LPL Research Lowers Their GDP Forecast for 2021

Last Edited by: LPL Research

Last Updated: September 28, 2021

Market Signals Podcast

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Ryan (00:00):

 

Hi, everybody. Welcome to the latest edition of the LPL Market Signals podcast, Ryan and Jeff here. So Jeff first things first, we had our fantasy football league, the LPL Research fantasy football league. You thrashed me. We're still friends though, right?

 

Jeff (00:18):

 

We're still friends. As long as you don't bring up the crushing Kansas City loss yesterday.

 

Ryan (00:25):

 

No promises. We'll start with this. Yeah, it was literally on a YouTube channel. I've got the scene from “Stepbrothers” where they got in a fight, beat each other up, and then they're sitting on the couch. They become best friends. You know, they're watching Shark Week and then did we just come best friends? So I got that. And the score as of last night, I've got 87.43, you've got 121.57. You potentially can get up to 150though. I'm done. So if you go, you go off tonight, you could have like double me that's the only laugh worthy. But I do realize  before the game, apparently I'm in 10th place and you're in 11th. That's a hundred person league. Right? How many people were in our league? I forget. What is it? 12.

 

Jeff (01:04):

 

Unfortunately not many more than 11.

 

Ryan (01:04):

 

 Yeah. So I guess hopefully people come to us for the market expertise, this proof for the market expertise. Although like you said,  every running back I've got is on the PUP or the IR. We could go all day on that. Nonetheless. Congratulations on a solid, solid victory. Hopefully everyone else is having fun. I've got multiple teams, I've got some good ones and some bad ones. It's kind of, that's why we diversify, right? That's why a little stocks, a little bonds, a little gold, little cash, little this little that, cause you never know what's going to work and what doesn't work. And in my LPL Research league, I'll just say does not work. Anyway. So guys, we've got a lot of stuff to discuss this week, we’re going to  get serious here. We’re going to talk about the GDP, right? LPL Research, just downgraded our view on GDP in 2021.

 

Ryan (01:47):

 

Not by a lot, just by a little bit. We're going to dig in there. Also we're going to talk about, was that it, we had scary pullback last week. I mean, it's all relative, only about 4.2% pullback then stocks balance, right? Is that all we're going to see? Also going to dive into the Fed what the Fed said, but honestly, it's kind of the reaction yields that have our attention. 10-Year yield to just soaring higher. I'm going to talk, dig into that, what it means, how you can invest in a potentially higher trending yield world and then finish things up with the scary month of October, 1929, 1987, 2008. There's probably been some other ones in there, but those are the big ones. October's known for some spectacular crashes. Can we avoid that this time around? So Jeff, first one, I guess we're going to start with as a 5% pullback or no 5% pullback, I should say. The average year.

 

Ryan (02:35):

 

And remember there's no such thing as average. I've used this joke before, but maybe it's been a while on the podcast. There's a statistician put his head in a bucket of ice and his feet in the oven. They said, hey, how do you feel? He goes well, on average, I feel pretty good. So again, no such thing as average, but the average year sees about three, 5% corrections. Jeff, we haven't had one for like a year. It was last October. We potentially avoided it again. My question to you, was that it, are we just going to keep soaring to new highs again after a 4.2% correction?

 

Jeff (03:06):

 

Oh, it's hard to say. The 4% pullback felt, you know, we felt it, let's say right. Because we haven't seen anything like that in a while. So could we get another one? Sure. Could it get a little bigger? Sure. We got a lot of risks out there. We know the Fed is going to taper, unless we get a dramatic change in the economic environment. That'll start in December. We have a lot of, you know, potential landmines in D.C. that we've got to get through or around. And so that'll be you know, a possible source of some volatility then, you know, we have the China situation, which, you know, we don't think is a huge global risk, but you know, could it drive a 5% pullback for the end of the year? Yeah, probably could.

 

Ryan (03:54):

 

Yeah. I think it's as simple as we've gone a long time without a 5% correction, we could be due. Don't forget late September, first part of October, historically, is a little bit of a troublesome area. After 104% rally maybe we could have a pullback. Now, you know, one of the things we're hearing a little bit more about is like you said, the Washington drama and two weeks ago, you and Barry did an excellent job on the podcast. I thought discussing all the different political things that are swirling out there. So we don't need to get too into all the political things that are happening, but you know, I'm hearing more and more about a potential and maybe this is because media likes to drum this up, a potential government shutdown, if both sides can't agree, that's still our, not our base case, but it's possible.

