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Weekly Market Commentary - December 20th, 2021

Submitted by Total Clarity Wealth Management, Inc. on January 4th, 2022

STOCK MARKET OUTLOOK 2022

Ryan Detrick, CMT, Chief Market Strategist, LPL Financial

Jeff Buchbinder, CFA, Chief Equity Strategist, LPL Financial

 

We expect solid economic and earnings growth in 2022 to help U.S. stocks deliver additional gains next year. If we are approaching—or are already in—the middle of an economic cycle with at least a few more years left (our view), then we believe the chances of another good year for stocks in 2022 are quite high. We believe the S&P 500 could be fairly valued at 5,000–5,100 at the end of 2022, based on an EPS estimate of $235 for 2023 and an index P/E between 21 and 21.5.
 

Most of this content was taken from Outlook 2022: Passing the Baton

We expect solid economic and earnings growth to help stocks deliver gains in 2022. When forecasting stock market performance, we start with the economic cycle. We believe we are currently approaching—or are already in—the middle of an economic cycle with at least a few more years left. Historically, if this holds true, then we believe the chances of another good year for stocks in 2022 are quite high, which is an important added factor for our positive outlook for stocks next year [Figure 1].

 

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Weekly Market Commentary - December 13th, 2021

Submitted by Total Clarity Wealth Management, Inc. on January 4th, 2022

                 

ECONOMIC OUTLOOK 2022

Ryan Detrick, CMT, Chief Market Strategist, LPL Financial

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

 

We believe pent-up demand, gradual improvement in supply chain challenges, solid labor force growth, and productivity gains will all contribute to another year of above-trend economic growth in 2022. COVID-19-related risks remain and the potential for a policy mistake may be elevated as the economy moves towards normalization, but we think the overall environment will be supportive of business growth and ultimately equity markets.

The U.S. economy bounced back from its worst year since the Great Depression in 2020 with one of the best years of growth in nearly 40 years in 2021. A combination of record stimulus, a healthy consumer, an accommodative Federal Reserve (Fed), vaccinations, and reopening of businesses all contributed to the big year.

In what amounted to the shortest recession on record, only two months in March and April 2020, the economy came roaring back to produce what is currently expected to be over 5% GDP growth in 2021, more than making up for the 3.4% drop in GDP in 2020. Of course, there have been hiccups along the way. You can’t shut down a $20 trillion economy and then expect it to get going again without warming up first. Supply chain backlogs, materials and labor shortages, and higher prices all held the economy back to varying degrees. The good news is, demand is still very strong, and as the backlogs unwind (which could take years in some cases), we expect above-trend economic growth and see low risk of a recession in 2022.

As the U.S. economy moves more to mid-cycle, our 2022 forecast is for 4.0–4.5% GDP growth in 2022 [Figure 1]. While a slowdown from 2021, it’s still a very solid number. We expect inflation to tame from 2021 levels to a potential run rate under 3% by the fourth quarter with core inflation numbers lower, a step in the right direction, although it may still be on an upward trajectory the early part of the year.

Globally, Europe and Japan were hit especially hard by the pandemic in 2021. But as COVID-19 cases potentially fall globally, those areas could be ripe for better economic growth in 2022. Meanwhile, emerging market economies may disappoint as growth in China could be constrained by regulatory crackdowns.

 

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December Blog

Submitted by Total Clarity Wealth Management, Inc. on December 21st, 2021

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Weekly Market Commentary - ​December 6, 2021

Submitted by Total Clarity Wealth Management, Inc. on December 14th, 2021

WILL OMICRON RUIN THE SANTA RALLY?

Ryan Detrick, CMT, Chief Market Strategist, LPL Financial

Jeff Buchbinder, CFA, Equity Strategist, LPL Financial

 

Historically, December has been a great month for stocks, but now we have the Omicron variant causing major volatility and uncertainty. Still, we remain optimistic that the new worries will subside over the coming weeks and stocks will finish 2021 on a solid note.
 

THE LATEST ON OMICRON

First things first, we are very excited to announce that tomorrow (Tuesday, December 7) we are set to release Outlook 2022: Passing the Baton. This will have all of our views on where we think the economy, stocks, and bonds are headed next year. Because the Outlook is coming out tomorrow, this week’s Weekly Market Commentary is shorter than normal, but hopefully just as impactful.

After 29 consecutive days without a single 1% move higher or lower for the S&P 500 Index, news of Omicron broke the Friday after Thanksgiving and as a result, five consecutive days saw at least a 1% move up or down. Clearly Omicron and the uncertainty it brought with it showed everyone that stocks can’t stay calm forever.

