We all are now close to two months into those ambitious New Year’s resolutions and hopefully successfully implementing those new healthy habits. For me, after our Phillies took us on an emotional rollercoaster, I made a personal goal to exhibit more emotional competence when supporting my teams. Well I had a reset this past Superbowl Sunday, so I am starting over, and we can leave it at that. When we look back on the past year plus, it’s easy to identify the challenges—but if we look closer, we can also uncover some opportunities.
Let’s not forget what we learned in 2022. The Federal Reserve showed us they can and will take swift action to defeat inflationary pressures, as demonstrated by the sharp interest rate increases. We also saw that severe inflation coupled with the Fed’s interest rate hikes had a larger-than-expected impact on the stock market. We also can’t forget the impact on bonds, with increased Treasury yields and ultimately, a terrible year for core bonds.
So what’s all the talk about opportunities and where are they for investors? In the bond market, it looks like we’ve uncovered some value, especially for income-oriented investors. This is a welcome change after nearly 20 years of difficulty in finding stable income-producing investments as market interest rates continued to fall. With higher yields now available in some durable areas of the bond market, we believe investors may be able to enhance their income-generating portfolios, while potentially taking on less risk than in years past.
Turning to stocks, the early weeks of 2023 looked promising. Inflation is still elevated as seen in the data, but we think it is too easy for the inflation hawks to thinking prices are surging again. The Fed is data dependent, specifically on the core drivers of inflation, energy, housing, and wages- and unless prices spike in these areas it is expected that the Fed will remain on course which we believe is to end rate hikes in the first half of the year. And how does this relate to the financial markets and equities? When the outlook ahead is more predictable for the fed and their campaign to battle inflation, this dampens volatility, thus allowing for multiple expansion in price to earnings valuation.
There are renewed hopes for a softer landing for the U.S. economy; our expectation is that the economy will either narrowly avoid a recession or enter a mild, short-lived recession in early-to-mid 2023. These factors have allowed investors to begin charting a more positive path forward, which we believe will continue despite some potential choppiness in the market. We continue to favor U.S. equities over international markets, despite pressure we expect on domestic profit margins. The international markets have also begun to show some signs of life as inflation looks to be peaking in the U.K. and Europe. Emerging markets have bounced back slightly, although uncertainty over China’s economy remains a wildcard.
LPL Research uses three investing disciplines to evaluate investments: 1) fundamentals, 2) valuations, and 3) technical analysis. I want to focus at this time on the valuation component of our investment disciplines. Solely looking at valuations reveals several asset classes and sectors to consider in 2023, including small and midcap stocks, value stocks, international stocks, and the energy and financials sectors. We recognize that valuations are typically not very good as short-term timing mechanisms, but over periods of a year or more, when combined with fundamentals, technical, and sentiment, we believe can be a useful piece of a robust process.
At first, moving down market cap to small and mid-size companies now might seem counterintuitive. During bear markets— especially those that are accompanied by recession—smaller companies with generally weaker balance sheets would be expected to lag their larger cap cousins as the cost of credit increases, credit availability diminishes, and merger and acquisition volumes dry up. But at current valuations, recession appears largely priced in for small caps, particularly for the more profitable companies that make up the S&P 600 Index.
There were few clear winners over the past year besides the energy sector, but value stocks certainly have put on a good show. Value stocks are, by definition, cheaper than their growth peers. That’s how they end up classified as value stocks. However, the size of the valuation discount matters and can make value stocks relatively more or less attractive against growth. As shown in Figure 3, despite the strong run for value last year, value stocks remain attractively valued compared with growth.
Within our research department, The Strategic and Tactical Asset Allocation Committee maintains a slight preference for value stocks overgrowth, including a positive view of energy and negative views of consumer discretionary and technology.
International equities in developed markets, particularly in Europe, have defied the skeptics, count us among them and performed well in recent months. Much of the outperformance by the International Index over the S&P 500 during the last quarter was driven by a weaker U.S. dollar. However, earnings are earnings and current year international earnings estimates have been moving nicely higher and may end up being more resilient than U.S. earnings in an economic slowdown. Still, we remain concerned about the energy crisis in Europe as the Russia-Ukraine conflict continues. Even so, the economic data has mostly surprised to the upside recently, suggesting the market’s worst fears may not be materializing. An economy going from bad to less bad can support attractive investment opportunities, and international has gotten our attention. We maintain a slightly negative view of international equities but reduced the underweight position in the updated tactical asset allocation in January.
Turning to our ongoing sector analysis; It’s easy to think that after a large rally in 2022 that the energy sector is expensive, but it actually isn’t. On a price-to-earnings ratio basis, the sector is trading at a more than 40% discount to the S&P 500 P/E, which would have been a 25-year low if it wasn’t for the pandemic when oil futures prices went negative in 2020, remember when that happened? On the more widely used price-to book value measure, the sector trades at a 37% discount to the S&P 500, like valuations seen during the oil downturn in early 2016.
Supportive valuations, along with tight global supplies, upside potential from China’s reopening, and increased financial discipline from producers are all supportive of the energy sector. The possibility of further U.S. dollar weakness in the near term could also help give the sector a boost by making oil cheaper to foreign buyers.
Financials also look attractively valued, both on a P/E and book value basis. The sector is trading at a more than 25% discount to the S&P 500 P/E, compared with the historical discount. On the more widely used price-to-book value for financials, the sector trades at a nearly 60% discount to the S&P 500. Fundamental challenges remain for the sector, particularly the inverted yield curve. Short term interest rates remain higher than long-term rates, signaling recession and creating a less profitable lending environment. Capital markets activity also continues to be constrained and loan demand has soften—especially for mortgages. We believe signs of technical improvement makes the financial sector one to watch. Inexpensive valuations and an improving technical picture can make a profitable combination, much like international equities lately.
Overall, we see reason for renewed optimism when it comes to the markets in 2023. Should the Fed pause rate hikes in the near term as expected, we may see a nice stock market rebound supported by falling inflation, reasonable valuations, and stable interest rates. Further equity market volatility remains a risk, but we believe we will see more positive outcomes from the stock and bond markets this year.
Please contact me if you have any questions. Stay Safe and Stay the Course!
