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August 3, 2020

CALENDAR CONCERNS AND GOLD GAINS

Ryan Detrick, CMT, Chief Market Strategist, LPL Financial

Jeffrey Buchbinder, CFA, Equity Strategist, LPL Financial

Real-time economic data continues to show a slowdown, at the same time we’re entering two months of the year that historically have been troublesome for stocks. Meanwhile, gold is breaking out to new all-time highs, confusing many as to what it all means. Stocks are likely due for a breather, but it isn’t out of the ordinary to see both gold and stocks trend higher together.

CALENDAR DOING NO FAVORS

Last week, we discussed why the stalling economic recovery could slow the stock market rally. This week, the calendar has our attention, as August and September historically have been troublesome months for stocks.

August and September have tended to be quite weak for stocks, with August ranking as the worst month of the year over the past decade [FIGURE 1]. August has been quite strong during election years previously, but after the best July for stocks since 2010, a little more caution may make sense.

July 27, 2020

STALLING ECONOMIC RECOVERY MAY SLOW STOCK MARKET RALLY

Jeffrey Buchbinder, CFA, Equity Strategist, LPL Financial

Ryan Detrick, CMT, Chief Market Strategist, LPL Financial

Stock market weakness late last week caused investors to ask whether the long-awaited market pullback may be at hand. This week, we review the drivers of the market’s impressive rally back to the break-even point for the year, share our thoughts on whether the gains are justified, and take a look at some timely data for clues on the state of the economic recovery.

UP AND DOWN WEEK

We have been expecting this rally to take a breather since COVID-19 cases began to accelerate in June and some reopening’s in Sunbelt and California hotspots were rolled back to combat the spread of the virus. The S&P 500 Index fell 1.2% on July 23 after solid gains the first part of that week, ending the week little changed.

Nonetheless, even as new daily infections remain near record highs and US-China tensions ratchet higher, S&P 500 stocks have been marginally higher year to date—and barely below their all-time highs. Market participants haven’t seemed too concerned about stock valuations, which are as high as they’ve been since the technology bubble. The S&P 500’s forward price-to-earnings ratio (PE) is over 20, even using consensus estimates for 2021 (source: Factsheet).

July 20, 2020

AN EARNINGS SEASON TO FORGET

Ryan Detrick, CMT, Chief Market Strategist, LPL Financial

Jeffrey Buchbinder, CFA, Equity Strategist, LPL Financial

This earnings season may be one to forget. We will see one of the biggest year-over-year quarterly declines in S&P 500 Index profits ever, and we will hear a lot about uncertainty facing corporate America as COVID-19 continues to impact many companies in the United States and globally. But it may not all be negative.

ESTIMATES MAY BE TOO LOW

The unprecedented nature of the COVID-19 lock downs and widespread withdrawal of corporate guidance has set up an unpredictable earnings season. The magnitude of the decline we are likely to see may make this an earnings season to forget.

As tough as it is to find a bright side in an estimated 40% collapse in S&P 500 Index earnings per share (EPS), there are several reasons to think the season may be better than analysts’ estimates have suggested. First, second quarter guidance has been better than average—55% of the guidance that has been provided has been negative, well below the five-year average of 69%, according to Fact Sheet.

Second, recent economic data has mostly exceeded expectations, particularly for jobs and retail sales. The Citigroup Economic Surprise Index—a measure of the frequency that economic data is exceeding expectations—stands at an all-time record high for the United States. Bloomberg’s version of the same measure is very close to a record high.

July 6, 2020

ELECTION PREVIEW

Ryan Detrick, CMT, Senior Market Strategist, LPL Financial

Jeffrey Buchbinder, CFA, Equity Strategist, LPL Financial

2020 is an election year, and as we get closer to November, we expect this to replace COVID-19 and the recession at the top of investors’ minds. The makeup of Congress may influence stock market performance, and how stocks and the economy perform prior to the election may forecast who will win.

THE MAKEUP OF CONGRESS IS VERY IMPORTANT

Although all election years feel different, 2020 no doubt may be one of the most unique election years ever. We have a pandemic, a deep recession, extremely heightened partisanship, a mail-in ballot controversy, an unpredictable president, and the oldest presidential candidate ever.

Amazingly, 1940 was the last time the S&P 500 Index was lower during an election year with an incumbent in the White House. Historically, when a president has been up for reelection, it has tended to boost stocks. Stocks were down big in 2008—but President George W. Bush had finished his two terms. It isn’t about Republican or Democrat—it’s about incumbents trying to boost the economy and stock prices by the time voters go to the polls. Some good news on the economy in the coming months or progress toward a vaccine

could potentially get the S&P 500 back to positive territory for the year, after being down 30% year to date in March, and it’s possible that may help President Donald Trump’s reelection chances.

We’re often asked if stocks perform better under a Republican or Democratic president. We’d take a different view and point out that stocks have tended to do their best when we have a split Congress [Figure 1]. Markets tend to like checks and balances to make sure one party doesn’t have too much sway.

June 22, 2020

5 REASONS WE FAVOR US STOCKS

Jeffrey Buchbinder, CFA, Equity Strategist, LPL Financial

Ryan Detrick, CMT, Senior Market Strategist, LPL Financial

Among developed markets, we maintain our preference for US equities over international, but the bout of strong performance for the MSCI EAFE Index relative to the S&P 500 Index in late May through early June and the latest weakness in the US dollar are noteworthy. We share our latest thoughts on international equities and reiterate our positive emerging markets view.

 EARNINGS SEASON'S MIXED RESULTS

Jeffrey Buchbinder, CFA, Equity Strategist, LPL Financial

Ryan Detrick, CMT, Senior Market Strategist, LPL Financial

First quarter earnings season offered something for everyone. On the positive side, corporate America produced solid results outside of the COVID-19 pandemic trouble spots, which included retailers, travel related businesses, and banks. At the same time, 2020 earnings estimates have plunged, and a return to "normal" earnings could be two years or more away.