Is the Equity Market Due for a Technical Bounce?

Last Edited by: LPL Research

Last Updated: October 05, 2022

Is the Equity Market Due for a Technical Bounce?

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Podcast Intro:

From LPL Financial, welcome to Market Signals.

Marc Zabicki:

Good day everybody. And welcome to the LPL Research Market Signals podcast. I am Marc Zabicki, Chief Investment Officer of LPL Financial. Joining me today is Lawrence Gillum, fixed income strategist. Lawrence, how are you doing today?

Lawrence Gillum:

I'm doing well, Marc. We're seeing some positive action in both the equity and bond market, so that makes the day a little bit easier.

Marc Zabicki:

Yeah, indeed. And we're going to get into some of that. So, just to note for the audience, we are recording this on Tuesday, October 4. So, as you see this open up the podcast, it is recording Tuesday October 4. So just in terms of the disclosures that were required to show these are the various disclosures for the Market Signals podcast. And then let's just talk about Lawrence, a little bit of what happened last week. I know we're going to get into what's happening over the last couple days, yesterday, certainly, and today so far. And we've got some notable commentary around that. But I just want to touch on some of the moving pieces that drove markets last week and actually really ended markets last week on a down note overall for the month of September. But a lot of news was coming out of the U.K. regarding what was happening with the British pound and also with gilt yields and, you know, LDI strategies within, you know, pension funds. So, can you kind of give the folks in the audience a little of a breakdown of the moving parts that were happening in the U.K.?

Lawrence Gillum:

Yeah, for sure. It looked like the bond vigilantes were back last week as it related to the U.K. gilt market. You know, the Liz Truss government unveiled kind of a surprise mini budget that turned out to be anything but mini as it related to expected tax cuts. And that caused a broad base selloff in the gilt markets. We saw yields on, you know, longer dated gilts up by 100, 125 basis points over the course of a couple days. So, it's important to remember bonds are financial obligations. So, when we see that type of move higher in yields, that tends to cause stresses in other parts of the market, other parts of the economy. And that's certainly what we saw as it related to these LDI accounts, these liability driven investing accounts.

These are pension funds that are really big and popular in the U.K. where they own long dated gilt securities to kind of offset their longer dated liabilities as well. And when you see a massive selloff in these markets, you know, a lot of times, particularly if they are levered, which seems like they were, that caused the potential for margin calls. So, the Bank of England was really backed up into a corner here and offered to intervene and try to settle down the gilt markets. But that certainly had kind of rollover impacts into our markets, both on the equity markets and on the fixed income markets. We saw treasury yields here in the U.S. spike higher right after that announcement as well. So that was an unexpected kind of fiscal policy, we'll call it a mistake, frankly, that unsettled markets, and caused a big selloff in fixed income markets and equity markets last week.

Marc Zabicki:

Yeah. And since then, the U.K. government's kind of backtracked, have they not?

Lawrence Gillum:

They have. They have indeed. There was a tweet, I think it was yesterday morning from the chancellor saying that, you know, we get it and we have listened, and they're going to remove that tax cut from the budget. And it seems like things have settled down a little bit, certainly in the rates market. We've seen yields lower in the U.K. market as well as in the U.S. market as well. And then of course, the equity markets appreciated backpedaling as well. And it seems like a lot of that fiscal kind of uncertainty that was caused by the U.K. has kind of been removed, at least for now.

Marc Zabicki:

Yeah, agreed, and just, I mean, notably, I think it was from the 27th through the, I'm sorry, the 22nd through the 27th of September, I think yields moved about a hundred basis points, the 10-year yields that is, from three and a half to about four and a half causing the distress and then thus the intervention from the Bank of England. On this side of the Atlantic we did get some consumer confidence numbers that were higher than expected. So, what you're seeing here in the slides that we're showing for those who are sort of viewing this podcast, consumer confidence was 108 versus the expectation of 103.2, so better than expected. Q2, GDP in the U.S. was effectively as expected. Negative 0.6, right in line with the consensus.

 

And then the GDP price index quarter over quarter was actually 4.7% versus the 4.4% expectation, which caught the market just a little bit off guard. And as we continue at LPL research to look at for further signs of a deceleration and inflation moving in a downwardly direction, that was a little bit of a shot to that expectation. But I don't know that the GDP price index is broadly followed. But it's something certainly to pay attention to. And let's move to the Federal Reserve policy overhang Lawrence, and I know the notion of this has kind of changed a little bit over the last kind 36 hours but, you know, Lael Brainard's speech, you know, where she acknowledged a stability concern, particularly in emerging markets that may be being caused by some central bank policy activity, but still pressed on the notion that rates should indeed go higher. So how is that playing out over the last 36 hours in terms of what the U.N. Has had to say, et cetera, et cetera?

