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New Bull or Bear Market Rally?

In the latest LPL Market Signals podcast, Jeffrey Buchbinder and Lawrence Gillum discuss whether the strong stock market rally since mid-June marks the start of a new bull market, recap the latest well-received inflation data, and take a look at what the bond market is telling us about prospects for a soft landing.

New Bull Market or Bear Market Rally?

The LPL Research strategists point out that the strength of this latest stock market rally enabled the S&P 500 Index to reach two key technical milestones suggesting a new bull market likely began at the mid-June lows. First, on August 12 the index retraced more than 50% of this year’s bear market decline. Also on August 12, more than 90% of S&P 500 stocks traded above their 50-day moving averages. These triggers have marked the start of bull markets following major market lows in the past. That doesn’t mean stocks will go up in a straight line, however, as a potential Federal Reserve (Fed) policy mistake and geopolitical risks remain. The strategists believe a retest of the June lows in the S&P 500 is unlikely, but some past bear market rallies have been similar in size and magnitude.

Peak Inflation Does Not Mean Mission Accomplished

The strategists believe that markets may have gotten a little too excited about peak inflation. While improving consumer and producer inflation data for July was encouraging, and inflation will likely continue to fall in the months ahead, getting near the Fed’s 2% inflation target will be frustratingly slow. Another percentage point of rate hikes from the Fed will likely be needed, in addition to planned balance sheet reduction which could potentially represent the equivalent of an additional half percentage point of tightening.

What Are the Credit Markets Saying About the Potential for a Soft Landing?

The strategists noted that the credit markets are providing an encouraging signal about the prospects of a soft landing. The return distribution for high yield investors is asymmetrical, which means the potential for losses can be magnitudes larger than the potential for gains. So, credit markets tend to react quickly when economic conditions start to deteriorate. While not ready to sound the all-clear just yet, that credit markets are trending in a positive direction is a good sign that the economy can avoid a recession in the near term.

Finally, the strategists see the potential for July retail sales due out on Wednesday to move the bond market this week, in addition to a chorus of Fed speakers ahead of next week’s Kansas City Fed Symposium in Jackson Hole, WY.

Tune In Now

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.


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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