Celebrating Record Highs and America’s Birthday

Jeffrey Buchbinder (00:00):

<Silence> Hello everyone and welcome to LPL Market Signals. Jeff Buchbinder here, your host this week with my friend and colleague, Dr. Jeffrey Roach. I know you just got back from Europe. Jeff, how was the trip? What can you share about the economic environment across the pond?

Jeffrey Roach (00:17):

Well, I, I certainly wasn't there for work, although I, I did have to say, you know, you can't, you can't get the work out of the guy, right? So I was in Frankfurt. Those that are aware of central banking know that that's where the European Central Bank is. So I, I wasn't some big cities. It was a lot of fun to see the vibe. Also shocked at the number of times that two in particular I paid for something in the U.S. dollars. Because That's what they wanted.

Jeffrey Buchbinder (00:45):

How about that?

Jeffrey Roach (00:47):

We'll, well, we might talk a little bit more about that later in the podcast.

Jeffrey Buchbinder (00:49):

Europe has not been dedollarized yet, which is good to know. Very good. Well, welcome back. Good, good to have you back from your travels. Actually sure, a number of you are probably traveling as you're listening to this big vacation week. The birthday of our great country. So probably see my little American flag on the lapel here. I got my red, white and blue shirt, so I know, Jeff, your sport in a similar color scheme. So trying to be patriotic as we get ready for the big holiday. So here's our agenda for today. First market recap, of course. Big story last week, all time high for the S&P. Also got one for the nasdaq, but we talk more about the S&P. Second, Jeff will give us latest thoughts on the economy in, in particular, on inflation in the context of this really tremendous rally off of the April lows.

Jeffrey Buchbinder (01:42):

Next we'll talk about the weekly market commentary, which is on the strategic allocation decision around international versus U.S. So when we say strategic, we mean three to five years or longer, and that's when valuations really do matter. Then of course, as we always do, we'll, we'll close up with a preview of the week ahead and that's why I'm glad, Jeff, you're here. One of the reasons, because you can help us understand what to look for in the jobs report, which is the biggest report on the economic calendar this week, for sure. So, let's get to it here. First market recap. Closing high on the S&P 500. We got about a 3.5% rally on the S&P 500 to get to that new all-time high, which was 6140, actually 6144 to be precise. Now, we're we close the week, 6173 and aren't really moving too much today.

Jeffrey Buchbinder (02:42):

It's the last day of June, Monday, June 30th, 2025. As we're recording this, the I mean, there are a number of reasons why this market has done so well. Certainly the Israel-Iran ceasefire is an obvious one. Certainly expectations of fed, excuse me, of fed rate cuts is another. And then we've had some progress on both trade deals and on the tax package currently working its way through Congress. So really a lot for the bulls to focus on. I mean, Jeff, I guess for you, what do you think about how the market has responded to the economic data recently?

Jeffrey Roach (03:22):

Well, I think it, it's still this same regime that we're in where it seems like we have shocks to the system, but there's no real risk, at least this is how investors are interpreting it. No real risk of contagion. So you think about, you know, what we saw shocks to the system really even several years ago, right? Even Silicon Valley Bank, another bank challenges the Russia, Ukraine conflict conflicts in the Middle East. I think investors are really focusing on all of these being one-offs and not really filtering through and rippling down into the rest of the markets in, in terms of the economic data. It's a slow and steady move downward to a real fast clip of growth, you know, in previous two years. 2025 clearly is going to be a year of much slower growth, but the transition seems to be fairly measured hence the soft landing narrative. And then, yeah, I think that's been the real focus de despite a number of other risks that are still out there, tariffs, uncertainty on tax policy, fiscal policy, you name it. There's certainly still are some lingering risks.

