Five Key Questions | Weekly Market Commentary | February 25, 2019

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KEY TAKEAWAYS

  • Stocks may keep going higher, but the easy gains likely have been made.
  • Stock valuations, when compared with bond yields, are actually historically cheap.
  • The overall technical backdrop supports a continuation of the bull market.

Click here to download a PDF of this report.
This week we reassess the stock market landscape following the latest rally. Specifically, we answer five of the most common questions we’ve received recently. We use multiple lenses to assess the stock market, including fundamentals, valuations, and technical analysis.

CAN STOCKS KEEP GOING HIGHER?

Since its low on December 24, 2018, the S&P 500 Index is up 18.8% as of February 22. Gains have been driven by progress in trade negotiations and a shift in the Federal Reserve’s (Fed) communication strategy; however, extreme oversold conditions and low valuations following the worst fourth quarter for stocks since the Great Depression provided an extra boost.
Recent gains eliminated oversold conditions and pushed valuations higher, raising the bar for further gains and making the next leg higher more difficult to achieve. We still see potential for some valuation expansion should the trade dispute be resolved and steady U.S. economic growth continue, but earnings may have to do the heavy lifting to push the S&P 500 to our year-end fair value target of 3000 by December 31, 2019.

IS EARNINGS GROWTH STRONG ENOUGH TO PROPEL STOCKS HIGHER?

We believe stock performance over the rest of the year can at least match the mid-single-digit earnings growth that we expect for the S&P 500 in 2019. A little bit of valuation expansion may help, but we think earnings will be enough to get stocks back to prior highs this year (2930 on the S&P 500) and potentially to our year-end S&P 500 fair value target of 3000.
Though a lot of attention has been paid to cuts in 2019 earnings estimates due to tariffs and slower global economic growth, the U.S. economic backdrop remains solid, manufacturing activity continues to expand (based on the latest Institute for Supply Management [ISM] survey), and the consumer spending outlook is well supported by a healthy labor market.
Tariffs are the primary risk to earnings. Other risks include possible margin pressures from higher wages or another potential leg down for European economies.

HAVE STOCKS GOT TEN TOO EXPENSIVE?

We don’t think so. With the S&P 500 at a forward price-to-earnings ratio of about 16, valuations are roughly in line with the average over the past few decades. Factor in still-low interest rates and inflation, which increase equities’ attractiveness versus other asset classes like fixed income, and we would argue stocks are still attractively valued and modest valuation expansion this year is likely.
An easy way to make this point is to compare the earnings generated by stocks with bond yields, which are essentially earnings generated by bonds. We do this by comparing the earnings yield for the S&P 500 Index (S&P 500 earnings per share divided by the index price level) with the yield on the 10-year Treasury.
This statistic, referred to as the equity risk premium (ERP), is currently over 3% after averaging about 0.5% over the past six decades. Historically, a higher ERP has pointed to better future stock market performance. Since 1960, when the gap between the earnings yield and 10-year Treasury yield has been above 3% (as it is now), the S&P 500 has gained 12.4% on average over the following 12 months [Figure 1].

DO WE NEED A RETEST?

We believe a retest of the December 24, 2018, low for the S&P 500, near 2350, is unlikely. As we wrote here last week, with more than 70% of S&P 500 components recently hitting 20-day highs, we believe pullbacks in the near term will be modest.
Market breadth, which measures how many stocks are participating in the movement of broader indexes, is another positive sign. The NYSE Common Stock Only Advance/Decline line recently broke out to new all-time highs. We’ve seen time and time again that new highs in market breadth has led to eventual new highs in price.
Lastly, more than 90% of the components in the S&P 500 recently were trading above their 50-day moving average. While it may seem like stocks are overbought based on this metric, as Figure 2 shows, being overbought by this measure is actually quite bullish.

IS SENTIMENT NOW OVERLY BULLISH?

We don’t think so. As discussed last week, the overall technical backdrop continues to look strong, but one other substantial positive is that investor sentiment is still not near levels of optimism that we would consider to be a major warning sign. We use several surveys to gauge sentiment, including the AAII bull-bear survey and the CNN Money Fear and Greed Index, as well as investor flows.
History has shown that the crowd can actually be right during trends, but it also tends to be wrong at extremes. This is why sentiment can be an important contrarian indicator. If everyone who might become bearish has already sold, only buyers are left. The reverse also applies. We see this contained optimism as healthy and, in fact, are surprised there isn’t more excitement after such a powerful rally.

CONCLUSION

The questions are mounting after the significant gains since the December 24 lows. The good news is that our expectation for steady earnings growth, solid technicals, and nice valuations amid a healthy economic backdrop support further gains for stocks throughout 2019. We reiterate our year-end fair value range of 3000 for the S&P 500 from our Outlook 2019 publication.
 
IMPORTANT DISCLOSURES
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. Any economic forecasts set forth in the presentation may not develop as predicted.
Investing involves risk including loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.
All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.
Because of its narrow focus, specialty sector investing, such as healthcare, financials, or energy, will be subject to greater volatility than investing more broadly across many sectors and companies.
All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
INDEX DESCRIPTIONS
The Standard & Poor’s 500 Index 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.
The Institute for Supply Management (ISM) Manufacturing Index is an economic indicator derived from monthly surveys of private sector companies, and is intended to show the economic health of the U.S. manufacturing sector. A PMI of more than 50 indicates expansion in the manufacturing sector, a reading below 50 indicates contraction, and a reading of 50 indicates no change.
This research material has been prepared by LPL Financial LLC.
To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.
Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by Any Government Agency | Not a Bank/Credit Union Deposit
Tracking #1-825770 (Exp. 02/20
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Economic Data FAQs | Weekly Economic Commentary | February 25, 2019

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KEY TAKEAWAYS

  • Recent economic data have been consistently missing consensus estimates.
  • We still see signs of sound economic fundamentals, even as some data point to weakness.
  • We expect growth to stabilize as near-term headwinds subside.

