Jeffrey Roach, PhD, Chief Economist
Jeffrey Buchbinder, CFA, Chief Equity Strategist
When we wrote the annual outlook last November, the data was mixed. Some metrics hinted at emerging cracks in the economy while others suggested the growth trajectory in capital markets and the economy had legs. So, the variety of the data produced the narrative that business activity in the New Year would grow on an annual basis but experience some bumps in the first half of the year. Now, enter the revisions.
Jeffrey Buchbinder, CFA, Chief Equity Strategist
Adam Turnquist, CMT, Chief Technical Strategist
A positive January has historically been a bullish sign for stocks. Yale Hirsch, the 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.
The LPL Strategic & Tactical Asset Allocation Committee (STAAC) determines the firm’s investment outlook and asset allocation that helps define LPL Research’s investment models and overall strategic and tactical investment thinking and guidance. The committee is chaired by the chief investment officer and includes investment specialists from multiple investment disciplines and areas of focus. The STAAC meets weekly to foster a close monitoring of all global economic and capital markets conditions to ensure that all the latest information is being digested and incorporated into its investment thought.
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Developments in artificial intelligence may be the antidote for an aging population, but it takes time for these advancements to work themselves into the fabric of our nation’s businesses. The impact of new developments can persist in markets, so investors need to carefully discern what could be different this time around.
"The four most dangerous words in investing are: 'this time is different.'" — Sir John Templeton
While some are drawing parallels between the current period and the late-1990s tech bubble and concluding that a crash may be coming, that’s not our view at all. This market environment is very different given who is leading the charge – the highest quality, most profitable companies in the world – and much lower valuations. Still, we think this history lesson can be instructive. The internet buildout took a number of years to play out, suggesting this buildout and its impact on stock prices may still only be in the early-to-middle innings. A Stanford University professor has some insights we will share later in this commentary.
Now, that doesn't mean technology stocks are going to continue to surge for years to come. There are many other important factors that matter than just artificial intelligence (AI). A likely path for markets, we believe, is a pullback or mild correction in the second half, offering investors the opportunity to buy on dips. We would not chase this narrow, AI-fueled rally, and maintain our neutral recommended technology allocation.
With stock valuations elevated after such a strong first half, earnings growth will be key to holding, or potentially building on these gains. LPL Research believes stocks have gotten a bit over their skis, but earnings season may not be the catalyst for a pullback in the near term given all signs point to another solid earnings season and stocks have mostly performed well during the peak weeks of reporting season in recent years. We may not get an increase in second-half estimates over the next couple of months — that's a lot to ask — but we should get a few points of upside and double-digit earnings growth for the second quarter on the back of technology strength.
Earnings season is right around the corner, with the big banks — JPMorgan Chase (JPM), Citigroup (C), and Wells Fargo (WFC) — scheduled to report on July 12. With the consensus expectations currently calling for a 9% increase in S&P 500 earnings per share (EPS), a double-digit gain for the first time since the fourth quarter of 2021 looks highly likely. That’s the main headline, but the sub-headline is the composition of that earnings growth.
The first half of the year was a challenging environment for a lot of fixed income markets, especially higher-quality markets. With the Federal Reserve (Fed) seemingly unlikely to lower interest rates until after the summer months (at the earliest), the “higher for longer” narrative has kept a lid on any sort of bond market rally. While falling interest rates help provide price appreciation in this higher-for-longer environment, fixed income investors are likely better served by focusing on income opportunities, which has been the traditional goal of fixed income investors. Investors can best navigate the latecycle economic environment by adding high-quality bonds, offering attractive risk-adjusted returns, and lowering overall portfolio volatility. Consider moving away from cash, with the Fed likely to cut rates in the second half.
Sharp shifts in interest rate expectations have been a hallmark of the bond market over the last few years, but with volatility comes opportunity, and investors should consider:
The LPL Strategic & Tactical Asset Allocation Committee (STAAC) determines the firm’s investment outlook and asset allocation that helps define LPL Research’s investment models and overall strategic and tactical investment thinking and guidance. The committee is chaired by the chief investment officer and includes investment specialists from multiple investment disciplines and areas of focus. The STAAC meets weekly to foster a close monitoring of all global economic and capital markets conditions to ensure that all the latest information is being digested and incorporated into its investment thought.
