January 4, 2021

10 ECONOMIC LESSONS FROM 2020

Ryan Detrick, CMT, Chief Market Strategist, LPL Financial

Nick Pergakis, Analyst, LPL Financial

2020 was a year characterized in part by the outbreak of a global pandemic, which captivated the world and shocked the global economy and financial markets. As we turn the page to 2021, it can be helpful to reflect on the lessons learned from such a historic year. We offer 10 economic lessons we’ll remember from 2020.

A YEAR TO REMEMBER

To say that 2020 was a unique year would be an understatement. What began as an ordinary year quickly turned into an extraordinary one—does anyone even remember it was a leap year? Initial reports in early January noted that a novel virus was beginning to spread, but few at the time could comprehend how the situation would escalate. By March, the COVID-19 pandemic gripped the entire world. So after such a tumultuous year, what have we learned?

10 TAKEAWAYS FROM 2020

The world is full of surprises. When we published our Outlook 2020 in December 2019, we did not forecast a recession in the United States. Heading into 2020, the economy was growing modestly—we didn’t see the usual extremes like excessive spending or over leverage that have been the hallmarks of the end of past economic cycles. The outbreak of COVID-19 forced the economy to slam on the brakes as much of the world went into lockdown to contain the spread, ending the longest economic expansion ever—one that had lasted more than 10 years.

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 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 7, 2020

A POSITIVE OUTLOOK FOR 2021

Ryan Detrick, CMT, Chief Market Strategist, LPL Financial

Nick Pergakis, Analyst, LPL Financial

October 5, 2020

MARKET RESPONSES TO ELECTION UNCERTAINTY

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

Nick Pergakis, Analyst, LPL Financial

Speculation has been increasing that the November election results may be delayed or disputed, or both. A contested election might affect financial markets in several ways. Also, the news that President Donald Trump has tested positive for COVID-19 may potentially impact markets as well.

NOTE ON PRESIDENT TRUMP’S COVID-19 DIAGNOSIS

While this Weekly Market Commentary was in production, we learned that President Trump and First Lady Melania Trump had tested positive for COVID-19. First and foremost, we wish the president and first lady a swift and full recovery. Obviously the news adds a layer of uncertainty to an already contentious election cycle.

The immediate market response has been relatively mild so far. US stocks were lower at open the morning of October 2, but some assets that are perceived to be more resilient in the face of a risk-off environment, such as Treasuries, gold, and the Japanese yen, have shown no real sign of added strength early on. The news adds to the election uncertainty, however. Trump will be unable to campaign in person during the quarantine period that he observes—and maybe longer if he exhibits more serious symptoms—which possibly could hurt his reelection chances. On the other hand, the United Kingdom’s Prime Minister Boris Johnson saw his approval rating rise while he was fighting the infection.

From a market perspective, we think it’s better not to speculate on the election impact of the diagnosis. We do know two things: 1) The response to COVID-19 is very different from case to case, which means only time will tell how the virus may affect the president, and 2) the president and first lady will be monitored closely and will have access to some of the best care in the world, which improves the outlook for both of them.

September 21, 2020

CENTRAL BANK SEASON

Ryan Detrick, CMT, Chief Market Strategist, LPL Financial

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

Nick Pergakis, Analyst, LPL Financial

When seasons change, the major central banks meet. The Federal Reserve, European Central Bank, and Bank of Japan all met in September to discuss their outlooks on the economy and monetary policy going forward. Key observations from the central bank meetings include maintaining policy while keeping an eye on COVID-19.

FEDERAL RESERVE

Expectations for major changes at the Federal Reserve (Fed) September meeting were low. The Fed had completed its framework review at the annual central bank symposium at Jackson Hole, Wyoming, in late August and announced its shift toward flexible average inflation targeting then. While no major policy decisions were made at the September meeting, the Fed did alter the language of its guidance to align with the change in inflation targeting, allowing for potentially higher inflation before it would consider raising rates. The Fed “dot plot,” a graphical projection of when Fed members expect to see higher rates, revealed that voting members expect rates to remain at the zero-bound until at least 2023. The Fed also continues to express concern for downside risks to the economy.

Although the Fed has reiterated that negative policy rates seen in Europe and Japan are not under consideration, adjustments to the policy rate are only one mechanism for further easing of financial conditions. The Fed also can provide additional support through adjustments to its asset purchase programs or changes to other available liquidity facilities. However, the current stance may leave the Fed vulnerable to being blindsided by a better-than-expected recovery, which may have longer-term implications on inflationary forces.

3 Things to Know Regarding COVID-19 and Your Retirement

We all know that the coronavirus pandemic has thrown us for a loop emotionally, physically, and financially. Working from home has become the new normal, restaurants are slowly starting to reopen for indoor dining, and businesses everywhere are still trying to make ends meet and stay afloat. Not only has the pandemic created a new way of life for most Americans, but the pandemic has caused a lot of worry for Americans, especially regarding their retirement plans. In this blog, we are going to go over three of the most important things to know about how the COVID-19 pandemic has affected your retirement. Keep reading!

1. Social Security Won’t Cover All of Your Retirement

Now, it is a common belief that Social Security will cover you in retirement, however, this is not true. Social Security can help you pay for things in retirement, but especially with the current status of the pandemic, it will not cover all of your retirement, just some. In fact, Social Security “never designed to do this, and with a possible benefit cut on the horizon, it's safer to rely upon your personal savings for the bulk of your retirement expenses,” (Fox Business).