Click here to download a PDF of this report.
Investors are sifting through a deluge of backlogged data after a historic U.S. government shutdown. As data have caught up, many reports have missed consensus estimates, stoking fears that Wall Street may be overlooking a slowdown in the U.S. economy [Figure 1].

To help allay those fears, we’re addressing some questions we’ve received about the economic landscape recently, and provide our thoughts on what to look for in gauging economic health.

ARE WE NEARING A RECESSION?

We don’t expect a U.S. economic recession this year for several reasons, many of which we outlined in our Outlook 2019. The best gauge of output, though, is the U.S. consumer, as consumer spending accounts for about 70% of gross domestic product (GDP). While a healthy job market and solid wage gains are more conducive to consumer activity than at any other point in this economic cycle, a wave of negative headlines has hampered spending as of late. December’s retail sales unexpectedly fell 1.2% year over year, the worst drop since September 2009 and far below consensus estimates for 0.2% growth.
Some economists have questioned the report’s accuracy, but consumer confidence has dropped sharply over the past few months, so lower spending is somewhat warranted. Trends in retail sales have historically been tightly correlated with longer-term GDP growth, and year-over-year retail sales growth has slipped noticeably since July 2018 [Figure 2]. Since the latest retail sales report was released, consensus expectations for fourth quarter GDP have dropped to 1.5–2.5%. If GDP growth comes in at the lower end of that range, it would be the slowest quarter of growth in three years.

Slowing growth is expected this late in the cycle, and we expect GDP growth to moderate from the 3% quarterly growth we saw last year. We do expect a slower pace of growth in 2019, but we believe the odds of a recession remain low. With fiscal stimulus still in play, the government shutdown drama resolved, the Federal Reserve (Fed) on hold, and a strong rebound in equity markets, consumer spending is likely to bounce back, even if the full recovery may be delayed into the second quarter. We’ll be monitoring this week’s GDP report for more clues on the factors driving output growth.

WHAT ABOUT BUSINESSES?

U.S. companies are wrapping up another earnings season of double-digit profit growth. Business’s top- and bottom-line health appears solid, but the corporate outlook is dimming. Gauges of business optimism have declined, first-quarter profit expectations have dropped at an above-average rate, and companies have put expansion plans on hold as they wait for a resolution to global headwinds.
We’ve been especially discouraged by recent data showing tepid growth in capital expenditures, as stronger growth in business investment is crucial this late in the expansion. Higher capital investment boosts productivity, which effectively caps labor costs and helps support profit margins. The latest durable goods report showed growth in new
orders of nondefense capital goods (ex-aircraft), our best proxy for capital expenditures, unexpectedly fell 0.7% month over month. Part of the recent drop could be from waning overseas demand, which has weighed on global manufacturing, but declines in other corporate-focused reports show domestic corporate appetite has taken a hit too.
We expect business spending to pick up once corporations get more clarity on trade, helped by aspects of the Tax Cuts and Jobs Act designed to encourage business investment. However, we likely have seen peak earnings growth this cycle, and our lower GDP forecast for 2019 is partially due to muted capital expenditures in the second half of 2018.

TOO MUCH INFLATION, OR TOO LITTLE?

Inflation data have been under a microscope recently as investors have tried to reconcile evidence of a slowing global economy with cycle highs in pricing and wage growth. Financial markets’ inflation expectations have fluctuated this year after investors interpreted the Fed’s patient policy approach as a sign policymakers won’t
stifle growth by raising rates at the pace seen in 2017 and 2018. While the Fed has likely paused, we think any future rate hikes will be primarily in response to upside inflationary risks.
Data released this month showed the core Consumer Price Index (CPI) rose 2.2% year over year in January, while the core Producer Price Index (PPI) climbed 2.8%. To us, current core inflation, which strips out the impact from food and energy prices, is manageable enough that it won’t force the Fed’s hand into additional policy tightening in the near term. U.S. inflation has also been largely immune from declining inflationary pressures overseas, and we see no signs of a domestic deflationary threat. We expect slightly higher (but manageable) inflation in 2019 amid a tight U.S. labor market, a flexible Fed, and prospects for moderate output growth, especially if near-term headwinds subside. Core CPI has hovered around 2% for the bulk of this tightening cycle as quarterly GDP growth has averaged slightly above 2%, which aligns with the Fed’s 2% growth target for core personal consumption expenditures inflation.

CONCLUSION

Investors have been understandably skittish about the economic environment these days. While it has been difficult to decipher trends from the recent data deluge, the indicators we track point to sound economic fundamentals despite signs of slowing. Overall, we project 2019 GDP growth around 2.5%, a respectable pace for the tenth year of an expansion, and low odds of a recession this year.
 
IMPORTANT DISCLOSURES
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results.
The economic forecasts set forth in this material may not develop as predicted.
Investing involves risk including loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.
All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
This research material has been prepared by LPL Financial LLC.
To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity
Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by Any Government Agency | Not a Bank/Credit Union Deposit
Tracking #1-825867 (Exp. 02/20)
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Portfolio Compass | February 20, 2019

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COMPASS CHANGES

  • Upgraded precious metals view to neutral from negative/neutral.

INVESTMENT TAKEAWAYS

  • Expectations for solid but slower growth in the U.S. economy and corporate profits support our year-end 2019 fair value target for the S&P 500 of 3000.*
  • We maintain our slight preference for value due to attractive relative valuations after a sustained period of growth outperformance.
  • We expect a transition to large cap market leadership and away from small cap stocks in 2019 as the economic cycle ages and trade issues ease.
  • We favor emerging markets (EM) equities over developed international for their solid economic growth trajectory, favorable demographics, attractive valuations, and prospects for a U.S.-China trade agreement.
  • We favor emerging markets (EM) equities over developed international for their solid economic growth trajectory, favorable demographics, attractive valuations, and prospects for a U.S.-China trade agreement.
  • Slower but still solid economic growth and modest inflationary pressure may be headwinds for fixed income. The pause by the Federal Reserve (Fed) reduces near-term upward pressure on interest rates, but an additional hike is still possible in the second half of 2019.
  • We emphasize a blend of high-quality intermediate bonds, with a preference for investment-grade corporates (IGC) and mortgage-backed securities (MBS) over Treasuries. Yield per unit of duration remains attractive for MBS while valuations and economic growth are supportive of IGCs.
  • The S&P 500 Index is off to its best start to a year since 1991, back near its 200-day moving average, and history shows that returns tend to be strong following such a start.
  • In our view, the odds of a retest of the December 2018 lows have decreased given
    the broad participation in the rally. Lower-trending bond yields remain a potential
    warning sign.


