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 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.

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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].