Although we do expect this volatility to continue, it very well could be a buying opportunity. We’ve been living with COVID-19 for more than 20 months now. We’ve seen several variants and managed to move forward, and we expect a similar playbook to work once again. Admittedly, we don’t know how effective current vaccines are against Omicron, or how transmissible it is, but we do know that the appetite for another nationwide shutdown is quite low and that these questions should be answered over the coming weeks. We remain optimistic that the medical community will quickly create booster shots against the new variant if needed, paving the way for this economic recovery to move forward early next year.

 

WILL SANTA STILL COME IN 2021?

December started off a little rocky, but we are still optimistic that the usual December bullish season will take place. For starters, the S&P 500 has gained 1.5% on average during the final month of the year, with only April and November better. But no month is more likely to be higher, with December up close to 75% of time.

As shown in Figure 1, it turns out that the majority of the gains tend to take place during the second half of the month, so we could see a continued choppy market until we have more clarity over Omicron, which would match the typical strong second half of December action.

Where things get interesting is after a negative November (like we saw this year), December does even better, up 2.7% on average and higher 19 out of 22 times (86.3%). What about if stocks are having a great year heading into December? You guessed it, the jolliest month of them all does better. We found there were 15 times the S&P 500 was up more than 20% for the year at the end of November and the month of December was up 11 of them with an average return of 1.7%; again, better than the average December return of 1.5%.

 

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Weekly Market Commentary - November 22, 2021

Submitted by Total Clarity Wealth Management, Inc. on December 2nd, 2021

THREE REASONS TO BE THANKFUL

Ryan Detrick, CMT, Chief Market Strategist, LPL Financial

Scott Brown, CMT, Senior Analyst, LPL Financial

             

There are only six weeks to go in 2021 and it has been an incredible year for the stock market bulls. In fact, in many ways it could go down as one of the best years ever. This week, in honor of Thanksgiving, we wanted to take a closer look at three reasons to be thankful. From the stock market to the economy, there are indeed many reasons to be thankful this year.

 

A YEAR TO REMEMBER

The S&P 500 Index is up approximately 25% for the year, which currently ranks it as one of the best years ever, certainly something to be thankful for in 2021. Although this year hasn’t been perfect, earnings have come in substantially better than expected, with 2021 S&P 500 earnings expectations up nearly 25% from where they were at the start of the year, helping to justify stocks at current levels.

If the S&P 500 were to end at current levels, it would rank as the 15th best year since 1950. In fact, the S&P 500 is on pace to be up at least 15% for three consecutive years for only the second time in history, exceeded only by an incredible streak of five in a row in the late 1990s.

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November 15, 2021

Submitted by Total Clarity Wealth Management, Inc. on November 22nd, 2021

A PEEK AT PEAK INFLATION: FIVE SIGNALS TO WATCH FOR

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

George Henry Smith, CFA, CAIA, CIPM Senior Analyst, LPL Financial

               

After an updside inflation surprise in October, it’s clear that peak inflation may still be ahead, possibly even pushing into 2022. While the Federal Reserve (Fed) maintains its position that elevated inflation will be transitory, we have yet to see progress. Below we look at five signs to watch for over the next several months that may signal that inflation may be near or at its peak.

The October reading for the Consumer Price Index (CPI), the most widely known measure of inflation, came with an upside surprise versus expectations on top of already elevated inflation concerns. The headline number came in at 0.9% for the month and 6.2% for the year, the highest reading since November 1990. The core reading (which excludes food and energy prices) rose 0.6% for the month and 4.6% for the year—the highest since August 1991.

Elevated inflation continues to be largely driven by pandemic-related dynamics—primarily supply chain challenges and tight labor markets combined with high demand as the global economy bounces back. The COVID-19 Delta variant has deepened those problems in unexpected ways, although we cautioned in the early days of the surge that further supply chain disruptions were likely. Calling inflation “transitory” has not really captured these inflation dynamics well. Elevated inflation will last as long as supply chain bottlenecks and hiring challenges remain in place. As those dynamics subside, we expect inflation to return to something close to 2%, but we believe that’s more of a 2023 conversation.

But market participants don’t need to wait until CPI is back under 3% to feel a sense of relief. It would be enough to know that we’re past the peak, something that might not happen until 2022. In fact, since markets are forward looking, it may be enough to have a “peek at the peak.” Here are five signs to watch for that peak inflation, if not immediately at hand, may be in the near future.