Sincerely,
Scott A. Shaw, CFA®, CFP®
CIO | Chief Investment Officer
40 E Montgomery Ave, 4th Floor Ardmore, PA 19003
Office Phone: 215-982-2743
Fax Number: 215-827-5814
Email: sshaw@bashcapital.com
Securities and advisory services offered through LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC.”
Important Information
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.
References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
All data is provided as of January 31, 2023.
Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities.
All index data from FactSet.
The Standard & Poor’s 500 Index (S&P500) is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
This Research material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Past performance does not guarantee future results.
Asset allocation does not ensure a profit or protect against a loss.
For a list of descriptions of the indexes and economic terms referenced, please visit our website at lplresearch.com/definitions
Financial markets have experienced quite a bit of change this year in just two short months. We started the year hopeful that stocks would benefit from a better economic and monetary policy environment by the spring, but recent developments suggest that may be further out than we initially thought. We remain confident that a new bull market will come— but again, I remind you that it may require patience before we get there.
At the start of the year, we had hoped for a Spring timeframe for the start of a shift in Fed policy from a tightening campaign to a “pause and watch the data” stance. Following recent data pointing to stronger growth and higher inflation, rate hikes may extend into the summer and potentially delay the start of a new bull market. Against that backdrop, even though stocks pulled back in February, this year’s flat market for the S&P 500 Index feels like a victory to some small extent.
Recent evidence of consumers’ resilience has been encouraging. Over 500,000 jobs were created in January, according to the U.S. Bureau of Labor Statistics, nearly triple economists’ expectations and the February report is much anticipated by the market and will be released March 10. The unemployment rate is at its lowest level since the 1960s. Retail sales rose a better than expected 3% in January month over month, as consumers benefited from the healthy job market and excess savings, while motivated by the diminished COVID-19 threat, and with perhaps a small assist from mild winter weather. However, that consumer strength was accompanied by a series of hotter than expected inflation reports for January, fueling more concerns about higher interest rates and, in turn, weighing on the stock market.
Rewards for investors will come—they always do—but they will require more patience. In an environment where inflation has been frustratingly slow to come down, with a Fed still very much intent on combatting it, our patience is being tested. The risk that the Fed tightens too much and drives the U.S. economy into recession has risen. Higher interest rates also put stress on stock market valuations, so the longer we worry about the Fed, the less likely we are to see that bull market arrive in the short term. Corporate America is not in a position to help much, given earnings declines are likely during the next two or potentially three quarters.
Still, we remain steadfast in our belief that investors’ patience will be rewarded. Warren Buffett wrote in his latest annual letter to shareholders, “There has yet to see a time when it made sense to make a long-term bet against America.” Stocks have generated annualized returns of over 9% since the advent of the S&P 500’s predecessor index, the S&P 90, back in 1927—and that includes the Great Depression, World War II, the dotcom crash, the 2008–2009 financial crisis, 9/11, and numerous other economic and geopolitical shocks. Stocks may be volatile until the direction and ultimate destination of interest rates becomes clearer, but new highs will come—eventually.
In closing, we expect investors who put money to work in Q1 and Q2 to be rewarded with solid gains this year. The next bull market may not arrive in time for spring, but stocks may still ramp up this summer as inflation eases and the Fed finally hits pause on rate hikes.
Please contact me if you have any questions.
Sincerely,
Scott A. Shaw, CFA®, CFP®
CIO | Chief Investment Officer
40 E Montgomery Ave, 4th Floor Ardmore, PA 19003
Office Phone: 215-982-2743
Fax Number: 215-827-5814
Email: sshaw@bashcapital.com
Securities and advisory services offered through LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC.”
Important Information
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.
References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
All data is provided as of January 31, 2023.
Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities.
All index data from FactSet.
The Standard & Poor’s 500 Index (S&P500) is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
This Research material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Past performance does not guarantee future results.
Asset allocation does not ensure a profit or protect against a loss.
For a list of descriptions of the indexes and economic terms referenced, please visit our website at lplresearch.com/definitions
Dear Valued Investor,
The green shoots are hard to see right now as spring approaches, clouded by war in Ukraine. Democracy is under attack and innocent lives are tragically being lost. But while we keep one eye on overseas developments, the other remains squarely focused on the fundamentals of the U.S. economy and the stock market to help investors stay the course.
Geopolitical uncertainty can be tough for investors to manage. The natural impulse for many is to sell, which history clearly shows is usually poorly timed. As difficult as it may be to see the green shoots through the fog of war, these periods usually end up representing good buying opportunities for investors.
Stocks have historically proven to be quite resilient to major geopolitical events and this time shouldn’t be an exception, even if the wait is uncomfortable. Over the past 70 years, only three major geopolitical events took the S&P 500 Index more than nine weeks to recover its post-event losses: 1) Pearl Harbor (307 days), 2) the breakout of the Korean War (82 days), and 3) Iraq’s invasion of Kuwait (189 days, when the U.S. economy was already in recession in 1990). None of these events seems comparable to the Ukraine conflict. Looking at all major geopolitical events since World War II, the average post-event loss for the stock market has been just 5%, with an average recovery time of less than seven weeks. The U.S. economy’s track record of resilience and corporate America’s ability to adapt are unparalleled.
The war in Eastern Europe will, however, carry an economic cost for the United States, though it will be modest. Although U.S.-Russia trade is minimal, we use very little Russian oil, and our banks hold a negligible amount of Russian assets, higher global oil prices will be felt by U.S. consumers. But it won’t be enough to stop us from spending, especially as COVID-19 restrictions disappear. For Europe, the cost will be higher due to the continent’s greater reliance on Russian energy, so steering investments away from Europe and more toward the U.S. makes sense for now.
This is a tough time for everyone as compassionate human beings and as investors. Russia’s aggression is unsettling and the images of the humanitarian crisis in Ukraine are disheartening. Ukraine’s resistance is inspiring, and we pray for the country and its people.
While it’s impossible to know how this conflict will play out, the outlook for the U.S. economy and corporate profits remains bright. Stocks have become more attractively valued following the latest correction, interest rates remain low, the Federal Reserve will likely now take a go-slow approach with its rate hiking campaign, and markets have historically proven resilient to major geopolitical events. Be patient and stick to your plan.
Please contact me if you have any questions.
