The Next Shoe to Drop?

Last Edited by: LPL Research

Last Updated: April 18, 2023

market signals podcast graphic

Subscribe to the Market Signals podcast series on iTunesGoogle Podcasts, or Spotify and find us on the LPL Research YouTube channel.
 

Jeff (00:00):

Hello everyone, and welcome to the latest edition of LPL Market Signals. Jeff Buchbinder, your host for this week with my friend and colleague Lawrence Gillum. Lawrence, how are you today?

Lawrence (00:11):

Oh, I'm doing great, Jeff. It's a beautiful spring day here in Fort Mill, South Carolina, sunny in seventies, so things are good here.

Jeff (00:20):

Now, don't rub it in. It's the Boston Marathon Day here in Boston, Patriots Day, and it is rainy and in the fifties. So good weather for runners but not for the rest of us who do everything we can to not run <laugh>. So thanks for joining this week. Let's get right into our agenda here. It's a busy one. We'll give you a lot of content here in the next 30 minutes. We've got a market recap, as we always have markets really defying the skeptics. I would say you know, S&P 500, up four or five weeks. I think the Dow actually is up might be up five weeks in a row. And then earning season update. It's a really good start to earnings. It really only started on Friday, but really good start on commercial real estate.

Jeff (01:08):

A lot of people are asking, is that the next shoe to drop? So, we won't necessarily make a call on that, but we'll give you some numbers to consider as you evaluate that situation. So Lawrence, you're a fixed income strategist, so it makes sense for you to handle the next one. Bond market update volatility subsiding. I've actually been surprised at how meaningful the bond market is to equity analysis. So certainly our worlds have been colliding, and they are no doubt going to collide again here when you talk about bond market volatility. And then lastly, as we always do, we'll preview the weekly calendar, which is quite quiet. So starting with the market recap, here's the S&P. We were up a little bit, it wasn't a big game, but we were up a little bit on the S&P and you know, continuing this pattern we've been talking about over the past few weeks of at least higher lows.

Jeff (02:07):

You know, we haven't broken through the recent resistance level at 4,200 yet, but we're getting pretty close kind of in that you know, 41, 30, 41, 40 range. As we're recording this, it's Monday afternoon, April 17, 2023. So you know, Lawrence, what do you attribute the resilience to? I mean, I guess part of it is maybe an anticipating earning season might be better than feared. You know, we had the inflation data last week that was better than expected, although expect inflation expectations based on the survey data have actually gone up a little bit as oil prices have gone up. What do you think is really a work here?

Lawrence (02:52):

Yeah, I think there's a lot of negativity in the market right now, so anything that's less negative than what markets are expecting and certainly could help push prices up. You know, you mentioned earlier about our worlds colliding a lot. If you look at October, October is when the 10-year treasury yield peaked at around 4 25. Since then, we've seen a pretty big move lower in yield. So that certainly helps equity prices and the discounting of cash flows. So it's been a resilient market, but I don't think it's outside of the realm of expectations.

Jeff (03:23):

Yeah, I think that's right. Actually, you know, there's this statistic, I don't look at this, this closely, but I've been seeing it pass around a lot about the commitment of traders on futures. S&P 500 futures are showing as much bearishness as we've seen since 2007. This is essentially a net bearish position of over 14%. So there is a lot of bearishness out there, and you can see it in reading the financial media. So, you know, the news doesn't have to be necessarily all that positive just, just better than feared. So we're certainly seeing some of that. I mean, maybe some people are also paying attention to the fact that, you know, we're just coming off of two positive quarters. You know, in particular q1, when you have a positive q1, that tends to mean good things for the rest of the year.

