One of the age-old questions for retirement is how much you truly need to retire. An extremely common nest egg goal is $1 million. But is $1 million too much or not enough? The answer is - it depends on multiple factors. Continue reading to learn more about if you need a million dollars to retire based on several factors.
Thomas Shipp, CFA, Quantitative Equity Analyst, LPL Financial
Adam Turnquist, CMT, Chief Technical Strategist, LPL Financial
The growth vs. value debate has been pretty one-sided in 2022, with value outperforming growth for a sustained period for the first time in almost 15 years. However, the debate is heating up as investors begin to consider whether the pendulum will swing back to growth if inflation and interest rates decline in 2023. In this week’s Weekly Market Commentary we look at the factors driving value’s 2022 outperformance, the technical trading setup for growth and value, and what to look for in the coming months.
One equity market debate discussed frequently in the LPL Research Strategic & Tactical Asset Allocation Committee (STAAC) is the growth vs. value style reversal experienced the past 12 months. Until November of last year, value had underperformed growth for nearly 15 years. Since then, value has outperformed growth for the longest sustained period since 2003–2007. How long might the current period of value’s outperformance last, and what are the catalysts that could end this cycle and pivot the market’s favor back to growth?
First, a bit of background. Value and growth stocks are simply stocks that exhibit greater “value” characteristics (e.g., comparatively inexpensive relative to earnings) or “growth” characteristics (e.g., comparatively faster sales or earnings growth) than peers. In this commentary, we focus on the S&P 500 Value and S&P 500 Growth indexes, which are the value-growth-oriented segments of the popular U.S. large cap S&P 500 Index.
Second, the focus here is on relative performance. Value’s year-to-date performance is negative along with most every other asset class, just less negative than both the broad market (S&P 500) and significantly less negative than growth. Said another way, value has outperformed the broader market by ~10 percentage points year to date, and outperformed growth by ~20 percentage points year to date [Figure 1]. We will emphasize relative performance when analyzing what is driving value’s outperformance from a fundamental standpoint, and take a look at S&P 500 Value and Growth index price charts to analyze the technical setup.
Barry Gilbert, PhD, CFA, Asset Allocation Strategist, LPL Financial
Jeffrey Buchbinder, CFA, Chief Equity Strategist, LPL Financial
Midterm elections are upon us, with Election Day on Tuesday. Republicans are strongly favored to win the House, and the Senate is roughly a tossup. We believe either outcome would be market-friendly, although the bigger market driver will likely be central banks’ efforts to tame inflation. In this week’s Weekly Market Commentary, we look at why the stock market may respond favorably to the midterm election, whatever the outcome.
Tuesday, November 8 is Election Day, although early voting has been taking place in some states since late September. Every member of the House is up for reelection, and 34 of the 100 members of the Senate are up for reelection. Currently, Democrats hold a narrow majority in the House of just five seats and the narrowest possible majority in the Senate, a 50-50 split with Vice President Harris breaking the tie as president of the Senate. All federal elections are consequential and we encourage all our readers to go out and vote, but as always at LPL Research, our focus is on potential market consequences.
Lawrence Gillum, CFA, Fixed Income Strategist, LPL Financial
Quincy Krosby, Ph.D., Chief Global Strategist, LPL Financial
Jeffrey Roach, Ph.D., Chief Economist, LPL Financial
Although Federal Reserve (Fed) Chairman Jerome Powell has repeatedly stressed the Fed will “keep at it,” he also noted at the end of September the Fed would soon be approaching the time to slowdown. There are calls from within the Fed that it is now time for the Fed to downshift rate increases as the economy responds to earlier rate hikes [Figure 1].
The statement the Fed will release at the conclusion of the meeting is key for the markets, and even more important for markets is what Powell will say during the following press conference. Always looking ahead, the market will be on alert for any indication of what the Fed may do at the December 13-14 FOMC meeting. The fed funds futures market is increasingly forecasting a 0.50% increase in December.
Jeffrey Roach, PhD, Chief Economist, LPL Financial
If the U.S. economy enters a recession, the causes and potential outcome will be hotly debated. At LPL Research, our starting point is always looking at history. This week’s commentary will remind us of three things we know about historical recessions.
First, a recession has an important technical definition that’s different than what many people think. Earlier this year when Gross Domestic Product (GDP) growth was negative, many were under the false impression that two consecutive quarters of negative GDP make a recession. Often that view is a good general approximation but not the technical definition. The National Bureau of Economic Research (NBER) is the official arbiter of U.S. business cycles, and they consider a wide range of economic indicators other than just the quarterly GDP metric. The official definition of a recession is “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.” [1] Now for most investors, this definition does not sound very specific and raises questions about things like the meaning of “significant.”
