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

What Could End This Bull Market?

LPL Financial strategists Ryan Detrick and Jeff Buchbinder react to last week’s Federal Reserve rate hike, rising recession odds after recent weakness in economic data, and discuss prospects for ending this bear market.

On the Federal Reserve (Fed), the 0.75% rate hike was not a surprise to markets after the leak to the Wall Street Journal. The good news is the hike and the tough talk around inflation helps the central bank restore at least some lost credibility as an inflation fighter, though the market’s concern shifted from runaway inflation to recession and sent markets lower the rest of the week. The Fed is far from done as another 75 basis points is quite possible at the July meeting, with several more hikes likely to follow by year-end.

On the economy, the needle the Fed is trying to thread to engineer a soft-ish landing has gotten smaller. The odds of recession have risen, to perhaps over 50% within the next two years. But consider how strong the economy has been coming into this slowdown, which may help it stave off recession longer than many expect. The Atlanta Fed GDPNow forecast is tracking toward no growth in gross domestic product (GDP) in the second quarter and some parts of the economy such as housing have seen material slowdowns already. The strategists also point out that the National Bureau of Economic Research is the official arbiter of recessions and they look at much more than gross domestic product.

The strategists believe that a fair amount of progress has been made toward completing the bottoming process, but it’s extremely difficult to call the bottom on a particular day. The good news is some of the stock market breadth readings from the past week point to levels of extreme selling often observed at major lows. Other readings based on implied volatility and hedging activity in the options market are not quite at levels the strategists would consider a complete flush out. Still, an eventual bottom at or near where stocks ended last week would not be surprising.

History shows stocks tend to bounce back strongly after two straight down weeks of 5% or more declines for the S&P 500—with gains over the next year on average of 28% (1987 was the only decline in the past seven occurrences). Finally, quarterly declines of 15% or more—likely in Q2—have historically been followed by very strong gains—31% on average with gains in all seven cases since WWII, according to Bespoke Investment Group.

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 iTunes, Google 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.

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.

The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.

Core CPI is a subset of the total Consumer Price Index (CPI) that excludes the highly volatile food and energy prices. It is released by the Bureau of Labor Statistics around the middle of each month. Compare to Personal Consumption Expenditures (PCE); Core PPI; Producer Price Index (PPI).

Personal consumption expenditures (PCE) is a measure of price changes in consumer goods and services released monthly by the Bureau of Economic Analysis (BEA). Personal consumption expenditures consist of the actual and imputed expenditures of households; the measure includes data pertaining to durables, nondurables, and services. It is essentially a measure of goods and services targeted toward individuals and consumed by individuals.

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#: # 1-05295519