August 31, 2020

ELECTION PREVIEW PART II A TRUMP SECOND TERM: UPSIDE AND RISKS

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

Ryan Detrick, CMT, Chief Market Strategist, LPL Financial

Jeffrey Buchbinder, CFA, CAIA, CIPM, Senior Analyst, LPL Financial

A second term for President Donald Trump would likely feature a continuation of the pro-growth policies from the first term of his administration, and importantly for financial markets, a continuation of the status quo. Markets don’t like uncertainty, and while Trump’s negotiating style has been unpredictable at times, his commitment to lower taxes and deregulation may provide a consistent, market-friendly policy environment. We look more closely at what a second term for Trump could mean for the economy and markets.

AFTER THE CONVENTIONS, ELECTION SEASON IN FULL SWING

With both the Democratic and Republican conventions now behind us and Election Day only nine weeks away, we’re following the August 24 Weekly Market Commentary analysis of a potential November win for former Vice President Joe Biden with a look at the potential market impact of a second term for President Trump.

We focus strictly on the market impact of the election, with the economy also a secondary concern, since that feeds into market impact. But our evaluation of the market impact is not a voting recommendation. There is always more at stake in elections than simply markets. These previews have been grounded in the facts, focusing on the upside and potential concerns of each candidate’s administration. If the upside doesn’t seem realistic, it can be dismissed, but we still think it’s useful to get a plausible version of the potential market upside (or lack of downside if that’s the best case) on the table.

MARKETS SIGNAL THE ELECTION REMAINS A COIN TOSS

We continue to believe the election remains a coin toss. US presidential elections consistently have been close. As discussed last week, four of the past five elections have been decided by less than a 5% margin in the popular vote, so a landslide victory for either candidate appears unlikely. Although early polling data appears to show Biden as the front runner, we are also continuing to follow market signals, which currently suggest an incumbent victory.

As we mentioned last week, how the S&P 500 Index performs in the three months leading up to the election has been a good predictor for who wins the White House, whether it reflects the state of the economy or because it signals the greater uncertainty that comes with a change in party [FIGURE 1]. A positive market over this period may signal an increased likelihood that the incumbent party may win, while stock market losses during the same period have tended to predict an opposition party win. The stock market returns in the three months leading up to the election have correctly predicted the election result every time since 1984, and 87% of the time since 1928. Since the clock started ticking on this indicator August 3, the S&P 500 has been up almost 6% and at fresh record highs, clearly favoring Trump.

August 24, 2020

ELECTION PREVIEW PART I: A BIDEN PRESIDENCY—UPSIDE AND RISKS

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

Ryan Detrick, CMT, Chief Market Strategist, LPL Financial

Jeffrey Buchbinder, CFA, Equity Strategist, LPL Financial

While a potential Biden presidency may mean a shift from some pro-growth policies of the Trump administration, it’s possible any negative market impact may be muted. Economic forces tend to dominate policy, though policy still matters, and historically, markets and the economy have shown little preference for either Republican or Democratic leadership. While there are risks associated with potentially higher taxes and increased regulation, and specific industries may experience a meaningful impact from policy shifts, for markets overall, there’s a real possibility that it may be just business as usual.

ELECTION FAST APPROACHING

With the Democratic convention behind us, the Republican convention this week, and Election Day only 10 weeks away, we thought it was time to take a closer look at the potential market impact of the election. Now that former Vice President Joe Biden has been formally nominated, we’ll look at the potential market impact of a Biden presidency this week. Next week, after the conclusion of the Republican convention, we’ll look at the potential impact of a second term for President Donald Trump.

Here’s how we’re going to go about it. First, as always, our concern is strictly the market impact of either party winning the White House, with the economy a secondary concern, since that feeds into market impact. But our evaluation of the market impact is not a voting recommendation. There is always more at stake in elections than simply markets. Second, each of these election previews, while grounded in the facts, will focus on the upside of each candidate, while also touching on potential concerns. If the upside doesn’t seem realistic, it can be dismissed, but we still think it’s useful to get a plausible version of the potential market upside (or lack of downside, if that’s the best case) on the table.