The three factors for defining a recession are depth, diffusion, and duration – conveniently referred to as the “three D’s.” Depth refers to declining economic activity that is more than a relatively small change. Diffusion describes an economy that has experienced a contraction in a wide range of sectors, such as trade, business activity, and consumer spending. Duration is likely the least important of the three D’s and measures the time between the previous business cycle peak and the following trough. Given the unique cause of the 2020 recession, the time between peak and trough was the shortest on record – only two months.
Second, warning signals usually precede a recession, and these signals are clearly set forth by NBER. The relevant data for determining the onset of a recession is conveniently categorized at the St. Louis Federal Reserve. [2]
One reason we see healthy debate on the likelihood of recession is that for most of this year, not all metrics were flashing warning signs. However, recent data may give us more clarity. On October 20, the Conference Board released the Leading Economic Index (LEI) and as of September, the LEI had declined seven out of the last nine months, showing that the economy could enter a period of significant and broad-based contraction. The decline is predictable as many sectors, such as housing, started slowing months ago. Since the inception of the index, a decline of this magnitude over a six-month period has always foreshadowed a recession in subsequent quarters [Figure 1]. As such, we think recession risks appear more probable by the beginning of next year. If the economy does fall into a recession, the cause will likely be from the consumer sector retrenching after years of inflationary pressures, high housing costs, and slow real wage growth.
Jeffrey Buchbinder, CFA, Chief Equity Strategist, LPL Financial
Expectations are very low for this earnings season. The challenges are many, with intense cost pressures and slowing economic growth at the top of the list. The chorus of analysts and strategists calling for big cuts to estimates has gotten louder. Expect estimates to come down, but not collapse. Here we take a look at whether expectations are low enough as we preview third quarter earnings season.
Corporate America has a lot working against it this earnings season. These headwinds include slower economic growth, cost pressures amid high inflation, ongoing supply chain issues, geopolitical instability in Europe and Asia, and significant currency drag from a very strong U.S. dollar. None of this is new news, but it has brought expectations for third quarter earnings growth down by nearly 7% to achievable levels in the 2% range [Figure 1].
Quincy Krosby, Ph.D. Chief Global Strategist, LPL Financial
George Smith, CFA, CAIA, CIPM, Portfolio Strategist, LPL Financial
As Federal Reserve (Fed) officials continue to emphasize the Fed’s commitment towards restoring price stability, the dollar marches ever higher. Markets are currently pricing in another 75-basis point rate hike at the November 2 Fed meeting as calls for the Fed to halt its aggressive campaign are mounting. Worries persist that tightening financial conditions, underpinned by a stronger dollar, will lead to deeper cracks within the global financial system.
Officials at the recent United Nations Conference on Trade and Development (UNCTAD) offered its views on Fed policy, stressing that it is “hurting the most vulnerable, especially developing countries,” and it “risks tipping the world into a global recession.” A wider range of informed critics also view the Fed’s assertive stance as unabating until something “breaks,” and point to the bond-related blowup in the U.K. and even the issues faced by Credit Suisse as examples of pockets of vulnerability that could be magnified more perilously as monetary policy becomes increasingly restrictive.
In markets that are focused on what can go wrong when monetary policy moves into restrictive territory, as it is now with global central banks raising interest rates to curtail stubbornly high inflation, the health of the banking system is always a top concern. Memories of 2008-2009 are still vivid even though global banks, overall, are in much healthier shape due to stringent regulations put in place following the crisis.
Credit Suisse's financial and leadership problems have been in the headlines as it struggles to convince investors that its balance sheet remains strong and liquid. The price of the bank's credit default swaps (insurance that the holder will be paid if there is a bond default) has been climbing. To counter investor concerns, the bank announced a repurchase plan to buy $3.03 billion of debt securities. In addition, a major structural re-organization is in the planning stages that will involve sales of assets and spinning off parts of the international business.
Comparisons with the now-infamous “Lehman” moment have been rife in the press, but analysts stress that the bank is in much stronger shape financially than when Lehman Brothers declared bankruptcy in September 2008.
Still, when clients are pulling away out of concern for Credit Suisse's financial stability, as recent reports have suggested, it can exacerbate fears that the bank is on the brink of insolvency, although by all accounts Credit Suisse remains in good financial condition.
Where there is legitimate concern, however, is that amid a more challenging market backdrop, the firm will have a difficult job raising capital at attractive rates.