Click here to download a PDF of this report.
 
IMPORTANT DISCLOSURES
All performance referenced is historical and is no guarantee of future results.
There is no assurance that the techniques and strategies discussed are suitable for all investors or will yield positive outcomes. The purchase of certain securities may be required to effect some of the strategies.
All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.
Stock and Pooled Investment Risks
The payment of dividends is not guaranteed. Companies may reduce or eliminate the payment of dividends at any given time.
Value investments can perform differently from the market as a whole. They can remain undervalued by the market for long periods of time.
Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal, and potential illiquidity of the investment in a falling market.
Investing in foreign and emerging markets securities involves special additional risks. These risks include, but are not limited to, currency risk, geopolitical risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks.
The prices of small and mid cap stocks are generally more volatile than large cap stocks.
Bond and Debt Equity Risks
Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate.
Alternative Risks
Event-driven strategies, such as merger arbitrage, consist of buying shares of the target company in a proposed merger and fully or partially hedging the exposure to the acquirer by shorting the stock of the acquiring company or other means. This strategy involves significant risk as events may not occur as planned and disruptions to a planned merger may result in significant loss to a hedged position.
Managed futures strategies use systematic quantitative programs to find and invest in positive and negative trends in the futures markets for financials and commodities.
Futures and forward trading is speculative, includes a high degree of risk that the anticipated market outcome may not occur, and may not be suitable for all investors.
INDEX DEFINITIONS
The S&P 500 Index 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.
The Bloomberg Barclays U.S. Municipal Bond Index covers the U.S. dollar-denominated long-term tax-exempt bond market. The index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds, and prerefunded bonds.
The Russell 1000 Growth Index measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values. Russell 1000 Value Index measures the performance of those Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values.
DEFINITIONS
A cyclical stock is an equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies that sell discretionary items that consumers can afford to buy more of in a booming economy and will cut back on during a recession.
Duration is a measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. It is expressed as a number of years. Rising interest rates mean falling bond prices, while declining interest rates mean rising bond prices. The bigger the duration number, the greater the interest rate risk or reward for bond prices.
Credit ratings are published rankings based on detailed financial analyses by a credit bureau specifically as it relates to the bond issue’s ability to meet debt obligations. The highest rating is AAA, and the lowest is D. Securities with credit ratings of BBB and above are considered investment grade.
Gross domestic product (GDP) is the monetary value of all the finished goods and services produced within a country’s borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory.
The simple moving average is an arithmetic moving average that is calculated by adding the closing price of the security for a number of time periods and then dividing this total by the number of time periods. Short-term averages respond quickly to changes in the price of the underlying, while long-term averages are slow to react.
The Beige Book is a commonly used name for the Federal Reserve’s (Fed) report called the Summary of Commentary on Current Economic Conditions by Federal Reserve District. It is published just before the Federal Open Market Committee (FOMC) meeting on interest rates and is used to inform the members on changes in the economy since the last meeting.
Technical analysis is a methodology for evaluating securities based on statistics generated by market activity, such as past prices, volume, and momentum, and is not intended to be used as the sole mechanism for trading decisions. Technical analysts do not attempt to measure a security’s intrinsic value, but instead use charts and other tools to identify patterns and trends. Technical analysis carries inherent risk, chief amongst which is that past performance is not indicative of future results. Technical analysis should be used in conjunction with Fundamental analysis within the decision-making process and shall include but not be limited to the following considerations: investment thesis, suitability, expected time horizon, and operational factors, such as trading costs are examples.
The PE ratio (price-to-earnings ratio) is a measure of the price paid for a share relative to the annual net income or profit earned by the firm per share. It is a financial ratio used for valuation: A higher PE ratio means that investors are paying more for each unit of net income, so the stock is more expensive compared to one with lower PE ratio.
Alpha measures the difference between a portfolio’s actual returns and its expected performance, given its level of risk as measured by Beta. A positive (negative) Alpha indicates the portfolio has performed better (worse) than its Beta would predict.
Beta measures a portfolio’s volatility relative to its benchmark. A Beta greater than 1 suggests the portfolio has historically been more volatile than its benchmark. A Beta less than 1 suggests the portfolio has historically been less volatile than its benchmark.
Idiosyncratic risk can be thought of as the factors that affect an asset such as a stock and its underlying company at the microeconomic level. Idiosyncratic risk has little or no correlation with market risk, and can therefore be substantially mitigated or eliminated from a portfolio by using adequate diversification.
This research material has been prepared by LPL Financial LLC.
To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.
Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by Any Government Agency | Not a Bank/Credit Union Deposit
Tracking #1-824341 (Exp. 02/20)
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Outlook 2019: Fundamental – How to Focus on What Really Matters in the Markets

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AFTER NEARLY 10 YEARS of witnessing the U.S economy and stock market recover—and thrive—investors are starting to wonder if we’ve seen all this expansion and bull market have to offer. At LPL Research, we believe there’s more room to run, and don’t expect an impending recession or bear market in 2019.
Given we are a decade in and likely nearing the end of the cycle, however, it is a good time to start thinking about what the next phase for the economy and markets may look like. The intention here is not to start worrying or assuming the worst, but to remind ourselves that slowdowns and declines—even recessions and bear markets—are a normal part of our market cycle. And even more importantly, if we’re prepared for any downturns, we can be better positioned to weather any challenges that may be ahead.
That’s where Outlook 2019: FUNDAMENTAL comes in—because we could all a handy guide whaen it comes to this market environment. We’re here to make sure you’re prepared for what may be around the corner, or further down the line, and help you through it all.

