Weekly Market Commentary

Each week the LPL Financial Research team assembles thoughtful insight on market news.

Buybacks Are Back

February 26, 2024 | LPL Research

This year, buyback activity appears to be back in action as inflationary pressures subside and the Federal Reserve (Fed) gets closer to transitioning from rate hikes to rate cuts. Economic activity and earnings are also improving. While Treasury yields have recently moved higher due to the repricing of Fed rate cuts further out on the calendar, higher rates have not eroded confidence in the potential for a soft-landing scenario.

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Treasuries: Who’s Buying and Why it Matters

February 20, 2024 | LPL Research

Currently, the Fed owns slightly more than $5 trillion in Treasury securities, or roughly 25% of issuance, but is on pace to reduce its exposure by several trillion by the end of 2024. While the Fed will likely not be able to get its balance sheet back to pre-COVID-19 levels, it likely won’t be a large buyer of Treasury securities in the near term either (unless an unforeseen macro event causes the Fed to implement quantitative easing again). So, the biggest buyer of Treasuries is likely on the sidelines for now.

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Outlook for U.S. Economy Continues to Brighten

February 12, 2024 | LPL Research

Services spending experienced something drastically different. The pandemic took a toll on services demand and after several years, consumers are finally back on trend for services. We think consumer spending will revert to the mean this year, but the strong momentum we have from jobs and credit suggest the reversion to the mean will be pushed out later — just like the timing of the first Federal Reserve (Fed) rate cut, which may not come until June.

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Will the January Barometer Come Through?

February 5, 2024 | LPL Research

The January Barometer tells us that stocks are likely to gain ground between now and the end of 2024. Meanwhile, over the course of the year, we expect easing inflation, stable or lower interest rates, and an expected ramp-up in earnings to support additional modest gains for stocks — potentially above our year-end fair value target of 4,950. Meanwhile, the presidential cycle may give the economy and stocks an added push to keep this still-relatively young bull market marching higher. The path to more gains won’t be linear given the macroeconomic and geopolitical challenges that lie ahead. Valuations are on the high side and corrections frequently happen during election years, even in bull markets.

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Is Too Much Optimism Priced In?

January 29, 2024 | LPL Research

Earnings are an accounting measure that can be distorted and shifted around, even while following generally accepted accounting practices (GAAP). For that reason, we view cash flows as potentially more important than earnings and a purer measure of the profits a business generates over time.

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Will Shipping Disruptions Alter Fed Plans?

January 22, 2024 | LPL Research

So why is the current problem different? Right after the start of the pandemic, firms struggled to set market-clearing prices and many initially thought inflation was transitory, a forecast that ended embarrassingly. However, since the beginning of 2023, the annual rate of inflation for durable goods was negative. So, although supply disruptions will likely bring upward pressure on goods prices, we don’t think the temporary shock will change the Fed’s pivot from hiking rates to cutting rates. And if the data support it, we could see the first cut in March.

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Magnificent Seven and Margins Are Keys to Q4 Earnings Season

January 16, 2024 | LPL Research

The STAAC recommends large cap growth-style equities over their large cap value counterparts. The Committee believes growth-style large cap equities may benefit from lower inflation and stabilization of interest rates in the intermediate term.

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China 2024 Faces Demanding Economic Challenges

January 8, 2024 | LPL Research

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: “This Time Is Different” in Post-Pandemic Economy

January 2, 2024 | LPL Research

As the economy continued to exceed expectations, interest rates went up by more than anticipated, and the chances for a recession went down, which in turn led the Fed to stick to its “higher for longer” approach—rather than lowering rates to stave off a looming recession.

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Key Equity Themes for 2024

December 18, 2023 | LPL Research

The technical backdrop for U.S. equity markets continues to improve. The S&P 500 has staged an impressive comeback after briefly entering a correction period this fall. Broad-based buying pressure outside of just the mega-cap space likely has underpinned the recovery.

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Discord in the OPEC+ Oil Patch

December 11, 2023 | LPL Research

Despite a heavy lobbying effort to cajole OPEC+ members to agree to a unified cut in oil production, Saudi Arabia, the de facto leader of the energy cartel, was unable to orchestrate anything more than pledges on a “voluntary” basis. Accordingly, benchmark oil prices continued to slide lower following the announcement, and without a catalyst to propel prices higher, oversupply in the market coupled with concerns over the global economic landscape, have steadfastly kept prices lower.

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Market Opportunities Amid An Economic Rotation

December 04, 2023 | LPL Research

Opportunities abound in the markets, even during periods when the economy appears ripe for a regime shift. Recent growth metrics surprised to the upside, but leading indicators point toward some downside risk. In this edition of the Weekly Market Commentary, we examine potential opportunities amid a rotation in housing, buying patterns, and inflation.

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Anatomy of a Market Rally: Looking at Key Catalysts

November 20, 2023 | LPL Research

As the market appears to be taking a rest and consolidating its $2.7 trillion rally leading up to the Thanksgiving holiday, the historical pattern over the last five years suggests the shortened holiday week typically enjoys modest gains. With concerns over the resiliency of consumer spending, however, the market can be affected by any indication that Black Friday doesn’t witness the throngs of consumers out hunting for bargains, or indications that the start to Cyber Monday won’t result in the billions of dollars that are spent online.