Jeff (04:13):

Got a stat from Bespoke Investment Group here. When you have a positive q1, the rest of the year gain on average is 8.9%. So we would certainly take that, that would be a mid-teens gain for the year. And then when you have back to back 5% gains, which we had in q4 and q1 that's happened I think 25 times in the post-World War II era. And you've been up 23 times average gain, 8.2% in the subsequent two quarters. So there you go. There's some real interesting, I mean, it's technical patterns, I guess, but I think interesting and points toward you know, maybe this market having more upside even though there's a lot of nervousness out there in terms of what worked last week, I mean, it was, it was more of a value week and maybe more of a global week than a U.S. week as you can see here.

Jeff (05:16):

So looking at, you know, S&P app, I mentioned not a big positive week, but up 0.8%. You had the Dow do a little bit better because it was more of a value-oriented week. The Nasdaq not quite as strong although the Nasdaq, I think is up seven out of nine weeks. So been a nice run there. You know, globally we had nice gains in Europe that can, that's certainly partly because of the weaker dollar. Yeah, it's nice gains in Japan. Japan's beginning a lot of attention lately because of the central bank leadership transition over there. And then in U.S. sector land, it was energy and financials at the top of the leader board. Energy's certainly getting help from a rally in oil financials, getting help from strong bank results on Friday. Anything you want to highlight here, Lawrence?

Lawrence (06:07):

Yeah, I think what's particularly interesting in, in something that we talk a lot about in our investment committee meeting is just the U.S. first non-us performance and, and allocations. You know, the non-U.S. parts of the world, the EFA index and the emerging market indexes are both up, you know, pretty decently over the past, say three months. And certainly over the past six months we've been favoring us and then the non-US developed. So I think our biases towards those developed markets are, you know, paying off in terms of our allocations. But it's been a good year, frankly, globally for a lot of these equity markets.

Jeff (06:47):

Yeah, we're not worrywarts, but if there's any place to be worried, it's probably Asia and you know, in China in particular, given what's gone there with geopolitical tensions. So we've been cautious in emerging markets, although those markets have actually done just fine. That doesn't mean there's not risk there. But absolutely Lawrence, favoring Europe and Japan over emerging markets, particularly Asian emerging markets. Latin America looks a little bit more interesting, but we're still just slightly leaning toward us over developed international. And then within the sectors we continue to like industrials. This is more your world, Lawrence. So I'll hand it over to you for the bonds, but you know, on the commodity side, we didn't get any gains out of precious metals. You can see from this index here last week.

Jeff (07:41):

But, you know, generally speaking, the precious metals have actually been doing pretty well, interest rates coming down a bit and the dollar coming down, that tends to be a good environment for precious metals-related investments. And then on the energy side, yeah, I mentioned a little bit of a bounce there. Certainly a weaker dollar helps commodities in addition to other non-dollar investments. Turning to the bond side, I mean, we've had this little bit of a creep higher in rates over the last week, Lawrence do you think that move has more to go or would you expect interest rates to kind of settle in here?

Lawrence (08:25):

Yeah, I mean, we've been in a range in the U.S. rates market for a few months now. We have seen rates move up a little bit higher. They're a little higher today with the expectation of maybe a higher for longer Fed. Which I'm sure we'll talk about later on. But nothing too dramatic in terms of moves. Again, we'll talk about this later as well, that the bond markets are really starting to calm down. Volatility is starting to calm down, which after a year that we experienced last year, we're certainly welcoming a boring bond market. Again, if we can continue to see that, that would be great for investors. Just so a, you know, a couple key takeaways here. Over the past six months, you know, the ag is up 6.4%, which I think a lot of investors wouldn't realize that the bond market, the high quality fixed income market is up over 6% over the last six months.

Lawrence (09:14):

Investment grade corporates up over 9%, you know, high yield even over 8.5%. So you know, decent longer term returns for fixed income investors, our bias has been to stay up in quality. So aggregate bond index type strategies, treasury strategies, mortgage backed securities, et cetera. We're not really taking on a lot of fixed income risk right now. We're, we're taking most of our risk in the equity markets not taking, we're not taking a lot of risk period, given the uncertain environment. But we are taking risk, it is on the equity side. So we've been up in quality on the fixed income side, and, you know, so far so good with the performance this year.