Scott A. Shaw, CFA®, CFP®
CIO | Chief Investment Officer
40 E Montgomery Ave, 4th Floor Ardmore, PA 19003
Office Phone: 215-982-2743
Fax Number: 215-827-5814
Email: sshaw@bashcapital.com
Securities and advisory services offered through LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC.” The information contained in this e-mail message is being transmitted to and is intended for the use of only the individual(s) to whom it is addressed. If the reader of this message is not the intended recipient, you are hereby advised that any dissemination, distribution or copying of this message is strictly prohibited. If you have received this message in error, please immediately delete.
Important Information
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.
References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
All data is provided as of February 24, 2022.
Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities.
All index data from FactSet.
This Research material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
I hope everyone had a wonderful Holiday, whether celebrating Passover or Easter, it’s all about spending time with family and friends, being outside in the nice weather, and of course for me, enjoying baseball. It’s my role to take the next 5 minutes and report to you, our clients and investors the current market and economic conditions we are navigating through and where our views stand in the short-term.
The financial markets’ resilient performance during March was striking, despite pockets of uncertainty surrounding the strength of the economy—and not to mention concerns over the durability of the banking system. The ability of the market to navigate nearly two weeks of headline-related risk tested the underlying resolve of the market’s capacity to look ahead.
Moreover, it underpinned our conviction that despite setbacks, including bouts of volatility, we will see the beginnings of a new bull market emerge, especially as the Federal Reserve (Fed) winds down its campaign to quell inflation. By all indications, the Fed is edging closer to its final interest rate hike, which should help bolster both consumer and business confidence.
According to The Conference Board, consumer confidence inched slightly higher during March, reflecting a solid labor market with an unemployment rate of 3.6%—the lowest it has been in over 50 years. In addition, the National Association of Home Builders Confidence index continued to climb higher in March, representing the third straight month of improvement. With mortgage rates tilting lower, sales of new homes began to pick up during the month, and many industry experts were commenting that the housing market may be on the cusp of “bottoming out.”
Certainly, the strains in the banking system jolted investor confidence and the market’s positive trajectory, but the quick response from government agencies—particularly the Fed’s lending facility, designed to help banks shore up their balance sheets quickly—helped restore calm in the markets. Fed Chairman Jerome Powell echoed the reassuring words of many officials in the U.S. and abroad when he said the U.S. banking system “is sound and resilient with strong capital and liquidity,” and that “deposits are safe.”
Helping to further strengthen support in the country’s financial infrastructure, and ease investor anxiety, was the headline that First Citizens Bank would purchase “all of the deposits and loans” of Silicon Valley Bank, the bank that collapsed quickly and ignited a stretch of fear and panic across financial markets. With the private sector showing the value it sees in the ailing bank, we saw renewed optimism and faith in the overall banking system and markets in general. First Citizens share price climbed 53% on the first trading day following the announcement, demonstrating the market’s confirmation that the deal made sense—and that the banking sector is safe.
Investors and traders alike were able to continue to find value in the markets as stability returned. Investors’ patience was tested yet again, however, when Credit Suisse, a major global bank with a strong presence in the U.S., came under severe pressure. That situation was resolved quickly when Credit Suisse was seemingly instantaneously rescued by merging with its long-time rival, UBS.
Overall, patience and perseverance was rewarded as markets continued to factor in an increasingly realistic scenario of lower interest rates and a weaker U.S. dollar. A weaker U.S. dollar helps exporters compete in the global marketplace and helps soften overall financial conditions globally. It’s also important to keep in mind that it’s very rare for markets to suffer negative returns two years in a row. The unwinding of the technology bubble and the financial crisis that began in 2008 witnessed successive years of negative performance, but they represent anomalies.
The sound foundation of our financial system corroborates our constructive optimism of the upward and long-run trend of markets, despite headlines designed to jar nerves and test our steadfast resolution. Stay true to your long-term financial plan, and do not make knee jerk reactions to long term plans based on short term trends.
As always, reach out to me with any questions. Stay safe and stay the course.
Sincerely,
Scott A. Shaw, CFA®, CFP®
CIO | Chief Investment Officer
40 E Montgomery Ave, 4th Floor Ardmore, PA 19003
Office Phone: 215-982-2743
Fax Number: 215-827-5814
Email: sshaw@bashcapital.com
Securities and advisory services offered through LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC.”
Important Information
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.
References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
All data is provided as of February 28, 2023.
Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities.
All index data from FactSet.
The Standard & Poor’s 500 Index (S&P500) is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
This Research material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Past performance does not guarantee future results.
Asset allocation does not ensure a profit or protect against a loss.
For a list of descriptions of the indexes and economic terms referenced, please visit our website at lplresearch.com/definitions
“Bull markets are born on pessimism, grown on skepticism, mature on optimism, and die on euphoria.” – Sir John Templeton
According to the guidance of revered investor Sir John Templeton, it appears to us that this market may have a bit more left in the tank. The market returns we witnessed in March seem to bear this out, as stocks surged during the month despite the backdrop of war in Ukraine, inflationary pressures, and surging interest rates. However, over the intermediate term, the path forward may only be partially defined by Federal Reserve policies, global diplomatic efforts, and rates. Why? For one reason—earnings from corporate America remain strong and the jobs market is back to approximate pre-pandemic levels. Indeed, there seems to be plenty of skepticism, but market fundamentals have yet to be materially shaken from their foundation.
Historically, geopolitical events have typically dented market sentiment for a period, but stocks have shown a tendency to rebound rather quickly when initial pessimism subsides. Past performance is no guarantee of future outcomes of course, but the latest market rebound seems to fit historical precedents. After hitting a March closing low of 4,170, the S&P 500 Index has regained considerable ground and is hovering near 4,500 at the time of this letter.
Meanwhile, the Federal Reserve’s first move to raise interest rates (in March) was well telegraphed by market participants, and most expect further tightening from the central bank. The primary policy target is rising U.S. inflation, an undesirable circumstance driven by unprecedented COVID-19-induced economic volatility and a massive policy response. That has been further complicated by current geopolitical tensions. The good news is we expect inflation to come down significantly as the year progresses.
And finally, the third pillar in the latest wall of worry is new concern over yield-curve inversion. Recently, the 10-year Treasury yield fell below the two-year Treasury yield, an occurrence that has preceded economic recessions in the past, but not always. A similar circumstance transpired in 1998 and 2005 and no recession immediately followed, while a recession following the yield curve inversion in 2019 would have been very unlikely if not for COVID-19. So, while yield curves may tell a cautionary tale and the media is quick to report on it, we do not believe a recession is imminent, given the overall strength in the economy.