EARLY DATA FAVORS BIDEN, BUT WE WOULD STILL CALL IT A COIN TOSS

We believe the best way to approach the election at this point is to consider it a coin toss. The margin of victory in the popular vote has been under 5% in four of the last five elections, and in two of those elections the outcome in the Electoral College differed from the popular vote. That’s not meant to criticize the Electoral College—it just highlights how close our elections have become. A 5% difference is small enough that an election can easily swing one way or the other based on what happens in the months and weeks before the election—and there are scenarios in which even a 5% difference in the popular vote could mean a different outcome in the Electoral College.

Some of the major factors potentially supporting each candidate, in our view, include:

•             The power of incumbency favors Trump. (Presidential incumbents win about 70% of the time.)

•             Electoral College dynamics favor Trump.

•             Enthusiasm toward one’s own candidate favors Trump, although the gap is narrowing.

•             Polls currently favor Biden.

•             The president’s approval rating favors Biden.

•             The economy favors Biden, but circumstances are unusual.

•             Enthusiasm to vote against the opposite party’s candidate favors Biden, but not surprisingly,  

               that’s not necessarily a big driver of turnout.

We also follow market signals. We have often highlighted that S&P 500 Index performance three months leading up to the election has had predictive value for who wins the White House, whether it’s because it reflects the state of the economy or it signals the greater uncertainty that comes with a change in party. A positive market over that time period historically has signaled an increased likelihood that the incumbent party wins. The clock started ticking on that indicator August 3. So far the S&P 500 is up just a few percentage points, potentially favoring Trump, but volatility could quickly lead to a reversal.

Our friends at Strategas Research Partners have also put together a basket of stocks likely to benefit from a Trump or Biden presidency. Since early June, the Biden portfolio has been outperforming the Trump portfolio, though we acknowledge these stocks are driven by other factors as well.

The Senate also is being closely watched this election. If Trump wins reelection, the Republicans may very likely hold their Senate majority, currently at 53–47. With Democratic Senator Doug Jones from Alabama unlikely to hold on to his seat based on the latest polling data, Democrats would have to defeat a net of four Republican incumbents in addition to a Jones loss to take control of the Senate if Biden wins. (If the Senate vote is tied, the vice president breaks the tie.) We would put the likelihood of the Democrats taking the Senate if Biden wins the presidency at well over 50%.

August 17, 2020

5 EARNINGS SEASON TAKEAWAYS

Jeffrey Buchbinder, CFA, Equity Strategist, LPL Financial

Ryan Detrick, CMT, Chief Market Strategist, LPL Financial

Corporate America delivered on expectations and then some during a second quarter earnings season that some are calling the biggest upside surprise ever. We recap the results, share five key takeaways for investors, and discuss our near-term outlook for stocks with the S&P 500 Index near record highs.

MUCH BETTER RESULTS THAN ANTICIPATED

Earnings blew away expectations that ended up being way too low. With 92% of S&P 500 Index companies having reported results, the average upside surprise has been 22%, which we believe is the highest ever recorded going back several decades. At 82%, the percentage of S&P 500 companies that beat earnings targets is the highest since FactSet began tracking that statistic in 2008. Earnings are still tracking to a significant 33% year-over-year decline, but that’s certainly better than the 45% decline reflected in analysts’ estimates when reporting season began (source: FactSet).

WHY WERE ESTIMATES OFF BY SO MUCH?

We think estimates were  off because analysts may have been guessing in many cases because of the lack of guidance from companies’ management teams. Other reasons we think played a role include:

•             Analysts underestimated companies’ ability to cut costs.

•             Analysts were surprised by the US economy’s ability to bounce back as states reopened.

•             Analysts underestimated the size and impact of fiscal and monetary stimulus.

•             US dollar weakness provided an unexpected tailwind for multinationals’ profits.

•             Companies that provided guidance had every reason to be conservative, given the uncertainty.

Results were good enough relative to expectations to prompt us to raise our 2020 S&P 500 earnings per share (EPS) estimated range to $125–$130 from $120–$125, as we noted in our August Global Portfolio Strategy publication [FIGURE 1]. Stocks are taking cues from earnings estimates in 2021 and beyond, based on currently elevated valuations, but a potentially higher base in 2020 may improve prospects for 2021 earnings.