 

Ryan (04:33):

 

My Bengals are in first place and it's October, right? Anything is possible. I think let's just get clear. Let's get that clear. But you know, historically Jeff, when you look at government shutdowns, stocks just do just fine. The last government shut down, we had, it was late 2018, early 2019 for over a month. That's a big gain, like 10%. I just looked back at some numbers I ran, you know, years ago when all this was going on. The last six times now the government has shut down, back to the mid-nineties. Stocks were higher every single time. Now, not every time up a lot, but it's almost as simple as well, it gets the headlines if we get a shutdown. But follow the fundamentals, for all it really matters. I think it sounds like a broken record when it comes to policy and in Washington. Yeah, watch it. It's important, but the fundamentals are strong, that's what matters. And we're going to talk about fundamentals quite soon with GDP. Do you have anything else you want to kind of add on the idea of pullbacks or anything I just  laid out there?

 

Jeff (05:28):

 

Yeah, well we're too early on the debt ceiling, but you know, just like the government shut down, the debt ceiling probably will not end up mattering to investors either. So just ignore the noise. It's a political loser to play with fire. We'll raise the debt ceiling and we will avoid a government shutdown. Or if we have a government shutdown, it'll be, it’ll be quick and probably pretty painless.

 

Ryan (05:49):

 

Yeah. Almost kick the can, right. I mean, we've done that for a long time when it comes to raising the debt and continuing to spend money and maybe that's just going to be the way it continues to go. You know,  I read a fascinating stat over the weekend. I knew it was something like this. But okay. The S&P is pulled back like 4.2%, right. And small caps will pull back more. Some other areas pull back more, we know materials that have bigger pullbacks,  energy had a big pullback, although it’s coming back. Go to the S&P 500 Jeff, more than 430 stocks in the S&P 500, which by the way, S&P 500 has like 504 or 505 stocks in it. It's kind of like who's buried in Grant's tomb. It's actually tad more than 500, still more than 430 stocks in the S&P 500 this year have seen at least a 10% correction.

 

Ryan (06:36):

 

So, you know, again, it's, it's as simple as some of the big companies that kind of skew the weightings a little bit, but to just say the market's gone straight up. If you've got a diversified portfolio, you've felt some pain along the way. I mean, Monday last Monday, wasn't pretty, there've been some big pullbacks along the way. So it's you know, it's just a unique way to look at it, but we have had, you know, you could argue a market correction in an awfully lot of stocks along the way as we head forward. Bt again, I think to put a bow on it, we're, we've been pretty spoiled. We wouldn't be surprised if we had a quick five, 6% correction. Here you go, Jeff, here's one for you. Let's say we have a five or 6% correction. Could it turn quickly to a 10 to 12% correction if we get something like that later this year? How, how deep do you think the cut could be?

 

Jeff (07:22):

 

Yeah, in this environment you know, even though on average, we do get a 10% correction every year. I think that's unlikely, right? You know, there's so much stimulus still, even though the Fed is starting to take away the punchbowl. There's so much liquidity out there so much excess consumer savings, interest rates are still low, even if they move a little bit higher. This is a really strong economic environment too, even though we'll get to this in a minute, not growing quite as strongly as maybe some had thought a few months ago, it's still very, very strong economic growth. So this is still you know, pretty solid bull market here. And you know, 10%, probably a little bit unlikely here.

 

Ryan (08:06):

 

Yeah. I think that's something we've been saying all year. We said, you know, you can have quick pullbacks, maybe a five to 8%, but all the stimulus and kind of positives we're seeing, I mean, we're going to get there, but just the positive of, hey, all of a sudden, don't look now cyclical value in small caps. They haven't just taken the baton back. They've ripped the baton back. And now they're really starting to lead. What did  Mark Twain tells us, history doesn't repeat, but it often rhymes. Fourth quarter last year, late last year we saw higher trending yield with cyclicals and small cap leading. And that's something that we, we think history could repeat again, but we'll, we'll get to that soon enough. So, Jeff, next thing we want to talk about is the economic update. We did just lower our view on the GDP, just by a hair, just 50 basis points and the idea of a Z shaped recovery. So I, when I hear Z, I think of World War Z with Brad Pitt, by the way, did you see that movie by chance Jeff? The zombie movie a few years ago with Brad Pitt.