To sum it all up, March has given us some signs that staying the course may be the most prudent investing decision to make. Although we warned that volatility was likely to return in 2022, and it has, we believe riskier assets, like stocks, still may present opportunities for investors. In our view, financial conditions remain favorable, earnings may continue to surprise to the upside, and economic data in many corners of the economy remain favorable. These elements help us label the recent market skepticism as potentially healthy and help us to forecast that the upswing in the business cycle may yet have a ways to go.
Please contact me if you have any questions.
Sincerely,
Scott A. Shaw, CFA®, CFP®
CIO | Chief Investment Officer
40 E Montgomery Ave, 4th Floor Ardmore, PA 19003
Office Phone: 215-982-2743
Fax Number: 215-827-5814
Email: sshaw@bashcapital.com
Securities and advisory services offered through LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC.” The information contained in this e-mail message is being transmitted to and is intended for the use of only the individual(s) to whom it is addressed. If the reader of this message is not the intended recipient, you are hereby advised that any dissemination, distribution or copying of this message is strictly prohibited. If you have received this message in error, please immediately delete.
Important Information
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.
References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
All data is provided as of February 24, 2022.
Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities.
All index data from FactSet.
This Research material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
“It has been a turbulent 2022 thus far. The S&P 500 Index had its worst April in more than 40 years, the Nasdaq entered a bear market on April 26 with its more than 20% decline, and bonds, which typically provide ballast for diversified portfolios during periods of stock market volatility, have not protected investors.
Markets face a number of threats. The COVID-19 pandemic has contributed to a disappointing start to the year for the U.S. economy as evidenced by the -1.4% growth in gross domestic product (GDP) reported on April 28. COVID-19 continues to disrupt global supply chains amid intermittent lockdowns in some of China’s largest cities. Russia’s devastating assault on Ukraine, arguably the biggest geopolitical threat in Europe since WWII, has added to the worst inflation problem in the U.S. since the 1970s. The bond market is now pricing in nine more Federal Reserve (Fed) rate hikes, after looking for only three when the year began. That’s a lot for investors to digest.
But during a market correction it’s easy to forget that this volatility is actually quite normal. So, let’s turn to the historical data for reference;
We concede a double-digit gain in 2022 is unlikely, but a U.S. consumer willing and able to spend, which makes recession unlikely in the near term, and steadily rising corporate profits still make a positive year for stocks in 2022 more likely than not in our view.
Inflation remains a big concern, but a number of factors could put downward pressure on prices beginning this summer. On the supply side, where most of the problem lies, supply chain normalization and more jobseekers coming off the sidelines could help ease pressure on goods, prices, and wages. An eventual cease-fire in Ukraine could remove some of the upward pressure on commodity prices. On the demand side, higher interest rates can help cool housing.
I feel like I say every day that the bond market is already doing some of the Fed’s work with the 10-year Treasury yield doubling in four months to 2.9%. These factors could easily cut headline consumer inflation in half by year-end from the current annual pace of 8.5%.
The outlook for corporate profits remains positive and may help prevent stocks from pulling back much further. Coming into this week with about 180 S&P 500 companies having reported, double-digit earnings growth appears within reach while analysts’ estimates for 2022 have continued to rise. These numbers are excellent considering slow economic growth, supply chain disruptions, and inflationary pressures.
The investing climate is quite challenging, but history suggests patience will be rewarded. Investors, there may be some downside and continued volatility in the short term, nevertheless consumer and business fundamentals remain supportive. Strong profits and lower stock prices mean more attractive valuations. Our belief is that current levels will end up being an attractive entry point over the intermediate to long term.
Stay safe and stay the course. Also, happy Mother’s Day to all the mother’s that make it happen day in and day out. I know how lucky my kids are and how grateful I am for my wife, and my mom.
Please contact me if you have any questions
Sincerely,
Scott A. Shaw, CFA®, CFP®
CIO | Chief Investment Officer
40 E Montgomery Ave, 4th Floor Ardmore, PA 19003
Office Phone: 215-982-2743
Fax Number: 215-827-5814
Email: sshaw@bashcapital.com
Securities and advisory services offered through LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC.” The information contained in this e-mail message is being transmitted to and is intended for the use of only the individual(s) to whom it is addressed. If the reader of this message is not the intended recipient, you are hereby advised that any dissemination, distribution or copying of this message is strictly prohibited. If you have received this message in error, please immediately delete.
Important Information
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.
References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
All data is provided as of February 24, 2022.
Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities.
All index data from FactSet.
This Research material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
A bear market is officially here thanks largely to stubbornly high inflation. For many of us, it has felt like a bear market for most of 2022, but the S&P 500 Index didn’t close more than 20% below its January 3rd record high until Monday June 13th. Tech stocks are down a lot more—the Nasdaq Composite is more than 32% below its November 2021 record high.
It’s hard to find a silver lining in inflation over 8%, but here’s the good news when you look at the economic data; Durable goods saw a rate of inflation that came down quite a bit, which is likely to continue. Also keep in mind that the Federal Reserve’s preferred inflation measure, the core personal consumption expenditure index also known as the PCE is just under 5%; with the next core PCE report due out June 30. The PCE inflation reading factors in product substitutions, making it a better reflection of how consumers are actually coping in this tough environment.
For those worried the Fed may be overly aggressive in its fight against inflation, consider the market, specifically the bond market has done a lot of the work for the Fed already.
Financial conditions are already tightening early in the Fed’s campaign. This is all actually good news, since these factors suggest the Fed may take its foot off the accelerator faster than anticipated on its rate hiking campaign in the fall. Keep in mind a good part of the inflation problem is on the supply side, not demand. The supply disruptions due to COVID-19, China lockdowns, and Russian oil sanctions, show there’s only so much the Fed can do by curbing demand. While some of these supply issues may take many months to resolve. With oil prices being the wildcard, we are still confident that a sizable piece of the inflation problem will get better in the months ahead and patient investors will be rewarded.