Click here to download a PDF of this report.]]>

Updates to Our Economic Forecasts | Weekly Economic Commentary | February 19, 2019

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KEY TAKEAWAYS

  • We’ve lowered our 2019 forecasts for Fed policy moves, GDP growth, and rates.
  • We expect the Fed to pause through the end of 2019 as it waits for clarity on global conditions.
  • GDP may grow at the lower end of our forecast as capital expenditures have slumped recently

Click here to download a PDF of this report.
2019 has been a busy year so far. The United States has weathered a 35-day government shutdown, global data have deteriorated further, trade headlines continue to dominate the news, and the Federal Reserve (Fed) has made a significant U-turn in monetary policy plans, all on top of the sharp market selloff in late 2018. In response to the collective impact of these events,we’ve adjusted our 2019 economic forecasts[Figure 1].

FED FORECAST

In January, policymakers removed language from the Fed’s policy statement that “some further gradual (rate) increases” would be consistent with economic conditions and added language that they would be “patient” when determining future rate adjustments. The Fed has been messaging all along that policy decisions would be data dependent, but markets were becoming increasingly concerned that the Fed was on autopilot despite a slowing global economy and tightening financial conditions. More recently, the Fed demonstrated its commitment to flexibility, and it will likely pause on further rate tightening as the world waits for greater clarity on global conditions.
We’ve long emphasized our faith in the Fed’s commitment to flexibility and said in our Outlook 2019 that policymakers likely would not be as aggressive in 2019 as investors have feared. Based on recent Fed commentary, we expect the Fed’s pause to continue through the end of 2019. The Fed may need to briefly pump the brakes with an additional rate hike, potentially in the second half of this year, if business investment rebounds, the labor market tightens further,and economic growth picks up. To be clear, we think the U.S. economy could digest another rate hike, and it would be prudent to increase rates if there were signs of excesses or overheating. However, the Fed must consider global stability in its monetary policy moves, as an accelerating U.S. dollar could disrupt trade further and curb growth in struggling economies internationally.
Recently, the Fed has also messaged flexibility in the pace of balance sheet runoff, which is likely to calm investors’ nerves. No official changes have been made yet, and we don’t expect any in the near term. Further balance sheet reduction still gives policymakers a more subtle tool to influence interest rates, helping to provide some tightening while hikes remain on hold. Despite continued balance sheet runoff, global liquidity remains more than adequate, and the impact on global markets should be modest.

GDP FORECAST

We see enough evidence to think 2019 gross domestic product (GDP) growth is likely to be closer to the lower end of our original 2019 forecast with risks balanced to the upside and downside. Heightened trade and political uncertainty have clearly weighed on corporate and consumer sentiment, and capital expenditures growth stalled in the second half of 2018 as U.S. corporations waited for greater clarity on trade risk before investing in their businesses. Growth in capital spending, measured by new orders of non defense capital goods (ex-aircraft) slowed through November, so we wouldn’t be surprised to see tepid business investment weigh on last quarter’s output. December’s historic slide in retail sales points to fourth quarter weakness in consumer spending as well. Control- roup retail sales, which are used to calculate GDP, decreased 1.7% in the month, the worst drop since September 2001. Fourth quarter GDP data are scheduled to be released February 28, with the consensus predicting from 1.5% to 2.5% growth.
As we mentioned in Outlook 2019, we still believe stronger growth in business spending may drive this leg of the economic expansion, as higher investment leads to greater worker productivity and profit growth. However, spending growth will likely be muted until the trade dispute with China is resolved.

INFLATION FORECAST

We believe U.S. inflation will remain manageable, even as domestic growth slows and the Fed pauses. We predict the core Consumer Price Index (CPI), which excludes food and energy components, will rise 2.25–2.5% year over year in 2019, consistent with our Outlook view. The pace of yearover-year core CPI growth has been about 25–50 basis points (0.25–0.50%) higher than growth in core personal consumption expenditures (PCE) this cycle. Therefore, if we trust the Fed’s ability to target roughly 2% core PCE growth, we would expect core CPI growth to be slightly above 2.25%.
Core CPI growth of 2.5% would be the fastest pace of price growth in the economic cycle, just above the 2.4% growth in July 2018. However, we think a slight increase in inflation would make sense given the firm U.S. labor market and the possibility that economic activity could stabilize after trade headwinds subside. If price growth does hold steady near 2.5%, we don’t expect inflation to significantly curb the domestic economy. Slowing global economic growth should cap U.S. price growth, and the Fed has room to adjust rates if inflationary threats emerge.
To us, wage growth is an important indicator of overall inflationary pressures, as wages constitute about 70% of business costs. Average hourly earnings for nonsupervisory workers have climbed as much as 3.5% year over year recently, but are still well below the 4% often seen late in the economic cycle. We don’t expect much upside in wage growth from these levels given the long-term structural forces driving the labor market right now, such as globalization and age demographics.

RATE FORECAST

Given our lower expectations for U.S. GDP and deteriorating global conditions this year, we expect the 10-year U.S. Treasury yield to trade in a range of 3–3.25% at the end of 2019. Our forecast implies about 30–50 basis points (0.30–0.50%) of upside from the 10-year yield’s current levels, due to accelerating inflation and still solid domestic growth prospects. U.S. government debt is attractively valued relative to other sovereign debt, so we expect global interest in Treasuries to counteract any further appreciation in longer-term yields.

CONCLUSION

We’re in a complicated environment right now, and uncertainty around global headwinds has roiled many economists’ predictions (including ours). Even though we’ve adjusted a few forecasts, our overall belief that the U.S. economy is on solid footing hasn’t wavered. We don’t expect a recession in 2019, and we have yet to see the red flags that in the past have signaled a large increase in recession risk.
 