 

Jeff (08:59):

 

I did not. I'm not a big zombie movie guy, sorry to disappoint you there.

 

Ryan (09:04):

 

To be honest, I'm not either, I don't like zombies. I don't like superhero movies. I can't stand. You like superhero movies. Like all those Marvels that come out every time I turn around, you like those by chance.

 

Jeff (09:15):

 

Not really, used to be more into that.

 

Ryan (09:18):

 

Yeah. I just, you know, I just like mindless action, you know, like The Expendables, I love those movies and Rambo anyway, whatever, go on all day on that stuff. That's the stuff I like to turn my brain off for a little bit. Now that we're starting travel again, it's kind of fun, download a movie on your phone and watch it on an airplane. And now I'm getting caught up on movies. Anyway. So I got a fun thing of Brad Pitt with World War Z, because we're going to talk very soon about why this recovery could be a Z shaped recovery. We've got all these crazy shapes out there. So Jeff, again, our overall view we laid out many times was 6.25% to 6.75% GDP in 2021. We said, hey, I remember you and  I said this to you a few months ago, when we did our major outlook.

 

Ryan (09:55):

 

We said, you know, we might be a little off here. It could be a little higher than that when all is said and done, but do not forget four or five months ago, many of our peers or competitors were saying seven, eight. I think some of them even said 10% GDP. We didn't listen to the sirens. We didn't drink the Kool-Aid. We said, eh, probably won’t be that strong. Now everyone's kind of lowering their target closer to where we were. And we just gently lowered our GDP forecast this year to between 5.75 and 6.25. So let's just call it right about 6%. Jeff, tell me why 6% is not the end of the world GDP.

 

Jeff (10:25):

 

Oh, it's still a really strong growth number. In fact you know, essentially 5% was as strong as we grew in any quarter during the last economic expansion. And I, you know, you haven't really seen growth rates like this for a year since the eighties. So, I mean, you know, if something around 6%, that is a really strong economic growth rate. So sure it's coming down a little bit. It's really all COVID right. COVID sitting in two ways. You know, you have a little bit less demand, either people choosing to lower their demand or companies just not making that demand available. And then you have supply, right, all the supply chain bottlenecks and labor shortages, material shortages all of these things that have really affected our daily lives. We've talked about it quite a bit on this podcast you know, over the last 15 months, probably. So you know, all of that combined maybe is a half a point off of GDP, but we could still grow 5% in the second half, which is still a really good growth rate.

 

Ryan (11:30):

 

Oh, absolutely. I mentioned a week ago on the podcast, I woke up last Monday cell phone, totally dead. Right. So I had to go to Verizon, like literally half the cell phones at Verizon, you can't get them or you got to order them. They're just not there. I don't recall having that problem in the past. And then you hear last week, Nike said, hey, we can't sell shoes. It's not that we can't make them. It's because they're all sitting on a record 62 boats over at the L.A. port and the Long Beach port. And then, oh, by the way, once we finally get them off the ships, we don't have enough truckers to get them where they got to go. I mean, this is like the real world stuff that we've been talking about. I know every one of you listening or watching on YouTube have experienced, and it’s the idea of, you know, sticky inflation versus just, you know, temporary inflation.

 

Ryan (12:15):

 

And we can kind of get into some of that stuff in a little bit, but it's just real world that is impacting the economy right here and now. But Jeff, I guess the question we have is, let's say some output is taking away. You know, let's say maybe you don't go to Disney in October now, cause you're worried about COVID and some of the things going on, but maybe you just push it back. I mean, do you think that's going to be the case, any output we lose this year, we just kind of make up next year. And it's just kind of, I don't know. a push back, I guess, is what I'm trying to say there.

 

Jeff (12:39):

 

Oh, absolutely. That's why we still think it makes sense to lean toward value stocks, which are really synonymous with recovery stocks. Right. There's going to be another push, we're not fully opened yet. I mean, the labor market is still, frankly, dysfunctional. Right. And COVID is really the reason why.