So, what should investors now come to expect being in a bear market? For starters, stocks are near their average decline in a bear market without a recession at about 24%, potentially introducing an attractive risk-reward trade-off for stock investors. The job market and consumer balance sheets simply look too strong for a recession to come in the very near term. The Monday, June 13th trading session got us closer to the type of capitulation and indiscriminate selling that has marked prior major lows. The Volatility Index known as the VIX which is the measure of implied stock market volatility rose above 35 on Monday June 13th, very close to the 40 level that has accompanied other major lows suggesting extreme fear and pessimism. These times are often looked at months later as what would have been very attractive entry levels at or close to market bottoms.
An encouraging statistic to help investors stay the course is after the S&P 500 enters a bear market, the median 1-year gain has been 24% with advances in seven of the past 10 instances back to 1957. Only 1973 and 2008 saw large deviations from historical averages. But wait, we are in a mid-term election year, where historically the corrections are steeper which we have experienced already; but the average 12-month gain off a midterm election year low is over 30% to the upside.
In closing, don’t forget that lower stock prices can lead to attractive valuations, improving prospects for future returns. It’s so tempting to sell, but history shows us time after time, that after big declines it can be the wrong move.
It’s a great time to review your portfolio allocation, and ensure you are positioned efficiently according to your constraints, objectives, and to maximize the upside potential on the next recovery.
Please contact me if you have any questions. Stay safe and stay the course.
Sincerely,
Scott A. Shaw, CFA®, CFP®
CIO | Chief Investment Officer
40 E Montgomery Ave, 4th Floor Ardmore, PA 19003
Office Phone: 215-982-2743
Fax Number: 215-827-5814
Email: sshaw@bashcapital.com
Securities and advisory services offered through LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC.” The information contained in this e-mail message is being transmitted to and is intended for the use of only the individual(s) to whom it is addressed. If the reader of this message is not the intended recipient, you are hereby advised that any dissemination, distribution or copying of this message is strictly prohibited. If you have received this message in error, please immediately delete.
Important Information
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.
References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
All data is provided as of February 24, 2022.
Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities.
All index data from FactSet.
This Research material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
The bull market that began in March of 2020 came dangerously close to an end. From March 23, 2020 through January 3rd, 2022, the S&P 500 Index gained 114%. From that January 3rd closing high through the recent low on May 19th, the S&P 500 fell nearly 20%, narrowly avoiding the level at which bull markets end and bear markets begin.
While we wait uncomfortably to see if the S&P 500 can hold its recent lows, it is somewhat reassuring to know that bear markets that are not accompanied by recessions tend to be milder:
Bottom line, if the U.S. economy is able to avoid recession over the next 12 to 18 months, then this selloff may be over sooner rather than later, and stocks could potentially make a run at previous highs.
That doesn’t take away from the increasingly challenging environment consumers and businesses are facing as sky-high inflation shows few signs of relenting. Recession risk is rising, increasing the chances of a larger decline—the average recessionary bear market decline is 34.8%. The Federal Reserve has taken away the punchbowl, giving markets a hangover. The cure is lower inflation, but it will take time.
Those who believe this environment is like the 1970s, 2000-2002, or 2008-2009, may want to consider more defensive positioning of portfolios. Those are the types of environments where some companies don’t survive. But if the economy stabilizes as the Fed fights to tame inflation which Fed Chair Powell aspires to achieve leading to the so-called “soft landing”, then the best path forward may be to ride this out. Market timing is hard. The sharpest rallies tend to come during bear markets and are very costly to miss for long-term investors.
Investors are anxious right now and understandably so. Legendary investor Warren Buffett tells us that situations like this are an opportunity to be greedy, not fearful. Sir John Templeton, another legendary investor, tells us bull markets are born on pessimism (and grow on skepticism, mature on optimism, and die on euphoria). Well, we have a healthy dose of pessimism right now to provide fuel for the next rally.
Buffett’s advice makes sense but is difficult to follow in practice. For those who can fight off the temptation to sell when stocks are down and have an investing time horizon spanning more than a year or two, history suggests you will be positioned to do well. Again, Bear market recoveries prior to record when not accompanied by recession, take on average seven months to recover. From a long-term investing perspective, that’s not long time to wait.
Please contact me if you have any questions.
Sincerely,
Scott A. Shaw, CFA®, CFP®
CIO | Chief Investment Officer
40 E Montgomery Ave, 4th Floor Ardmore, PA 19003
Office Phone: 215-982-2743
Fax Number: 215-827-5814
Email: sshaw@bashcapital.com
Securities and advisory services offered through LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC.” The information contained in this e-mail message is being transmitted to and is intended for the use of only the individual(s) to whom it is addressed. If the reader of this message is not the intended recipient, you are hereby advised that any dissemination, distribution or copying of this message is strictly prohibited. If you have received this message in error, please immediately delete.
Important Information
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.
References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
All data is provided as of February 24, 2022.
Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities.
All index data from FactSet.
This Research material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
Markets rarely give us clear skies, and there are always threats to watch for on the horizon. But the right preparation, context, and support can help us navigate what lies ahead in the financial world we operate in. So far, this year hasn’t seen a full-blown crisis like 2008-2009 or 2020, but the ride has been very bumpy. We may not be flying into a storm, but there’s been plenty of turbulence. How businesses, households, and central banks steer through the rough air will set the tone for markets over the second half of 2022.
The sources of turbulence are clear. A global economy that was already vulnerable to inflation from supply chain disruptions, tight labor markets, excess stimulus, and loose monetary policy then came under more pressure from Russian aggression in Ukraine which added sharply rising commodity prices and has pushed Europe on the brink of recession. The effects of these forces have included renewed pressure on interest rates, which hurts bond investors and the so called 60/40 investor. The most recent reading on the Consumer Price Index for June showed continued price pressure with index rising to 9.1% year over year inflation. This has substantially contributed to tightening financial conditions, and a much more aggressive stance by the Federal Reserve (Fed) along with other global central banks. Add in the typical market challenges of a midterm election year and the third year of a bull market, and it’s no surprise it’s been a very bumpy ride. Those are quite a few reasons to be pessimistic or scared as investors.
Understandably, rising prices, slowing economic growth, and a challenging first half for both stocks and bonds have many investors on edge, and outright fatigue from more than two years of COVID measures. But investors remember with your intellect and not feelings, the markets are ALWAYS forward looking, it’s important to remain focused on what lies ahead, not what has already occurred. There will most certainly be challenges ahead in all investing environments, but there are also some tailwinds that don’t get enough headlines such as a strong job market, resilient businesses, and the likelihood that inflation will soon start to slow. Markets historically can get a little lift from lower uncertainty around elections as midterms approach.
