Weekly Market Commentary

May 22, 2023 – LPL Research
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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. LPL’s Strategic and Tactical Asset Allocation Committee (STAAC) recommends investors maintain a neutral duration relative to benchmarks with the expectation that Treasury yields are likely headed lower (or at least not much higher) over the next few quarters.

May 15, 2023 – LPL Research
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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. There’s plenty to worry about the rest of the year (debt limit, recession, tightening financial conditions, a Federal Reserve (Fed) policy mistake, among them), but the risk of an additional sharp contraction in profit margins has come way down.

May 08, 2023 – LPL Research
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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. These accusations have been particularly prevalent as the Ukraine/Russia conflict continues, with Russia and its long-standing allies asserting that the U.S. has illegally frozen billions of dollars of Russian financial assets.

May 01, 2023 – LPL Research
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“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 – LPL Research
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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 – LPL Research
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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. Banks, especially smaller cap regionals, are most exposed to CRE if credit cracks continue to widen. 

April 10, 2023 – LPL Research
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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. It will be interesting to see how management teams react to these latest developments.

April 3, 2023 – LPL Research
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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. If growth stalls and inflation materially slows, the Fed could cut yet keep real rates positive. Read more below for our reasoning and for what it means for your investments.

March 27, 2023 – LPL Research
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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 – LPL Research
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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. And while we don’t think a full-blown crisis is imminent, financial stability risks have clearly increased, which makes a prudent asset allocation plan a must.

March 13, 2023 – LPL Research
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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. This commentary is focused on our asset allocation views, but no doubt the Silicon Valley Bank saga will require more attention from investors in the days ahead.

March 06, 2023 – LPL Research
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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 – LPL Research
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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 – LPL Research
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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 – LPL Research
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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 06, 2023 – LPL Research
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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.

January 30, 2023 – LPL Research
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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 – LPL Research
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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.

January 17, 2023 – LPL Research
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Fourth quarter earnings season is underway and probably won’t bring much good news. Lackluster global growth, ongoing profit margin pressures from inflation, and negative currency impacts are likely to translate into a year-over-year decline in S&P 500 Index earnings for the quarter. As always, guidance matters more as market participants look forward. The key question coming into this earnings season is whether the pessimism surrounding 2023 earnings has gone too far.

January 09, 2023 – LPL Research
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We believe accountability and modesty are among the keys to success in this business. In striving for those qualities, LPL Research has a tradition of starting off a new year with a lessons learned commentary. We got some things wrong last year, no doubt. But those who don’t learn from their mistakes are doomed to repeat them. Here are some of our lessons learned from 2022. As you might imagine, inflation and the Federal Reserve are common themes throughout.

January 03, 2023 – LPL Research
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2022 was a dizzying year as markets and the global economy continued to find itself out of balance due to the still present aftereffects of the COVID-19 pandemic and the policy response to it. If 2022 was about recognizing imbalances that had built in the economy and starting to address them, we believe 2023 will be about setting ourselves up for what comes next as the economy and markets find their way back to steadier ground.

December 19th, 2022– LPL Research
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The Federal Reserve (Fed) wrapped up its last Federal Open Market Committee (FOMC) meeting of the year last week, where it hiked short-term interest rates for the seventh time in as many meetings, taking the fed funds rate to 4.5% (upper bound). A day later, both the European Central Bank (ECB) and the Bank of England (BoE) also hiked interest rates, taking their respective policy rates to the highest levels since 2008.