2. You May Retire Later Than You Expected

With the amount of people in our country losing their jobs or being furloughed, you may have realized that you might be working longer than you had anticipated. If you were planning to take out retirement funds early, you may want to reevaluate, as delaying retirement could mean more money for you once you actually reach your full retirement age, which varies depending on the year you were born. You can find use this website to determine your full retirement age here.

August 24, 2020

ELECTION PREVIEW PART I: A BIDEN PRESIDENCY—UPSIDE AND RISKS

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

Ryan Detrick, CMT, Chief Market Strategist, LPL Financial

Jeffrey Buchbinder, CFA, Equity Strategist, LPL Financial

While a potential Biden presidency may mean a shift from some pro-growth policies of the Trump administration, it’s possible any negative market impact may be muted. Economic forces tend to dominate policy, though policy still matters, and historically, markets and the economy have shown little preference for either Republican or Democratic leadership. While there are risks associated with potentially higher taxes and increased regulation, and specific industries may experience a meaningful impact from policy shifts, for markets overall, there’s a real possibility that it may be just business as usual.

ELECTION FAST APPROACHING

With the Democratic convention behind us, the Republican convention this week, and Election Day only 10 weeks away, we thought it was time to take a closer look at the potential market impact of the election. Now that former Vice President Joe Biden has been formally nominated, we’ll look at the potential market impact of a Biden presidency this week. Next week, after the conclusion of the Republican convention, we’ll look at the potential impact of a second term for President Donald Trump.

Here’s how we’re going to go about it. First, as always, our concern is strictly the market impact of either party winning the White House, with the economy a secondary concern, since that feeds into market impact. But our evaluation of the market impact is not a voting recommendation. There is always more at stake in elections than simply markets. Second, each of these election previews, while grounded in the facts, will focus on the upside of each candidate, while also touching on potential concerns. If the upside doesn’t seem realistic, it can be dismissed, but we still think it’s useful to get a plausible version of the potential market upside (or lack of downside, if that’s the best case) on the table.

EARLY DATA FAVORS BIDEN, BUT WE WOULD STILL CALL IT A COIN TOSS

We believe the best way to approach the election at this point is to consider it a coin toss. The margin of victory in the popular vote has been under 5% in four of the last five elections, and in two of those elections the outcome in the Electoral College differed from the popular vote. That’s not meant to criticize the Electoral College—it just highlights how close our elections have become. A 5% difference is small enough that an election can easily swing one way or the other based on what happens in the months and weeks before the election—and there are scenarios in which even a 5% difference in the popular vote could mean a different outcome in the Electoral College.

Some of the major factors potentially supporting each candidate, in our view, include:

•             The power of incumbency favors Trump. (Presidential incumbents win about 70% of the time.)

•             Electoral College dynamics favor Trump.

•             Enthusiasm toward one’s own candidate favors Trump, although the gap is narrowing.

•             Polls currently favor Biden.

•             The president’s approval rating favors Biden.

•             The economy favors Biden, but circumstances are unusual.

•             Enthusiasm to vote against the opposite party’s candidate favors Biden, but not surprisingly,  

               that’s not necessarily a big driver of turnout.

We also follow market signals. We have often highlighted that S&P 500 Index performance three months leading up to the election has had predictive value for who wins the White House, whether it’s because it reflects the state of the economy or it signals the greater uncertainty that comes with a change in party. A positive market over that time period historically has signaled an increased likelihood that the incumbent party wins. The clock started ticking on that indicator August 3. So far the S&P 500 is up just a few percentage points, potentially favoring Trump, but volatility could quickly lead to a reversal.

Our friends at Strategas Research Partners have also put together a basket of stocks likely to benefit from a Trump or Biden presidency. Since early June, the Biden portfolio has been outperforming the Trump portfolio, though we acknowledge these stocks are driven by other factors as well.

The Senate also is being closely watched this election. If Trump wins reelection, the Republicans may very likely hold their Senate majority, currently at 53–47. With Democratic Senator Doug Jones from Alabama unlikely to hold on to his seat based on the latest polling data, Democrats would have to defeat a net of four Republican incumbents in addition to a Jones loss to take control of the Senate if Biden wins. (If the Senate vote is tied, the vice president breaks the tie.) We would put the likelihood of the Democrats taking the Senate if Biden wins the presidency at well over 50%.

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).

April 20 2020

Jeffrey Buchbinder, CFA, Equity Strategist, LPL Financial

Ryan Detrick, CMT, Senior Market Strategist, LPL Financial

This earnings season will be unlike any other, as travel restrictions and lockdowns related to COVID-19 have impacted results dramatically. The biggest economic hits came in mid-March, however, and won’t be fully captured in first quarter results. This makes company guidance particularly important as market participants look for clues into what earnings may look like for the rest of the year.

EARNINGS SEASON UNLIKE ANY OTHER

It goes without saying that this will be a reporting season unlike any other. For some companies less impacted by the COVID-19 pandemic, the numbers may appear normal. For others, the focus will be on balance sheet strength and survival. The separation between winners and losers is widening in this environment.