Posted by George Smith, CFA, CAIA, CIPM, Portfolio Strategist
Wednesday, August 3, 2022
LPL Financial held its FOCUS conference at the Colorado convention center in Denver, CO from July 24-27 for over 4 thousand financial advisors. Today we bring you the second part of the most frequently asked questions that LPL Research received at the conference. “FOCUS is such a great event because it allows LPL Research to connect with so many advisors and understand their most pressing questions about the state of the markets,” said LPL Financial Asset Allocation Strategist Barry Gilbert. Following on from yesterday’s blog where we looked at the FOCUS 2022 questions relating to the economy below we share some of the most frequently asked questions we received on the stock and bond markets:
- What would it take for the S&P 500 to break down below the 2022 lows?
The bottoming of stock markets is a process so while we have a positive view on equities a retest of the June S&P 500 low would not surprise us. Around the June S&P 500 lows we did not see the levels of market capitulation or fear to believe that all potential sellers have been flushed out, so it’s entirely possible for there to be another wave of selling after this bounce. We did however see more of the market signals that typically occur around, or after, market lows. We discussed this in more detail in our recent “Was That The Bear Market Low Part 2” blog. On a more fundamental level a lot of uncertainly remains in the markets and while none of these are our base case risks remain. The primary risk is the Federal Reserve (Fed) overtightening, whether due to a policy mistake or an appropriate response to inflation not cooling as expected and more importantly inflation expectations becoming untethered. Overtightening could push the economy into recession with significant job losses and damage to companies’ earnings. Military conflict spilling into Europe outside of Ukraine or a Chinese aggression towards Taiwan are also non-zero risks that would provide negative shocks to global financial markets. Although, as shown in the below chart, when we look back at historic events the S&P500 has recovered relatively quickly (average 42 days) from the mild drawdowns that have accompanies past geopolitical shocks (average -4.7%).
- Does LPL Research believe the rebound in growth stocks will continue?
The rebound in growth stocks, from somewhat oversold conditions, has been strong over recent trading sessions but we believe a slight tilt toward the value style is still prudent for now. Renewed confidence in economic and earnings growth and stable interest rates would set the stage for the growth rebound to continue, as these conditions would allow growth stocks superior earnings power to shine. At the present time however there is a lot of uncertainty and we believe growth stocks are still relatively expensive and could still be susceptible to valuations compression if inflation continues to put upward pressure on interest rates.
- Which stock sectors does LPL research currently favor?
LPL Research recommends a modest tilt toward defensive sectors and away from cyclicals as the second half begins with uncertainty still elevated. Our favored defensive sectors include healthcare and real estate, while the near-term outlook for the energy sector remains positive on both a fundamental and technical basis. The aforementioned conditions for a style shift toward growth (falling inflation, stabilizing economic growth and interest rates) may also drive a turnaround in some sectors with technology, the most important, so that is one to watch for the second half of the year.
- What is LPL Research’s view on bonds? Is the worst over?
Despite the historically poor start to the year, the value proposition for bonds has actually improved year-to-date, although the 10-year Treasury yield is now well of its 2022 highs. Even after the recent pullback the yield on most fixed income asset classes is still close to the highest levels we’ve seen in a decade and since starting yield levels are the best predictor of future returns this could still be an attractive opportunity for income-oriented investors. And while we certainly can’t guarantee that interest rates won’t return to 2022 highs, even at current yields, the risk/ reward for owning fixed income has improved dramatically, in our opinion.
IMPORTANT DISCLOSURES
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.
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 information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
All index and market data from FactSet and MarketWatch.
This Research material was prepared by LPL Financial, LLC.
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