"History doesn’t repeat itself, but it often rhymes."

Dr. Jeffrey Roach, LPL Financial chief economist on market projections

How you prepare for market instability can help you run a thriving business

What’s next?

How long will market volatility last?

What should I tell my clients?

Financial advisors and institution professionals like you have many questions surrounding the continued market volatility. Many headlines and analysts point to the instability continuing, so LPL Share-Cast sits down with LPL Financial’s chief economist, Dr. Jeffrey Roach, to share LPL’s research on the current market environment and what can probably be expected as we look ahead.

To plan with more insight, check out LPL Research Outlook 2023: Finding Balance.

Dr. Jeffrey Roach

  • Chief Economist, LPL Financial
  • 16+ years of financial services experience
  • Follow on Twitter @JeffreyJRoach

Samantha Davison:
Hello, and thank you for tuning in to this episode of the LPL Share-Cast series. I'm your host, Samantha Davison. Through this series, we're bringing you news and insights from LPL leaders and partners to help you run your business day in and day out. This year, for the first time in many years, we've been talking about market volatility and inflation. For financial advisors, that has meant more time spent helping clients sift through the noise and understand what's really happening to their portfolios and how this environment will impact their goals. Joining me today to help make sense of the markets and to provide guidance as we look ahead to 2023 is Dr. Jeffrey Roach, LPL's Chief Economist. Thank you so much for being here, Jeff.

Dr. Jeffrey Roach:
Well, thanks for having me. Looking forward to the conversation.

Samantha Davison:
Okay. So at the time of this recording, middle of November, November 14th, to be exact midterm ballots have been cast and Wall Street is digesting the changes. Elections typically play a role in the market. So how do you think the market will react to the recent results, and what is the current market environment now as a result of that?

Dr. Jeffrey Roach:
Well, I think in a nutshell, you know, the answer to that question is gridlock is good. So gridlock is good for markets. It's good in the sense that whatever party is holding the White House, you wanna have checks and balances. So in some ways, you know, historically we've seen this both when the red and the blue have different controls and different areas of government, overall, you know, the markets like when one party's not gonna go run away with their pet projects and there's that checks and balances just like what we see in so many other sections of government. So, gridlock is good. I think this is certainly gonna play out this time around as well.

Samantha Davison:
So as we look ahead to 2023 and the markets, do you think there'll be a big shift or what happens typically at the end of the year looking into a new year?

Dr. Jeffrey Roach:
So in many cases, you know, after midterm elections the markets go up. That's most of the time historically, and so as we, you know, we think about this year, will 2022 be different? Well, when you ask that question, you certainly could say, well, you know, this time has been quite a different kind of scenario than in previous decades. Coming out of a pandemic then a reopening phase and in some ways we're still in a little bit of the, the late innings of the reopening. So, you know, going back to "what is this going to mean for 2023?" And I think, you know, gridlock is good, as I said earlier, but I think ultimately the biggest player here is the Federal Reserve. So it really is all on inflation. I think though that the gridlock, potential gridlock, could at least provide some aspect of certainty in the markets. It clears up a little bit of the unknowns and the volatility that came about because of the unknowns.

Samantha Davison:
So how do you think the Fed may adjust their rate strategy? And what other data do you look at and what does that mean for the markets, do you think?

Dr. Jeffrey Roach:
You know, I can harken back to my days at Bank of America. You asked about what data we look at. Well, we actually look at industry data, and it turns out the Fed does the same thing. I remember when I started my career Greenspan was still in the chair, and he would talk to us at Bank of America because we had industry data that helped him get a good understanding on what's happening, boots on the ground kind of understanding. So what data we look at, we look at industry data, we look at data that comes out of Silicon Valley tracking rents on a real-time basis. Of course, we're tracking you know, more government data, but that comes out with a lag. So we're recording the week after the October CPI report was released, and that certainly made investors happy because we are now getting a little more convincing evidence that inflation truly is indeed decelerating. Yes, still very high, but at least we're going in the right direction.

Samantha Davison:
So what steps would you say does the market wanna see the Fed take now, to keep it going in the right direction?

Dr. Jeffrey Roach:
Right, so the markets always are nervous about the risk that the Fed overtightens becomes overaggressive in their policy and because of that ends up, breaking something, as we like to say, we talk about that phrase a lot. And what that means, of course, is that because of Fed aggressive tightening, we get a recession. And we probably are gonna be heading into a soft patch, potentially recession, even without the Fed being aggressive. But it certainly has added the risk because in the last recent hikes, the Fed has been very aggressive in hiking rates by 75 basis points, or three quarters of 1%. That's extremely aggressive. And I think the market wants to see a Fed be cognizant of the fact that they might break something if they're too aggressive.

Samantha Davison:
So, to help financial advisors and institutions provide their clients some context. Can you compare the current market volatility with maybe another market downturn? You know, is it similar? What does it mean long term? I mean, as you look historically. And I imagine that's, you know, part of what you do, you look at what's happened previously but give us some thoughts on that.

