Weekly Market Commentary

September 18, 2023

Recent data suggests economic conditions in Europe are deteriorating, removing a key element of LPL Research’s positive view of the attractively valued developed international equities asset class. Previous U.S. dollar weakness and strong earnings momentum, which were other key reasons why we became more interested in European investing earlier this year, have reversed and suggest looking elsewhere for investment opportunities. Another international market to consider is Japan, which is also attractively valued with better fundamentals than Europe, in our view.

September 11, 2023

The BRIC acronym, without the “S,” was introduced in 2001 by the Goldman Sachs chief economist who highlighted the prodigious growth and investment prospects of Brazil, Russia, India, and China combined. In 2009, Russia advanced the BRIC platform to create an informal bloc that could challenge the dominance of Western nations, particularly the United States. In 2010, South Africa joined and became the “S” in the BRICS lexicon. The original bloc, an informal economic alliance, comprises approximately 45% of the global supply chain for commodities, including industrial, precious, and agricultural products. In terms of contribution to global GDP, the BRICS constitute 31%, with expectations for a more expanded share as the new BRICS+ entrants are installed in 2024. The bloc has been characterized as the “commodity powerhouse of the world,” and that title will only strengthen with additional members.

September 5, 2023

Fixed income investors have had a rough time over the last few years. Normally a staid asset class, core bonds (as proxied by the Bloomberg Aggregate Bond Index) have seen negative returns over the last two calendar years and could potentially see negative returns for a third straight year—something that has never happened in the history of the core bond index (since 1975). But, despite the rapid rise in interest rates (fall in bond prices), there’s no reason to believe that we are in the beginning of a sustained bear market. Just because yields fell for many years doesn’t mean that they have to keep rising. 

August 28, 2023

The Federal Reserve (Fed) often uses the Jackson Hole Symposium to announce tweaks in policy. Other central bank leaders are also worth watching as investors try to perceive where rates will be in the coming months. In this piece, we discuss some of the opportunities and risks we see in the markets and the economy following the central banker confab. We close the piece with investment implications.

August 21, 2023

Volatility has returned right on cue as U.S. equity markets continue to pull back from overbought levels. The recent jump in interest rates has proven to be too much too fast for stocks to absorb, especially for the heavyweight and longer-duration technology sector. Deteriorating economic conditions in China and weak seasonal trends have been additional factors behind the selling pressure. However, don’t panic, pullbacks are completely normal within a bull market. With volatility comes opportunity, and as valuations reset, overbought conditions recede, and support is found, we believe a buying opportunity back into this bull market will present itself over the coming months. 

August 14, 2023

It’s different this time. The four (or five) most dangerous words in investing. We’ll take the risk and use those words here as we break down the recent decision by credit rating agency Fitch to downgrade U.S. government debt to its second-highest rating, AA+ (note that several countries in Europe, including Denmark, Germany, Netherlands, and Switzerland enjoy AAA ratings, as do Johnson and Johnson (JNJ) and Microsoft (MSFT)). We compare the potential market impact of this decision to what markets experienced in 2011 when S&P issued its U.S. debt downgrade.

August 7, 2023

Earnings season is mostly behind us with about 85% of S&P 500 companies having reported second quarter results. The high level results aren’t particularly impressive, but if we peel back the onion, the numbers are encouraging. Results and guidance probably haven’t been good enough for stocks to add to recent gains, but they have been good enough, in our view, to end the earnings recession and limit the magnitude of any potential pullback. Here we provide some takeaways from this earnings season.

July 31, 2023

The economy is doing better than expected, and the markets are responding accordingly. In this piece, we discuss some of the factors that cause us to think the Federal Reserve (Fed) hiked for the last time in this cycle as inflation is receding and the outlook for the consumer looks cloudy. We close the piece with investment implications.

July 24, 2023

The first half of the year probably didn’t go the way many fixed income investors had hoped, particularly after the historically awful year last year. It wasn’t a horrible start—more in line with recent years—but expectations were high this year, with many calling 2023 the year for fixed income. But the themes that negatively impacted fixed income investors last year have carried over into this year as well—namely inflation and the Federal Reserve (Fed).

July 17, 2023

Earnings season is upon us as some banks and a small handful of other blue chip companies have already reported results for their quarters ending June 30. The results on the surface probably won’t offer much to write home about given consensus estimates imply a 7% year-over-year decline in S&P 500 earnings per share. However, the key question is always what’s priced in, which at least offers an opportunity for markets to react positively, though our best guess is we get the typical upside surprises and guidance reductions, giving this rally a convenient excuse to take a breather.