Jeff (09:53):

Yeah, bonds, working stocks, working stocks internationally, working as well as domestic. You know, this has definitely been a year for diversification After last year, certainly diversification was punished. So thanks for those thoughts, Lawrence. So let's turn to a quick earnings update. You know, last quarter we were talking about better than feared over and over again, right? In this quarter in our weekly commentary last week, which you can find on lpl.com. I said it would be deja vu all over again, and we get, you know, not so great numbers. You know, estimates would be cut and then you'd have, you know, stocks rally on that, right? You'd have potentially better than feared. So it's probably going to be that again. In fact, actually, it's even been a little bit better than that so far. But just, you know, to sort of share some perspective on this, we've had 30 companies in the S&P 500 report, and most of those, of course, were through the you know, the February month end rather than March month end.

Jeff (10:56):

So it's a very small number of companies here, but we're off to an excellent start. You know, the consensus was calling for about a 7% decline in earnings in Q1 coming into this period of the most recent batch of earnings. And now we've basically taking a percent off of that, and now we're tracking the down six. It's still down. We're still probably going to have three quarters in a row of down earnings, but again, better than feared. We've had 90% of the companies in the S&P that have reported beat estimates. We have had an upsides surprise on average of 8%. Certainly, the big banks who are a big part of that actually for the financial sector, the average upside surprise has been 15%, which is a really big number. And estimates overall have not come down much, again, very, very early.

Jeff (11:52):

But off to a good start, we're not saying earnings are necessarily going to drive the market higher, but given the pessimism they certainly could be helpful here as we hopefully can get the S&P 500 up to you know, 4,200, which is the next resistance level. So let's talk commercial real estate here, Lawrence next. And you know, I think this is probably the hottest topic in terms of what people are asking us. The banking fears have sort of died down, right? It looks like we're not going to going to get another meaningful institution fail on us, like the Silicon Valley Bank. Maybe you'll have tiny banks fail, but that pretty much always happens. They don't get a lot of headlines, but, but that, that's a pretty regular recurrence. So people are looking at commercial real estate because of the whole work from home thing and, you know, empty offices and a lot of downtowns across America.

Jeff (12:50):

So Adam Turnquist from our team put together some charts and wrote the Weekly Market Commentary this week on this topic. And I think it's really interesting. So we got four charts on this. So office res are down. This is the office REIT Real Estate Investment Trust index within the Russell 3000 while vacancies rise. So, I mean, it's no surprise that you're seeing higher office vacancies, I guess, Lawrence, and it's certainly not a big surprise that these securities are seeing declines, right? Given what we all know. I mean, you know, I go downtown in Boston on occasion, it's pretty easy to see. In fact, the next chart on here, you'll see the back to work. You only got about 50% of folks back in the office, and certainly the pandemic is largely passed.

Jeff (13:48):

So that creates a challenge for office-based real estate. I guess one takeaway for me, and then I'll hand it over to you, Lawrence, or at least something for folks to keep in mind, the office market is only about 8% of the total real estate market, okay? And the cities where people commute downtown, where you have big office buildings, I'm certainly in one of those in Boston. That's a big piece of the real estate market. But it's when you put it all together and, and compare all the different components of the real estate market, these big downtowns, the offices, and these big downtowns in big cities. They're really not that big of a deal. They might be a big deal, the individual company or a small set of companies, but it's really not that big, and there's not a ton of leverage like we had in 2008 against these buildings. So frankly, I would argue that it's probably not the next big shoe to drop. But certainly it's going to take some time for these long leases to roll through. What do you think, Lawrence?

