December 21, 2020

A NEW ECONOMIC START IN 2021

Barry Gilbert, CFA, PhD, Asset Allocation Strategist, LPL Financial

Nick Pergakis, Analyst, LPL Financial

After modest growth to begin 2020, the economy screeched to a halt as the onset of the pandemic ended the longest economic expansion ever. A record decline in gross domestic product (GDP) in the second quarter was followed by record GDP growth in the third quarter as the economy emerged from lock downs. After such a tumultuous year in 2020, we take a look at what’s in store for the economy in 2021.

2021 ECONOMIC OUTLOOK

As we turn the page to 2021, we expect real GDP growth in the United States of 4–4.5%, modestly outpacing our forecast of 3.75%–4.25% for our developed international counterparts. Emerging market economies, particularly in Asia, have fared better in controlling the outbreak of COVID-19, and we believe their economies may be in a better position heading into 2021. We forecast 5–5.5% real GDP growth for emerging markets.

After GDP contracted an annualized 5% during the first quarter of 2020 and then a record 31% in the second quarter, the economy revved back up with a 33% jump in the third quarter, bouncing off depressed levels. Record fiscal and monetary stimulus helped provide additional fuel for the economy as it emerged from lock downs. We expected the 2020 recession would be one of the shortest recessions ever, and although the National Bureau of Economic Research (NBER) has yet to declare it officially, the recession probably lasted less than six months.

When the economy began to shift into gear in the second half of 2020, we believe a new economic expansion likely began. Dating back to WWII, economic expansions have lasted more than five years on average, with the past four expansions averaging more than eight years [Figure 1].

December 14, 2020

STOCKS AND BONDS OUTLOOK FOR 2021

Jeffrey Buchbinder, CFA, Equity Strategist, LPL Financial

Nick Pergakis, Analyst, LPL Financial

Stocks and bonds posted strong returns in 2020 despite a tumultuous year, although that may be surprising only for bonds. We believe we’re in the early stages of a new bull market for stocks, but the opportunities for bond investors may require more patience. The investment landscape for both asset classes may offer new opportunities for investors in the New Year.

2021 STOCK MARKET OUTLOOK

In Outlook 2021: Powering Forward, our 2021 year-end fair value target for the S&P 500 Index is 3,850–3,900, reflecting about an 8% total return from the close on December 11. Our target is based on a price-to-earnings (PE) ratio of around 20—slightly below current valuations—and our preliminary 2022 earnings per share (EPS) estimate of $190 [Figure 1].

Skeptics might say after a 64% rally in the S&P 500 since the low on March 23, 2020, that this market may soon run out of gas. Historically, the second year of previous bull markets has been rewarding for investors. We think this bull market is set up potentially for a better-than-average first two years based on the experience during the 2008–09 financial crisis and an expected strong earnings rebound. Fiscal and monetary stimulus and pent-up demand once the economy fully opens will help.

December 7, 2020

A POSITIVE OUTLOOK FOR 2021

Ryan Detrick, CMT, Chief Market Strategist, LPL Financial

Nick Pergakis, Analyst, LPL Financial

November 30, 2020

COVID-19 MAY THREATEN THE RECOVERY

Jeffrey Buchbinder, CFA, Equity Strategist, LPL Financial

Nick Pergakis, Analyst, LPL Financial

A new wave of COVID-19 cases threatens to trip up the economy. Increasing cases in Europe and the United States have brought new restrictions on activities, but the market doesn’t appear to be fazed by the recent outbreaks. Progress on developing vaccines has provided a clear boost to sentiment, but prospects for a divided Congress and the potential for more fiscal policy support also may be playing a role.

NEW WAVE OF COVID-19

Just as the economic recovery was beginning to gain some steam, COVID-19 cases have been rising dramatically in several regions around the world [FIGURE 1]. The change of seasons is adding to concerns, as colder weather shifts more activities indoors—increasing the chances of viral transmissions. This has prompted many governments to take greater action to try to curb the spread of COVID-19. Several countries and many states in the United States have rolled back reopening plans and implemented new restrictions such as school closures, nighttime curfews, and even stay-at-home orders.

College Planning 101: Tips for Success

November 23, 2020

FROTHY SENTIMENT RIDES BULLISH TECHNICALS

Ryan Detrick, CMT, Chief Market Strategist, LPL Financial

Scott Brown, CMT, Senior Analyst, LPL Financial

The post-election environment and positive developments toward a COVID-19 vaccine have led to a surge in stock prices. The added clarity on these two fronts has boosted sentiment, which may present a risk in the near term as stock prices are near all-time highs.