July 3, 2023

The long dormant capital markets have recently begun showing signs of interest from institutional investors and deal makers anxious to bring companies to market. While activity remains muted at best, expectations are focused on 2024, when there is a prevailing consensus that the Federal Reserve (Fed) will be finished with its rate hike campaign, and that economic conditions will be resilient enough to underpin a strong capital markets environment. Given the country's unique characteristics in nurturing innovation and technological leadership, the role of capital markets is crucial in maintaining hegemony. 

June 26, 2023

We know it’s old news at this point, but on June 8, 2023, the S&P 500 entered a new bull market. After such a strong rally off the October lows, this young bull probably needs a breather. A look at the charts suggests this market may be due for a pause. Bull markets are not linear. However, the impending end of the Federal Reserve (Fed) rate-hiking campaign, and the economy’s and corporate America’s resilience, help make the bull case that steers LPL Research toward a neutral, rather than negative, equities view from a tactical asset allocation perspective.

June 20, 2023

As the economy is likely downshifting, investors should take heed that the Federal Reserve’s (Fed) current stance is eerily similar to early 2007.  During that time, the Fed held a tightening bias since they believed the housing market was stabilizing, the economy would continue to expand, and inflation risks remained. Clearly, their expectations were not met as the economy soon fell into recession. That’s not suggesting another 2008 is coming, but rather highlights how fast the economic environment can change. 

June 12, 2023

The Federal Reserve (Fed) meets this week where it is largely expected to not raise short term interest rates for the first time in 15 months. However, Fed messaging has been all over the place in recent weeks. While some Fed officials continue to advocate for additional rate hikes, others want to be more patient. So, according to current market pricing anyway, the Fed is expected to skip the June meeting before hiking again in July which could mark the starting point for an extended pause.

June 5, 2023

Stocks have had a nice run, but at higher prices, the bar for further gains gets higher. We have recently made the case in this publication that there are a lot of reasons to expect the market to go higher between now and year end. But with stocks at higher valuations, high-quality bonds offering attractive yields, an S&P 500 Index with concentrated leadership facing technical resistance at 4,300, and an elevated risk of a late-2023 recession, we think it makes sense to be a bit careful here.

May 30, 2023

The mega-cap technology companies have powered the broad market higher this year. In fact, the 8.1% gain in the S&P 500 year to date has been driven entirely by six mega-cap stocks: Apple (AAPL), Microsoft (MSFT), NVIDIA (NVDA), Meta (META), Amazon (AMZN), and Alphabet (GOOG/L). Is this narrow leadership a problem for stocks looking forward? We try to answer that question below.

May 22, 2023

Economists like to remind us there is no such thing as a free lunch. In investment parlance, that just means all investments carry risk—even cash. And the big risk with cash is reinvestment risk. That is, while short-term rates are currently elevated, the risk is these rates won’t last and upon maturity, investors will have to reinvest proceeds at lower rates. And if this current cycle follows history, we could see lower core bond yields over the next year, which would mean cash-only investors may miss out on these higher yields. 

May 15, 2023

First quarter earnings season is nearly complete, and it has caused us to regret titling our earnings preview commentary on April 10, “Malaise Continues.” While the “better than feared” label fit the past couple of earnings seasons quite well, based on the magnitude of upside surprises in the first quarter, and encouraging guidance from corporate America, that’s probably underselling it. 

May 8, 2023

Much has been written lately about the threats facing the reserve currency status enjoyed by the U.S. dollar. “De-dollarization” headlines appear on a near-daily basis, suggesting the dollar’s reign is in looming jeopardy, while counter arguments point out there isn’t another currency with the depth, transparency, and reliability associated with the dollar. Still, critics accuse the U.S. of having “weaponized” the dollar, that is, punishing other countries with sanctions and freezing assets.

May 1, 2023

“Sell in May and go away” is probably the most widely cited stock market cliché in history. Every year a barrage of Wall Street commentaries and stories in the financial press floods in about this popular, but overused, stock market adage. Here we take our annual look at this historical seasonal pattern which, as you will see below, has started to lose some of its street cred recently.

April 24, 2023

Investors use various analogies to describe the importance of small businesses in the domestic economy. Some refer to the small business sector as the backbone or the lifeblood of the economy.  At this current stage of the cycle, we could say there are rising risks of an acute backache or a draining of that lifeblood. In this edition of the Weekly Market Commentary, we discuss the weakness in small businesses and what that foreshadows in the markets and the economy. 

April 17, 2023

The commercial real estate (CRE) market has recently captured the spotlight after being flagged as the next potential shoe to drop following last month’s banking turmoil. While rising rates have weighed on financing costs and the recent bank failures will make lending more restrictive, the post-pandemic world has produced structural changes that will likely weigh on the sector, especially within the retail and office segments. 