Lawrence (14:56):

Yeah, I think that last comment was the important one. It is going to take time for these leases or these contracts to come and refinance it, these potentially higher rates. But this isn't going to be a next quarter thing or a next six-month thing. This could be a next few year type of thing. Depending on kind of how this work from home dynamic evolves, you know, we've started to hear some big finance chiefs out there call all their workers back into the office full-time. So if that trend or pattern reverses itself, where, you know, certainly here at LPL we are allowed to work remotely, come into the office as much as we need to. So we haven't heard anything from our leadership that we need to come back into the office. But I think JP Morgan may and perhaps Goldman, they called a lot of their workers back into the office full-time. So a lot can play out over the next couple years. So what we're seeing now may not be as bad or as dramatic when these leases or these contracts come due.

Jeff (15:58):

Yeah, the LPL Boston office lease came due. And so we are moving you know, that's going to happen over the next several years as companies leases come up and they move take less space, which certainly LPL is doing in Boston. So that's happening everywhere, certainly, but you'll probably see more folks come back over time. It's just going to be very gradual. And the hybrid thing is here to stay. You know, the reason this is tied of course to the whole banking, it's not a crisis really, in my view, but this whole bank stress issue because you know, now that we're maybe comfortable with the treasury securities on bank balance sheets, which, which I guess fundamentally is really what doomed Silicon Valley Bank we're looking at other risks, right?

Jeff (16:52):

And so commercial real estate is certainly another risk for these banks. And if you look at the small banks, this is what this chart shows. You know, over half of small bank balance sheets are commercial real estate, that is big. So you know, I think the weakness that we've seen in regional banks are probably justified given the potential weakness in commercial real estate. However, I mean, this is spread all over the country, right? And so, you know, this is not necessarily where you have the big empty office buildings. That's maybe one point. And it's also, I think, helpful that rates have come down a little bit, right? Lawrence, maybe kind of short up these balance sheets. So we're going to see some losses in commercial real estate we just mentioned. It's going to be slow. It is going to affect regional banks. In fact, this, this issue caused us in LPL Research to take down our small cap exposure broadly and shift a little bit more towards large caps. We think that makes sense in a period of tighter financial conditions, where you've got weakness in banks smaller banks in particular makes sense to be a little more, little bit more large cap, high quality focused, kind of like what Lawrence you were just talking about with the bond market.

Lawrence (18:10):

Yeah, and I think your point earlier about the office market is only a, a small part of the commercial real estate market. There are hotels and restaurants and other parts that maybe aren't seeing the pressures that the office market is. So just because these small banks have a lot of commercial real estate on their balance sheet doesn't mean that they're all going to be stressed, right? But this is going to take some time to work itself out, and there will be some winners and losers. And to your point, Jeff, we did just take down our small cap exposure. We've taken down our high yield exposure, which tends to be dominated by small cap issuers. So there are ways to be defensive in this environment. And that's sort of what we're doing.

Jeff (18:52):

Yeah. Still slightly overweight equities and taking a little bit you know, out of our you know, cash and bond allocations, not a lot, but you know, stocks in general still look pretty good to us. So this last chart is taking a look at delinquencies by segment, right? I mean,when do you have to worry about real estate? You have to real worry about real estate when tenants aren't paying their bills. So this looks at all these different segments and the percentage of these loans that are delinquent, right? Essentially. So I probably should have let you set this up, Lawrence, being a bond guy, you're probably better at looking at delinquencies than I am. And you see here, the biggest segment of this pie chart is retail anchored, right?

Jeff (19:45):

So you're seeing 34% of retail properties are seeing delinquencies of more than three months, right? So somebody's l somebody's three months plus late. You know, there's certainly a lot more retail nationally than these big empty office buildings, <laugh>, right? That are in big downtowns and in major metropolitan areas. So I think that's the first thing that jumps out at you. And it's actually, I mean, it's double the size Lawrence of, of these other segments, including office, right? Which is 15%. So office tenants are generally paying, right? I mean, that's not a bad number. It's not great, but it's not an awful number to have 85% sort of current. What, what else would you would you take away from this slide? I mean, is retail in trouble or is this kind of comforting that it's diversified and you have, you know, some areas that aren't so bad kind of offsetting the areas that are more challenged?