Turbulence cannot be completely avoided, but it also need not deter us from making progress toward our financial goals. The LPL Financial Research department has spent countless hours have been spent focused on the volatility felt in 2022, but more so, what are we doing to position portfolios for the recovery, when that happens. There are many cycles that are intertwined and have dramatic effects on the markets. Cycles like economic cycles, credit cycles, the business cycle, and market cycles. What I often observe is how easy the everyday noise can take away from the perspective of where we are in the cycle. Afterall, we do not know where we are going, but we sure as heck better know where we are. An understanding of where we are in cycles allows us to have clarity and remember that cycles don’t start and stop, they peak and trough, and then peak again. Without knowing where a trough or bottom of a cycle is doesn’t appear to be very relevant or a smart proposition to invest on. Rather, investing when fear and pessimism is highest is often associated with attractive long term entry points.
In LPL’s Midyear Outlook they focus on navigating the turbulence and is designed to help you assess conditions over the second half of the year, alert you to the challenges that may still lie ahead, and help you find the smoothest path for making continued progress toward your goals. When times are turbulent, the surest path toward progress remains a sound financial plan centered around your goals and long-term planning. Certainly, this advice must come from a dedicated professional who operates under strict ethical and moral principles.
Please contact me if you have any questions. Stay safe and stay the course.
Sincerely,
Scott A. Shaw, CFA®, CFP®
CIO | Chief Investment Officer
40 E Montgomery Ave, 4th Floor Ardmore, PA 19003
Office Phone: 215-982-2743
Fax Number: 215-827-5814
Email: sshaw@bashcapital.com
Securities and advisory services offered through LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC.” The information contained in this e-mail message is being transmitted to and is intended for the use of only the individual(s) to whom it is addressed. If the reader of this message is not the intended recipient, you are hereby advised that any dissemination, distribution or copying of this message is strictly prohibited. If you have received this message in error, please immediately delete.
Important Information
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.
References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
All data is provided as of February 24, 2022.
Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities.
All index data from FactSet.
This Research material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
The past two weeks have been epic for market-watchers and those that live and breathe financial news. It started a couple weeks back with a Federal Reserve (Fed) rate hike of 75bps, then a much-anticipated gross domestic product (GDP) report, followed by the busiest week of earnings season which got most of the headlines. And this was all before the past couple days which were riddled with inflationary data which added to the evidence that inflation has peaked. There was even a surprise out of Washington D.C., with a Schumer-Manchin agreement on a climate-healthcare-tax bill. What a start to August it has been.
Stocks expressed approval of this news, securing three straight solidly positive weeks and a breath of fresh air for investors. The S&P 500 Index enjoyed its best month since November 2020 and its best July in over 80 years. Last week’s gains were encouraging, and this week’s gains turned investors heads. Let’s look at each piece of news individually.
First, the Fed hinted at slowing the pace of interest rate hikes later this year then we receive the economic data everyone has been waiting for, reliable evidence in CPI and PPI that peak inflation has been seen. Now, whether markets may have gotten a little ahead of themselves remains to be seen, but in the past six weeks, nearly 75bps has come out of the market’s expectation for the peak fed funds rate, which is the short-term rate controlled by the Fed to affect monetary policy. The inflation battle is far from over, but the market’s reaction has been encouraging, and the Fed may be poised to surprise the market with a pause by year-end.
Next, the first read on second quarter GDP revealed the U.S. economy contracted for the second straight quarter. The rule of thumb is two quarters of negative GDP defines a recession, but the official definition by the National Bureau of Economic Research is broader than that. With a strong, even if slowing job market and resilient consumer spending, we believe not enough sectors of the economy are contracting to qualify as an official recession. If a recession comes—probably a 50-50 proposition for the first half of 2023—it will likely be mild. A mild recession was probably already at least partially if not fully priced in at the June stock market lows, suggesting June 16 may mark the S&P 500’s ultimate low.
Capping off the busy week, the flurry of earnings reports demonstrated that corporate America has managed stiff headwinds effectively. Given the slowing economy, intense cost pressures, and a strong U.S. dollar clipping foreign-sourced profits, a 6% year-over-year increase in S&P 500 earnings per share during the second quarter is quite impressive. Estimates for the second half of 2022 and 2023 have come down as expected, but with expectations having gotten so low, stocks generally rallied on results even as estimate were cut.
Looking ahead, we are in August which has historically been a weaker month for stocks. We must also consider that midterm election year lows typically come around this time on the calendar for the S&P 500. These lows have historically been followed by an average gain of over 30% over the subsequent 12 months. Moreover, some of the timeliest leading indicators of inflation, such as commodity prices and various consumer and business surveys, indicate cooling to continue, even if it may be a slow process. Market-based interest rates—those not controlled by the Fed—have also come down quite a bit, which is supportive of stock valuations.
At the same time, geopolitical tensions are rising as House Speaker Nancy Pelosi visits Taiwan and the war in Ukraine continues. We watch these developments closely and look for trends or leading indicators that the landscape has changed, and I report to you our investors to provide what we believe to be the most prudent advice. We believe the recipe of low valuations, lower interest rates, projections for inflation reducing, and the possibility that the Fed signals a pause over the upcoming months tip the scales toward the bulls. The ride probably won’t be smooth, but we believe long-term investors who sticks to their financial plan, and continue to invest with discipline, won’t have to wait too long to be rewarded for their patience.
Please contact me if you have any questions. Stay safe and stay the course.
Sincerely,
Scott A. Shaw, CFA®, CFP®
CIO | Chief Investment Officer
40 E Montgomery Ave, 4th Floor Ardmore, PA 19003
Office Phone: 215-982-2743
Fax Number: 215-827-5814
Email: sshaw@bashcapital.com
Securities and advisory services offered through LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC.” The information contained in this e-mail message is being transmitted to and is intended for the use of only the individual(s) to whom it is addressed. If the reader of this message is not the intended recipient, you are hereby advised that any dissemination, distribution or copying of this message is strictly prohibited. If you have received this message in error, please immediately delete.
Important Information
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.
References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
All data is provided as of February 24, 2022.
Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities.
All index data from FactSet.
This Research material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
In the last several weeks, we have continued to face elevated uncertainty in financial markets due to high inflation and rising interest rates. We believe it is an important time to take stock with the final quarter of 2022 just days ahead.