Jeffrey Buchbinder (04:33):

Yeah, no doubt geopolitical risks can't be dismissed either, even though we're in a calm period. Certainly. Let's hope that continues. So last week's rally was really driven by tech and AI names. So you see here communication services, which of course is where alphabet meta, and that was the leader, but you also had a strong week for tech up almost 5%. The you know, growth trade continues to work related to the AI trade, the tech trade. So you know, last week, growth beat value by about two and a half percentage points. I mean, over the last three months, growth has beaten value by over 10 percentage points. So really, you know, gotten back that value rally that we had early in the year. Small caps continue to lag. So we're con we're, we're kind of on the sidelines there with a little bit of an underweight still in LPO research's, strategic and tactical asset allocation views.

Jeffrey Buchbinder (05:40):

The international markets have held up well even after this, you know, huge rally earlier in the year and the tech trade working in the U.S. So generally speaking, you got about the same amount of gains outside the U.S. as you did inside. Certainly the rallying doll or the selling off of the dollar in global for Forex markets has been a part of that. See here over the last five days, the dollar down over one point. So that's been a boost. International returns, you know, another thing that's supported the market is lower oil prices, which is tied to lower, lower yields. We'll talk more about inflation Jeff here in a minute, but you got a really nice rally in the bond market. So just like international lately has been keeping up with this strong U.S. rally off the April lows.

Jeffrey Buchbinder (06:32):

Frankly, the bond market's been keeping up pretty well too broadly. You know, most of, you're seeing probably 4% gains in your bond portfolios, maybe even a little bit more depending on how they're positioned. And we're of course, only halfway through the year, so pretty good year for bonds. And of course, oil prices are to thank, we actually, you know, not only do we have the drop in Bonos last week, about 13 basis points on the 10 year, we also had about a $10 drop in WTI, crude, of course, for responding to the Middle East. That has certainly been a a driver of the equity rally and the bond market certainly has been a part of that as well. So that's a quick recap. Anything to add to that, Jeff, before we keep moving?

Jeffrey Roach (07:21):

Well, I think it's a reminder for investors that in the oil markets at least, it's, it's really a demand story versus a supply story, right? So we really thought that given the uncertainty in the unrest in the Middle East, you'd see some upward pressure on prices. But I think the big story is there's a slowdown globally. It's not just in the us, not just the U.S. consumer. It's across the entire globe. And that slower demand is certainly pulled back, the demand on, on oil, and hence prices in the mid to low sixties, really not a bad situation.

Jeffrey Buchbinder (07:56):

Yeah, the, the market is basically saying that the straight of home moves is going to be open, right? I mean, that, that is, that has the potential to drive, you know, 20, 30, maybe even $40 spike in oil prices. That's really how Middle East conflict translates into economic weakness in the U.S. potentially and globally, frankly, it's with higher oil prices and you know, just your, I mean, the market of course is used to Middle East conflict, but the market is not used to closing off the street, where I think 20% of the global oil goes through that. In fact, I don't believe that's ever been closed. So that, that would be a game changer. But anything short of that, oil prices probably going to re remain contained. And certainly the Trump administration is targeting oil prices and yields. Keeping those down is certainly helpful in many ways that we've talked a lot about, you know, in terms of the deficit and the tax bill and inflation and tariffs and all of that, which is all tied together.

Jeffrey Buchbinder (09:01):

So here's your S&P 500 chart. Hey, record high there you go. Breaking through that very top red dotted line here at that 6144 level. So, you know, technically speaking, typically these moves after you go through highs, go another several percent. Who knows, you know, we, obviously we don't have crystal ball but if you're just looking at technicals, the path of least resistance is probably a little bit higher. We're not significantly overbought on the RSI 15, at least RSI 14 in terms of breadth. You only have a, a little under 10% of stocks in the S&P 500 technically overbought. So that's an RSI or relative strength index over that 70 mark. So that certainly should not get in the way of further gains in the short term. Again, just speaking technically, here's another technical perspective. You know, the question to ask is a lot of you, I'm sure would, would ask is, what happens after the stock market returns to a record high?