 

Ryan (12:59):

 

It sounds like a New York, a football team, the word dysfunctional. How about that, both Jets and Giants both winless. I know we got a lot of friends listening from New York, but hey, as long time suffering Bengals fan, I just like to see anyone else suffering. It makes me feel better. I'll admit it. So anyway, yeah, that's dysfunctional.

 

Jeff (13:13):

 

Just like just like investing. It's all about expectations and I suspect expectations over there were low, particularly for the for the Jets. So you know, we need more labor supply, right? We need to get more people back to work to fill these jobs. You know, you highlighted the trucker jobs but there's jobs, you know, all over our neighborhoods that companies of all types are having trouble filling. So we need a more normal labor supply. And then of course you know, there's, there's a lot more that can happen to help the demand once COVID is more under control. So you know, we might not get a booming job market this month, but it's probably coming pretty soon what we're going to see some big job numbers. You also got, you know, kids back in school certainly helps in the, we've talked a lot about this, the expiration of the unemployment benefits that should help provide more incentive for folks to get back to work as well.

 

Ryan (14:10):

 

And you mentioned the expiration of the unemployment benefits. You know, clearly we know Washington's fairly divided, the country is  fairly divided, much as it's ever been. All 50 governors agreed to end those benefits. So that's clearly one place we seem to agree that it was time to end those benefits and it likely could hopefully help the job market come back, like you said. But Jeff, the final thing we want to talk about. So we lowered our GDP forecast just to tad. Still 6% GDP growth is, is spectacular, honestly. You know, a little bit lower than what everyone was expecting three, four months ago, but you know, it is what it is. The idea of a Z shaped recovery. This time a year ago, we were talking about W shaped recoveries, square root shaped recoveries, the recoveries. Now we're talking about a Z shaped recovery. Walk the listeners through what exactly is a Z shaped recovery and why could we be seeing it for the first time since the seventies right now?

 

Jeff (15:04):

 

Yeah, it's kind of like the Z is on its side, which maybe you could say is an N or an upside down N.

 

Ryan (15:12):

 

Now it’s an N shape recovery guys. We just changed on this podcast. Yeah,

 

Jeff (15:15):

 

I think about half of the alphabet has been used thus far to characterize the shape of this economic coverage. Really all it is that, you know, after the V-shaped recovery, the economy grows above its potential, which is what it's doing now. We measure potential by just looking at essentially workforce growth and productivity growth. Right? Very simple. It's really hard to drive a lot of productivity gains right now, after you've already spent, you know, 15 months loading up on tech equipment, right. And, you know, essentially uprooting businesses to get them to you know, fit in the COVID environment, work from home, stay at home and all of that. So that, you know, maybe you can get a percent and a half productivity growth. Maybe you get a half a percent workforce growth. 2% is really the potential of this economy given the demographic situation. But we're growing, you know, five, basically. So you know about potential, but we're probably going to go right back down below it over time, or at least to it over time, maybe that takes a year or two, but you know, we're probably heading back towards that, you know, two, maybe two and a half percent growth rate that we got used to during the last expansion.

 

Ryan (16:30):

 

Okay. Interesting. Yeah, that's true. The K shape recovery was the other one that made sense. Remember K goes two ways, right? Some people in this economy, as we just said, technology, and some other areas did just fine. In fact, probably you could argue, did better due to the terrible circumstances of the pandemic. Obviously, the other part of a K that goes down, that was a lot of other parts of the economy services and manufacturing that struggle. But now you know, there's definitely big recovery coming in a Z shaped recovery. And you know, so the key concept, again, let's say we grow 6% this year. Next year, we probably grow above trend if trends about two to 9%. And we'll, we'll give you our forecast in a couple months here, but you know, we might see three, 4% growth next year and then eventually get back to trend, which makes a lot of sense.

 

Ryan (17:10):

 

Jeff, going forward, Fed talk, Jerome Powell didn't rock the boat, in my opinion. We spent some time last week talking about the Fed meeting. You could argue, I think, and make a good argument that it came off a little hawkish actually saying, listen, tapering is probably going to happen unless something bad happens with the economy, going to announce it fairly soon, probably November, probably going to start tapering in December. Market took that as hawkish yet stocks had a good bounce on a Wednesday and the first 1% gain on the S&P 500 in about two months on Thursday, after you had time to think about it, remember so many times you get the reaction, the opposite reaction, if you will, to a Fed meeting and you have time to think about it. You know, we'll talk about yields in a second, because the big story to me is the action and the 10 year yield, but just going back to the Fed and the tapering, maybe this year. Anything that I missed or anything that struck you, we should dig in on Jeff before we dig in on yields going higher.

