October 26, 2020

ARE THE POLLS WRONG AGAIN?

Ryan Detrick, CMT, Chief Market Strategist, LPL Financial

Nick Pergakis, Analyst, LPL Financial

The race for the White House is down to the homestretch, and although presidential candidate Joe Biden is comfortably ahead in the election polls, various market and economic-based indicators suggest the election may be much closer than many are expecting.

SUPPORT FOR A BIDEN VICTORY

Various polls show former Vice President Joe Biden comfortably in the lead in the 2020 presidential race, although in some battleground states the race appears to be quickly tightening. Influential states like Ohio and Pennsylvania may even be a coin toss at this point.

Not surprisingly, approval ratings can play a large part in forecasting the overall percentage of the votes in an election. Only two presidents have lost reelections since the Great Depression: George H. W. Bush and Jimmy Carter. Not surprisingly, both had low approval ratings leading up to the elections. If the people don’t approve of the job you’re doing, you may not serve a second term.

Recent Gallup polls suggest that President Donald Trump’s approval rating is 43%. Using a regression of previous elections, this equates to less than half of the two-party vote [Figure 1]. Of course, Trump received less than half of the popular vote in 2016, but he still won the election because he had more than 270 votes in the Electoral College. Still, the polls currently favor Biden, and this appears to be his race to lose.

October 19, 2020

THREE REASONS WE LIKE SMALL CAPS

Jeffrey Buchbinder, CFA, Equity Strategist, LPL Financial

Scott Brown, CMT, Senior Analyst, LPL Financial

Nick Pergakis, Analyst, LPL Financial

Markets have come a long way since the March lows, but we believe there may be more room for stocks to run. Given the impressive economic recovery to date and improving underlying technical and fundamental conditions, we think small cap stocks in particular may have attractive growth potential. Despite election and COVID-19-related risks, we see further gains ahead.

NOT OUT OF THE WOODS, BUT IMPROVING

The significant impact of COVID-19 on the US economy has created unprecedented levels of uncertainty for investors, with a heated election as the cherry on top for 2020. Investors have had a lot to digest since markets bottomed in March, and the virus is not yet under control, but the US economy is certainly in a much better place today than it was in the spring. While we previously have favored large cap stocks due to their strong balance sheets and resilient earnings during this recession, we highlight three reasons we have been warming up to small cap stocks.

EARLY-CYCLE ENVIRONMENT FAVORS SMALL CAPS

We believe the latest recession is over and the new economic expansion has begun. The Federal Reserve of Atlanta’s GDPNow updated its forecast to 35% gross domestic product (GDP) growth in the third quarter on an annualized basis, potentially confirming our view that the recession has ended. While we acknowledge the immense amount of uncertainty facing the economy, along with the growing risk that there may be no additional fiscal stimulus until after the election, we stop short of calling for a “double dip” recession.

October 12, 2020

EARNINGS GROWTH IS APPROACHING

Jeffrey Buchbinder, CFA, Equity Strategist, LPL Financial

Ryan Detrick, CMT, Chief Market Strategist, LPL Financial

This earnings season, corporate America will get closer to the return of earnings growth—which is likely in the first quarter of 2021. We probably will have another decline in profits for third quarter 2020, though potentially only about half as big as last quarter’s. And we will undoubtedly hear more about uncertainty— both COVID-19 and election-related. We also highlight three things investors can watch this earnings season.

MOVING IN THE RIGHT DIRECTION

How investors evaluate this earnings season will depend on their perspectives. We are likely to get a much smaller year-over-year decline in S&P 500 Index profits in the third quarter compared to the second quarter, which is good news. Consensus is calling for a roughly 20% year-over-year decline in earnings per share (EPS) according to Fact Set’s estimate, but we expect quite a bit better [Figure 1].

The consensus estimate for the third quarter has risen by about 4% over the past three months (best such increase in more than two years according to Fact Set), a good sign that companies may be able to deliver more than the typical upside. And although fewer companies have offered guidance because of the amount of uncertainty, 67% of the guidance has been positive, significantly higher than the five-year average of 32%. Accordingly, we expect company management teams to instill confidence that the earnings rebound baked into analysts’ forecasts—or at least something close to it—may materialize.

October 5, 2020

MARKET RESPONSES TO ELECTION UNCERTAINTY

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

Nick Pergakis, Analyst, LPL Financial

Speculation has been increasing that the November election results may be delayed or disputed, or both. A contested election might affect financial markets in several ways. Also, the news that President Donald Trump has tested positive for COVID-19 may potentially impact markets as well.

NOTE ON PRESIDENT TRUMP’S COVID-19 DIAGNOSIS

While this Weekly Market Commentary was in production, we learned that President Trump and First Lady Melania Trump had tested positive for COVID-19. First and foremost, we wish the president and first lady a swift and full recovery. Obviously the news adds a layer of uncertainty to an already contentious election cycle.

