Market Commentary

Revisiting Energy

APRIL 15H, 2024 | LPL Research

The attacks on oil tankers in the Red Sea by the Yemen-based Houthis, considered a proxy for Iran, have also led to crude oil prices inching higher.

In terms of the Ukraine-Russia conflict, Ukraine’s continued drone attacks on Russian oil refineries have also pushed oil prices higher as supply disruptions, regardless of the cause, support prices.


Within the discussion of the production/price equation, the OPEC+ decision advocated by Saudi Arabia and Russia to maintain voluntary production cuts until the end of June has helped maintain higher prices. The 53rd meeting of the Joint Ministerial Monitoring Committee, scheduled for June 1, will play a key role in the trajectory of crude oil prices, as will data releases from the world’s two largest economies, the U.S. and China, in helping to determine forecasts based on global demand.

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What to Watch This Earnings Season

APRIL 8TH, 2024 | LPL Research

Heading into the last reporting period, the consensus earnings estimate for the fourth quarter came down quite a bit, falling 6.8% between October and December. That low bar helped drive a solid average upside surprise of nearly 5% for S&P 500 constituents. The picture is different this quarter, with just a 2.5% cut to Q1 numbers from January through March, so the bar isn’t as low.

The good news is that the economic environment has been supportive enough that the typical three to four percentage points of upside to current estimates (+3%) is probably reachable, potentially putting S&P 500 earnings per share (EPS) growth for the first quarter at around 6%.

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IPOs as a Market Tell

APRIL 1ST, 2024 | LPL Research

The artificial intelligence (AI) narrative has helped underpin two of the most recent IPOs, as both Reddit (RDDT) and Astera Labs (ALAB) infused their respective stories with AI references. For RDDT, typically viewed as a social media company that is supported by advertising revenue, there was much discussion regarding its AI-based data platform and its $60 million licensing partnership with Google designed to utilize Reddit content to train its AI models.

Astera Labs, a high-powered chip infrastructure manufacturer that provides “purpose-built connectivity solutions” and more of a direct AI play than Reddit, included video commentary from NVIDIA (NVDA) CEO Jensen Huang in its roadshow, during which Huang endorsed the company.

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Navigating the Strategic Investing Landscape

MARCH 25TH, 2024 | LPL Research

Investing over a tactical time horizon, on the other hand, resembles the dynamic nature of changing tides, responding to short-term market conditions like the unpredictable surges and waves in the sea. Like a sailor in a small boat who is heading north may adjust sails to veer east, west, or even south to pick up strong winds or avoid turbulent waters, our Tactical Asset Allocation (TAA) process is more nimble and actively managed, seeking to capitalize on timely market trends and fluctuations by making more frequent adjustments based on technical analysis and current market fundamentals.

Our tactical asset allocation decisions place less emphasis on valuations, which have been shown to have less predictive power over shorter time periods of a year or less (we wrote about that topic in a March 6, 2024, blog entitled “Valuations Aren't Great Timing Tools"). We publish our Tactical Asset Allocation suggestions each month but can make changes to it as market opportunities present themselves, with the typical trade time horizon being at least three months but typically not much beyond one year.

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A Busy (and Perhaps Historic) Week for Central Banks

MARCH 18TH, 2024 | LPL Research

On Wednesday, the Fed concluded its two-day meeting where it is unlikely it will change short-term interest rates. At 5.3% (effective rate), the fed funds rate has remained unchanged since its July 2023 meeting, and it looks like it will be a few more meetings until the Fed is comfortable enough with existing progress on inflation to start to lower interest rates. The Fed has preached patience recently, acknowledging progress, but they want more evidence that inflation is headed back to its 2% target. Markets, of course, are forward-looking and have currently priced in around three cuts this year, which would take the fed funds rate close to 4.5%.

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Gold Shines Brighter Than Ever

MARCH 11TH, 2024 | LPL Research

In a market enthralled by mega cap performance and artificial intelligence, the ancient-old gold trade managed to steal some of the spotlight last week as the yellow metal rallied to new highs. The path to record-high territory has been a long one, mired by inflation and fixed income market volatility, drastic fiscal and monetary policy changes, and a host of geopolitical surprises, but after three-and-a-half years, gold finally surpassed its August 2020 high near $2,075.