 

Jeff (18:02):

 

Well maybe, maybe the most important takeaway for folks is that, you know, the Fed is tapering because the economy is, is looking pretty good, right. If we weren't seeing the recovery that the Fed wants to see at this stage, then they wouldn't be removing accommodations. So I think that's probably the most important point for investors to keep in mind. And then also note that this dot plot, it's kind of in the weeds, but even though some Fed officials think maybe we should get a rate hike in late 20, 22, it's almost certain to be early 2023 or later, given the need for some spacing between the end of tapering. In other words, the elimination of these asset purchases from the Fed and the start of interest rates.

 

Ryan (18:52):

 

Yeah, 2023, we had a huge stock market gain bonds didn't do well. Yields been higher, had a government shutdown had debt ceiling discussions sounds a little bit like 2020 you know, last I checked there, but Jeff, again, I think the big takeaway from the action last week, in my opinion, was the move higher in the 10 year yield, honestly yields across the board, but we always kind of focus on the 10-year yield. 10-year yield was having trouble getting above 138, 139ish for about two months. Soared. through the time you are recording this, it's up to 150. And it was at like 130 not that long ago, that's a pretty big move in yields. The market is clearly, I think, saying, okay, you know, hey, better, better economy could be coming. And it could have been what the Fed said.

 

Ryan (19:33):

 

And again, I think it's people we understand what rates have been this low. Some really unique things have happened. A lot of money sloshing around. Maybe it's just, let's, let's say the economy coming back and let's start the tapering process. Let's maybe start to raise rates somewhere down the future. Let's just get more into normalcy and the stock market and the bond market are saying, we kind of liked that. And again, some of the pockets of the economy, aren't great. We're fully aware of that. But if you look atone of the manufacturing data pieces we saw last week, multi-month highs in future orders expected. The leading economic indicators, one of our favorite economic indicators, has been very, very strong once again. Retail sales can be better than expected. The economy is not perfect, not wearing rosy glasses here. But still there are some positives just getting back to normalcy. So Jeff, if you were to invest in a world where you think the yields are going to go higher, which we do, where would you invest and why?

 

Jeff (20:21):

 

Oh, you got to start with financials. Certainly the most interest rate sensitive and if you know, intermediate to long-term rates rise, they can earn more on their loans. Yep. I mean, plus it's a cyclical sector. So if the economy does better companies have more revenue opportunities. So I think that's probably where you start, but even higher level than that, you know, for folks, you know, using you know, value funds and growth funds probably want to lean a little bit more value, value tends to do better when you get up a little bit more inflation, a little bit higher interest rates and a steeper yield curve, which all of that is a positive economic signal in our view. So you know, your natural resources stocks we think can do fairly well in that kind of environment, your industrials, where they can do well in that environment. And then on the other side, you know, might not want to be too heavy on the interest rate, sensitive areas like your utilities and real estate.

 

Ryan (21:17):

 

Yeah. And obviously that's from the equity point of view, but from the bond point of view, if yields continue to go higher, that probably impacts bonds. Lawrence, friend of the show, Lawrence Gillum, our fixed income strategist on the team, you know, he's pointed out, hey, we think, you know, higher yields are probably still coming. And, you know, you want to lighten up a little bit in your bonds. We don’t want to get too geeky for this podcast, but shorten up your duration. There'll be overweight, long-term treasuries, own some shorter duration bonds and things like mortgage backed securities and bank loans are not as impacted by higher trending yields, which again is what we expect to happen. And those can be some pockets that we do like on the fixed income side of things. So definitely an interesting conversation, but maybe Jeff, one final thing that we will move forward.

