economy

February ,  2021

THE SEARCH FOR INCOME

Jeffrey Buchbinder, CFA, Equity Strategist, LPL Financial

Lawrence Gillum, CFA, Fixed Income Strategist, LPL Financial

Interest rates have risen steadily over the past six months but remain low by historical standards. That means the traditional high-quality bonds that many of us owned for decades are not doing the job for investors looking for income, while the potential for interest rates have risen steadily in recent months brings more risk in the bond market than has been evident historically. Here we look at some income ideas that may help with these challenges.

When investors think about income, or yield, they would normally think bonds first. More on that below. Next they might think about getting extra yield from their stock portfolios, maybe with a dividend strategy that might be heavy on real estate investment trusts (REITs) and utilities. While we don’t have anything against using those types of strategies for a portion of a portfolio to get some yield, they can also carry unwanted interest rate sensitivity if rates rise. We highlight some equity income ideas that we would expect to perform well in a rising rate environment for you to consider when building your portfolio.

INCOME IDEA #1: ENERGY

The first idea is energy stocks. You may be surprised to learn that the energy sector currently yields about 5% based on dividends paid in 2020, topping all S&P 500 sectors [Figure 1]. In this month’s Global Portfolio Strategy report, we upgraded our view of the energy sector to neutral. Our increased optimism was driven primarily by three factors. First, as we get closer to a fully reopened economy and travel activity picks up—potentially in the second half of this year—energy is likely to be a big beneficiary. Second, our technical analysis work revealed attractive upside potential based on recent price appreciation after an extended period of weakness. Third, we see the sector as attractively valued, especially when considering the income potential.

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].

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.