odds that 2024 GDP growth has a 2-handle — though not our base case — will increase. We have raised our GDP growth forecast for this year from 1% to 1.4% and marginally increased growth forecasts for developed international economies due to some positive spillover.

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Will the January Barometer Come Through?

February 6th, 2024 | LPL Research
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A positive January has historically been a bullish sign for stocks. Yale Hirsch, creator of the “Stock Trader’s Almanac”, first discovered this seasonal pattern back in 1972, which he called the January Barometer and coined its popular tagline of ‘As goes January, so goes this year.’ Here, we assess the likelihood that this popular stock market adage delivers more gains for investors this year. The weight of the evidence leans toward yes, as we explain.

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Is Too Much Optimism Priced In?

January 29th, 2024 | LPL Research
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History shows higher interest rates have translated into lower stock valuations and vice versa. Consider the fundamental value of a stock is the present value of the company’s future cash flows. That means when we discount future earnings, or cash flows, which is a purer measure of a company’s fundamental value—interest rates come into play. Interest rates also matter to stock valuations because bonds compete with stocks for investors’ investment dollars.

So, to incorporate interest rate levels into our evaluation of P/E ratios and get this fuller picture, we calculate an equity risk premium, or ERP. This statistic compares the earnings yield on the S&P 500 (the inverse of the P/E) to the 10-year U.S. Treasury yield. Essentially, an ERP compares the earnings generated by stocks to the income generated by bonds (in this case, the yield on the 10-year Treasury). By putting stocks and bonds in the same terms, they can be compared on an apples-to-apples basis to see if investors are getting enough earnings “compensation” for the additional risk they are taking by owning equities relative to lower-risk Treasury bonds.

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Will Shipping Disruptions Alter Fed Plans?

January 22nd, 2024 | LPL Research
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During the depth of the pandemic, shipping lanes backed up due to understaffed ports and insufficient supply of intermodal containers. Additionally, activity at production plants was hampered from governmental restraints and inconsistent labor supply. Investors often overlook the length of time for the backlogs to clear — ports didn’t return to more normal levels until the middle of 2022.1 The lack of supply during the early stages of the pandemic was a significant driver for goods inflation.

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Magnificent Seven and Margins Are Keys to Q4 Earnings Season

January 16th, 2024 | LPL Research
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Margins are always an important element of corporate profits but take on added importance when revenue growth is modest. It’s also tougher to generate substantial margin beats when the business cycle is mature, as it is now. For example, margins can massively beat estimates coming out of recessions, but upside potential is more limited when economic growth is slowing after a multi-year economic expansion.

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China 2024 Faces Demanding Economic Challenges

January 8th, 2024 | LPL Research
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As China emerged a year ago from the shadow of the stringent zero COVID-19-related measures that all but shut down its economy for over two years, much was expected in terms of its economic growth prospects. There were numerous reports suggesting the world’s second largest economy would ignite a bout of inflation as its industrial base would require vast quantities of commodities to power a newly energized China. Clearly that didn’t happen. Here we explore why and provide our updated thoughts on investing in China and emerging markets.

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Lessons Learned in 2023

January 2nd, 2024 | LPL Research
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Stocks recovered quickly as investors became more comfortable with the banking sector risk being more idiosyncratic than systemic. The soft-landing narrative also gained traction, and the S&P 500 promptly climbed to key resistance at 4,200 by June. At this time, technology was overbought, market leadership was particularly narrow, and valuations appeared full, given the economic backdrop. 

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Key Equity Themes For 2024

December 18th, 2023 | LPL Research
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History doesn’t always repeat, but it rhymes. As the next 12 months of the bull market get underway, kicking off year two of this bull market born in late 2022, market history tells us solid gains may lie ahead. Of the 12 such second year bull market periods since 1950, the S&P 500 has gained an average of 12.6% and was positive every time. 

A gain of this magnitude seems very reasonable at this point, if not conservative, given the potential for support from the Fed as inflation falls. And the S&P 500 is up over 8% since the bull market turned one on October 12, 2023, leaving the index just 4% or so away from that historical average. 