IMPORTANT DISCLOSURES
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results.
Any economic forecasts set forth in the presentation may not develop as predicted.
Investing involves risk including loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.
All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
This research material has been prepared by LPL Financial LLC.
To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.
Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by Any Government Agency | Not a Bank/Credit Union Deposit
Tracking #1-822882 (Exp. 02/20)

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The Rally Continues | Weekly Market Commentary | February 19, 2019

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KEY TAKEAWAYS

  • The market rally continues, with stocks off to their best year’s start since 1991.
  • Near-term stocks are quite overbought and a pullback could be warranted.
  • Yet, from a sentiment perspective, we still aren’t seeing signs of the over-the-top optimism that is consistent with major peaks.

Click here to download a PDF of this report.
The rally continues, as the S&P 500 Index gained for the seventh week out of the past eight, while the Dow Jones Industrial Average, Russell 2000 Index, and Nasdaq all closed higher for the eighth consecutive week. Sparking the rally this week were Washington striking a deal to avoid another government shutdown and hopes that President Trump might push back the March 1 deadline on higher tariffs on Chinese goods. With the S&P 500 off to its best year’s start since 1991, how much further can things go? This week we’re going to take a look at market sentiment, which can play an important part in determining how long the bull will run.

ABOVE THE 200-DAY

As Figure 1 shows, the S&P 500 finally closed above its 200-day moving average for the first time since early December 2018. Since October, the index hasn’t stayed above this long-term trend line for more than a few days. Given the S&P 500 has now bounced more than 18% from the December 24 lows, some type of consolidation or maybe another pullback would be normal.

As we discussed in That Was The Easy Part, a retest of the December 24 lows likely won’t happen. Historically, you see retests at major market lows, but this could be one of those rare times that we don’t. Two main reasons are:

  • On January 18, 2019, more than 70% of the S&P 500 components made a new 4-week high, and the returns after such a rare blast of strength have been quite impressive 3, 6, and 12 months later.
  • We saw two 90% up days coming off the December lows, on December 26 and January 3. This means that 90% of all stocks on the New York Stock Exchange were higher and 90% of the volume was also higher on those days. When we
    see two strong days like that so close together coming off a low, continued future gains without a rest is likely, in our view.

CHECKING IN ON SENTIMENT

The overall technical backdrop continues to look strong, but one other substantial positive is that investor sentiment is still not near areas we would consider to be a major warning sign.
History has shown that the crowd can be right during trends, but it also tends to be wrong at extremes. This is why sentiment can be an important contrarian indicator. If everyone who might become bearish has already sold, only buyers are left. The reverse also applies.
On multiple levels, we see increasing optimism— but not at levels that have shown it paid to be contrarian. In fact, with a more than 18% bounce off the December lows, we are quite surprised there isn’t more excitement.

  • The Bank of America/Merrill Lynch Global Fund
    Manager Survey had the highest number of investors “overweight cash” since early 2009. Additionally, investors with an “overweight global equities allocation” sank to the lowest level since September 2016. This shows managers aren’t giddy over the good start to the year and suggests there could be potential cash on the sidelines waiting to come in.
  • The CNN Money Fear and Greed Index hit single digits back in December, but has bounced to only 64 recently (on a 0–100 scale), again suggesting overall optimism isn’t near previous warning signs.
  • The National Association of Active Investment Managers (NAAIM) Exposure Index was recently over 80 for the first time since October, but again this has peaked much higher in the past.
  • The number of bulls in the weekly American Association of Individual Investors (AAII) Investor Sentiment Survey has been beneath 40% for 14 consecutive weeks, the longest such streak since last spring, when the first 10% correction in nearly 18 months occurred. What is so interesting about it this time around is bulls aren’t springing into the picture even after week after week of gains.
  • Investors continue to pull money out of equity mutual funds and equity exchange-traded funds (ETF). In fact, according to weekly data from the Investment Company Institute (ICI), only seven weeks over the past year have seen inflows into U.S. domestic mutual funds and ETFs. Additionally, the week of the December 24 lows saw the largest weekly outflows of funds since February 2018. We would expect to see more inflows and optimism before an ultimate market peak could take place.

CONCLUSION

The rally continues, and although we see many signs potentially indicating new highs for equities later this year, some type of market consolidation or pullback could be due. We have an improving technical backdrop that should support any pullback as a buying opportunity, and overall sentiment is still a long way away from what we’d call over-the-top and troublesome from a contrarian point of view. We believe the combination of fiscal policy,
optimism over a potential U.S.-China trade deal, and our expectation for steady earnings growth is strong enough to support further gains for stocks throughout 2019. We reiterate our year-end fair value range of 3000 for the S&P 500 from our Outlook 2019 publication.
IMPORTANT DISCLOSURES
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. Any economic forecasts set forth in the presentation may not develop as predicted.
Investing involves risk including loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.
All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.
Because of its narrow focus, specialty sector investing, such as healthcare, financials, or energy, will be subject to greater volatility than investing more broadly across many sectors and companies.
All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
INDEX DESCRIPTIONS
The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of he broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
This research material has been prepared by LPL Financial LLC.
To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.
Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by Any Government Agency | Not a Bank/Credit Union Deposit
Tracking #1-823073 (Exp. 02/20)]]>

Feeling Confident? | Weekly Economic Commentary | February 11, 2019

<![CDATA[

KEY TAKEAWAYS

  • Consumer confidence has dropped sharply, primarily from what we see as temporary factors.
  • Economic fundamentals are still sound and could help stabilize sentiment.
  • We have yet to see the signs of excesses that have preceded past recessions.

Click here to download a PDF of this report.

Deteriorating confidence over the last several months has soured the economic landscape.

About four months ago, the Conference Board’s Consumer Confidence Index reached an 18-year high. Since then, the gauge has dropped about 18 points, its biggest three-month decline since 2011. Sentiment’s swift decline has caused some to wonder if a drop in confidence could be self-fulfilling, as lower confidence could weigh on consumer
spending, and consequently, on output. Historical data show that the U.S. economy has entered a recession a average of 19 months after a peak in consumer confidence, and a drop in sentiment has been a warning sign for past economic cycles [Figure 1].

