What To Do When Retirement Is a Decade Away

March 29, 2021

ARE WE ON THE BRINK OF AN INFLATION CRISIS?

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

Nick Pergakis, Analyst, LPL Financial

There is a growing debate over whether an expanding economy, in conjunction with historic fiscal and monetary stimulus, may cause inflation to overheat. Adding to the intense debate, the Federal Reserve (Fed) has shifted its policy framework, potentially allowing inflation to run a little hotter than it has in the past. Despite vocal calls for runaway inflation, we believe that any uptick in inflation will ultimately prove transitory due to slack in the labor market and other structural forces.

WHAT’S DRIVING THE INFLATION DEBATE

Concerns over an inflation scare are rising as investors question whether an accelerating US economy supported by pent-up demand will overheat amid a backdrop of historic fiscal and monetary stimulus. With roughly $3 trillion worth of fiscal stimulus set to take effect in 2021 and a Federal Reserve (Fed) that has expressed its commitment to maintain extraordinary monetary support until its objective of maximum employment is achieved, the concerns are reasonable. Adding to inflation fears, the Fed’s strategy to allow inflation to modestly overshoot its 2% target raises the concern that it may end up scrambling to raise interest rates to control inflation—potentially tightening financial conditions in the process. While we do believe inflation may run hotter than it has in recent years, we believe worries of runaway inflation are overdone and that the upside risk for core inflation will be capped at around 3% for the full year in 2021—and likely will run meaningfully lower.

NEAR-TERM PRESSURES APPEAR WELL CONTAINED

The US economy has come a long way, but it will take synchronized global growth before economic risks truly begin to abate, and this should limit inflationary pressure as well. Europe, Japan, and other regions have not been able to make the same progress on vaccination efforts, and mixed success in their prolonged battles against COVID-19 has led to slower economic activity relative to the US. We’ve also discussed how some areas of the economy have not participated in the recovery to the same degree, and the bifurcation between goods and services in the US is a perfect example. It’s no secret that service industries have borne the brunt of the economic impact of the pandemic, and this relationship is well illustrated by the changes in the core consumer price indexes (CPI) for goods and services [Figure 1].

March 1, 2021

HERE COMES THE EARNINGS BOOM

Jeffrey Buchbinder, CFA, Equity Strategist, LPL Financial

Ryan Detrick, CMT, Chief Market Strategist, LPL Financial

Fourth-quarter earnings season is in the home stretch, and it’s been a good one. After raising our 2021 earnings forecast for the S&P 500 Index in our Weekly Market Commentary on February 8, our upgraded forecast may now be too low, based on what we have learned from corporate America during the three weeks since. In this commentary, we recap earnings season and share our latest thoughts on just how strong the earnings rebound could be in 2021 and beyond.

OUTSTANDING NUMBERS IN THE FOURTH QUARTER

Coming into fourth-quarter earnings season, investors had plenty of reasons to expect that companies would deliver better-than-expected results. The US economy grew at a solid 4% annualized pace in the fourth quarter (source: Bureau of Economic Analysis GDP data). Strong manufacturing surveys signaled better earnings ahead. Analysts’ earnings estimates rose during the quarter, as companies issuing fourth-quarter guidance mostly raised expectations.

Now that all the numbers are pretty much in the books (93% of S&P 500 companies have reported results), it’s clear that optimism was warranted as earnings impressively grew during the quarter [Figure 1].

In our earnings preview on January 19, 2021, we wrote:

Consider that the bar has been raised substantially over the past two quarters, making it tougher to clear. That probably takes  positive earnings growth off the table, but a low-to-mid single digit decline in earnings would be a positive outcome, especially if forward estimates hold up as fresh guidance is provided.

After the bar had been raised, with the prior two quarters following similarly strong results compared to expectations, it made a lot of sense to expect more limited upside as estimates catch up to reality. But it turned out another quarter of huge upside—and earnings growth—was in the cards as corporate America again blew by expectations. S&P 500 companies delivered more earnings during the still-pandemic plagued Q4 2020 than in (pre-pandemic) Q4 2019.