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In his recent speech, Federal Reserve (Fed) Chairman Jerome Powell focused on the fragilities of the labor market and is preparing markets for the new phase for policy. “The time has come for policy to adjust.” A soft landing looks achievable, barring any shocks. Disinflation while preserving labor market strength is only possible with anchored inflation expectations, so an independent and credible central bank is key. One of the best concepts in the speech for investors to understand is the current data shows an evolving macro landscape. The jury is still out on if the Fed can successfully manage the risks to both sides of their dual mandate.
Last summer, Jerome Powell ended his Jackson Hole speech with an intimidating tone — this tone was almost gone at this year’s symposium. He pivoted his policy inclinations from “We will keep at it until the job is done” to a more calming promise that “The time has come for policy to adjust.”
This clarity is just what the markets wanted. As consumer prices are no longer rising at breakneck speed, the Fed can move on to the other part of its dual mandate for full employment.
What we learned from Jackson Hole is the Fed is interested in preparing markets for the committee to start cutting rates at the September 18 meeting and to start a measured process of cutting throughout the rest of this year and into next.
In December 2023, Vladimir Putin declared that the 2024 BRICS Summit, hosted by Russia, would be focused on establishing a “fair world order” based on shared principles. At the core of Putin’s goals for stronger BRICS economic integration is a longstanding and overriding objective to provide a viable alternative to the West’s global hegemony in nearly all facets of political, military, economic, financial, and security affairs.
Creating a common currency designed to curtail — and displace – the dominance of the U.S. dollar as the world’s reserve currency has been a central theme when the BRICS Summit was formalized in 2009 with initial founding membership of Brazil, Russia, India, and China. Today, the dollar remains the commanding currency in global transactions, involved in an overwhelming number of exchanges, although a growing number of dealings involve the euro.
Putin has recently called for BRICS to establish a “safer and harmonious world” with a goal towards creating its own parliament.
Today, BRICS as an intergovernmental organization is comprised of Russia, China, India, Brazil, South Africa, Egypt, Ethiopia, Iran and United Arab Emirates. Saudi Arabia, due to join formally in January 2024, has not yet declared its official membership, while rumors persist that North Korea is seeking affiliation. Argentina was also invited to join, although newly elected President Javier Milei has made it clear the nation will not be joining in the near-term.
Second quarter earnings season is in the books, and it was a good one. S&P 500 companies collectively grew earnings at a double-digit pace for the first time in three years. Companies beat estimates at a solid 79% clip. Guidance from company CEOs and CFOs was relatively upbeat. And although some were a bit disappointed by big technology results based on stock reactions, the problem was high expectations more than anything else.
Second quarter numbers were quite good and generally in line with LPL Research’s expectations. In our earnings preview on July 1, we called for double-digit earnings growth and we got it — S&P 500 earnings per share (EPS) grew nearly 12% in the quarter, or over 13% excluding a $9.1 billion write-down of media assets by Warner Brothers Discovery (WBD). Profit margins expanded quarter over quarter by a not insignificant 0.4%, indicating companies did a good job controlling costs.
Source: LPL Research, FactSet 09/05/24
Past performance is no guarantee of future results. Estimates may not develop as predicted.
With the first presidential debate behind us, it’s safe to say election season is in full swing. While last week’s debate was light on economic policies, the future of tax policy (along with potential efforts to arrest elevated federal deficits) could have broad implications for the municipal (muni) market — some good, some not so good. With the Tax Cuts and Jobs Act (TCJA) set to sunset in 2025, the election will go a long way in determining the future of tax policy in the U.S. And for muni securities and their unique tax-exemption characteristics, the election will go a long way in determining future demand for the asset class. But with the Federal Reserve (Fed) embarking on a rate cutting cycle likely starting this week, the next few months could be the last “best time” to buy munis, regardless of changes to tax policy.
While there are still several months until the election is decided, the expectation is that regardless of who ultimately becomes our 47th president, the biggest loser could be the fiscal deficit. Per the Congressional Budget Office (CBO), the U.S. government is expected to run sizable deficits over the next decade — to the tune of 5% – 7% of gross domestic product (GDP) each year. According to the CBO, the deficit increases significantly in relation to GDP over the next 30 years, reaching 8.5% of GDP in 2054. That growth results from rising interest costs and large and sustained primary deficits. CBO deficit projections assume the personal tax cuts within the TCJA will expire at the end of 2025, so deficits are likely to be even higher assuming either Kamala Harris or Donald Trump will extend most, if not all, of the tax cuts. If tax cuts are fully extended, budget deficits are expected to be in the 7%–8% range of GDP over the next decade. Deficits will remain elevated regardless of who is in the White House in 2025, even without new spending or tax cuts due to higher spending on Medicare and Social Security plus the (growing) interest expense on the (growing) debt pile.