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Gold Shines Brighter Than Ever

MARCH 11TH, 2024 | LPL Research

In a market enthralled by mega cap performance and artificial intelligence, the ancient-old gold trade managed to steal some of the spotlight last week as the yellow metal rallied to new highs. The path to record-high territory has been a long one, mired by inflation and fixed income market volatility, drastic fiscal and monetary policy changes, and a host of geopolitical surprises, but after three-and-a-half years, gold finally surpassed its August 2020 high near $2,075.

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Super Six Drives Solid Earnings Season

MARCH 4TH, 2024 | LPL Research

While Apple’s and Microsoft’s consensus EPS estimates for this year increased modestly, the top four saw increases of between 17.5% and 46.2%. And these aren’t small companies, with S&P 500 weightings of 3.7% (NVDA), 3.4% (GOOG/L), 3.3% (AMZN), and 2.2% (META). So not only did this group grow earnings significantly last quarter, but their already very strong outlooks were strengthened further by a healthy dose of management optimism.

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Buybacks Are Back

FEBRUARY 26TH, 2024 | LPL Research

Buyback activity has made a comeback after most companies suspended share repurchase programs in the wake of the pandemic. For example, total S&P 500 buybacks jumped from $525 billion in 2020 to $930 billion in 2022. However, buybacks tapered off last year to $782 billion as economic uncertainty and higher interest rates pushed repurchases to the sidelines. (Higher rates made leveraged buybacks — when companies issue debt to buy back shares — less attractive.)

With the economy continuing to show signs of resilience and inflation moving in the right direction, albeit at a slower and bumpier trajectory than expected, buybacks are expected to rebound again in 2024. According to S&P Dow Jones Indices, S&P 500 companies are expected to repurchase $885 billion in stock this year. So far, companies are off to a solid start with $155 billion in announced repurchases year to date, including a notable $50 billion share repurchase program from Meta (META).

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Treasuries: Who’s Buying and Why it Matters

FEBRUARY 20TH, 2024 | LPL Research

The Fed has a history of stepping into the Treasury market during periods of economic stress, with the Great Recession (2007–2009) popularizing the term “Quantitative Easing” (QE), when the Fed purchased large portions of various Treasury instruments, called large-scale asset purchases (LSAPs). The Fed’s balance sheet expanded by $3.5 trillion during late 2007–2013, as the Fed continued to help bolster the economy. By the end of the recession the balance sheet was $4.5 trillion.

Resorting to an assortment of monetary measures in the Fed’s “toolbox” has been normalized and institutionalized, but a key aspect of these extraordinary purchases is that the Fed will reduce its balance sheet to pre-crisis levels, as it is currently engaged in.

From 1941–1951, the Fed kept rates at low levels to weaken the cost of the debt incurred and subsequently kept the peg in place for six years following the end of World War II. This policy was also implemented during World War I, as well as the war’s aftermath.

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Outlook for U.S. Economy Continues to Brighten

FEBRUARY 12TH, 2024 | LPL Research

Financial conditions improved in recent months as fewer banks tightened credit conditions in Q4 because fewer firms were pessimistic about demand. As investors digest the experience of loan officers, historically we experienced recessions when credit was this restricted. Improving credit conditions suggest the economy had good momentum as the New Year got underway and markets are responding accordingly.


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Will the January Barometer Come Through?

FEBRUARY 5TH, 2024 | LPL Research

Since 1950, the S&P 500 Index has posted an average annual return of 16.8% during years that included a positive January, with gains impressively 89% of the time. In contrast, when the index traded lower in January, annual returns dropped to -1.7%, with only 50% of occurrences yielding positive results.

Isolating just February through December, the index has gained an average of 12% during years when January is higher, rising 86% of the time. And during election years when January is positive, such as this one, the S&P 500 has not traded lower over the subsequent 11 months in any year since 1950 (eight for eight), with an average gain of 10.1% during this period.