While confidence shifts can be meaningful obstacles to economic activity, we think the severity of the current decline is due, in part, to temporary factors such as the government shutdown, and the fundamentals are still in place for sentiment to stabilize.

CHALLENGING HEADWINDS

Over the past several months, U.S. consumer sentiment has had to weather increasing trade risk, a 35-day government shutdown, unnerving headlines on geopolitical issues, a slowdown in global growth, and a near bear market in the S&P 500 Index. Many of these headwinds have understandably chilled confidence, and their collective impact can be daunting.
However, we think many of these headwinds will subside in the near term, if they haven’t already. Trade tensions have had a widespread effect on corporate sentiment and economic activity, but we expect meaningful progress toward a U.S.-China trade resolution soon. Government shutdowns, especially when prolonged, have historically dampened consumer sentiment. For example, consumer confidence fell an average of 9.3 points in the final month of the 1995 and 2013 shutdowns, which were both at least 17 days. However, confidence (and economic activity) typically has rebounded after shutdowns, and we expect the same outcome here.
A downturn in major asset prices can also lead to consumers having a decreased sense of financial well-being, which can restrain spending and further reduce asset prices. The S&P 500 posted one of its worst slides of the current bull market in November and December 2018, but we believe stocks have bottomed, and may even make new highs in 2019. The S&P 500 has rebounded 14% since the late December lows, so we could see sentiment turn solely from stocks rallying.

SOLID FUNDAMENTALS

We believe solid fundamentals are especially important during a mature business cycle, a point we’ve emphasized frequently in today’s volatile environment. The bulk of U.S. economic data we’ve seen lately remains sound. The labor market continues to show strength. Manufacturing gauges rebounded last month. Inflation has largely normalized, and it remains manageable. Most important, we still see reasonable potential for a resurgence in capital investment, which could drive higher productivity and help extend the cycle.
Corporate earnings have also signaled the possibility of a longer runway for economic growth. Profit growth for S&P 500 companies recently peaked at 23% in the third quarter of 2018, the quarter before consumer confidence’s latest high. Since 1980, the U.S. economy has entered a recession an average of 28 months after the last earnings peak in the economic cycle [Figure 2].

Fiscal policy remains supportive, and concerns about potentially restrictive monetary policy have settled down considerably. Following its most recent policy meeting in January, the Federal Reserve committed to patience when determining future interest rate adjustments and emphasized a commitment to flexibility until there is greater
clarity on global economic conditions. At the same time, fiscal stimulus from the 2017 tax law, deregulation, and increased government spending remain in place, and it can take several years for the impact on economic output to fully play out, so we expect we’ll continue to see benefits.

SIGNS OF EXCESSES?

Fiscal stimulus this late in the cycle does have some potential to contribute to a build-up in economic excesses, but we don’t see any alarming signs of late-cycle excesses or “red flags” in the economy. Growth in wages, which makes up about 70% of business costs, has been healthy but subdued enough to not significantly weigh on profit margins. Average hourly earnings for nonsupervisory workers has climbed as much as 3.5% year over year recently, but is still well below the 4% we’ve seen preceding recessions historically. Unit labor costs, or employers’compensation expenses per unit of output, grew 0.9% year over year through the third quarter of 2018, well below the 2% unit labor cost growth at historical consumer confidence peaks.
Valuations in financial markets are also under control and appropriate, given economic fundamentals. The S&P 500’s price-earnings ratio is in line with its average for the bull market, and businesses’ balance sheets remain healthy. While it’s important to be mindful of where we are in the economic cycle, later-cycle economies can
continue to exhibit stable growth for years, so the age of the expansion in itself isn’t a red flag to us.

CONCLUSION

Global uncertainty is at its highest point in several years, but while the current environment is uncomfortable, we believe the steep drop in confidence has been exaggerated by some short-term factors, and we don’t expect the recent decline in consumer confidence to have a meaningful impact on growth. Risks to economic fundamentals have increased, but the economy overall remains on solid footing, and, as discussed in our Outlook 2019, we expect GDP growth of 2.5–2.75% in 2019.
 
IMPORTANT DISCLOSURES
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results.
Any economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
Investing involves risk including loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments
.
All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
This research material has been prepared by LPL Financial LLC.
To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.

Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by Any Government Agency | Not a Bank/Credit Union Deposit
Tracking #1-821165 (Exp. 02/20)
]]>

Key Takeaways from Fourth Quarter Earnings | Weekly Market Commentary | February 11, 2019

<![CDATA[

KEY TAKEAWAYS

  • Earnings growth for the fourth quarter is tracking to a solid 17%, above prior estimates but below the pace of the previous three quarters.
  • The bar has been substantially lowered for the first quarter, setting up potential upside surprises, particularly if trade uncertainty is diminished.
  • We expect S&P 500 companies will be able to at least deliver mid-single-digit earnings growth in 2019, driven by solid economic growth, fiscal stimulus, and share buybacks.

Click here to download a PDF of this report.
Earnings growth slowed in the fourth quarter but was still solid.
With two-thirds of S&P 500 Index companies having reported results so far, corporate America has delivered solid earnings growth—in the mid-to-high teens—for the quarter. However, slowing global growth and trade tensions have challenged the outlook, setting up slower earnings gains in the coming year. This week we provide key takeaways from fourth quarter earnings season, and update our 2019 earnings outlook.

THE NUMBERS

Year-over-year earnings growth for the fourth quarter is tracking near 17%, one percentage point above the growth rate reflected in year-end estimates (source: Refinitiv, formerly Thomson Reuters). This is solid growth, but below the 25% pace of the prior three quarters [Figure 1]. Tax cuts boosted earnings growth by 7–8 percentage points. Revenues (which are not impacted by the tax cuts) are tracking to a healthy 6% increase, similar to prior expectations.