 

Ryan (21:57):

 

You know, small caps to me are kind of lumped in this cyclical. I don't know, small caps, you know, wherever they land. I think they're kind of lumped in this cyclical world. And if you look at the breakdown of small caps, financials make up like 20% of small cap. So financials go up, you probably have a tailwind for small caps. Small caps have gone sideways like all year, but they had a huge fourth quarter last year record, 24 or 25% gain for the Russell 2000 in the fourth quarter. I think small caps been consolidating all year, perfectly healthy, perfectly normal. Will history repeat? Could we see small caps take the baton along with cyclical value in the  fourth quarter?

 

Jeff (22:29):

 

I think the odds are good at that. I mean you say yourself, these are economically sensitive companies, right? So when you get, I mean, that's why they did so well coming off the lows in spring of 2020. If you get a stronger economic growth environment that should in theory encourage investors to take a little bit more risk and some of these companies with more operating leverage, right? So they can drive stronger revenue rebounds coming out of a challenging economic environment. Hopefully not have the costs go up as much as the revenues. That should set the stage for we think maybe a little bit better, small cap performance. We also like mid-caps too. So leaning a little bit, just like we're leaning a little bit toward value on our asset allocation that we're recommending to our advisors. We're also recommending maybe a little bit of a tilt towards small caps and mid-caps.

 

Ryan (23:21):

 

And obviously the last couple of months it’s been aggravating, right? Small caps, mid-caps have struggled. Look at last two or three months, came out gangbusters first three or four months of this year, but hey, markets go up, markets take their time, they consolidate, but it sure looks like those groups want to take some leadership here. In fact, 10-year yield keeps going higher. That's probably how you want to have portfolios positioned. And look at that. I guess I did have a chart the whole time. Maybe Neil, you can just put this in of the 10-year yield, breaking out above 139 so we can share it on the YouTube channel right now, but you can see the clear resistance level and yields of absolutely soared higher which again is a tailwind for everything we just discussed. Now, Jeff, this is when you might want to go to mute or just turn off your camera.

 

Ryan (24:03):

 

I hate to hate to do this to you, but I'm showing now the Cincinnati Bengals in first place and the Kansas City Chiefs in last place. I'm fully aware this is a long season, but I will take whatever I can get as a long suffering Bengals fan. We've just been stomped by so many teams. It felt good yesterday to beat Pittsburgh at their own game by playing tough defense, playing smart football, so I took it. Now, Jeff, I mean, we like to think we're forecasters when you listen to his podcast, those, when it comes to sports, I'm wrong every single time. So I won't even give my prediction of the Bengals. How's this? I think the Bengals was going to lose the rest of their games. Maybe I'm going to go this route. They're going to lose every single game the rest of the year. Maybe I'll jinx it the other way. Your Chiefs though, I mean, 1-2, you're not jumping off the bandwagon yet. Right? Kind of like value where you want to jump. We don't want to jump off the bandwagon in the summer. We thought there's still time to come. What's your take on your Chief's real fast.

 

Jeff (24:50):

 

I was rooting for them and going to games before you were born young Mr. Detrick. So I am not getting off the train and I still have faith that they'll get it going. I mean, a little bit of a fluky loss last week. So this is definitely a wake-up call. They’ve got some work to do, but they’ve just got too much talent to be a below 500 team.

 

Ryan (25:12):

 

Yeah. Speaking of fluky. I mean, how about that Tucker, 66 yard field goal, all-time record, and hits the upright and bounces over. Don’t know if you guys got a chance to see that yet, but I wouldn't call it a fluky. I mean, Tucker's probably the greatest kicker, you know, ever, but boy oh boy,  that was something else. Hit the crossbar and make it through. Anyway. So Jeff we're going to, we're going to kind of end things with the idea of October and how scary October can be. I'm going to paraphrase the famous Mark Twain quote, friend of the show. I'd love to have him on the show sometime because if you look he's all over the internet still. Mark Twain said something along the lines of  the most dangerous month to speculate is October. The others are February, September, December, August, you know list all the months mixed up, you get the gist of it. And again,  the rationales, we've seen some spectacular crashes in October, historically. October is right around the corner is also my birthday month, which is coming up. Jeff, when's your birthday again? It's earlier in the year, right? Whent was your birthday?

 

Jeff (26:12):

 

April. Okay.

 

Ryan (26:15):

 

So sell your birthday, buy my birthday. And historically that's a good pattern, right?

 

Jeff (26:21):

 

That’s right. Yeah.