It has been a difficult year, not only for investors but also for households and businesses as we navigate higher prices along with higher cost of borrowing to finance short term needs or operations for businesses. Economically speaking, there remains challenges ahead as the Federal Reserve (Fed) continues to raise rates in their attempt to control inflation. We believe the Fed is doing the right thing for the long-term health of the economy, while also increasing the near-term economic risks. As the efforts of the Fed continues and we see how sticky inflation can be on the economy, I am reminded that inflation is the one guest at the dinner party that never leaves.
Given the risks, we are receiving many questions about stagflation and concerns that we may again be facing the investment environment of the 1970s. This is not your 1970s- style stagflation. While growth has stalled and inflation has been high, the unemployment rate has remained very low. The average unemployment rate during the stagflationary years in the 1970s and early 1980s was 6.7%, compared with just 3.7% in August of this year. Unemployment will move higher, but it’s likely to remain low by comparison, giving the economy is more resilient than in the 1970s.
At the same time, inflation is decelerating. For example, Gas prices and agricultural commodity prices, have declined throughout this summer. Moreover, rents in some areas of the country are dropping, durable goods prices are declining, and many import prices are falling. When our central bankers are sufficiently convinced, the Fed can slow the pace of tightening as inflation moves closer to their long-run target. Some of the recent market volatility has come from mixed inflation data and signals, so as these data points become more aligned, we expect volatility will fall and investor sentiment will improve.
The level of bearishness right now is very high, but remember that historically extreme negative sentiment has often been followed by strong market performance. The American Association of Individual Investors (AAII) has been doing a weekly survey since the 1987. Last week’s survey had a level of bearishness seen only four other times before. Subsequently, the S&P 500 returns a year later averaged over 30%. We don’t know whether that will happen again, but just like in 2020, when a lot of negative sentiment is being priced into markets, it may set the bar low for stocks to outperform expectations.
Investors should avoid the impulse to time the market, and should spend time in the market focused on their allocations, rebalancing, and repositioning for current investing landscape. Bank of America did a study on S&P500 returns over the decades. Specifically in the decade starting in 2010, the price return on the index was 190%. But if you missed only the best 10 days of the decade, your return was slashed to 95%. From 2000-2010, the price return on the S&P was a negative 24%, but if you missed the best 10 days, your return was actually a negative 62%. And since the start of the current decade, it’s been no different and even more lopsided due to the increased volatility experienced from Covid-19 and the bear market of 2022.
We also have some positive seasonal patterns ahead with November through April being historically strong months for equities along with positive historical stock performance after mid-term elections and the third year of the four-year presidential cycle has historically been the strongest for the equity markets.
Never the less, the recent declines are concerning and we can’t be certain when the volatility will end. We do know that conditions continue to indicate that better times are ahead. Market volatility and negative sentiment can make it harder to make investing decisions, but we believe the surest path forward remains sound financial advice centered around a comprehensive financial plan.
When it’s most painful to do so, it’s most critical to stay safe, and stay the course.
Please contact me if you have any questions.
Scott A. Shaw, CFA®, CFP®
CIO | Chief Investment Officer
40 E Montgomery Ave, 4th Floor Ardmore, PA 19003
Office Phone: 215-982-2743
Fax Number: 215-827-5814
Email: sshaw@bashcapital.com
Securities and advisory services offered through LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC.” The information contained in this e-mail message is being transmitted to and is intended for the use of only the individual(s) to whom it is addressed. If the reader of this message is not the intended recipient, you are hereby advised that any dissemination, distribution or copying of this message is strictly prohibited. If you have received this message in error, please immediately delete.
Important Information
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.
References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
All data is provided as of February 24, 2022.
Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities.
All index data from FactSet.
This Research material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
October is now behind us and it has delivered on its long-term trend as a historically favorable month for stocks, offering some respite for investors as major equity indices rose for the month. The downside pressure on equities had gotten a bit overdone after investor pessimism during September reached lows not witnessed in quite a few years. At the end of the third quarter after seeing year-to-date performance across all markets, it was admittedly difficult to be optimistic. The most recent quarter saw both stocks and bond prices fall in tandem again. The negative returns for both markets were the third consecutive quarterly declines for stocks and bonds. 187 quarters since 1976, never has there been a period that has seen negative quarterly returns for both stocks and bonds three quarters in a row. Said another way, this is the longest period since 1976 that bonds have not played the traditional role in portfolios of offsetting losses in the equity markets.
From a contrarian perspective, extreme pessimism can often be followed by a market bounce. Such a reaction can serve as a reminder not to react too quickly to near-term market developments. Gains in October helped deliver that message again, though they have only slightly offset this year’s losses during what has been a very tough environment for all areas of capital markets.
While it may be easy to consider the October market reaction as only temporary, there are some potentially sustainable developments that may continue to provide a slight tailwind. First, investors may have begun to look beyond current inflation pressures and the Federal Reserve (Fed) monetary policy tightening cycle toward potentially better conditions in 2023. The market is always forward-looking, and asset prices tend to reflect what may happen months or quarters ahead. If investors continue to look ahead to better inflation readings and an eventual end to the Fed’s rate hikes, asset prices may begin to reflect some budding optimism more regularly.
The Fed may have been slow to attack inflation, but its policies are working. Jobs and housing markets have been cooling, which are two inflation variables the Fed is seeking to influence. Some recent softening in economic data, coupled with signals from the bond market, could be indicating that Fed policymakers’ concerted inflation fight may be closer to the end than the beginning. We will be paying close attention to potential subtle directional shifts in Fed policy expectations, which may be instrumental in shaping future market direction.
We are very aware that drawing elements of optimism from a stubbornly poor equity and bond market trend is no easy task. However, times like September when pessimism is at an extreme and emotions are running high, is often when investors need to steadfastly adhere to a clear-eyed view of market history and a good plan.
As we look ahead, the months of November and December have historically been constructive for asset prices. This year’s calendar is complicated by political implications of the midterm elections, but markets historically have responded positively to the opportunity for course correction that mid-term elections provide. We should also have slowing corporate earnings growth and greater economic uncertainty to contend with, some formidable seas to navigate. Still, as we survey what are better equity valuations, long-awaited income opportunities in the bond market, and a likely less-antagonistic Fed in 2023, there may be emerging reasons to believe that the next year may be more constructive than the last.