Dr. Jeffrey Roach:
Right. So history doesn't repeat itself, but it often rhymes, we say. And one of the things that I've been highlighting for, for clients when I'm out on the road and talking to colleagues internally as well, is that there, there has been a period of time, particularly 1993, '94, '95, period of time when inflation was hot, the Fed responded by hiking rates. And as the Fed hiked, the economy slowed, and the Fed was aware enough to say, all right, let's pause on our hiking. Let's watch what is happening. And in this case, early ’90s, the economy did not fall in a recession, but the labor market slowed pretty aggressively. And so as the Fed basically moved from a tightening cycle to wait and hold to eventually actually cutting rates a little bit, kind of removing some of that tightness in response to a weakening labor market, I think that's a scenario that could play out.

You know, that could be a little bit of wishful thinking, because there certainly is some recession risks for the first half of 2023. But I think we wanna see the Fed act like they did in the ’90s, where they were cognizant of the lagged impacts. So, the full effects of the recent tightening of policy has not likely felt its way throughout the economy. And so the Fed clearly needs to get to that point where they say, all right, we're gonna at least slow down the pace of hikes, or we're going to just wait and see for a while before we do our next action.

Samantha Davison:
So then as we look ahead to 2023, is there any indication of how long the volatility will last?

Dr. Jeffrey Roach:
Yes and no. You gotta, you gotta love that answer. I think in this case, the fact that we're starting to see a little bit of cracks in particularly in the consumer space, I think at this point, we don't see a repeat of the great financial crisis. So we don't have a Lehman moment. At least that's not our base case. I think in some ways our job at LPL Research exists to be worried about those kind of potential risks – but our base case doesn't have a Lehman moment. So, in that scenario, a 2023 outlook, again, is not gonna be a long, deep type of recession. It's going to be a very slow, perhaps the recession is there for a little bit, but it, it's a slow economy given the changing, demographics. And really maybe a little bit of going back to what it was like in the Q4 of 2019. The economy was slowing below trend, and so that's probably what 2023 is gonna look like. Maybe out a little bit of positive growth in the latter half of next year.

Samantha Davison:
And can you talk about just the data that shows that the downturns have historically lasted a much shorter time than the good times, would you say that's the way it has been and will be going forward?

Dr. Jeffrey Roach:
Yes, I think that's true. So if you think about the last hundred years of our growth, and we have a pretty nice way to do this. You literally can just graph growth in the economy and then those little slivers of recession, we often do this at our LPL Research in our Weekly Market Commentary. We show these graphs of what it looks like in those periods of recessions. And yes, most of the time, our economy grows, population grows, opportunities to invent and produce things of that nature. So, most of the time we're growing, most of the time companies are earning a profit, hence, that kind of translates into equity market prices in that area of our monitoring markets. But in this case, recessions are not the majority of the time, and they do tend on average after World War II, I think it's somewhere around 10 months long on average when we do have one. So, in essence, I'm long-term bull right, a long-term bull particularly in the US markets.

Samantha Davison:
And are there certain signs that financial professionals should be keeping an eye on so that they can, you know, filter through the noise that's happening and help their clients?

Dr. Jeffrey Roach:
Well, you know, I think bankruptcies, I think the traditional metrics that track consumer strain, debt ratios, financial obligation ratios, that's the technical term that is in the data, looking at those higher frequency metrics that help us understand where the pressure points are. And that's a very, very helpful way to kinda look at where the consumer is. And, you know, some people say, well, look, you're always talking about the consumer. Well, that's 70% of the economy. So by, you know, I think by extension it's helpful to really focus on that. And that's why, why I tell clients to look at those consumer metrics again, for early warning signs about the health of the consumer.

Samantha Davison:
And can we talk quickly about the LPL Research team? And this is what you love about your job, is being able to watch what's happening. Can you share a little bit of that passion to our listeners? What you look for, what motivates you every single day so that you can help them help their clients?

Dr. Jeffrey Roach:
Yeah exactly, LPL Research exists to find an edge where can we see things that are foreshadowing future activity and perhaps uncover things that other people haven't yet uncovered and talk about. I think to your question, one of the things I really enjoy about this role is that in essence when I talk to clients. It's about starting a conversation with themselves internally, in their wealth management shop, and starting the conversation with clients. And it's interesting, I'm all over the country talking to advisors and their clients. Clients know that we cannot predict the future. We don't have the crystal ball, but the value is starting the conversation, trying to be inquisitive, having that inquisitive mind, un-turning the rocks and see if there's anything interesting there that's why we exist. We're here to help our clients think through these things. Whether it's a challenging time of high volatility or those periods that we long for – periods of low volatility.

Samantha Davison:
So, if there's one thing that you want listeners to take away from our conversation, what would that be?

Dr. Jeffrey Roach:
Well, I think one of the things, it's helpful to think about is, this is a long-term scenario. It's about having a plan, executing the plan, sticking with the plan, not trying to change plans midstream. Looking about long-term opportunities, long-term goals. I think that's one of the things that I would want people to take away with. Don't focus on the short-term – what did Fed governor say this time? What is the Chinese doing now? And with today's announcement. It's not about these one-off conversations, it's the big picture. And that's where the value is developing a plan. And we're here to help advisors and their clients develop plans, stick to the plan, and see how that works out.

Samantha Davison:
All right, Jeff, thank you so much for your time and your insights.

Dr. Jeffrey Roach:
Thank you.

Samantha Davison:
For the latest on the markets and the economy, check out all of the Research material on lpl.com.

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