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Is Too Much Optimism Priced In?

JANUARY 29TH, 2024 | LPL Research

As of January 25, 2024, the ERP for the S&P 500 Index was 0.1%, which is below the long-term average of 0.7%. (Higher values mean stocks are less expensive relative to bonds, and vice versa.) Using the consensus earnings estimate for the next 12 months rather than the last 12 months pushes the ERP up to a more attractive level near 1%, but even at that number, the case for stocks over bonds on valuations is difficult to make. In other words, even factoring in relatively low interest rates by historical standards, with the 10-year yield near 4%, at best we can argue stock valuations are fair. Strong momentum and corporate fundamentals leave us comfortable with our neutral tactical stance on equities, but there is not much room for error. And we should watch the risks closely, particularly geopolitics.


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Will Shipping Disruptions Alter Fed Plans?

JANUARY 22ND, 2024 | LPL Research

The global economy experienced multiple shocks in recent times from the Russian attacks on Ukraine, atrocities in the Middle East, the seating of an unconventional president in Argentina, and most recently, a crisis in the Red Sea. Yet, markets and the economy remain surprisingly resilient. Could the recent challenges in inter-continental shipping contribute to a resurgence of inflation and hamper the Fed’s plans this year?

During the depth of the pandemic, shipping lanes backed up due to understaffed ports and insufficient supply of intermodal containers. Additionally, activity at production plants was hampered from governmental restraints and inconsistent labor supply. Investors often overlook the length of time for the backlogs to clear — ports didn’t return to more normal levels until the middle of 2022.1 The lack of supply during the early stages of the pandemic was a significant driver for goods inflation.

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Magnificent Seven and Margins Are Keys to Q4 Earnings Season

JANUARY 16TH, 2024 | LPL Research

One of the more interesting dynamics heading into the fourth quarter reporting period is how much expectations have come down during the past three months, despite the resilient U.S. economy. According to FactSet data, the consensus S&P 500 earnings per share estimate has been cut by 6.8% since September 30, the most since a similar cut in Q3 2022, and about double the average intra-quarter estimate cut over the past 10 years. The lowered consensus estimate implies just 1.3% year-over-year earnings growth for S&P 500 companies.

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China 2024 Faces Demanding Economic Challenges

JANUARY 8TH, 2024 | LPL Research

For investors in Chinese markets, concerns over regulatory changes and requirements are paramount. Foreign companies have been subject to unexplained audits, while local analysts have been warned not to issue negative reports on a wide range of subjects. Unemployment data is now considered embargoed.

The move towards prohibiting the use of foreign smart phones within government offices was viewed as an attempt to thwart Apple’s hold on the local market, while propping up China’s smartphone maker Huawei. A deepening paranoia over spying apparently also played a role in Beijing’s mandate.

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Key Equity Themes for 2024

DECEMBER 18, 2023 | LPL Research

If 2023 was the year of stubbornly high inflation and rate hikes, perhaps 2024 could be the year of significant progress toward the Fed’s 2% inflation target and rate cuts. 

This economic cycle has been unique and difficult to predict due to post-pandemic distortions. Importantly, though, even if we get a mild, short-lived recession in the first half of 2024 (far from assured), a second-half 2024 economic recovery should support stocks. We believe the bear market in 2022 and accompanying cost cuts from corporate America (particularly in technology areas) prepared markets for a slowdown, which should help mitigate equity market downside. And don’t forget, the inflation and rate surge that sparked recession fears is far less of a worry today.

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Discord in the OPEC+ Oil Patch

DECEMBER 11, 2023 | LPL Research

Consistent reports of oil oversupply have hindered the market’s attempt to drive prices higher.

Production in the U.S. has reached record levels with 13.24 million barrels a day being added to supplies, which is more than supply from Russia or Saudi Arabia. Forecasts call for 2024 production to increase by an additional 500,000 barrels of oil a day.

Gasoline prices in the U.S. have fallen comfortably and have helped elevate consumer sentiment.