Lawrence Gillum:

Yeah, for sure. It does seem to be that there's kind of a break between you know, certain members within the FOMC, you know, the FOMC is the monetary committee that manages the short-term interest rate hikes. And there seems to be like a group of folks within the FOMC that want to go more aggressive. They want to continue to raise rates at the current pace and current magnitude and get to what they call, you know tight monetary conditions as soon as possible, where then you have others like Lael Brainard and some other folks that are saying, we've already done a lot and maybe we'll continue to raise rates, but maybe we don't need to go 75 basis points every meeting because there are, you know, inevitably there's going to be spillover concerns into other parts of the world. You know, kind of what happens here in the interest rate market doesn't stay here. It does impact other locales as well. And that was that was followed up, I think it was yesterday, by U.N. concerns about the elevated rate hiking campaign that's going on globally, frankly. And the U.N. was cautioning that again, there will be you know, financial stability concerns if the Fed and other central banks continue to raise rates at the pace that they are currently raising rates. Because one thing to remember too about rate hikes is that they do have a long and variable lag time. So, a lot of these central banks have only started raising rates over the past, you know, six, seven months. And those rate hikes haven't really filtered into the real economy yet.

 

So, you know, there's the potential for, you know, over tightening, I would say particularly at the rate and the magnitude that we are seeing rate hikes, but it did cause maybe some discussion within I think some of these central banks, and certainly we're seeing it in the market pricing and, you know, maybe the Fed doesn't have to go 75 in November. They likely will. But you know, I think that does put some additional doubt into markets and if there's any sort of kind of slowdown in rate hiking expectations, that's tended to be good for risk assets and frankly, for treasury market yields as well.

Marc Zabicki:

Yeah, and I think the market has been pricing in this expectation, and we've talked a lot about it in terms of conversations that we have weekly in our Strategic and Tactical Asset Allocation Committee, is that I think the market's pricing in the fact that the Federal Reserve is absolutely and utterly not going to blink at all whatsoever. And that may generally be the case, but I mean, I think what the U.N. statement raised was, it reminded folks of the possibility that the Federal Reserve could slow down. And you mentioned before we got on, the Bank of Australia actually, you know, did a little bit of a less of a rate hike at 25 basis points versus the 50 basis point expectations. So, I think it just reminded folks that there may be still that possibility that central banks are going to blink here.

 

Right now, we're really kind of taking them at their word, but that you know, perhaps the markets were, you know, overpricing the fact that, you know, all central banks were going to plow ahead and that's why the U.N. statement perhaps caught markets off guard just a little bit. So just talk about, I'll just cover off on the S&P 500 Index through nine months historic. We've talked a lot about it really at an ad nauseum level in this podcast and other things that we do. Third worst performance through nine months since 1931, that's according to Bloomberg. That is outstandingly bad. What makes it worse, honestly, Lawrence, and you can speak to this, is we haven't gotten any respite from the fixed income market. So, I don't know that I've got similar statistics off the top of my head through nine months, but, you know, just again, a brief comment on fixed income performance has really offered folks really no safe haven through the balance of 2022 so far.

Lawrence Gillum:

Yeah, and that's been the problem frankly, that, you know, equity markets, they do go through these periods where you see these drawdowns and usually, historically anyway, bonds have been there to help support the negative price action that we see out of equity markets. They just haven't played that role this year. You know, this is the first time since I think 1976, where we've had three consecutive quarters of both negative stock prices and bond prices. So, this is kind of the longest streak of, you know, bonds not playing that traditional role within the equity market drawdown. I think that makes it tougher for a lot of investors out there to see their statements. They had a diversified asset allocation and, you know, frankly, the bonds weren't there to provide that support that they have historically. Now we do think that relationship or that ability for bonds to play that diversifying role has improved with these higher yields, but that hasn't helped certainly over the past nine months for sure.

Marc Zabicki:

And that's probably working a little bit better over the last couple days. But as you know, kind of now bonds are getting people are recognizing the opportunity that perhaps has been afforded them in bonds based on the activity that we've seen, historic activity we've seen in fixed income. Let's just turn the conversation into what people can expect, you know, this week in terms of U.S. economic data. You know, ISM was actually a little bit less than expected, which, you know, may feed into some of this activity that we're seeing in risky asset prices. However, contrary that may seem, because we are getting a slow down in activity that the Federal Reserve clearly wants you. Lawrence, before we got on, we talked about this morning's JOLTS job openings number, which was about a million light versus expectations.