Lawrence (20:49):

Yeah, I mean this certainly doesn't show kind of the bigger picture about how long or the trend in these delinquencies, right? So, I mean, we could see that 35% of, of retail is of all the delinquencies, 35% of those are coming from the retail part of the commercial real estate market. I mean, I don't know if that's up or down from, you know, a year ago, because I mean, you really argue that retail and for the last few years has been under a lot of pressure, as more shoppers shop online versus go to these brick and mortar stores. So you know, there's always going to be delinquencies. That's just the way the market works. I don't think it's necessarily alarming to see a diversified basket of properties here that are delinquent. But to your point, office is only about 15% of current delinquencies could that get go higher. Sure. but right now we don't think that this is going to be to your comment earlier, we don't think this is kind of the next shoe to drop particularly the fact that it's going to take, like we said earlier, years to work itself out.

Jeff (21:53):

Yeah. It's maybe yet to be determined, but, you know, based on your look at the credit markets and what you've been sharing with our investment committee, is this is not some sort of building stress that's going to just you know, implode on us and really drive a nasty recession. We're still on the camp that says we've got some challenges here, a number of them, and that's why the economy's probably going to shrink a little bit over the next several quarters maybe, but not much. Kind of a mild short-lived recession. So let's move on to our next topic, Lawrence. This will be all you, you don't want me talking about bonds. Bond volatility subsides, I mean, I guess it's related to the Fed, right? You know, there are other factors too, but we're really close potentially to the end of the road hiking cycle.

Lawrence (22:51):

Right, and

Jeff (22:52):

That's the people agree on that

Lawrence (22:53):

That’s the takeaway.

Jeff (22:54):

Right? So people generally agree that that's the case, and so maybe it makes sense that you wouldn't have as much volatility there.

Lawrence (23:02):

Yep. And that's exactly the takeaway is that over the last, say 12 months, the Fed has been hiking aggressively. We know that but the bond markets are, they still believe that the Fed is going to get the job done. And we won't spend a lot of time on these next three charts. I think it's the totality of these charts. In fact, it's not an individual chart per se, but this first chart we're looking at is just the market implied inflation expectations. So what markets are pricing in, or what markets are expecting inflation will average over the life of these various centers here. And you can see that they've really kind of calmed down a lot recently. And markets still expect the Fed to get those inflation rates back to around 2% in relatively short order.

Lawrence (23:44):

So, you know, the fact that the Fed is hiking aggressively to maintain or to make sure inflation expectations don't become unanchored, you know, this is one chart suggesting that inflation expectations haven't become unanchored, at least as far as this bond market or segment of the bond market is telling us the next chart, again, this doesn't mean a lot in isolation, but you know, these are your high yield option adjusted spreads. So the additional compensation for owning risk year segments of the fixed income markets, high yield spreads, are again, relatively well-behaved. So I think if the Fed was submarine the economy, if the Fed was going to break something, it's not showing up in credit spreads right now, that orange line I think is particularly important. Those are your triple C rated credits.

Lawrence (24:37):

Those are the ones that are most prone to default. We did see some widening after that SVB situation, but we've seen spreads tighten most of the way back to where they were before SVB, but they are still lower than where we started the year with. So again, the corporate credit markets aren't too concerned about the Fed breaking something yet. So looking at inflation expectations, looking at credit spreads, you know, these are two markets that are showing continued trust in the Fed. The last one, and I think this is important for both fixed income and equity investors, is that we're starting to see bond market volatility, treasury market volatility kind of subside, right? So we've talked about how much volatility there is in the treasury market. I think on this forum and in other forums we've seen a lot of big moves in treasury securities.