Iran has also been pumping more oil, although there are questions regarding the exact amount. Most analysts agree, however, that Iran currently has 26 million barrels of oil on floating storage facilities, which are designated for global sales.

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Market Opportunities Amid An Economic Rotation

DECEMBER 4, 2023 | LPL Research

After a volatile 2022, the pace of new home sales has stabilized around the pre-pandemic rate as new home prices moderate and homebuilders get creative with in-house financing to entice buyers. New home prices are down over 17% from a year ago.

Not so with the existing home market. Investors have not seen much recovery in the existing home market. With supply of existing homes still below 50% of its pre-pandemic level, new homebuilders stand ready to take advantage of any increase in demand. Currently, activity is strongest in the Midwest and West, with supply chain issues and inclement weather negatively affecting builds in the Northeast.

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Anatomy of a Market Rally

NOVEMBER 20, 2023 | LPL Research

Markets became deeply oversold while the notion of a rally became deeply contrarian. With the 10-year Treasury yield working its way towards 5%, markets were obsessively following every inch higher in yields. On October 19, the 10-year yield briefly touched 5%.

Somehow “the market” very often seems to punish overwhelmingly strong and one-sided consensus views and the more pessimism sets in, the possibility of a positive catalyst can change the market’s direction.

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Is the Stock Market Correction Over?

NOVEMBER 13, 2023 | LPL Research

There is nothing like an eight-day winning streak to change the market narrative. Stocks have quickly gone from a correction to a comeback this month, and the S&P 500 is now challenging key resistance at 4,400. While a confirmed breakout above this level raises the odds of the correction being over, there are still a few boxes left to check on our technical list before making that call.

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Possible Halloween Scares for Markets and the Economy.

OCTOBER 30, 2023 | LPL Research

As of last month, the Fed’s policy actions had tightened financial conditions more than meets the eye, which may explain some of the choppiness we see in markets, on top of rising geopolitical tensions, interest rate fears, and some high-profile third quarter earnings disappointments.

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Can Something Good Come From A Crisis?

OCTOBER 23, 2023 | LPL Research

From an investment standpoint, the “recession call” may end up being irrelevant. A recession could still emerge as consumers buckle under debt burdens and use up their excess savings, but a Fed sensitive to risk management might provide the salve necessary for more risk appetite. Investing is a relative game, meaning the U.S. could experience the 3 Ds of an economic contraction—depth, diffusion, and duration—but at the same time, still outperform other markets and hence, still be an attractive option for investors looking for calculated risk.

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Earnings Hope to Keep This One-Year-Old Bull Market Going

OCTOBER 16, 2023 | LPL Research

Third quarter earnings season should be solid given the resilience of the U.S. economy. The likely end of the earnings recession should be well received by markets, but, as always, guidance from company management teams will drive the market’s reaction.

As market participants start thinking more about earnings in 2024, we would expect stocks to garner some support. The favorable seasonal tailwinds through year-end, stocks’ strong performance historically during the second year of bull markets, and our expectation that interest rates will stabilize or move lower point to upside for stocks in the coming months, though how the war in Israel plays out will be an important factor, particularly with regard to oil prices.

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Higher for Longer - Updating Our Treasury Forecast

OCTOBER 9, 2023 | LPL Research

While there has been noticeable weakness in the most interest rate-sensitive parts of the economy, most notably housing, the broader economy has been surprisingly resilient despite an overly aggressive Fed. The index includes economic data on things like the labor market, retail sales, and the personal/household sector, to name a few. And since May, the economic data, broadly, has surprised to the upside, pushing out prospects of an economic slowdown, which has pushed Treasury yields higher as well. 

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Prospects for a Fourth Quarter Rally 

OCTOBER 2, 2023 | LPL Research

From a fundamental perspective, rates have been driven higher by a U.S. economy that has continued to outperform expectations, pushing recession expectations out further, and by the unwinding of rate cut expectations by the Federal Reserve (Fed) to be more in line with the Fed’s “higher for longer” regime. These dynamics have led to a dis-inversion of the yield curve, with the 10-year yield rising faster than the 2-year (called a bear steepener).

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