 

Again, you know, the Federal Reserve's work is, you know, basically focused on the jobs market and correcting what they term as an overly tight jobs market. You know, JOLTS job openings that are coming in less than expected. So that number was about 10 million versus the 11 million or so expected. That lower-than-expected number is actually, you know, feeding into the concept that the Federal Reserve is actually impacting the economy in a way that was expected. And then just as we look throughout the balance of the week, PMI numbers are always important. ISM services number, initial claims on Thursday, again, always important. And then on Friday we actually get the U.S. non-farm payrolls number, which is now getting an expectation or consensus forecast of 290,000 jobs to be added to the economy.

 

The prior number was 308 and the employment rate as of today is expected to stay steady at 3.7%. And in international economies it's really all about PMI and manufacturing activity across, you know, major areas of the non-U.S. globe. We pay specific attention to kind of the eurozone broadly. So, I've highlighted in the previous chart and also this table some of the more important numbers that people pay attention to in terms of what's going on, not only in U.S. economics, but also international economics, you know, as well. So, the PMI numbers are going to be key for people to keep an eye on as we pace through this week. In terms of other issues that are likely going to drive conversation, you know, we've touched a little bit about the U.N. statement and you know, perhaps, change in some level of expectations that may be occurring in terms of the way market participants think about central banks.

 

We've mentioned already that the U.K. government's kind of backtracked in its plan for a tax cut. And that has also improved market conditions in the pound and also reduced gilt yields. We went into the week focused on some U.K. and eurozone bank distress and that conversation was prompted by some news coming out of Credit Suisse and also just by the general problem in the U.K. and the pension funding and the LDI issue going on in the U.K. So, although, you know, some of that talk has been a little bit washed away by some of the market activity over the last couple days. Still, something to keep an eye on in terms of whether, you know, central bank activity is going to actually start breaking things.

 

So, keep an eye on that in the U.K. and in the eurozone, because I think it's a general consensus view that the banking complex in the U.S. is much stronger than it is in the U.K. and eurozone. So, if something is going to break, it may come out of the U.K. and the eurozone first. Notable earnings people are going to be pay attention likely to pricing, input costs and volume just from like an inflation perspective. So, Consolation Brands, McCormick and ConAgra are set to report this week. So, three notable companies that you may want to keep an eye on. And then obviously tomorrow's as we sit here today on a Tuesday, tomorrow, which is Wednesday's OPEC+ meeting where the broad expectation is that members are going to discuss a potential production cut of approximately, you know, 1 million barrels a day, which is just a little over 1% of total global production.

 

Just in terms of that, you know, talk of the OPEC meeting or what may come out of the OPEC+ meeting on Wednesday, it's caused a little bit of a bounce as we can see here in oil prices, not dramatic. And it really hasn't changed the narrative around decelerating oil prices, which oh, by the way is beneficial for our inflation story and the globe's inflation story. But we've been discussing commodities here in this forum in other forums for the last several months indicating that we believe the commodities trade is perhaps over in this cycle, at least the best of that trade is perhaps over in this cycle. So here we're looking, looking at WTI approved futures that are really giving no indication, at least so far, that technically it's ready to recognize a material rebound.

 

And certainly, the trend is not your friend in this case. We've also talked about, and again, in this forum and in other forums the bearish sentiment that we were recognizing in markets, dramatic bearish sentiment, we were recognizing in markets over the last, you know, several weeks or so, you know, I mentioned this in our Street View Video. So, historic levels, bearish responses to the AAII survey. And this chart goes back, you know, 10 plus years, 12 years. So, we reached bearish responses in the AAII survey that we haven't seen in the last 12 years, which is a notable outcome we think people should be paying attention to. So effectively what you're getting out of this market so far today, and also yesterday was a U.N. release, effectively the U.N. statement you know, a change in central bank expectations, perhaps just a little bit coupled with an overall overly bearish sentiment framework that's helped cause some of this rebound in the market again, so far over today

 

and yesterday. If I further that notion just a little bit again, when you look at not only the AAII survey, but a percentage of S&P 500 Index constituents with new four-week lows, again, that reached levels that we've only rarely seen over the last 20 years and those instances were 9/11, the GFC, the Greek eurozone contagion effectively, then obviously the COVID pandemic. And now in 2022, inflation discussion, inflation dynamic, which has driven historical bearishness, when it comes to this particular indicator and last, and oh by the way, you know, when we created this chart on Friday, we labeled it tactical bounce pending. We perhaps have gotten our answer to that already. This just furthers that conversation percentage of S&P 500 Index constituents with new four-week lows.