Companies in the communication services, energy, and industrials sectors produced the most upside to prior estimates. Energy and communication services, in that order, made the biggest contributions to earnings growth. Upside was limited by the financials and technology sectors, which came up short.
Forward-looking guidance has been tepid overall during reporting season, mostly because of the uncertainty surrounding the U.S.-China trade dispute and slower growth overseas. U.S.-focused companies have delivered stronger revenue and earnings growth than more global companies, according to analysis by FactSet, while consensus S&P 500 earnings estimates for the first quarter were cut by an above-average 4.6% in January, as shown in Figure 2. Excluding energy, though, the reduction has been typical.

KEY TAKEAWAYS

Our key takeaways from the quarterly results received so far are:
1. Upside is tougher to come by
At this late stage of the economic cycle, it is tougher for companies to produce big upside surprises. Slower growth overseas, particularly in Europe, makes it even more difficult, which means we should probably expect 2–3% upside, rather than the recent 3–6% range, to be the norm going forward.
2. The bar for 2019 has been lowered substantially
The more-than-4% cut to consensus first quarter earnings estimates—to near flat with the prior-year quarter—sets companies up to surprise on the upside when first quarter results start being reported in April.The more-than-4% cut to consensus first quarter earnings estimates—to near flat with the prior-year quarter—sets companies up to
surprise on the upside when first quarter results start being reported in April.
3. Trade uncertainty is a headwind.
Based on management commentary this quarter, most companies are feeling an impact from the China trade dispute, either through tariff costs, supply chain disruptions, dampened consumer and business confidence, or simply less demand for U.S. goods in China. Until this uncertainty is lifted and tariffs are reduced or eliminated, current estimates may be difficult to achieve.

THE OUTLOOK

Earnings growth will likely slow in 2019 as the one-year anniversary of the tax cuts passes. Still, we think that S&P 500 companies will be able to at least deliver mid-single-digit earnings growth in 2019 due to the following:

  • Solid domestic economic growth. Our forecast is for U.S. GDP growth of 2.5–2.75% in 2019, supported by increased consumer spending, business investment, and government spending. The booming January jobs report, including steadily rising wages, reaffirms the strength of the consumer. January readings of the Institute for Supply Management (ISM) surveys on manufacturing and services, both in the 56–57 range, signal near-term earnings gains.
  • Fiscal stimulus. The tax reform boost will be smaller in 2019 than in 2018, but tax cuts and increased
    government spending could still provide an incremental fiscal policy boost to economic growth this year. Policy uncertainty has clouded capital investment decisions, but capital investment incentives enacted in December 2017
    remain in place, and a trade deal is a potential catalyst for more business spending.
  • Share buybacks. Healthy corporate balance sheets, still-low borrowing costs, and repatriation of overseas profits at low tax rates (part of the December 2017 tax reform) all support another year of robust share buyback activity. We expect S&P 500 earnings per share to get at least a 2% boost in 2019 from buybacks, despite being somewhat politically unpopular.

There are risks to the downside, most notably from tariffs and trade. Other risks include further deterioration of the European economy, a jump in labor costs, or a surging U.S. dollar. A potential sharp drop in oil prices poses another risk, though the potential energy cost savings for consumers and businesses would help offset the drag on energy sector profits.

CONCLUSION

Corporate America has delivered solid earnings growth in the fourth quarter, though the pace of growth has slowed and is poised to slip further. Limited upside to prior estimates reflects the late-cycle economic environment, slower growth overseas, and trade tensions, but the lower bar for first quarter expectations should lead to more
upside surprises.
We continue to expect mid-single-digit earnings growth for S&P 500 companies in 2019, driven by solid economic growth, fiscal stimulus, modest inflation, and steady share buybacks. Although the peak earnings growth rate for this economic expansion is almost certainly behind us, profit growth peaks have historically been followed by several years of economic growth and stock market gains.
We believe the earnings outlook is strong enough to support solid gains for stocks over the balance of 2019, and we reiterate our year-end fair value range for the S&P 500 of 3000 from our 2019 Outlook publication.
 
IMPORTANT DISCLOSURES
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. Any economic forecasts set forth in the presentation may not develop as predicted.
Investing involves risk including loss of principal. No investment strategy or risk management technique can
guarantee return or eliminate risk in all market environments.
All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.
Because of its narrow focus, specialty sector investing, such as healthcare, financials, or energy, will be subject to greater volatility than investing more broadly across many sectors and companies.
All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
INDEX DESCRIPTIONS
The Standard & Poor’s 500 Index 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.
The Institute for Supply Management (ISM) Manufacturing Index is an economic indicator derived from monthly surveys of private sector companies, and is intended to show the economic health of the U.S. manufacturing sector. A PMI of more than 50 indicates expansion in the manufacturing sector, a reading below 50 indicates contraction, and a reading of 50 indicates no change.

This research material has been prepared by LPL Financial LLC.
To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.
Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by Any
Government Agency | Not a Bank/Credit Union Deposit
Tracking #1-821145 (Exp. 02/20)
]]>

Market Insight Monthly | January 2019

<![CDATA[

ECONOMY

SOLID ECONOMY, BUT RISING UNCERTAINTY IN JANUARY REPORTS
January’s reports painted a picture of a solid economy struggling with global uncertainty. The Conference Board’s Leading Economic Index (LEI), an aggregate of ten leading indicators, declined 0.1% in December, but grew 4.3% year over year for 2018. While the LEI declined for the month, positive yearover-year momentum signaled low odds of recession in the coming year.
Still, data showed pockets of the U.S. economy weakened through the end of 2018. The Institute for Supply Management’s (ISM) manufacturing Purchasing Managers Index (PMI), a gauge of U.S. manufacturing health, fell to its lowest level in two years in December. Although the level of activity was near average for the cycle, the magnitude of December’s decline from the prior month was striking: The drop was the ISM PMI’s biggest since October 2008. Markit’s PMI fell to a 13-month low in December, confirming the decline in manufacturing. We see the ongoing trade dispute with China as the primary obstacle to corporate health, as some businesses have opted to put future expansions on hold until there is more clarity on the tangible and intangible effects of tariffs on demand and profits.
Rising economic uncertainty also weighed on business and consumer confidence data. In December, the Conference Board’s Consumer Confidence Index fell the most since August 2011, while the National Federation of Independent Business’s (NFIB) measure of business confidence slid for a third straight month. While the decline in confidence business confidence.
Jobs data continues to be solid despite trade uncertainty. Nonfarm payrolls rose 312K in December, beating the median consensus estimate of 184K by a very healthy margin.The unemployment rate ticked up to 3.9%, but the labor force participation rate rose, indicating that more participants were enticed by solid labor market onditions to enter the workforce. Many of these new entrants are initially unemployed. Average hourly earnings grew 3.2% year over year in December, well below the 4% wage growth that has preceded economic recessions in the past [Figure 1].