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Discord in the OPEC+ Oil Patch

December 11th, 2023 | LPL Research
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As China’s economic recovery continues to disappoint, markets hope Beijing will introduce a broad fiscally-oriented program to bolster growth. Crude oil exports to China, the world’s largest importer of oil, have declined significantly as Beijing struggles to focus on the ongoing debt problems enveloping the once prominent property market.

Thus far, monetary measures have been introduced to help maintain liquidity in the failing sector. Consumer spending in China has suffered as the economy remains sluggish, and manufacturing has slowed.

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Anatomy of a Market Rally

November 20th, 2023 | LPL Research
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As the Fed tries to engineer a “soft landing” the market will enjoy the benefits of a strong package of support from positive seasonality, a positive presidential cycle data that points to a typically robust finish to the year when the incumbent is running for office in the following year, and the extremely rare occurrence for the S&P 500 to close lower for two years in a row.

Don’t be surprised if in the midst of conflicting data and Fedspeak, the S&P 500 surprises the bears and keeps working its way higher. History advocates that this is customarily the case.

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Is the Stock Market Correction Over?

November 13th, 2023 | LPL Research
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The S&P 500 violated several key support levels, including the closely watched 200-day moving average (dma). A downtrend subsequently developed via a series of lower highs and lower lows, implying sellers became more enthusiastic than buyers over the last few months. Underneath the surface of the S&P 500, breadth—used to assess the overall participation and strength of a move in the market—has been damaged.

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Can Muni Investors Catch A Break? We Think So.

November 6th, 2023 | LPL Research
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While many equity investors are familiar with seasonality trends, fixed income investors may not be as versed. Generally, after the summer doldrums, new issuance tends to pick up with October a heavy supply month. In the 10 years from 2013 to 2022, the month of October ranked highest among average tax-exempt municipal supply, as issuers sought to complete borrowing plans ahead of the winter holidays. The increase in supply has generally put downward pressure on prices (upward pressure on yields). However, average tax-exempt supply typically falls to below-average levels from November to February. 

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Possible Halloween Scares for Markets and the Economy.

October 30th, 2023 | LPL Research
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The road to getting the U.S. debt problem under control will be long and tough. Though more of a long-term scare, a functioning government will be critical in coming years as federal debt service costs increase. The government’s net interest cost as a percent of tax revenue bottomed below 7% in 2015 before doubling since then to more than 14% currently, a level that has sparked austerity in the past.

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Can Something Good Come From A Crisis?

October 23rd, 2023 | LPL Research
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Despite headwinds, the U.S. could experience structural changes in the labor market, residential real estate, and inflation as the post-pandemic economy progresses into the New Year. As markets adjust to a new regime, investors should recognize the economy is becoming less interest rate sensitive and they should focus on leading indicators such as the ratio of part-time workers and not on lagging metrics such as the headline growth stats mostly cited in the media.

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Earnings Hope to Keep This One-Year-Old Bull Market Going

October 16th, 2023 | LPL Research
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Analysts have underestimated corporate America’s ability to generate revenue and control costs throughout 2023, while economists have generally underestimated the resilience of the U.S. economy, consumers’ willingness to spend, and benefits from both prior stimulus and previously low interest rates. As a result, even under intense cost pressures, companies have exceeded expectations throughout the year and kept estimates steady.

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Higher for Longer - Updating Our Treasury Forecast

October 9th, 2023 | LPL Research
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As the economic data has continued to surprise to the upside, however, the bond market’s yield curve has slowly started to dis-invert. After spending over a year inverted and reaching levels last seen in the 1980s, the difference between shorter maturity Treasury yields and longer maturity yields is normalizing. And while that difference has narrowed, there is still a risk to Treasury yields that the gap fully normalizes, which could put additional upward pressure on intermediate and longer-term yields. 

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Prospects For A Fourth Quarter Rally

October 2nd, 2023 | LPL Research
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From a fundamental perspective, rates have been driven higher by a U.S. economy that has continued to outperform expectations, pushing recession expectations out further, and by the unwinding of rate cut expectations by the Federal Reserve (Fed) to be more in line with the Fed’s “higher for longer” regime. These dynamics have led to a dis-inversion of the yield curve, with the 10-year yield rising faster than the 2-year (called a bear steepener).

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