August 23, 2021

WHY STAGFLATION ISN’T IN THE CARDS

Jeffrey Buchbinder, CFA, Equity Strategist, LPL Financial

Ryan Detrick, CMT, Chief Market Strategist, LPL Financial

Scott Brown, CMT, Senior Analyst, LPL Financial

The term stagflation has been circulating increasingly in the financial media as inflation readings have risen sharply in recent months. The term is often associated with the 1970s, which saw runaway inflation—largely driven by sky-high energy prices—and lackluster economic growth. Stagflation and a return to the weak equity markets of the 1970s would be understandably scary. However, when looking at the data, we remain skeptical that either runaway inflation or low growth are right around the corner, much less both at the same time.

THE MISERY INDEX

One way to gauge stagflation is to calculate what is commonly referred to as the Misery Index—inflation plus unemployment. As shown in Figure 1, the Misery Index today is nowhere near the extreme levels of the 1970s. In fact, the level of “misery” is very close to the long-term average near 10—despite the highest inflation readings we’ve seen in over a decade.

August 16, 2021

CORPORATE AMERICA DOES IT AGAIN

Jeffrey Buchbinder, CFA, Equity Strategist, LPL Financial

Ryan Detrick, CMT, Chief Market Strategist, LPL Financial

August 9, 2021

COVID UPDATE: DELTA VARIANT MARKET IMPACT

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

The highly transmissible Delta variant of COVID-19 now makes up an overwhelming majority of the new cases in the U.S., bringing with it a rise in cases and hospitalizations. Widespread vaccine distribution and distancing measures have helped limit the variant’s impact, but we could still see some drag on economic growth as some restrictions are reintroduced and consumers potentially become more cautious. While we may see an increase in market volatility due to the Delta variant, we believe the S&P 500 is still likely to see more gains through the end of the year.

THE DELTA VARIANT MAY DRAG ON ECONOMIC GROWTH

Despite the increased transmissibility of Delta and the increased health threat for those who aren’t vaccinated, our understanding of the measures needed to contain COVID-19 is in an entirely different place than it was in 2020. Above all else, we have not just one but several vaccines, which drastically reduces the risk from the variant, although it can’t completely eliminate it. We understand the effectiveness of masks in limiting transmission. Treatments have improved. We also know that the virus is not easily transmitted by touching surfaces—especially with simple good practices around handwashing—limiting the need for certain restrictions. Because of that, deaths from COVID remain near the lowest level of the pandemic despite the pick-up in cases [Figure 1]. Much of that is due to the vaccines’ ability to limit serious cases, though health risks remain high for those who aren’t vaccinated. We are also seeing some strain on healthcare systems in regions with low vaccination rates.

July 26, 2021

SIX SURPRISES SO FAR IN 2021

Ryan Detrick, CMT, Chief Market Strategist, LPL Financial

Jeff Buchbinder, CFA, Equity Strategist, LPL Financial

Thomas Goulder, CFA, Senior Analyst, LPL Financial

2021 has been a very strong year for both stocks and the economy, but that doesn’t mean there haven’t been some surprises. Below we take a look at some things that have happened so far in 2021 that have surprised the LPL Research team.

SURPRISE 1: YIELDS AREN’T HIGHER

Interest rates have surprised us twice this year. While we expected interest rates to increase this year, the strength of the move higher in the first quarter of 2021 was the first surprise. But reversing course and steadily falling since March may be an even bigger one. Put them together and the 10-year Treasury yield is still about 0.35% above where it was at the start of the year. Incredibly enough, we’re still in a rising rate environment. But the more recent decline is what’s on investors’ minds.

We don’t think there’s a simple explanation for why rates have fallen since March. A lot of factors have contributed: outsized inflation expectations coming down; short covering from crowded bets on higher rates; foreign buying; the drawdown of the Treasury General Account balance; and rising economic concerns about the impact of the Delta variant have all contributed. Part of the story is just one surprise correcting another. The 10-year yield had likely risen too far too fast in late 2020 and early 2021 and a course correction was natural, even if the pullback has been stronger than expected.

What’s the outlook for the rest of the year? Despite four months of falling rates, growth and inflation expectations still point to higher rates. Plus, don’t forget that the 10-year yield is still higher this year and we wouldn’t be at all surprised to see it resume its climb.

FIVE THINGS TO KNOW HEADING INTO AUGUST

Ryan Detrick, CMT, Chief Market Strategist, LPL Financial

Jeff Buchbinder, CFA, Equity Strategist, LPL Financial

Barry Gilbert, CFA, Asset Allocation Strategist, LPL Financial

Last week was a huge news week, from the Fed, to gross domestic product (GDP), to a giant week of earnings reports. Below we review the big events from last week, while also looking ahead to what could be an eventful August for investors.