And personally, thank you to our Fightin Phillies, who provided Philadelphia fans a wild ride, especially for this guy, whose teammates call Pickle. Let this be the start of a bullish period for baseball.
Please contact me if you have any questions. Stay safe, and stay the course.
Scott A. Shaw, CFA®, CFP®
CIO | Chief Investment Officer
40 E Montgomery Ave, 4th Floor Ardmore, PA 19003
Office Phone: 215-982-2743
Fax Number: 215-827-5814
Email: sshaw@bashcapital.com
Securities and advisory services offered through LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC.” The information contained in this e-mail message is being transmitted to and is intended for the use of only the individual(s) to whom it is addressed. If the reader of this message is not the intended recipient, you are hereby advised that any dissemination, distribution or copying of this message is strictly prohibited. If you have received this message in error, please immediately delete.
Important Information
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.
References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
All data is provided as of February 24, 2022.
Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities.
All index data from FactSet.
The Standard & Poor’s 500 Index (S&P500) is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
This Research material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio.
Diversification does not protect against market risk.
Past performance does not guarantee future results.
Asset allocation does not ensure a profit or protect against a loss.
For a list of descriptions of the indexes and economic terms referenced, please visit our website at lplresearch.com/definitions.
Through all the challenges, newfound opportunities, and every high and low we’ve experienced during the last couple of years, it’s no surprise why we might be striving for more balance. Whether it’s about the markets and global economy or what’s happening in our local communities, the news we’re hearing on a daily basis has the potential to disrupt the balance of our lives. But with resilience, perspective, and the support of close connections, we can navigate through it all and regain our sense of equilibrium. Even after another dizzying year, as 2022 proved to be.
After two years of disruption due to the COVID-19 pandemic, we were searching for some kind of return to normalcy, while at the same time, still experiencing the aftereffects of the pandemic. Some of those aftereffects included the imbalances created by the fiscal, monetary, and public health policy put in place to address the pandemic—and the process of addressing those imbalances has been disorienting at times. If 2022 was about recognizing imbalances that had built in the economy and starting to address them, we believe 2023 will be about setting ourselves up for what comes next as the economy and markets find their way back to steadier ground—even if the adjustment period continues.
One note on the recent mid-term elections is that perhaps the most important outcome of the election is simply that we have it behind us. The third year of the presidential cycle has historically been the strongest and a weak 2022 may help set up that pattern again. We would add a note of caution though, that increased fiscal stimulus in anticipation of the presidential election has often supported returns in the third year and we are unlikely to see that added tailwind next year.
The Fed spent 2022 aggressively fighting inflation by raising interest rates and has repeatedly warned investors about the potential for pain. That pain is mostly likely associated with an expected increase in unemployment as the job market cools from a slowing economy. The Job Openings and Labor Turnover report was hardly on center stage until Fed Chair Jerome Powell used a press conference to highlight the number of job openings in the economy. The pandemic caused three important metrics to become off balance: the ratio of openings to unemployed, the number of those not in the labor force, and the percent of firms having difficulty finding qualified workers. Investors should watch these metrics throughout 2023 as the economy leads to a more balanced labor market.
In 2023, we expect the Fed to find that point where it can stop raising rates, as inflation starts to come under control. The timing of the last rate hike of this cycle is uncertain and will not be clear for a while, but our view is that the Fed will pause during the first quarter of 2023 amid an improving inflation outlook and loosening job market. Should that occur, stocks would likely move higher, consistent with history. Stocks have tended to produce solid gains after hiking cycles end, including a 10% average gain one year later.
The Fed’s efforts to control inflation throughout 2022 pulled interest rates off extremely low levels that were historically unprecedented. While that has been painful for bond investors, for the first time in a decade, savers can now get an attractive yield, and 2023 will be more focused on how to potentially benefit from this significant shift. Stock market expectations may also see some realignment heading into 2023. The projections for certain market segments became too high in 2022 following a decade of low rates and a burst of extraordinary technology adoption.
One reason we are currently seeing a healthy debate on the likelihood of a recession is that for most of 2022, not all of the metrics were flashing warning signs. However, recent data may give us more clarity. The Conference Board’s Leading Economic Index (LEI) has declined for seven of the last nine months, showing that the economy could enter a period of significant and broad-based contraction. The decline is predictable as many sectors, such as housing, started slowing months ago. Since the inception of the index, a decline of this magnitude over a six-month period has always foreshadowed a recession in subsequent quarters. As such, we think recession risks appear more probable by the beginning of next year. If the economy does fall into a recession, the cause will likely be from the consumer sector retrenching after years of inflationary pressures, high housing costs, and slow real wage growth.
Housing plays a significant role in consumer spending and investors should monitor the housing market as a bellwether for the health of the consumer. Consumers spend roughly 34% of their total spending on housing, so a decline in housing-related costs should give consumers more for discretionary spending.
Our base case for S&P 500 earnings per share in 2023 is $220, similar to where 2022 is tracking and about $12, or 5%, below the consensus estimate as of November 15, 2022. Revenue will continue to get a boost from inflation, as many blue-chip companies during third quarter earnings season have demonstrated an ability to pass along higher prices due to their pricing power. But margins will likely compress further over the next several quarters before support from lower costs potentially arrives. Our research department and specifically our Strategic and Tactical Asset Allocation Committee (STAAC) sees fair value for the S&P 500 at 4,400–4,500 at year-end 2023, based on a price-to-earnings multiple of 18–19 times $240 per share in S&P 500 earnings in 2024. That target is derived from probability-weighted scenarios and based on various paths for the economy, inflation, interest rates, and earnings.
Finding Balance is our guide to how the readjustments in the economy and markets may impact you in the coming year. The disruptions may not be fully resolved and there may be more challenges to come, but progress toward finding balance is well underway. And when those disruptions hit the market, it can be hard to find your footing and stay the course. Those are the times when sound financial advice is more valuable than ever, as it helps us find our center, remember our plan, and stay focused on our goals.
Please contact me if you have any questions. Stay safe, and stay the course.
Scott A. Shaw, CFA®, CFP®
CIO | Chief Investment Officer
40 E Montgomery Ave, 4th Floor Ardmore, PA 19003
Office Phone: 215-982-2743
Fax Number: 215-827-5814
Email: sshaw@bashcapital.com
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