 

We discussed that, but we're looking at RSI here on this chart, again at a historic low relative to the recent past and percentage of members with prices greater than the 50-day moving average, that is a trend low here. So again, this market was setting up for a rebound. It took a little bit of news out of the U.N. in order to perhaps get us there, but we were in a condition that was dramatically, you know, oversold. On the inflation front because we had added this chart, so Lawrence, and I'll ask for your view here in a second, but you know, again, our view as a Strategic and Tactical Asset Allocation Committee is that inflation has already started to roll over. And perhaps it could pick up speed over the next, you know, several months. We will see, we would expect some of the Federal Reserve work so far to lead to perhaps exactly that. Lawrence, just in terms of how the bond market is viewing this construct in terms of a potential trend change in inflation, you know, what's on your mind in that regard?

Lawrence Gillum:

Yeah, so obviously inflation is the big concern for fixed income investors. Because higher prices with fixed coupons means you're getting less purchasing power. So, you know, bond markets are hypersensitive to inflation and expected inflation. And one of the interesting developments in the bond market is if we look at the difference between nominal treasury yields and these treasury inflation protected security yields, that comes up with a breakeven analysis or kind of what market is implying the inflation expectations will be over a certain amount of time. These market implied inflation expectations have really fallen off a cliff. You know, back in March of this year, you know, markets were thinking that, you know, inflation over the next 2, 3, 5 years was going to be, you know, significantly elevated relative to the Fed's 2% target.

 

Now we're seeing, you know, three, five, you know, 10, 30-year kind of time periods back in line with that historical 2% target that the Fed's aiming for. So, whether the actual realized inflation gets back down to that 2% level, you know, the bond markets are forecasting that the Fed is going to be successful in their rate hiking campaign and arrest these generationally high consumer price increases. So right now, the bond market isn't worried about inflation lingering or coming this new you know, inflation regime where we have, you know, 4 or 5% inflationary pressures on a go forward basis. The bond market is kind of signaling that, you know, the Fed is going to win this battle.

Marc Zabicki:

Yeah. And indeed, and just in terms of some of the forecasting that's going on by economists in the industry, I mean, given that we've effectively shut off an economy and turned it back on economists in general are trying to get their bearings around, you know, setting forecasts for a number of data series inflation being one of them. So, you know, I referred to the GDP price index earlier and the fact that it was higher than expectations. Well I mean, it's been such a moving target not only for inflation, but PMI and et cetera, et cetera. We're seeing you know, sometimes numbers being very different than the consensus estimate. And that's just because we're trying to get our hands on what's going on in this economy. Again, when you turn it off and then turn it back on, dramatic things can, you know, can tend to happen.

 

And we're certainly seeing that. So, want to also touch on the activity that we're seeing in fixed income, Lawrence, and, you know, at the Strategic and Tactical Aseet Allocation meetings that we have every Monday. We've talked about duration quite a bit and recently, in yesterday's meeting we also talked about our S&P 500 Index target and whether that body should change that target level. So, more on that to come. But in terms of duration, I think we've been waiting for this time, Lawrence, and I know that, you know, you've talked a little bit about this this morning and the Morning Call, but we've been waiting for a time to increase duration based on a market that may have reached somewhat of an irrational state, maybe. What do you say to that?

Lawrence Gillum:

Yeah, for sure. We definitely have changed the way we're thinking about the fixed income markets given the big backup and yields that we've seen. So, what we're showing here is we have updated our 10-year treasury end of yield forecast. You know, coming into frankly, the last couple of weeks, we were thinking maybe yields can get back to 275 to 325, but with this, you know, prolonged inflationary battle that the Fed is determined to fight. And with the release of the latest you know, fed funds forecast we have changed our views you know, marginally, you know, here in LPL Research, we do use a lot of these quantitative tools and models to inform our decisions. And for these interest rate forecasts specifically we use a lot of these econometric models that allow us to look at the relationship between some of these fundamental factors like economic growth, expectations, inflation expectations, and fed terminal rate, foreign demand equity volatility, et cetera.