EARNINGS CONTINUE TO SOAR

Last week was a very busy week for quarterly earnings reports and as we wrote in Midyear Outlook 2021: Picking Up Speed, we expected strong earnings growth to support further gains for stocks in the second half of 2021. Well, the second half is only a month old, but corporate America has sure delivered so far this earnings season. With only about half of S&P 500 Index constituents having reported so far, earnings growth is tracking to a year-over-year increase of 85% (source: FactSet), more than 20 percentage points above the consensus expectation when earnings season began and well ahead of our optimistic upside target in the mid-to-high-70s. We thought the bar had been raised too high for that much upside. Clearly we were wrong.

Growing earnings from the depressed year-ago quarter while much of the economy was shut down is not very impressive on its own. But blowing away analysts’ estimates after they’ve been consistently raised since last fall is very impressive, especially when considering ongoing challenges around COVID-19, supply chain bottlenecks, labor and materials shortages, and input cost pressures.

The strong momentum doesn’t appear ready to stop anytime soon. Estimates have been rising as companies have shared their outlooks. The consensus estimate for 2022 has increased 1.7 percentage points since July 1, a strong result given the history of estimate reductions during reporting season and the fact that about half of the index has yet to report.

July 19, 2021

MIDYEAR OUTLOOK 2021:

PICKING UP SPEED

Ryan Detrick, CMT, Chief Market Strategist, LPL Financial

Jeffrey Buchbinder, CFA, Equity Strategist, LPL Financial

Scott Brown, CMT, Senior Analyst, LPL Financial

It is hard to believe we have passed the halfway point of 2021. After a 2020 that would never end, the first six months of 2021 flew by. With the second half underway, we have updated our views of the markets and economy in LPL Research’s Midyear Outlook 2021: Picking up Speed. Below we provide a summary of those expectations covering the economy, policy, stocks and bonds.

ECONOMY: SPEEDING AHEAD

The U.S. economy has surprised nearly everyone to the upside as it speeds along thanks to vaccinations, reopening, and record stimulus. The growth rate of the U.S. economy may have peaked in the second quarter of 2021, but there is still plenty of momentum left to extend above-average growth into 2022. Despite the natural challenges of ramping back up, the recovery still seems capable of providing upside surprises.

We forecast 6.25–6.75% U.S. GDP growth in 2021, which would be the best year in decades. Last year’s 3.5% drop in GDP, the worst year since the Great Depression, may not be forgotten—but it has been left in the dust of 2020.

We continue to watch inflation closely but believe recent price pressures are transitory and will begin to work their way off gradually later in the year. As shown in Figure 1, the average U.S. expansion since World War II has lasted five years and much longer over the last few decades. There’s nothing on the horizon to indicate the current expansion can’t reach that mark.

July 12, 2021

THREE THINGS TO WATCH THIS EARNINGS SEASON

Jeffrey Buchbinder, CFA, Equity Strategist, LPL Financial

Ryan Detrick, CMT, Chief Market Strategist, LPL Financial

We ran out of superlatives to describe corporate America’s stunning performance during first-quarter earnings season. Despite lofty expections, results exceeded expectations by one of the biggest margins ever. So what will companies do for an encore? We expect more good news this quarter as more of the economy has opened up, while also acknowledging the second quarter will almost certainly end up being the peak in earnings growth for this cycle. Here, we highlight what to watch.

NUMBERS SHOULD BE GREAT AGAIN

After a remarkable performance during first-quarter earnings season, delivering an encore that will please investors will be tough. Recall that S&P 500 Index earnings grew 52% year over year during the first quarter [Figure 1], which was nearly 30 percentage points above expectations at the end of the quarter. Before companies started to report first-quarter numbers, we had thought 30% earnings growth would be pretty good; 50% was practically inconceivable.

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June 28, 2021

THREE THINGS THAT WORRY US

Ryan Detrick, CMT, Chief Market Strategist, LPL Financial

Jeff Buchbinder, CFA, Equity Strategist, LPL Financial

Scott Brown, CMT, Senior Analyst, LPL Financial

Markets are off to a strong start this year, with the S&P 500 Index up about 14% so far. However, most of those gains came early in the year, and many stocks have stagnated over recent months. While we remain overweight on stocks relative to bonds, this week we explore three things that worry us—and could make the market more susceptible to a pullback as we enter the second half of 2021.

Year Two Tends To Be Choppy

The good news is the second year of every single bull market since World War II has seen the S&P 500 climb higher. That is 12 for 12 for year two gains. The second year for this bull market started on March 23, 2021, and so far, stocks are off to a solid start—up more than 9%. The bad news is for many of the past bull markets, year-two gains were quite muted, as stocks caught their breath from the year-one sprint. With the S&P 500 up more than 90% from the March 23, 2020 lows, we wouldn’t be surprised at all if history repeated and stocks saw choppier action in year two.