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Is the Stock Market Correction Over?

November 13, 2023 | LPL Research

The risk-reward trade-off between stocks and bonds looks relatively balanced to us, with core bonds providing a yield advantage over cash.

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Can Muni Investors Catch a Break? We Think So

November 6, 2023 | LPL Research

The muni market has had to deal with numerous external factors— aftershocks of the regional banking crisis, tax season, elevated levels of selling by banks, unexpectedly large federal budget deficits, and a hawkish Fed. So, with the last two potentially out of the picture, we think the set-up for muni investors could be a positive one.

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Possible Halloween Scares for Markets and the Economy

October 30, 2023 | LPL Research

We expect the strong job market, cooling inflation, the end of Fed rate hikes, stable interest rates, and growing corporate profits to help stocks overcome these worries and keep this young bull market going. And we believe the macroeconomic environment and seasonal tailwinds will provide enough support for stocks to move modestly higher over the balance of the year, though the path may be bumpy.

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Economic Impact: Can Something Good Come from a Crisis?

October 23, 2023 | LPL Research

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 16, 2023 | LPL Research

Earnings season has kicked off with several of the big banks and a handful of other blue-chip companies having already reported results for their calendar third quarters. The key headline this reporting season will be the (likely) end of the earnings recession. The October-November reporting season can be particularly interesting because full-year numbers are nearly locked in while more companies share thoughts on the year ahead. Here are several things we will be watching as reports stream in.

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Yields Higher for Longer: Why We’re Updating Our Treasury Forecast

October 09, 2023 | LPL Research

U.S. Treasury yields have seemingly been moving in one direction lately (higher), with the 30-year Treasury yield temporarily breaching 5% for the first time since 2007. The move higher in yields (lower in price) has been unrelenting, with intermediate and longer-term Treasury yields bearing the brunt of the move. There are several reasons we’re seeing higher yields, but rates are moving higher alongside a U.S. economy that has continued to outperform expectations, pushing recession expectations out further, and by the unwinding of rate cut expectations to be more in line with the Federal Reserve’s (Fed) “higher for longer” regime. And with the economic data continuing to show a more resilient economy than originally expected, we think Treasury yields are likely going to stay higher for longer as well. As such, we now project the 10-year Treasury yield will end the year between 4.25% and 4.75% (previously 3.25% and 3.75%).

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Prospects for a Fourth Quarter Rally

October 02, 2023 | LPL Research

After a difficult September for stocks, investors are surely ready to flip the calendar to October. That’s the month that kicks off the historically strong fourth quarter. Expecting this pattern to repeat this year is tricky given the overhang of a government shutdown, interest rates near 16-year highs, a market still trying to digest the Federal Reserve’s “higher for longer” message, and a consumer who is facing some stiff headwinds as excess savings are drawn down, student loan payments restart, and the effects of higher borrowing costs are increasingly felt. Amid that complicated backdrop, here we assess prospects for a fourth-quarter rally.

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Is India Surpassing China to Become the Next Superpower?

September 25, 2023 | LPL Research

India has emerged as a compelling economic growth story and an increasingly attractive alternative to China within the emerging markets complex. A growing population with a robust and young workforce, significant infrastructure spending, and an ongoing digital transformation have been key catalysts to India’s outperformance over China. India has also benefited from the de-globalization trend as manufacturers move production away from China. While we may not go as far as officially calling India the new China, the economic and technical trends suggest the country may be set for a prolonged period of outperformance.

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Advice to Advisors: Buy Japan, Hold U.S., Sell Europe

September 18, 2023 | LPL Research

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.

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The Growing List—and Politicization—of BRICS and Friends

September 11, 2023 | LPL Research

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.

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Interest Rates Are Back to Normal, But What Is Normal

September 05, 2023 | LPL Research

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. In fact, at current levels, after years of artificially suppressed levels, long-term yields are back within longer-term ranges. And with inflation trending in the right direction and the Federal Reserve (Fed) near (at?) the end of its rate hiking campaign, we think the big move in long-term rates has already happened and interest rates are finally back to normal.

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Lessons Learned From the Grand Tetons

August 28, 2023 | LPL Research

Fed Chair Powell warned that persistent above-trend growth and tighter labor conditions could
warrant further tightening. But where the economy is today, investors can still expect no
change in rates at the September meeting, but the Committee will be highly data-dependent at
the November meeting. Investors need to carefully watch increasing delinquencies and
shrinking excess savings for leading indicators of the economy.

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Pullback Perspective: The Reasons Why Stocks Are Pulling Back

August 21, 2023 | LPL Research

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. 

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How This U.S. Debt Downgrade is Different from 2011

August 14, 2023 | LPL Research

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.

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Key Earnings Season Takeaways

August 07, 2023 | LPL Research

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.

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A Cloudy Outlook Makes for Choppy Markets

July 31, 2023 | LPL Research

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.

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(Still) Waiting on the Fed to Be Done Raising Rates

July 24, 2023 | LPL Research

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).

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Earnings Need to Do Some Heavy Lifting to Keep Rally Going

July 17, 2023 | LPL Research

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.

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Capital Markets: The Essence of American Capitalism

July 03, 2023 | LPL Research

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. That Apple's market capitalization at the close of the second quarter crossed over $3 trillion, exemplifies the country's dominance and the role of innovative experimentation. 

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