Ramifications of the coordinated global move higher in interest rates and that currency is acting as a pressure release valve, have been felt nowhere more strongly than the United Kingdom (U.K.). The British pound had been weakening for some time amid a backdrop of dollar strength and a poor economic outlook as the U.K. has been wracked by rising energy costs. A stimulus packed government ‘mini budget’ announcement that included significant unfunded tax cuts sent sterling spiraling to an all-time low of $1.035 per pound, see Figure 1, as currency markets panicked about the U.K.’s rising current account deficit.
The Bank of England (BoE) is projected to continue raising interest rates to slow inflation. A weak pound exacerbates inflation as imports become more expensive, which puts fiscal and monetary policies at odds with each other. This is worth highlighting because fiscal policy and monetary policy should go hand in hand. If an economy needs to see inflation easing, it makes little sense to stimulate the economy through tax cuts while tightening monetary policy by raising interest rates.
Quincy Crosby, Ph.D., Chief Global Strategist, LPL Financial
On October 16, China will begin its 20th National Congress of the Chinese Communist Party in Beijing. This plenum is especially significant because it is expected that President Xi Jinping will be granted an unprecedented third term, something that he set in motion in 2018 when term limits were abolished.
Analysts anticipate President Xi will further consolidate his power base by ensuring that his political loyalists are appointed positions within the Politburo structure. Because the congress convenes every five years, those moving into the higher ranks are among the leadership cohort that will emerge as China’s senior ruling class. Given the country’s weak economy, due in large part to stringent zero-COVID-19 measures that have led to strict and prolonged lockdowns, coupled with a debt-laden property market, authorities in Beijing and throughout the Chinese provinces will need to focus on reviving the country’s economic underpinning. Moreover, the 20th national congress will most likely be assessing, and perhaps even debating, the trajectory of its future as it seeks military dominance in East and Southeast Asia, technological leadership, and an economy that embraces both capitalism and authoritarianism.
Modern China grew at a dizzying pace as it embarked on opening its economy to the West. Market reforms, trade with the West, and allowing foreign investment led to an economic boom that was characterized by the World Bank as “the fastest sustained expansion by a major economy in history.” China’s trade relationship with the United States grew at such a rapid pace that it became the chief manufacturer of most imported goods. At the same time, U.S. financial services companies, automobile manufacturers, and leading national brands worked towards negotiating agreements to partner with Chinese companies.
Similarly, Chinese entities, especially real-estate companies, invested throughout the U.S. and Europe. But much of China’s expansion in real estate domestically and abroad was fueled by enormous debt that ultimately led to bailouts and various forms of receivership by the Chinese government.
The real-estate industry in China is vast and includes intricate partnerships within other industries. According to Moody’s, the entirety of the industry is responsible for over a quarter of China’s nearly $17 trillion economy. Since early 2022, as cracks in the real estate market became more severe, Moody’s downgraded 91 high-yield Chinese property developers.
Evergrande, a major property developer with vast holdings throughout the country, was placed on Moody’s “B3 negative list.” The list underscores the speculative and high-risk environment that hovers over much of the property market. Given its size and complex relationships across industries, Evergrande exemplifies the depth of the heavily indebted real estate industry. In December, Evergrande defaulted on its debt along with other real estate developers, while many others continue to have trouble making interest payments on time. With over $300 billion in debt obligations, Evergrande’s foreign investors hold approximately $20 billion in notes. More worrisome are the billions of dollars in dollar-denominated debt issued by other Chinese developers.
In addition, over the past year and a half, individual investors have refused to pay monthly mortgage fees on condos in unfinished buildings. Property values continue to fall and indicate few signs of abating. To provide a modicum of assistance, policy banks have been lowering five-year mortgage rates, and one-year prime rates are also being eased in an effort to provide relief to builders who cannot secure private financing. The People’s Bank of China (PBOC), China’s central bank, is also trying to help by allowing cities that are most vulnerable to the property crisis to cut mortgage rates for first-time buyers.
Consequently, if the endemic problems of the industry are not resolved, there are fears that China could undergo its own version of the sub-prime mortgage collapse that engulfed markets globally 14 years ago.
At the end of September, the World Bank downgraded its 2022 economic growth projections for China to 2.8% from an earlier forecast of 5%. Global investment banks are also lowering their GDP estimates. For the first time in 30 years, China’s economic growth is lagging the rest of the Asia-Pacific region. World Bank data expects the other 24 countries encompassing the area to grow a cumulative average of 5.3%. China’s stringent measures to control the spread of COVID-19, the “zero-COVID” policy, are being blamed for the marked slowdown of the world’s second largest economy. Business leaders hope that the upcoming plenum will result in a significant easing, if not a full abolishment of the strategy.