 

Ryan (26:23):

 

I don't know how about, how about that one anyway? So, so the scary month of October is right around the corner. I'll just say this, October might be misunderstood because when we look back at market history, yes, 29, 87, 2008 are all there and there's been some other rough October's. But if you look, you know, since 1950 October is actually right in the middle of the pack, honestly, if you look at the last 10 years, October has been one of the better performing months. So I think it's just misunderstood, you know, and I was just playing with some numbers before we started. When you're up about 15% for the year, like, well, we're going to hopefully be at more than 15% for the year heading into October, last couple of times, October is actually still higher. So Jeff, I mean, what could spook markets, let's go this route if we don't think are going to have a major pullback, like we just said you know, be quick, if it happens, what, what do you think could spook markets in October?

 

Jeff (27:11):

 

First let me say, I hope October doesn't live up to its name of being the month where bear markets go to die. True. Because that would mean we'd have a bear market that ends in October and I don't want a bear market right now.

 

Ryan (27:22):

 

We had a one month bear market back year and a half ago. We don't need another one month bear market like that. We still look at the gray hair,  zoom in. You know, we all got some gray hair after dealing with that one. Yeah,

 

Jeff (27:31):

 

Yeah, no doubt. So, you know, there are a number of things that certainly could cause the volatility. Remember  these 5%, pullbacks are normal. We usually get a few of them and we haven't had one all year. So you know, the drama in Washington, coming with tax increases most likely, that could be a source of more volatility between now and the end of the year. Certainly have the China, you know, the troubled real estate developer Evergrande, that situation, it's probably not going to be a contagion situation. You know, it's probably not going to look anything like Lehman Brothers, it's night and day different. But that certainly could be a source of volatility if markets start to worry about a more pronounced slowdown in economic growth in China. So that's one. And then, you know, even though the Fed telegraphed it's moved when they actually start tapering, I mean, you know, you've seen charts that show the Fed's balance sheet against the S&P 500, right? The stock market pays attention, follows the Fed, no doubt. And so if we do get a move higher and rates as the Fed pulls back on stimulus, that could potentially drive some volatility, but these are probably, you know, three to five to 7% kind of pull back things altogether. You know, my best guess is not 10.

 

Ryan (28:50):

 

Right? Yeah. I  tend to agree. I mean,  who knows, it could be something no one's talking about, right. That's probably what it is, right. If everyone's talking about the same thing, somebody, or everybody's thinking about the same thing, somebody isn't thinking. You know, a month ago, nobody was expecting, I don’t think, too much of a major catastrophe in Chinese real estate, but that's clearly what we're seeing. But again, the fallout seems to be contained. I think it could be as simple as in a couple of weeks, my wife and I are going on our 15 year anniversary down to the Dominican Republic. And it never fails right. When we're away, that's when the volatility happens. So just be aware that from October 13th to October 17th, there could be a good deal of volatility because I will be away.

 

Ryan (29:28):

 

But I did the one thing that gets me, Jeff, that I still think is maybe a bigger issue than people give it credit for is U.S.-China relations. I mean, it's kind of one of those, it is what it is. They're about as low as it's ever been. You know, we're not really going along with China. I mean, one of the things we thought president Biden took over was some of those tariffs that he had on China, or sorry that President Trump had on China, you start to remove them, he hasn’t removed any, right. And there's actually talk of adding more. So the back and forth between the two superpowers you know, that, that could be one thing that could upset things. I mean, don't forget it was in early February of 2018 after a huge, I think it was 15 months in a row rallies.

 

Ryan (30:01):

 

You could argue the market was ready for a break. Anyway, after President Trump won that election 2016 had a huge rally. Then the trade war started and we had a major, major, major peak in February of 2018. It took a long time to get back above. So we'll see. I mean, it's not, you know, not our base case scenario, but I think the U.S.-China relations are one thing that worry me a little bit more, I guess, than the headlines might make it sound. So, Jeff, we're about at the end of the road, what are you on the lookout for this week? What can move markets? What should investors and listeners of the podcast, which, by the way, we've got a lot of listeners. We had a lot, a lot last week, so thank you very much. You want to help us give us a light, give us a follow, give us a positive review. It goes a long way. And like I said, this is our 151 cause last week was one fifty, a hundred fifty first LPL Market Signals podcast. What are you looking for this week, Jeff, that could shake things up a little bit?