Lawrence (25:30):

It's starting to slow down a little bit, and that's good for investors both again, on the fixed income side and the equity side, you know, the bond market, the treasury market is arguably one of the most important bond markets in the world. So when you start to see types of moves that we've seen recently out of treasury securities, these 20, 30, 40 basis point moves in a day, that's not something that we're used to in the fixed income market. So we're starting to see more measured moves in a lot of these treasury securities. So we do think that that's a positive and that does provide more confidence again, that the Fed is, is going to frankly win the war against inflation without potentially submarine the economy.

Jeff (26:14):

Yeah, to me it's just about uncertainty, right? As uncertainty comes down and people just get more confidence in the outlook that can support higher stock valuations. So you should see stocks do well as the move index that measures bond market volatility comes down. So good message there. And then we've also talked in recent podcasts about how lower rates translates into higher price earnings ratios for stocks, right? That relationship over time is actually pretty consistent. So, there's a lot of reasons for, you know, stock investors to follow the bond market especially now. So thanks for that Lawrence. Good, good topic. We'll just really quickly preview the week ahead. It's about earnings more than anything else this week. But we do have a couple of data points that are going to be interesting to pay attention to.

Jeff (27:07):

It's not really a data point. The Fed Beige Book, right? All the districts report on economic conditions in their areas. It's kind of a look at Main Street. So that's always interesting. And I think what investors should watch for there is whether tightening financial conditions and bank stress have translated into sort of impact on businesses, right? Not being able to get the credit that they need and kind of slowing down, maybe hiring fewer workers, that sort of commentary, right? To gauge just how much of a slowdown we've had. Because we've, you know, Lawrence, everybody says that there's a lag to interest rate increases, right? Fed tightening some people think has a lag of a year, right? So we're really, you know, the rate hike campaign started a year ago. We're really just now starting to feel it. I think we're going to start to see small businesses that, you know, comment a lot about the conditions in their areas in the in the basement. They, they're going to start to, to feel some pain. It's not just about banks. It's probably going to be about small businesses across a number of industries starting to feel that. Now that might not necessarily mean that the Fed does not hike in May, but certainly it's going to cause the Fed to be a little bit more careful, I think.

Lawrence (28:32):

Yeah, for sure. And that's the message that these Federal Reserve presidents from these various regions are going to bring to the committee in first of May. And they're going to talk through the various financial conditions within their regions, and they're going to come together and make a decision on, on rate increase or no rate increase. Our expectation is rate increase 25, another 25 basis points to take the upper level to 5.25%. But that could be it. And as you know, as we just talked about on the, the move index, that's one of the reasons why we're starting to see that interest rate volatility come down because we are getting closer to the, the end of this this rate hiking campaign, one of the most aggressive rate hiking campaigns in, in 40 years. So I think we'll all be happy when this rate hiking campaign comes to an end.

Jeff (29:18):

Yeah, many people are probably tired of talking fed, no offense to you, Lawrence or any of the other bond strategists out there, <laugh>. But I think I've had enough Fed talk to last me a while and I'm ready to just focus on you know, economic growth earnings yeah, and certainly interest rates in general market-based interest rates, not as much about the Fed and monetary policy and quantitative tightening and all these things. We'll eventually move past all that and can kind of settle into something more normal, we'll say. But it's, it's going to take some time. It's not like you flip a switch on May 2 or May 3 and everything's great <laugh>, right? Yeah, far from it. I think that's when the meeting is far from it, but we'll get there. It's just, going to take some more time.

Lawrence (30:09):

You're not going to like this then. There's scheduled eight Fed speakers this week, so a lot of Fed speak this week as well. It's a quite quiet calendar week for economic data, but a pretty busy week for Fed speak.

Jeff (30:22):

Well, that's fine for now, <laugh>, that's fine for now, but hopefully they can move to the background after this cycle ends. How about that? The only other data point on here that I thought was interesting, I mean, we know the housing market slowing, and so the housing data will get some attention, but the leading economic index is one of these leading indicators that people are watching because it signals recession and it's still signaling recession. And it almost certainly will be down again, just like the yield curve. We're just hoping that this is a very mild and short-lived recession or somehow we muddle through because inflation falls fast enough. Those are probably the you know, we would say the most likely scenarios. But that one will get some attention just because of all the recession fears that are out there.