 

SUPPLY CHAINS

Current inflationary pressure is primarily about supply chain disruptions, the inability to get product to market (whether because of labor and material shortages), the inability to maintain needed inventory, or logistical disruptions. Supply chains will heal over time—businesses have a strong profit incentive to address supply chain challenges. But there are structural constraints on how quickly progress takes place that businesses can’t control.

To take one high profile anecdotal example of supply chain disruptions and the impact of structural problems, there are currently over 100 container ships waiting to unload off the ports of Los Angeles and Long Beach, California. Before the pandemic, the worst backup was under 20. But the needed equipment, space, workers to accelerate progress simply isn’t available on demand.

Our best peek at how supply chains are doing may be purchasing managers’ index (PMI) readings. Supply-chain related readings from the Institute for Supply Management’s October release has shown some improvement in places, but disruptions remain elevated. The reading on order backlogs peaked in May, but at 63.6 remains well above its long-term median of just above 50 (above 50 indicates higher backlogs from the previous month).

Likewise, supplier deliveries also peaked in May but has moved higher the last two months and was at a very elevated 75.6 in October. Readings in the mid to low 50s for both of these sub-indexes would probably be needed to indicate we were on the cusp of significant improvement to supply chain problems.

 

HOUSING AND RENTS

Shelter excluding energy costs, essentially housing costs and rents, makes up about 1/3 of CPI and just over 40% of core CPI (excluding food and energy). Costs for housing have picked up on a year-over-year basis but, unlike some other measures of inflation, it has not yet hit a high dating back to the 1990s [Figure 1]. In fact, current one-year housing inflation, at 3.5%, is lower than its 2019 peak. Nevertheless, housing costs have jumped the last three months and housing inflation is a concern—both because it represents such a high proportion of consumer spending and because it tends to be relatively sticky. Base effects (rolling low numbers off the one-year reading) will likely help push annual shelter inflation higher until April 2022, so looking at monthly numbers will be important. Consecutive monthly readings near 0.3% would be a good sign that housing costs have stabilized but, even at that level, the year-over-year number could continue to climb in the first several months of 2022.

 

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November 1, 2021

Submitted by Total Clarity Wealth Management, Inc. on November 4th, 2021

FIVE THINGS THAT MIGHT SPOOK MARKETS

Ryan Detrick, CMT, Chief Market Strategist, LPL Financial

Jeffrey Buchbinder, CFA, Equity Strategist, LPL Financial

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October 25, 2021

Submitted by Total Clarity Wealth Management, Inc. on October 27th, 2021

BULLISH SETUP INTO YEAR-END

Ryan Detrick, CMT, Chief Market Strategist, LPL Financial

Scott Brown, CMT, Senior Analyst, LPL Financial

 

The S&P 500 Index has gained more than 20% so far this year, making more than 50 record highs along the way. Certainly nobody should be upset with that return if that was all 2021 brought us. However, we see signs that there could be more gains to come in the final two months of the year. Seasonal tailwinds, improving market internals, and clear signs of a peak in the Delta variant all provide potential fuel for equities heading into year-end, and we maintain our overweight equities recommendation as a result.
 

LATE OCTOBER IS THE SEASONAL LOW

One of the most important points we believe investors should recognize is that there has been a sort of stealth correction going on throughout most of the summer, consistent with the historically weak period commonly referred to as “Sell in May and Go Away.” While the S&P 500 has returned more than 8% since the end of April, the average individual stock in the index suffered more than a 10% correction. Meanwhile, the average stock in the Russell 2000 Index (covering small cap equities), which is almost unchanged over that period, suffered a more than 25% bear market.

However, as shown in [Figure 1], late October has historically marked the seasonal low before stocks typically rally into year-end. In fact, the fourth quarter as a whole is by far the strongest quarter historically, on average, with the S&P 500 rising 4% and finishing higher nearly 80% of the time. November, meanwhile, is the strongest month of the year—both since 1950 and over the past decade. So, whether you believe that stocks have thus far followed the historical pattern of summer weakness that should be ending, or that the current price trend is so strong that it was able to buck the summer doldrums, we see ample reason to believe that seasonality has now turned from a headwind for equities to a tailwind.

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October 18, 2021

Submitted by Total Clarity Wealth Management, Inc. on October 20th, 2021

Q3 EARNINGS PREVIEW: LESS UPSIDE

Jeffrey Buchbinder, CFA, Equity Strategist, LPL Financial

Ryan Detrick, CMT, Chief Market Strategist, LPL Financial

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New Tax Laws You Need to Know

Submitted by Total Clarity Wealth Management, Inc. on October 13th, 2021

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