 

Jeff (30:51):

 

Yeah. I mean, I hate to say that the goings on in Washington could shake things up, cause it's a little bit early. What happens this week probably won't matter. Even if we get a government shutdown, it'll be short. They're not going to default on the debt. I mean the debt ceiling doesn't have to be addressed for at least a few more weeks at this point. So I'm going to say not Washington D.C. I'll say the inflation number we get on Friday, which is the Fed's preferred inflation measure, the Personal Consumption Expenditures Index, ex-food and energy, also called core. It's been about three and a half percent the last few months, hopefully it'll stay there. Even though it's a high number, it's not getting any worse which is good to see. So that's actually the key data point. I did confirm that, you know, the jobs reports being pushed out at another week. So we don't get that until next week, October 8th.

 

Ryan (31:45):

 

Got it. Okay. Good stuff there. And that's one of the things that the Fed said on Wednesday, they actually lowered our GDP forecast for this year 2021, increase their inflation expectations. None of that was really a surprise though. It was more expected than not, but again, the PCE is the Fed's favorite look at inflation and we'll get that on Friday. And we'll probably dive into that a little bit next week in the next podcast. So Jeff, thanks as always for joining. Thanks to Neil our producer. Neil told us he drove 1900 miles with his family and his car. Last week I said, I drove five minutes with my kids yesterday and wanted to kill them all, so congratulations, Neil for driving 1900 miles with your family. I don't think I could pull that off. Everybody have a great day. We'll be back next week with the latest LPL Market Signals podcast. Take care everybody. Bye-bye.

 

Lowering Our GDP

This week in the LPL Market Signals podcast, LPL Research strategists Jeff Buchbinder and Ryan Detrick discuss why LPL Research lowered their GDP forecasts for 2021, while dissecting the recent Federal Reserve Bank (Fed) meeting and move higher in yields. Lastly, it is October—this has many concerned about past market crashes, which isn’t something investors should be worried about this year.

Was that it?

A week ago, stocks had one of their worst days of the year over concerns about the Chinese real estate market, but in the end it was only a 4% pullback before a late week reversal. Was that it? The strategists don’t think we are out of the woods quite yet, but it is likely that any pullbacks will be short-lived with the record monetary and fiscal stimulus. All in all, it has nearly been a year since the last 5% pullback, so one is due, but will it get down to 10? That is unlikely in our view.

Lowering our GDP forecast for 2021

LPL Research lowered their 2021 U.S. gross domestic product (GDP) growth forecast from 6.25%-6.75% to 5.75%-6.25% this week. The strategists noted that the Delta variant is the main culprit, but don’t forget—6% growth is still spectacular. Jeff discusses the idea that the economy may still yet see a Z-shaped recovery, where the economy temporarily jumps above its sustainable level of output before settling back down. Ryan chimes in that some of the potential economic weakness this year could simply be moved back to early next year once concerns about the Delta variant calm down. Lastly, the strategists see potentially stickier inflation, but inflation will still lower back to longer-term trends over the coming years.

Fed round up

The Fed completed their recent meeting last week and all in all—they didn’t rock the boat. Jeff notes it is likely that tapering will be announced soon and it could start before this year is over. Ryan points out the real story is the reaction to yields with the announcement that the 10-year Treasury soared to multi-month highs. As a result, financials and value had big weeks. LPL Research continues to like cyclical value and a higher trending yield (as we expect) will be a major tailwind for those groups.

October is simply misunderstood

The fourth quarter is nearly here, which will bring back memories of past market crashes. October saw stocks crash in 1929, 1987, and 2008, but could it happen again? Ryan notes it isn’t likely, as October is actually one of the better months historically and stocks do quite well when the year is strong heading into this spooky month.

Tune in now

Listen to the entire podcast to get the LPL strategists’ views and insights on current market trends in the US and global economies. You can subscribe to Market Signals on iTunesGoogle Podcasts, or Spotify and find us on the LPL Research YouTube channel.


 

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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 in the podcast may not develop as predicted and are subject to change.

References to markets, asset classes, and sectors are generally regarding the corresponding market index. All indexes are unmanaged 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.

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All index data is from FactSet.

All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

This Research material was prepared by LPL Financial, LLC. 

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