August 10, 2020

DISSECTING THE DISCONNECT

Jeffrey Buchbinder, CFA, Equity Strategist, LPL Financial
Ryan Detrick, CMT, Chief Market Strategist, LPL Financial

One of the most difficult questions for investors to answer right now is how can the US economy be struggling so much while the stock market keeps churning higher? Even harder to answer questions are: When will that gap close and what will be the catalyst that starts to close it? We highlight some differences between the stock market and the economy in an attempt to explain the disconnect.

MAKING SENSE OF THE RALLY

The stock market continues to do quite well. The S&P 500 Index, which has risen four straight months, has returned 5% so far in 2020, despite probably the worst pandemic in the United States in 100 years and one of the sharpest economic contractions since the Great Depression. How does that makes sense? Let’s start with some context for the stock market’s recent strength:

1) The pandemic has an end date. Markets are looking forward to better days ahead. Although the timing is uncertain, the stock market is expressing confidence that the pandemic will end eventually with a vaccine—or multiple vaccines—and with help from better treatments in the interim. Progress has been tremendous with many shots on goal that are likely to score at least one and maybe more success stories.

2) Low interest rates. Stocks are expensive, no doubt, but they look cheap compared with US Treasuries yielding about 0.5%. When discounting future profits back at such low interest rates, equity valuations get a significant boost.

3) Massive monetary stimulus. The stimulus from the Federal Reserve has driven the money supply, measured by M2, sharply higher—roughly 25% above last year’s levels. Some of that money has found a home in the stock market. Historically, money supply growth and stock prices have tended to move together, which has certainly been the case over the past few months [FIGURE 1].

4) Support from the winners. The so-called stay-at-home stocks have thrived in this environment. We saw evidence of that in the blowout earnings reports from some of the technology giants on July 30. The good news extends beyond those companies, however, with about 40% of the S&P 500 classified as technology, digital media, or e-commerce. Add in some of the most defensive industries within the consumer staples, telecom, and utilities sectors, and more than half of the index is well positioned for this difficult environment.

August 3, 2020

CALENDAR CONCERNS AND GOLD GAINS

Ryan Detrick, CMT, Chief Market Strategist, LPL Financial

Jeffrey Buchbinder, CFA, Equity Strategist, LPL Financial

Real-time economic data continues to show a slowdown, at the same time we’re entering two months of the year that historically have been troublesome for stocks. Meanwhile, gold is breaking out to new all-time highs, confusing many as to what it all means. Stocks are likely due for a breather, but it isn’t out of the ordinary to see both gold and stocks trend higher together.

CALENDAR DOING NO FAVORS

Last week, we discussed why the stalling economic recovery could slow the stock market rally. This week, the calendar has our attention, as August and September historically have been troublesome months for stocks.

August and September have tended to be quite weak for stocks, with August ranking as the worst month of the year over the past decade [FIGURE 1]. August has been quite strong during election years previously, but after the best July for stocks since 2010, a little more caution may make sense.

July 27, 2020

STALLING ECONOMIC RECOVERY MAY SLOW STOCK MARKET RALLY

Jeffrey Buchbinder, CFA, Equity Strategist, LPL Financial

Ryan Detrick, CMT, Chief Market Strategist, LPL Financial

Stock market weakness late last week caused investors to ask whether the long-awaited market pullback may be at hand. This week, we review the drivers of the market’s impressive rally back to the break-even point for the year, share our thoughts on whether the gains are justified, and take a look at some timely data for clues on the state of the economic recovery.

UP AND DOWN WEEK

We have been expecting this rally to take a breather since COVID-19 cases began to accelerate in June and some reopening’s in Sunbelt and California hotspots were rolled back to combat the spread of the virus. The S&P 500 Index fell 1.2% on July 23 after solid gains the first part of that week, ending the week little changed.