April 10, 2023

First quarter earnings season kicks off this week with some big banks reporting toward the end of the week. In some ways this quarter’s earnings season will probably be déjà vu all over again—earnings declines and cautious guidance, reductions in estimates, but better than feared. However, tightened financial conditions in the wake of last month’s banking turmoil and building evidence for a slowing economy has changed the economic backdrop this quarter. 

April 3, 2023

Financial markets and the Federal Reserve are reading from two different playbooks. Who is right? The markets are pricing in several rate cuts by the end of this year, while the Federal Reserve communicated more rate hikes with an expectation of holding rates up throughout the balance of 2023. We think that markets have it right, but several factors need to play out for this outcome to prevail.

March 27, 2023

A lot has changed in the past few weeks, both in terms of expectations for interest rates and lost confidence in the health of the banking system as a result of the sharp rise in interest rates that has led to some things “breaking,” as we wrote about here last week. Here we share some thoughts on who’s to blame for the ongoing banking crisis and reiterate how we are telling investors to adjust, or not adjust, their asset allocations in light of ongoing market volatility.  

March 20, 2023

The Federal Reserve (Fed) has a history of raising short-term interest rates until something “breaks.” Considering the Fed has raised rates from a near-zero level to 4.75% (upper bound) over the course of only one year, it was almost a near certainty this time would be no different. Recent bank failures suggest things are indeed starting to break. However, we don’t think we’re on the brink of a full-blown crisis, as market indicators we follow suggest contagion risks are still currently low.

March 13, 2023

Last week did not play out how we anticipated. Coming into the week, it was all about Federal Reserve (Fed) Chair Jerome Powell’s congressional testimony and the February jobs report. Instead, we got a shockingly fast collapse of a financial institution with over $200 billion in assets, which turned the market’s focus toward the stability of the banking system and what systemic risks banks might be facing.

March 6, 2023

Suggesting an economy makes “no landing” makes no sense. Analogies eventually break down, especially this one. Economic activity does not stop like an airplane eventually does, but rather the economy will settle into a steady state where growth is consistent with factors such as population and productivity. Here we take a look at some factors that illustrate how the economy is struggling to find a stable growth path.

February 27, 2023

While concerns about the debt ceiling have been increasing, markets, businesses, and the economy are likely to see only minimal impact until we are days, or maybe a few weeks, from the “x date,” the date on which the federal government will no longer be able to meet all its obligations, likely in the summer or early fall. We continue to believe the chances that Congress will fail to raise the debt ceiling before the x date remain extremely low, but current political dynamics have likely increased the risk and there are some negative consequences to even an eleventh hour agreement, as we saw in 2011.

February 21, 2023

Markets have adjusted to several changes this year. The pace at which inflation has cooled is slowing. The market has started to believe the Federal Reserve’s (Fed) “higher for longer” message. The bar for earnings has been lowered. Market relationships to interest rates have been turned upside down. And many of last year’s losers are this year’s winners, and vice versa. Here we take a look at some of the biggest changes in the market environment so far in 2023 and what those changes could mean for investors over the balance of the year.

February 13, 2023

Soft landing or no soft landing, that is the question, with all due respect to William Shakespeare. But while this may be the most commonly asked question these days, it may not be the most important or the toughest. That honor goes to what’s priced in. Good market forecasts are not just about the economy and earnings—they are about what the market is pricing in. Below we share our thoughts on the potential for a soft landing, the possible role China might play in that, and whether markets are pricing in too much good news.

February 6, 2023

Investors got more excited about international investing late last year. Some of that was chasing better returns, as developed international equities solidly beat the U.S. over the last three months of 2022. Some was the increased popularity of value investing as mega-cap U.S. technology stocks became less in favor. The surprising resilience of core European economies and a weaker U.S. dollar added to the market’s excitement. After such strong performance in international benchmarks recently, is there enough good news still yet to come for these markets to continue to outpace the U.S.?

January 30, 2023

The script has been flipped in 2023. Last year’s underperformers have turned into outperformers this year, driving the S&P 500 Index up over 5% this month. The pace and composition of the rally have left many investors skeptical over its sustainability, especially amid a lackluster earnings season thus far. Of course, the market is also forward-looking, with expectations for falling inflation and a less hawkish Federal Reserve (Fed) as we progress into 2023. 

January 23, 2023

The latest episode of the debate between stock market bulls and bears has gotten more interesting. For every valid point from one side, there’s an equally compelling argument on the other side. Perhaps the best reason for the debate is the uniqueness of this environment. The pandemic and its aftermath don’t come with a historical playbook. We haven’t been here before. So we’ll just recognize that the outlook is uncertain, weigh the pros and cons, glean what we can from the past, and give it our best shot. Call us cautious bulls.