The immediate market response has been relatively mild so far. US stocks were lower at open the morning of October 2, but some assets that are perceived to be more resilient in the face of a risk-off environment, such as Treasuries, gold, and the Japanese yen, have shown no real sign of added strength early on. The news adds to the election uncertainty, however. Trump will be unable to campaign in person during the quarantine period that he observes—and maybe longer if he exhibits more serious symptoms—which possibly could hurt his reelection chances. On the other hand, the United Kingdom’s Prime Minister Boris Johnson saw his approval rating rise while he was fighting the infection.

From a market perspective, we think it’s better not to speculate on the election impact of the diagnosis. We do know two things: 1) The response to COVID-19 is very different from case to case, which means only time will tell how the virus may affect the president, and 2) the president and first lady will be monitored closely and will have access to some of the best care in the world, which improves the outlook for both of them.

September 28, 2020

CENTRAL BANK SEASON

Jeffrey Buchbinder, CFA, Equity Strategist, LPL Financial

Scott Brown, CMT, Senior Analyst, LPL Financial

Nick Pergakis, Analyst, LPL Financial

The recent correction in the S&P 500 Index’s technology sector presents a unique challenge to markets following a historic stretch of outperformance as technology’s share of the market has ballooned in size. Despite September weakness in this sector that has dragged the broader market lower, we expect technology leadership to continue given supportive underlying fundamental and technical conditions.

A SEPTEMBER TO FORGET

During the COVID-19 pandemic, technology has played a curious role in mitigating downside during bouts of volatility, while also posting considerable outperformance when markets rebounded, as many viewed the sector as relatively well insulated from the economic effects of the virus. After a “melt-up” environment for tech during the month of August, the sector so far has corrected more than 12% from its prior high in September, a historically weak month for the S&P 500. Investors are asking if the weakness will continue.

FUNDAMENTALS ARE SUPPORTIVE

The question of whether technology’s strong performance since March has put it in bubble territory has received a lot of attention in the financial media as well as with investors. Although we acknowledge that some of the better-performing technology and technology-related stocks have been on an upward trajectory similar to that of the late 1990s until the recent sell-off, we don’t believe technology is in a bubble.

We would first point out how strong fundamentals are right now. Earnings estimates for the sector have already moved above their pre-pandemic highs. While there is risk that these expectations may not be achieved, the gap between technology sector earnings and earnings from the entire S&P 500—which includes technology— is impressive [Figure 1].

September 21, 2020

CENTRAL BANK SEASON

Ryan Detrick, CMT, Chief Market Strategist, LPL Financial

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

Nick Pergakis, Analyst, LPL Financial

When seasons change, the major central banks meet. The Federal Reserve, European Central Bank, and Bank of Japan all met in September to discuss their outlooks on the economy and monetary policy going forward. Key observations from the central bank meetings include maintaining policy while keeping an eye on COVID-19.

FEDERAL RESERVE

Expectations for major changes at the Federal Reserve (Fed) September meeting were low. The Fed had completed its framework review at the annual central bank symposium at Jackson Hole, Wyoming, in late August and announced its shift toward flexible average inflation targeting then. While no major policy decisions were made at the September meeting, the Fed did alter the language of its guidance to align with the change in inflation targeting, allowing for potentially higher inflation before it would consider raising rates. The Fed “dot plot,” a graphical projection of when Fed members expect to see higher rates, revealed that voting members expect rates to remain at the zero-bound until at least 2023. The Fed also continues to express concern for downside risks to the economy.

Although the Fed has reiterated that negative policy rates seen in Europe and Japan are not under consideration, adjustments to the policy rate are only one mechanism for further easing of financial conditions. The Fed also can provide additional support through adjustments to its asset purchase programs or changes to other available liquidity facilities. However, the current stance may leave the Fed vulnerable to being blindsided by a better-than-expected recovery, which may have longer-term implications on inflationary forces.

September 14, 2020

THE BULL CASE FOR STOCKS

Ryan Detrick, CMT, Chief Market Strategist, LPL Financial

Jeffrey Buchbinder, CFA, Equity Strategist, LPL Financial

Markets have been on a wild ride in September so far, with a strong first two days of the month followed by one of the sharpest 10% corrections ever for the NASDAQ. The case can be made that stocks may move higher over the rest of 2020 despite a number of risks, including a possible increase in COVID-19 cases, heightened US-China tensions, and election uncertainty.

WILD RIDE

After virtually no volatility since March, market-watchers got a heavy dose of it with the recent three-day 10% correction in the NASDAQ—one of the fastest corrections ever, and the fastest ever from a record high. Historically, the NASDAQ has tended to rise after fast corrections from new highs [FIGURE 1]. Stocks were higher 6 and 12 months after those corrections more than 90% of the time going back 40 years, with the end of the 1990s bull market the glaring exception. Many of these examples took place during the technology boom in the late 1990s, but the history is still instructive

Even with the 4% drop in the S&P 500 Index over the four trading sessions last week, and the nearly 7% drop from September 3 to September 8, the index is still up from the March 23 lows and higher year to date, as of September 11, 2020.