Nonetheless, even as new daily infections remain near record highs and US-China tensions ratchet higher, S&P 500 stocks have been marginally higher year to date—and barely below their all-time highs. Market participants haven’t seemed too concerned about stock valuations, which are as high as they’ve been since the technology bubble. The S&P 500’s forward price-to-earnings ratio (PE) is over 20, even using consensus estimates for 2021 (source: Factsheet).

July 20, 2020

AN EARNINGS SEASON TO FORGET

Ryan Detrick, CMT, Chief Market Strategist, LPL Financial

Jeffrey Buchbinder, CFA, Equity Strategist, LPL Financial

This earnings season may be one to forget. We will see one of the biggest year-over-year quarterly declines in S&P 500 Index profits ever, and we will hear a lot about uncertainty facing corporate America as COVID-19 continues to impact many companies in the United States and globally. But it may not all be negative.

ESTIMATES MAY BE TOO LOW

The unprecedented nature of the COVID-19 lock downs and widespread withdrawal of corporate guidance has set up an unpredictable earnings season. The magnitude of the decline we are likely to see may make this an earnings season to forget.

As tough as it is to find a bright side in an estimated 40% collapse in S&P 500 Index earnings per share (EPS), there are several reasons to think the season may be better than analysts’ estimates have suggested. First, second quarter guidance has been better than average—55% of the guidance that has been provided has been negative, well below the five-year average of 69%, according to Fact Sheet.

Second, recent economic data has mostly exceeded expectations, particularly for jobs and retail sales. The Citigroup Economic Surprise Index—a measure of the frequency that economic data is exceeding expectations—stands at an all-time record high for the United States. Bloomberg’s version of the same measure is very close to a record high.

July 6, 2020

ELECTION PREVIEW

Ryan Detrick, CMT, Senior Market Strategist, LPL Financial

Jeffrey Buchbinder, CFA, Equity Strategist, LPL Financial

2020 is an election year, and as we get closer to November, we expect this to replace COVID-19 and the recession at the top of investors’ minds. The makeup of Congress may influence stock market performance, and how stocks and the economy perform prior to the election may forecast who will win.

THE MAKEUP OF CONGRESS IS VERY IMPORTANT

Although all election years feel different, 2020 no doubt may be one of the most unique election years ever. We have a pandemic, a deep recession, extremely heightened partisanship, a mail-in ballot controversy, an unpredictable president, and the oldest presidential candidate ever.

Amazingly, 1940 was the last time the S&P 500 Index was lower during an election year with an incumbent in the White House. Historically, when a president has been up for reelection, it has tended to boost stocks. Stocks were down big in 2008—but President George W. Bush had finished his two terms. It isn’t about Republican or Democrat—it’s about incumbents trying to boost the economy and stock prices by the time voters go to the polls. Some good news on the economy in the coming months or progress toward a vaccine

could potentially get the S&P 500 back to positive territory for the year, after being down 30% year to date in March, and it’s possible that may help President Donald Trump’s reelection chances.

We’re often asked if stocks perform better under a Republican or Democratic president. We’d take a different view and point out that stocks have tended to do their best when we have a split Congress [Figure 1]. Markets tend to like checks and balances to make sure one party doesn’t have too much sway.

June 22, 2020

5 REASONS WE FAVOR US STOCKS

Jeffrey Buchbinder, CFA, Equity Strategist, LPL Financial

Ryan Detrick, CMT, Senior Market Strategist, LPL Financial

Among developed markets, we maintain our preference for US equities over international, but the bout of strong performance for the MSCI EAFE Index relative to the S&P 500 Index in late May through early June and the latest weakness in the US dollar are noteworthy. We share our latest thoughts on international equities and reiterate our positive emerging markets view.

 EARNINGS SEASON'S MIXED RESULTS

Jeffrey Buchbinder, CFA, Equity Strategist, LPL Financial

Ryan Detrick, CMT, Senior Market Strategist, LPL Financial

First quarter earnings season offered something for everyone. On the positive side, corporate America produced solid results outside of the COVID-19 pandemic trouble spots, which included retailers, travel related businesses, and banks. At the same time, 2020 earnings estimates have plunged, and a return to "normal" earnings could be two years or more away.