Of course, last week’s headliner was Jerome Powell and the Federal Reserve (Fed) cutting rates by a half percent on Wednesday, September 18, the first time since the COVID-19 pandemic broke out in 2020. The Fed “pause” ended at 423 days and now stands as the second-longest on record, while the 26% gain for the S&P 500 during the pause (7/27/23–9/18/24) ranks first. Here we share some thoughts on the Fed’s move last week and some potential market implications of not only Fed policy but also fiscal policy post-election.
Golfers may appreciate this mantra as representing the importance of the final putt that goes in the hole as being the most important thing, more so than a well-struck first shot off the tee. We think this analogy works for the Fed here. While the 0.25% vs. 0.50% debate was all the rage, what matters most is how much Powell and company cut for the entire cycle and how lower rates affect the economy. Whether the cycle starts with a quarter or half-point cut isn’t as important given the Fed will almost certainly have to cut much more than that this cycle. (For those who appreciate NASCAR more than golf, call it a pit stop on the way to the more important finish line.)
We don’t know how much the Fed will end up cutting, but if they are able to engineer a soft landing — and last week’s rally sure suggests the market thinks that’s what we’ll get — then perhaps they end up stopping before they get to 3% (the upper bound now sits at 5%, down from 5.5%). The Fed and most analysts think the neutral rate is around 3%, or potentially a bit higher. Either way, based on the 1995 experience, that sets up a favorable environment for stock investors. After the initial cut in July 1995, the S&P 500 rallied 18.7% over the next 12 months.
When it comes to investing, gold may be the antithesis of artificial intelligence (AI). The precious metal has acted as a store of value for thousands of years with zero technological innovation — gold is discovered, not developed. Gold is also a real tangible asset and can act as a potential hedge against inflation or a safe haven during times of crisis. Given these properties and the backdrop of a risk-on-record-setting equity market, many investors are wondering what’s behind the paradoxical price action of gold’s rally to new highs and how the yellow metal has matched the momentum in AI stocks over the last several months (gold and the equal-weight Magnificent Seven Index are both up around 20% since March). Herein we discuss the key drivers of gold and why this rally is no flash in the pan.
After consolidating sideways for several years, spot gold prices finally reached record highs in March. The rally continued into the summer months as expectations for a monetary policy pivot from the Federal Reserve (Fed) firmed. Interest rates and the dollar subsequently declined as the market began to price in higher probabilities for rate cuts. This was an expected response from gold, as lower U.S. interest rates and a weaker dollar increased the appeal of non-yielding bullion.
Perhaps more surprising is the lack of demand for gold exchange-traded funds (ETFs). Until recently, ETF holdings of gold had inexplicably decoupled from the precious metal over the last two years. However, with gold breaking out to new highs and creating a lot of headlines along the way, fear of missing out appears to be kicking in. Buyers have returned to chase this rally as gold ETF holdings recently reported seven straight weeks of positive inflows, marking the longest inflow streak since March 2022. History suggests this trend could continue as peaks in gold ETF holdings tend to occur after peaks in gold prices.
On October 12, 2022, there were very few comments suggesting that a new bull market was in thethroes of being born as the S&P 500 opened at 3,590.83 and closed at 3,577.03.
After all, inflation was still running hot even though the Federal Reserve (Fed) began its rate-hiking campaign on March 16, 2022, by raising rates by 25 basis points (0.25%) and moving to a 50-basispoint hike on May 5, 2022, as it tried to quell inflationary pressures. By mid-June, a series of 75- basis-point hikes were introduced as the Consumer Price Index (CPI) peaked in June at 9.1%.
The October 13 rally that ended the bear market at a low of 3,577.03 began with the S&P 500 selling off in the morning only to rally dramatically higher into the market close. The CPI report earlier in the day showed headline inflation at 8.2% on a year-over-year basis, but Core CPI ─ not including food and fuel prices ─ beat the consensus estimate at 6.6%. The S&P 500 closed at 3,669.91 and the bull market had commenced.