A NOVEMBER TO REMEMBER

The reaction from stocks since the US election has been truly impressive. The S&P 500 Index is up 8.8% for the month, on pace to be the best November for the S&P 500 in 40 years. Small caps have also soared, with the Russell 2000 Index up 16%, which would be its second-best month ever. Although we remain longer-term bullish on equities, there are some signs that sentiment could be getting a little frothy at the moment, which could increase the odds of a pullback.

TECHNICALS SUPPORTIVE OF FUTURE STRENGTH

On November 9, more than 71% of the stocks in the S&P 500 hit a one-month high, the third-highest reading using data back to 1990. Not only does this tell us that participation in the post-election rally has been extremely broad and not limited to only a few heavily weighted names in the index, but historically this has been an extremely positive signal for the next year. Returns can be quite weak in the near term after more than 65% of stocks reach a one-month high, but returns over the next 12 months not only have been far above average, but have been positive in all seven observed instances [Figure 1].

November 16, 2020

Q3 RESULTS BRIGHTEN 2021 PICTURE

Jeffrey Buchbinder, CFA, Equity Strategist, LPL Financial

Ryan Detrick, CMT, Chief Market Strategist, LPL Financial

Corporate America delivered quite an encore to a surprisingly good second quarter earnings season with more of the same in the third quarter, despite a higher bar. S&P 500 Index companies didn’t quite match the biggest upside surprise ever—but they came close. We’re optimistic about the earnings recovery in 2021 and beyond, and outline five key takeaways for investors.

AN ENCORE PERFORMANCE

Earnings blew away expectations during the second quarter as the unprecedented COVID-19 lock downs early in the quarter, followed by the uncertainty and unevenness of the reopening and limited guidance from corporate leaders, caused analysts to badly miss with their forecasts. In the third quarter, analysts had more information and the environment included fewer twists and turns, which should have made predicting results much easier. Still, analysts were overly pessimistic by nearly the same margin, as earnings results far surpassed expectations.

Putting numbers to it, with more than 90% of S&P 500 companies having reported quarterly results so far, S&P 500 earnings are tracking to a 7.5% year-over-year decline, roughly 14 percentage points better than September 30 estimates (source: Fact Set) [Figure 1]. Revenue is tracking to only a 1.7% year-over-year decline, a solid 1.9 percentage points above prior estimates.

November 9, 2020

MARKET-FRIENDLY ELECTION OUTCOME

Jeffrey Buchbinder, CFA, Equity Strategist, LPL Financial

Tom Goulder, CFA, Senior Analyst, LPL Financial

Nick Pergakis, Analyst, LPL Financial

Heading into the election, polling data and market signals disagreed on how close the presidential election would be, with market signals calling the race much closer—which turned out to be accurate. Now that we have more clarity on the results of the election, we can review what we believe will be some of the key market implications going forward.

BIDEN WINS BUT SENATE YET TO BE DECIDED

Former Vice President Joe Biden has been elected the 46th President of the United States, defeating President Donald Trump in a tight race. Based on the polls and some market signals, the outcome of the presidential election may not have been much of a surprise.

The Senate was a different story. Conventional wisdom expected the Senate to go the same way as the top of the ticket. But the stronger-than-expected performance by some Senate Republicans considered vulnerable means that the Democrats will have to win both Georgia Senate seats in January runoffs—a tall task in a traditionally conservative state—to reach 50 seats and take control of the Senate (Vice President-elect Kamala Harris would break any tie). Here we focus on the most likely outcome—a split Congress under Biden.

November 2, 2020

RECORD GDP ON THE EVE OF THE ELECTION

Ryan Detrick, CMT, Chief Market Strategist, LPL Financial

Barry Gilbert, CFA, PhD, Asset Allocation Strategist, LPL Financial

Nick Pergakis, Analyst, LPL Financial

2020 has been a year of records, both record losses and record gains. After a brutal spring, markets and the economy have mostly rebounded in the summer and fall. We take a closer look at October 26’s record gross domestic product (GDP) report, which may have implications for the upcoming presidential election.

RECORD GROWTH IN THE THIRD QUARTER

The outbreak of COVID-19 and the subsequent lockdowns triggered the largest quarter-over-quarter decline in GDP since WWII, so perhaps it comes as no surprise that the following quarter tallied the sharpest rebound in that same time period. GDP grew 33.1% annualized in the third quarter, ahead of Bloomberg consensus estimates of 32% and reversing much of the economic fallout stemming from COVID-19-related lockdowns. The largest segment of the US economy—consumer spending— rebounded in a big fashion, while business investment and inventories also helped fuel the surge in growth [Figure 1]. Residential investment also gained momentum in the third quarter, driven by pent-up demand, the work-from-home trend, and historically low mortgage rates.