 

And how that relates or what that relationship is to treasury yields. And that allows us to kind of model out those relationships, which allows us then to stress, and you know, provide a forecast, for 10-year treasury yields. So, the big change that we've really seen recently when we plug in this new fed funds terminal rate that was released, I think it was a couple weeks ago by the Fed, with a higher-than-expected fed terminal rate, now that, you know, the FOMC thinks that the fed terminal rate is around four and a half percent. So, when we plug that into our model, we do come up with a kind of a fundamental fair value number of 3.5% on the 10-year treasury yield.

 

But then we, what we do is we stress those factors under, you know, 10,000 different scenarios to come up with a range of potential outcomes. You know, we know that point estimates in this business are popular, but they're not very, you know, precise. The markets are too volatile for that type of precision. So, we do want to have a range of potential outcomes. So, we stress these models and these factors 10,000 times and come up with a range. So, that range is now determined to be 3.25 to 3.75% for the year-end target. You know, we've seen a big move in yields already. And that kind of relates to our second decision that we've made recently, and that is to kind of neutralize our underweight duration positioning within our tactical asset allocation portfolios.

 

So, if you want to go to the next slide, you know, we've been running model portfolios that were underweight duration. We've had about a half a year underweight to within these portfolios relative to our index, which is the Bloomberg Aggregate Bond Index. So, we've kind of kept that underweight bet in place until recently where we did want to neutralize that duration allocation because of just the move higher in yields, you know, recession risks are increasing given the global coordinated central bank tightening that we're seeing. So, we want to add that interest rate risk, which tends to offset that equity risk within portfolios. And we also want to take advantage of these higher yields. So, we did decide as a committee to neutralize that underweight duration that, and we've seen yields move significantly this year.

 

If you think about where we came from back in August of 2020 at 50 basis points, we got as high as you know, close to 4%. So, which is one of the largest moves higher in the 10-year treasury yield since 1983 and 84, right? So, we've seen a big move out of treasury yields already. So, we do want to take advantage of that. We also tend to see, you know, treasury yields peaking before the Fed gets done. We're not saying yields are going to peak at this at this point because there's just a lot of illiquidity and volatility in the treasury market, but we do think that the big move higher in yields has already taken place. So, we do want to take advantage of that move higher. Yeah.

Marc Zabicki:

Yeah, Lawrence and again you know, the Strategic and Tactical Asset Allocation Committee has been talking about this for months and looking for the right time to make that duration change. You know, as we got some of that, you know, that upside activity lifting 10-year treasury yields at four percent-ish, you know in the last couple weeks we thought now was the time and you raised a good point is that, you know, typically, you know, yields peak before the Fed actually gets done with its work. You know, given that that historic trend, maybe that happens again. And we've got this pinpointed, you know, fairly well. We've looked good over the last couple days, so we'll see if that that continues. You never want to hang your hat on that though. Let's talk about high yield, which is an interesting space in terms of what some of these companies have been able to do you know, in the low interest rate environment, you know, directly around Covid. So, speak to that a little bit, Lawrence.

Lawrence Gillum:

Yeah, for sure. The high yield corporate credit market is an area that we've kind of leaned into a little bit here in our tactical asset allocation models over the past few months, I would say. We have seen higher yields and we certainly want to take advantage of that. We're not going all in on high yield at this point, but we do think it is a pretty attractive opportunity if you have a holding period that's measured in years and not months, particularly because we think that the default expectations have really been overblown in the high yield corporate credit market. Market implied default rate over the next 12 months is between seven to 8% depending on how you kind of measure recovery rates and liquidity premiums. But if you look at this top chart, the top chart is showing how much of the existing debt has to be paid off over, you know, the next couple years and then kind of what needs to be rolled over and how much of the market actually needs to access the capital markets to pay off some of this debt.

 

And companies have done a really good job of taking advantage of low interest rates. They've termed out their debt, meaning they've extended the maturity on a lot of this debt. So less than 6% of the existing high yield market needs to access the capital markets over the next couple years, less than 8% if you go all the way out to 2024. So, the fact that markets are pricing at a default rate of 7 to 8% when these high yield companies don't need to access the capital markets. Like they have in the past. You know, we think that some of these spread widening is overblown. And the bottom chart is just kind of reinforce the fact that, you know, these companies have taken advantage of lower rates and, you know, easy access to capital markets. The amount of debt that's been issued over the last couple years, over 400 billion of debt was issued in 2020 and in 2021, which was the most on record you know, at least over the past decade. So, you know, the financial stability of the high yield corporate credit market is in pretty good shape. And because they don't have to access the capital markets anytime soon, I think the maturity wall here we're showing is,

 

2029, that's when a lot of that debt becomes due. We think that there's going to be a, you know, a pretty good opportunity to take advantage of these higher yields and higher spreads that we're seeing in the high yield market.