Doubts are growing, however, that President Xi is prepared to abandon the policy that includes mass testing, extreme tracking, and isolating areas where there are outbreaks. Shanghai, with a population of 25 million residents, was shut down for two months this past spring. The restrictions stemming from the shutdown exacerbated global supply chain challenges given the region’s economic importance, but also included disturbing reports of citizens worried about food supplies. And throughout China, lockdowns and quarantines have created an environment of uncertainty with regard to business planning, investing, hiring, or borrowing, not to mention anxiety for the general population.
There is mounting concern that President Xi views his zero-COVID-19 policy, and its ability to eradicate the virus, as a key goal for the country and his platform. That it is increasingly perceived that he remains wedded to maintaining the strict measures clearly indicates that it takes precedence over economic considerations.
China’s continued economic weakness spilled over into the services sector last month, where intensifying problems in the property market and continued lockdowns are slowing activity in the retail, food services, and transportation sectors. The National Bureau of Statistics reported that the sub-index that measures services fell to 48.9 in September from 51.9 in August. Manufacturing, however, improved slightly.
Weakening global demand presents a major headwind for China as an important exporter to the world. In August, the statistics bureau reported a continuing decline in exports, with new export orders weakening in September. Cargo and container activity for export shipments contracted by 15% compared with a year ago. Expectations are that if a global recession does unfold, the economy will contract more dramatically.
Compared with the previous national congress in 2017, where economic growth stood at 7.0%, the multitude of problems facing party members this year is far greater, while the global backdrop does little to offer help [Figure 1]. Much is expected from this year’s meeting in terms of stimulus, programs for development, and viable solutions to the debt overhang that permeates nearly all sectors of the economy.
Lawrence Gillum, CFA, Fixed Income Strategist, LPL Financial
Josh Whitmore, CFA, Sr. Fixed Income Analyst, LPL Financial
The LPL Research Strategic and Tactical Asset Allocation Committee is increasing its recommended interest rate exposure in its tactical allocation from underweight to neutral. Now that interest rates have moved substantially higher, we believe opportunities in fixed income have improved and are looking to add back to certain areas within fixed income that may benefit.
Because the equity risk within our diversified asset allocation portfolios is still the largest contributor to total portfolio risk, we like the defensive properties that bonds could play on a go-forward basis. In the form of high-quality bonds, interest rate exposure has been a good diversifier to equity risk. And while that hasn’t been the case this year, we think at these higher interest rate levels, bonds can act like that diversifier again. While we acknowledge that interest rates could move higher still, we think the risk/reward profile of adding to rate-sensitive fixed income assets has improved. That said, for those income-oriented investors who mostly or exclusively hold bonds and don’t need fixed income to diversify stock holdings, we think there are ample opportunities in shorter maturity Treasury and investment-grade corporate securities.
In last week’s Weekly Market Commentary, we wondered how much higher interest rates could go. The yield on the 10-year U.S. Treasury yield is up over 3.0% from its August 2020 lows and has already seen the biggest move higher in yields since 1987, when rates moved higher by 3.2%. Since the 1980s, the average trough-to-peak increase in 10-year Treasury yields has been closer to 2.5%, but that includes large rate increases in the early ‘80s when Treasury yields were much higher. Since 2000, the average increase in the 10-year yield during major moves higher is around 1.8%. Clearly, we’re not in normal times, but the move on the 10-year Treasury yield since it bottomed in August 2020 has been significant. As such, yields on most fixed income instruments are trading above longer-term averages.
The significant increase in yields, especially this year, is because of changing Federal Reserve (Fed) rate hike expectations. In late 2021, markets expected the Fed to largely stay on the sidelines and keep short-term interest rates low. However, as inflationary pressures remained (and still remain), the Fed has embarked on a historically aggressive rate hiking campaign [Figure 1]. Because of the Fed’s stated desire to front-load rate hikes, the current rate hiking cycle is the most aggressive campaign since the early ‘80s in both the speed and magnitude of rate hikes. The Fed has signaled that more interest rate hikes will likely be necessary to arrest the generationally high consumer price increases we’re currently experiencing. Markets have already priced in what we think is an appropriate terminal fed funds rate. As such, we think we may be at or near peak “hawkishness” from the Fed, which should allow fixed income yields to stabilize at or near current levels.
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