September 8, 2020

TOP 10 INVESTOR QUESTIONS

Ryan Detrick, CMT, Chief Market Strategist, LPL Financial

Jeffrey Buchbinder, CFA, CAIA, CIPM, Equity Strategist, LPL Financial

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

Many investors, our selves included, find it difficult to understand why stocks have done so well lately in such a challenging economic environment and COVID-19 still an ongoing threat. We heard that question quite a bit at our annual national conference for LPL financial professionals held virtually in late August. That isn’t the only question we’ve been getting recently, so we’ve compiled our top-10 investor questions and answers.

QUESTION #1: CAN STOCKS KEEP GOING HIGHER, CONSIDERING THE RISKS?

With the S&P 500 Index up more than 50% since the March lows and stocks pricing in an optimistic recovery in the economy and corporate profits, we believe stocks may be due for a pullback—and the drop that occurred September 3–4 may be the start of it. The S&P 500 is near our bull-case scenario of a fair-value target of more than 3,450 that we highlighted in our Midyear Outlook 2020 publication—and our base-case target of 3,300 is under review. We also expect a pickup in volatility ahead of the November election.

From a technical perspective, we may see a little more near-term upside in the 3,700 range, potentially helped by positive COVID-19 news, another fiscal stimulus package—we still expect another one of more than $1 trillion—and continued strength from stocks that have performed better in the pandemic, mostly technology stocks. On the downside, we would see technical support at around 3,200.

QUESTION #2: HOW WILL THE ELECTION IMPACT STOCKS AND THE ECONOMY?

Historically, stocks have generated positive returns under all political combinations in the White House, House of Representatives, and Senate, including Democratic and Republican sweeps. While this is a very important election, as they all are, as investors we want to keep any impact to the stock markets in perspective.

Strictly from a markets perspective, a potential Democratic sweep of the Senate and presidency possibly could bring higher corporate, individual, capital gains, and dividend tax rates that may be expected to translate into lower stock values, all else being equal. But it could also bring more fiscal spending, including an infrastructure package, and lower tariffs. A victory by President Donald Trump may help keep taxes low, but it also may lead to escalating tensions with China, more tariffs, and further decoupling of the trade relationship between the two countries, all of which could potentially lead to bouts of market volatility.

For more in-depth answers to this question, read our last two Weekly Market Commentaries in which we discuss the potential economic and market implications of wins by former Vice President Joe Biden and President Trump.

QUESTION #3: HOW CAN CURRENT STOCK VALUATIONS ARE JUSTIFIED?

The S&P 500 price-to-earnings ratio (PE) based on estimated 2021 earnings is over 21, above the peak levels that historically have marked the end of bull markets (in the 18–19 range) and the long-term average of 15– 16. We acknowledge stock valuations are high. However, we don’t think they are irrational given: 1) the massive stimulus from the federal government and the Federal Reserve (Fed); 2) depressed interest rates that reduce the attractiveness of bonds and enhance the value of future corporate profits; 3) corporate profits are on the upswing with many winners in this environment; and 4) potential vaccine availability within the next 6 to 12 months.

QUESTION #4: WHAT TACTICAL ASSET ALLOCATION CHANGES HAVE YOU MADE RECENTLY?

We’re frequently asked when the decade-long leadership in growth-style stocks might reverse. At this point, despite the big drop September 3–4, we’re sticking with our preference for growth style until it becomes clearer that the US economic recovery is more durable, but we recognize growth stock valuations look stretched and value style will eventually have its day in the sun. The sharp sell-off in growth stocks recently was a reminder of what can happen when the rubber band gets stretched too far, though we believe fundamentals and technical still support leaning toward the growth style.

We have warmed up to small caps as the new bull market has taken hold, and we selectively added some exposure in our tactical model portfolios in August. On the sector side, our last move was to upgrade materials to positive in August on US dollar weakness and strong technical momentum; we downgraded financials to negative in a corresponding move.

3 Things to Know Regarding COVID-19 and Your Retirement

We all know that the coronavirus pandemic has thrown us for a loop emotionally, physically, and financially. Working from home has become the new normal, restaurants are slowly starting to reopen for indoor dining, and businesses everywhere are still trying to make ends meet and stay afloat. Not only has the pandemic created a new way of life for most Americans, but the pandemic has caused a lot of worry for Americans, especially regarding their retirement plans. In this blog, we are going to go over three of the most important things to know about how the COVID-19 pandemic has affected your retirement. Keep reading!

1. Social Security Won’t Cover All of Your Retirement

Now, it is a common belief that Social Security will cover you in retirement, however, this is not true. Social Security can help you pay for things in retirement, but especially with the current status of the pandemic, it will not cover all of your retirement, just some. In fact, Social Security “never designed to do this, and with a possible benefit cut on the horizon, it's safer to rely upon your personal savings for the bulk of your retirement expenses,” (Fox Business).

2. You May Retire Later Than You Expected

With the amount of people in our country losing their jobs or being furloughed, you may have realized that you might be working longer than you had anticipated. If you were planning to take out retirement funds early, you may want to reevaluate, as delaying retirement could mean more money for you once you actually reach your full retirement age, which varies depending on the year you were born. You can find use this website to determine your full retirement age here.