Marc Zabicki:

Yeah. And I think the message is that, you know, as you delivered Lawrence is we would wade in here just a little bit. I mean, you're likely going to continue to see volatility in this space as the market kind of figures this thing out a little bit. You know, the funny thing is we've talked as a research department and as financial advisors and fiduciaries for a long time about where are we going to get income, where are we going to get income?

 

Well, now's an opportunity if you can, you know, stomach some near term volatility to put some income away in the high yield market. You know, obviously active portfolio management is what you want to do in high yield. So, there is that, but you do have an opportunity here in terms of the strengths of some of the balance sheets and high yield and also some of the yields and spreads that you're seeing in high yield to actually do some work and put some income into your portfolio and be glad you did over the next, you know several years, at least that's the way we think about it. Lawrence, I want to thank you for, for joining us. Folks thank you for joining us, as well wanted to try to give you a little bit of insight in terms of what we're thinking on a day-to-day basis at LPL Research and what issues are driving our conversation in terms of our Strategic and Tactical Asset Allocation Committee work.

 

So have a good day and have a good week and we'll see you next week.

Podcast Outro:

This material was provided by LPL Financial 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 risk, including possible loss of principle. 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. All performance reference is historical and is no guarantee of future results. All information referenced and the podcast is believed to be from reliable sources. However, we make no representation as to its completeness or accuracy. Securities and advisory services offered through LPL Financial, a registered investment advisor and broker dealer member FINRA and SIPC insurance products are offered through LPL or its licensed affiliates.

 

To the extent you are receiving investment advice from a separately registered investment advisor, that is not an LPL affiliate. Please note, LPL makes no representation with respect to such entity. If your financial professional is located at a bank or credit union, please note that the bank or credit union is not registered as a broker dealer or investment advisor. These products and services are being offered through LPL or its affiliates, which are separate entities from and not affiliates of the bank or credit union. Securities insurance offered through LPL or its affiliates are not insured by the FDCI or NCUA or any government agency, not bank or credit union, guaranteed not bank or credit union deposit or obligations, and may lose value.

In the latest LPL Market Signals podcast, Director of LPL Research Marc Zabicki and Fixed Income Strategist Lawrence Gillum discuss if the equity market is due for a technical bounce given all the bearishness out there. They also provide an update on current thinking around fixed income markets and an updated year-end target for the 10-year Treasury Yield.

Historical Bearishness

The American Association of Individual Investors (AAII) survey reflects the most bearish sentiment in over a decade, and the percentage of S&P 500 index constituents with new four-week lows is on par with events like the global financial crisis, COVID-19 pandemic, and Eurozone debt crisis. With all the bearishness already priced into markets, the set-up for an equity bounce could be in place.

Raising Our 10-year Treasury Yield Forecast and Increasing Recommended Interest Rate Exposure From Underweight to Neutral

LPL Research recently updated its interest rate model to take into consideration a higher terminal fed funds rate, and we now expect the 10-year Treasury yield to end the year between 3.25% and 3.75%. In concert with that decision, and because we think the big move in yields has already occurred, we’ve increased our recommended interest rate exposure in tactical allocations from underweight to neutral.

High Yield Companies Have Taken Advantage of Pandemic Era Interest Rates

Companies rated below-investment grade were able to take advantage of ultra-low interest rates over the past few years by issuing debt and extending maturities. As such, less than 6% of the non-investment grade universe (by market value) will have to access the capital markets in the next two years. Companies have improved their balance sheets so an economic contraction may not be as negatively impactful as previous recessions. The high yield market may be worth a look for those investors with a long-term investment horizon that can stomach some near term volatility.

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

 


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IMPORTANT DISCLOSURES

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth 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.

Stock investing includes risks, including fluctuating prices and loss of principal. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

High yield/junk bonds (grade BB or below) are not investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors.

Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

The Standard and Poor's 500, or simply the S&P 500, is a stock market index tracking the performance of 500 large companies listed on stock exchanges in the United States.

The Bloomberg U.S. Aggregate Bond Index, or the Agg, is a broad base, market capitalization-weighted bond market index representing intermediate term investment grade bonds traded in the United States.

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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