Here are the impressive numbers:

•Fourth-quarter earnings growth for the S&P 500 is tracking to 3.5%, more than 12 percentage points above the consensus estimate at quarter-end (December 31, 2020).

•A near-record 79% of S&P 500 companies have exceeded earnings estimates, above the five-year average of 74%.

•Five sectors grew their earnings by double-digits: communication services, financials, healthcare, materials, and information technology.

•Sales for S&P 500 companies in aggregate impressively rose more than 3% year over year.

•During earnings season, the consensus earnings estimate for the next 12 months rose 4%, compared with the average 2-3% reduction historically.

All earnings data is sourced from Fact Set

These results were particularly impressive given the wave of COVID-19 that brought some new targeted restrictions late last year.

January 19, 2021

EARNINGS RECESSION IS LIKELY OVER

Jeffrey Buchbinder, CFA, Equity Strategist, LPL Financial

Ryan Detrick, CMT, Chief Market Strategist, LPL Financial

This earnings season likely will be the last of the earnings recession. After year-over-year declines in the first three quarters of 2020, the fourth quarter likely will make it four in a row. Looking ahead, earnings are likely to grow solidly in the first quarter 2021 and throughout the year, which we think will enable stocks to grow into their lofty valuations.

EXPECT MODEST EARNINGS DECLINE

We expect solid upside to S&P 500 corporate earnings relative to current estimates. However, expecting a year-over-year increase may be too much to ask. Consensus is calling for a roughly 8.5% year-over-year decline in earnings per share (EPS) according to FactSet’s estimates [FIGURE 1].

We expect earnings to surprise to the upside by a solid margin again this quarter for a number of reasons.

Higher estimates. Estimates for the fourth quarter have risen by about 2.3% since October 1, 2020, which signals companies, will be able to deliver at least the typical several percentage points of upside. Estimates typically decline by about 4% during a quarter.

Guidance has been very positive. A very high 66% of companies that provided guidance during the fourth quarter guided numbers higher. That percentage is significantly higher than the five-year average of 33%.

January 11, 2021

MARKET POLICY PROJECTIONS FOR 2021

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

Nick Pergakis, Analyst, LPL Financial

As a result of the Senate runoffs in Georgia, Democrats are poised to take control of the US Senate, which would give them a majority in both houses of Congress. This will shift the policy outlook moderately to the left, but majorities are still razor-thin, giving moderates heavy influence. We also envision a potential move toward increased bipartisanship, which may help bring more clarity to policy in 2021.

GEORGIA ON OUR MIND

Assuming the Georgia Senate races play out in line with the current vote count, Democrats will soon have control of both chambers of Congress as well as the presidency, at least until mid-term elections in 2022. While there is a material difference between the Senate flipping to Democratic control and Republicans holding the Senate, we don’t believe it’s a radical shift.

The Democrat’s Senate majority will be razor thin, with the Senate split 50–50 and Vice President-elect Kamala Harris casting any tie-breaking vote. That means legislation will need to satisfy the most moderate Democratic Senators, such as West Virginia’s Joe Manchin and Montana’s Jon Tester. If Democrats lose votes from the left wing of their party, they will need to pull in moderate Republicans as well. With such a narrow margin, eliminating the filibuster is basically off the table. On many key legislative issues, Senate Democrats will need to muster 60 votes. The Democratic majority in the US House also narrowed significantly in the 2020 election and currently stands at 222–211 with two vacancies, creating a similar challenge.

LITTLE THINGS MATTER IN POLICY

Historically, which party occupied the White House or controlled Congress hasn’t had a meaningful impact on broad stock market performance. Policy matters—but larger economic forces are much more influential, and businesses are very good at adapting to different political environments. Having an environment where it’s easier to start or run a business can make a big difference in people’s lives, but the policy impact on markets tends to be more focused.

Markets historically have seemed to prefer divided government, whether because it removes the extremes or it encourages a spirit of compromise. At the same time, market performance when Democrats have held the presidency and controlled both the House and the Senate has been in line with longer-term historical returns [Figure 1]. The distribution of power in Washington, DC, by itself does not mean a lot, especially since voters have the chance to change the balance of power every two years.

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 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