Pricing gauges also showed that inflationary pressures remain manageable. The core Consumer Price Index, which excludes food and energy, increased 2.2% year over year, while the core Producer Price Index climbed 2.5% year over year. Core personal consumption expenditures, the Federal Reserve’s (Fed) preferred inflation gauge, rose 1.9% year over year, just below policymakers’ 2% target.
Many economic releases were delayed by the partial government shutdown, adding to the uncertainty. Releases on durable goods, housing, trade, inventories, and the monthly budget statement were pushed off due to agency closures. The biggest delay was the fourth-quarter gross domestic product (GDP) report, which the Bureau of Economic Analysis postponed indefinitely. With the government now open, we expect to see the delayed data released in the coming weeks.
Fed Pauses in Response to Crosswinds
Fed policymakers reconvened in January and decided to leave interest rates unchanged. More significantly, they removed language from the Fed’s policy statement that “some further gradual (rate) increases” would be consistent with economic conditions and added language that they would be “patient” when determining future rate adjustments. In the post-meeting press conference, Fed Chair Jerome Powell noted that the Fed based its decision on rosscurrents and conflicting signals,” including slowing growth in China and Europe, trade risk, elevated uncertainty, and deteriorating sentiment. However, Powell also emphasized several times that the U.S. economy is solid and inflation remains manageable.
Financial markets are now positioned for a pause in rate hikes through at least the end of this year [Figure 2]. We expect to see one or two more interest rate hikes this economic cycle, though not necessarily in 2019, if inflationary pressures build too quickly or other signs of excesses appear.

Click here to download a PDF of this report.
 
IMPORTANT DISCLOSURES
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security.
To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. The economic forecasts set forth in this material may not develop as predicted. All performance referenced is historical and is no guarantee of future results.
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy
For a list of descriptions of the indexes referenced in this publication, please visit our website at lplresearch.com/definitions.
This research material has been prepared by LPL Financial LLC.
To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.
Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by Any Government Agency | Not a Bank/Credit Union Deposit.
Tracking #1-820247 (Exp. 02/20)
]]>

Stocks Warm Up In January | Client Letter by John Lynch | February 7, 2019

<![CDATA[Most of the country might still be in the throes of the winter, but after extreme cold throughout many parts of the United States, thankfully the weather has warmed up. Stocks followed a similar path, warming up in January after a chilling December. Since the lows in December, the market is up more than 16% (as of Feb. 6, 2019). Some recent reports have been encouraging and point to a steadily expanding economy. Meanwhile, market participants have become more comfortable with the Federal Reserve’s (Fed) message. While these are positive developments, we do acknowledge that the likelihood for further volatility persists. We encourage investors to remain focused on the fundamentals that support our positive outlook for continued economic growth and stock market gains in 2019.
Recent economic data have pointed to a U.S. economy that remains on sound footing. The latest reports on U.S. manufacturing came in better than expected, reversing December’s disappointing data and signaling continued expansion in the manufacturing sector. In addition, more than 300,000 jobs were created in January, while inflation remains contained. These data points signal a growing U.S. economy.
The Fed and the market haven’t seen eye to eye on policy over the past year, but that may be changing. At its last policy meeting, the Fed announced it would be much more patient with future rate hikes, which could remove one of the big uncertainties for investors. The Fed reinforced its stance that the U.S. economy remains solid, and cited factors such as slowing growth in China and Europe, trade risk, elevated uncertainty, and deteriorating investor sentiment as influencing its recent shift. Because of these crosswinds, the central bank has chosen a wait-and-see approach, and will likely hold off on policy moves until there is greater clarity on global economic conditions. The stock market responded positively to the Fed’s message that interest rates would be lower than had been initially anticipated, with its first gain on a Fed announcement day since Jerome Powell took over as Fed chair.
With stocks up strongly since late December, the next move higher may be tougher to achieve. However, in addition to the solid economic backdrop, we see several factors working in stocks’ favor that we think may send stocks higher from here. Stocks are less expensive than bonds. Earnings growth has been solid. A potential U.S.-China trade agreement still appears likely. And finally, a broad and diverse mix of stocks has been rising, a symptom of a healthy market advance. Key risks working against stocks include slowing growth overseas and budding earnings headwinds — although a slowdown in earnings growth is very different from a contraction.
We maintain our forecasts presented in the LPL Research Outlook 2019: FUNDAMENTAL: How to Focus on What Really Matter in the Markets, including our expectations for continued economic growth and strong corporate profits, which support the potential for solid stock market gains.
In closing, although we should remain prepared to weather any further market volatility, these signs are encouraging — much like early signs of spring peeking through the snow. We encourage investors to stay focused on the fundamentals supporting the economy and corporate profits.
If you have any questions, or would like to read our Outlook 2019, please contact your trusted financial advisor
Click here to download a PDF of this report.
 
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results.
All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.
Economic forecasts set forth may not develop as predicted.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.
All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
This research material has been prepared by LPL Financial LLC.
To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity
Not FDIC/NCUA Insured | Not Bank/Credit Union Guaranteed | May Lose Value
Not Guaranteed by Any Government Agency | Not a Bank/Credit Union Deposit

Tracking #1-819896 (Exp. 02/20)
]]>