The explanations for the market reversal that day traversed from excessive short covering to the deep pessimism embedded in the market psyche that allowed investors and traders alike to witness a modicum of improvement in the CPI report.
The bar for third quarter earnings is low, with analysts currently expecting only about a 3% increase in S&P 500 earnings per share (EPS). That low bar and a supportive economic environment points to potential upside. However, stocks may already be pricing in solid results, with the S&P 500 up more than 7% since the third quarter began on July 1. Here we preview earnings season and discuss some of the key drivers of earnings growth in the year ahead.
The S&P 500 consensus earnings growth number of 3% for the third quarter is not something to write home about, especially after double-digit earnings growth in the second quarter. The soft number is partly due to a tougher comparison. In Q2 2024, earnings had an easier comparison with a 3.3% drop in earnings in the prior-year quarter (Q2 2023 vs. Q2 2022). For the third quarter now being reported, the comparison gets tougher as earnings growth in Q3 2023 was over 5% (vs. Q2 2022).
The biggest drags on earnings this quarter are likely to come from the energy and industrials sectors, while the biggest contributions are expected to be from technology, communication services, and financials. The largest, technology-oriented companies — the so-called Magnificent Seven (Mag 7) — will again drive a big chunk of overall earnings growth even as their growth has slowed (more on that below).
Stocks have done so well this year that it’s fair to say market participants haven’t feared much. But just because risks haven’t affected markets lately doesn’t mean they won’t in the future. In that “spirit,” as Halloween approaches, we discuss what scares us about the economy and financial markets.
For U.S. consumers, it’s the best of times and the worst of times. It’s no surprise that upper-income households supported consumer spending in recent periods. And it’s also no surprise that firms like credit card lender Capital One (COF) want to focus on the wealthier consumer, knowing those consumers weather downturns better.
When people talk about a “resilient consumer,” what they are really talking about is upper-income households. To borrow from Charles Dickens, the current macro landscape is the best of times and simultaneously the worst of times.
So, it behooves investors to carefully track the health of wealthier consumers, and they just got a troubling update from the New York Federal Reserve (Fed). What scares us this Halloween season is the potential stress on the wealthier cohort as more upper-income households reported they will most likely be unable to make their minimum debt payment — now at the highest percentage since mid-2014 when the economy was feeling the aftereffects of the Global Financial Crisis.
The imposition of tariffs by the United States this week has understandably sparked volatility in the markets.
It's in the face of such challenges that our diversified, strategically balanced, long-term approach demonstrate their true value. Our goal has always been to withstand market ups and downs, minimizing exposure to individual market events and maximizing potential returns through diversified investments across various asset classes.
One essential concept in navigating such circumstances is the importance of avoiding financial inertia. In prosperous times, this tendency may lead to missed opportunities for diversification or rebalancing. Conversely, during downturns, failing to act might result in unwisely holding onto underperforming assets or making reactive decisions driven by fear.
By emphasizing the importance of ongoing evaluation and dynamic adjustments to your portfolio, our proactive management involves regular reviews and strategic shifts to align with current market conditions, helping to avoid these pitfalls.
While market reactions to tariffs may introduce short-term volatility, maintaining focus on your long-term financial goals remains paramount. Rest assured, I am closely monitoring these developments and am prepared to implement strategic adjustments as necessary to better position your portfolio's performance.
For decades, U.S. Treasury bonds were regarded as among the safest of investments—so reliable, in fact, that they came to be viewed as the foundation of the global financial system.
But today we are facing an environment where those old assumptions may no longer hold true. With U.S. debt growing at an accelerating pace, confidence in Treasuries is being tested in ways we have not seen for generations. What was once considered unquestionably secure is now subject to doubt, challenging the traditional idea that there are permanent “safe havens” in investing.
This shift carries a powerful reminder: the past cannot always serve as a dependable guide to the future. The strategies that felt comfortable for decades may no longer provide the same level of protection or opportunity.
That is why professional guidance is more important than ever. My role as your advisor is to help you navigate these changes with clear-eyed analysis and strategies based not only on legacy assumptions, but on today’s realities—and tomorrow’s challenges. By reassessing risks, identifying new opportunities, and adjusting portfolios with discipline and foresight, we can strive to preserve and grow your wealth even in uncertain times.
If you’d like to discuss how these shifting dynamics could affect you, please don’t hesitate to reach out. It is exactly during periods like this that a thoughtful, flexible approach makes all the difference.