Jeff (31:16):

If we're going to come into recession, it's going to take a little bit more time to get there. So I'm going to end with kind of a cool stat here, Lawrence. The other thing that is happening this week is it's tax deadline, right? Tax day. So hopefully you've got your taxes done or you're really close. Here's another cool stat from Bespoke the week, after the tax deadline has actually been very bullish. So, you know, if, if we scared some of you out there with talk of recession, stay with me, because we're going to get you back. Over the last 25 years, median S&P 500 performance on the week following tax deadline day. It's been a gain of 0.83% with positive returns 76% of the time. Those are excellent numbers. I don't know how to explain that. People pay their taxes and then they make the stock market go up. This one surprised me, but that is very bullish. What do you think, Lawrence? Can you, can you explain that one?

Lawrence (32:20):

Well, maybe it's the individuals that are getting tax refunds and they're investing their money in a diversified asset allocation portfolio perhaps or, you know, maybe even managed by the LPL research team. That would be ideal.

Jeff (32:36):

That would be, how about that? You might, you might be onto something there. I've always paid my taxes late and haven't gotten refunds before April 15th, <laugh>, but yeah, maybe for some people that is indeed what's happening. That's actually potentially moving up the X date for the debt ceiling, right? If we don't get a lot of tax dollars into the federal government, then the X date moves up and the debt ceiling deadline comes sooner. It's still probably not until July, but it's coming. So we'll probably fill a couple of podcasts with some details on that situation. We don't need to worry about that right now, but it's coming. So I guess we ended on a mixed note, positive and negative in there for you related to tax date. But we do expect the deadline or the debt ceiling to be, to be raised. It'll just probably go down to the last minute like it always does, unfortunately. So we'll go ahead and stop there. Thank you Lawrence, for joining. Good, good discussion. Certainly a lot of topics to cover. Thank you to all of our listeners and viewers for tuning in. We will be with you next week of course, as always for another edition of LPL Market Signals. Take care everybody.

Next Shoe to Drop?

In the latest LPL Market Signals podcast, Chief Equity Strategist Jeffrey Buchbinder and Fixed Income Strategist Lawrence Gillum discuss whether commercial real estate (CRE) is the next shoe to drop. They also explain how negative sentiment has helped support the stock market’s recent gains and why lower bond market volatility matters for investors.

The S&P 500 Index posted another positive week, the fourth out of the past five. The good start to earnings season and favorable inflation data helped, but bearish positioning among traders may have been an even bigger factor.

The strategists discuss the CRE market, which has been a source of concern among investors because of the work-from-home trend, regional banks’ high exposure to CRE loans, and recent bank stress. The office market is challenged but is a small piece of the overall CRE market.

Next, the strategists talked about the bond markets’ continued trust in the Federal Reserve (Fed). Market-implied inflation expectations have stayed relatively steady and show inflation drifting to 2% over time. This, along with still calm credit markets, suggest the Fed can win the inflation fight without driving the economy into a deep recession. Markets are pricing in one more rate hike and then a pause sometime during the summer and the corresponding fall in interest volatility could be a tailwind for both stock and bond investors. 

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.

 


You may also be interested in:

Read. Listen. Watch.

Keep up with economic insights from the LPL Research team. Read Weekly Market Commentary. Listen to Market Signals Podcast. Watch Street View.

LPL Newsroom

Thought leadership. Advisor stories and tips. And, Research. Find the latest insights from advisors, what’s new for advisors, and the latest from LPL Research.

LPL’s Thought Leadership Series

Throughout the year, LPL’s Thought Leadership team takes a look at those things that impact and help advisors, providing advisor stories and advisor solutions.

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. 

Member FINRA/SIPC

For Public Use — Tracking#: 1-05367664