Jeffrey Buchbinder (10:12):

And so we looked at that after corrections. So a correction is 10 to 20% drawdown. So this doesn't include the pandemic recession, because that was a 34% drawdown. So if you just isolate 10 to 20% corrections after those corrections are over, in other words, after you fully recover that 10 to 20% decline, what happens next? And here's your answer. Over the next six and 12 months, stocks tend to go higher with very high frequency of gains. So the average gain over the next six months is almost 10%, the average gain over the next 12 months, 16%. And you can see the medians here as well, which are which are similar. And you're up at about nine outta 10 times. So very likely that this stock market is higher in six months and higher in a year. Although that certainly doesn't mean we won't have some volatility on along the way.

Jeffrey Buchbinder (11:18):

We're going to talk about this concept in our mid-year outlook, which will be out in about a week. You'll see all of the different line items, you know, all of the different corrections. I think there are 23 of them, again, excluding bear markets, just corrections market has been very resilient holding onto these gains. And, you know, frankly, decent chance that, that, that happens. Again, really, really important perspective. So let's turn onto the economy. Jeff your section here, I mean, I just posed the question, does the outlook justify the, the rally? I think it, it probably does <laugh> when you look at all the pieces, but there are a lot of pieces to this rally. I mean, I guess one of 'em is inflation, right? The inflation outlook. At least the market's telling us the inflation outlook's better, but you're telling us that the inflation environment maybe is going to get a little bit tougher. So how do you reconcile that?

Jeffrey Roach (12:14):

Yeah, so I think just tying in where we see the economic data as it relates to how markets are trading, I think it's one of those things that as long as there aren't really acute shocks to the system, momentum is a really strong factor. Those that study factor analysis understand all that. And so the momentum is there and there's not much yet to change that momentum. Hence what you were calling out, I think with that previous slide on the, on the six month and 12 month recoveries. And so wanted to draw people's attention though, to the broader inflation picture. And I think one of the things that might be just a little bit confusing is you might think, okay, well we had a little bit of an uptick in inflation readings last week and the market still hit a new high. What's that all about?

Jeffrey Roach (13:05):

Well, no surprises that there was going to be some gyrations from April and May, but I think this might be a little bit of the calm before the storm as it were. Meaning we probably see inflation tick a little bit higher once we get into June and July. Now, granted, for those that are patient, maybe by Q4, we'll see some tapering off here, but I think the end of the summer, early Q3 might have a little bit of those challenges. But I'll basically, you look at that far right column, there may data green is good, red is bad, and you, one thing I wanted to call your attention to is that that 3.12 figure, the bottom right and the green, that's what the Fed policymakers often call super core, meaning core, core services, I should say super core services, it's core inflation, which means it strips out food and energy, but it also strips out housing.

Jeffrey Roach (14:02):

And that's because for the majority of Americans that have a fixed rate mortgage, their inflation rate as it were, is unchanged, right? You got a mortgage rate, you're paying your monthly mortgage, you got that fixed rate. And so there's really no need to impute the owner's equivalent rent component to it, 3.12%. That is a pretty good figure relative to where it was just earlier in the year and the end of last year. So that bottom line, core deflator core services X housing, that's one thing to call out in particular. One thing on the other side of the equation that's not so good is that dark red we're seeing third row down. Third line down there is on the services prices index level. That's from the ISM survey. We're actually going to get some ISM data later in the week. I'll talk about that. That's why it's worth highlighting. But purchasing managers are certainly reporting higher risk here in prices paid. That really hasn't showed up in the data yet because look at import prices, producer prices, that's not picking up what purchasing managers are reporting. So that's why it's a little bit of a mixed picture, but at this point, expect inflation to tick up a little bit in the next couple of months.

Jeffrey Buchbinder (15:17):

Yeah, the market is clearly looking through this, Jeff, that, that, that doesn't mean that it'll look through it in two months after we see it, but clearly following the, I guess, the recommendations of some members of the Fed, right? I think Waller is one that are saying this is just a, a, you know, a little bit of a temporary blip and, and we shouldn't you know, conduct monetary policy assuming that this uptick in inflation from tariffs continues. Yeah,

Jeffrey Roach (15:45):

That's right. But I think brought, you know, back of the envelope is if inflation and running in the mid to high twos and the, the fed's upper bound is in the high fours, that spread is just too wide. And I think that's what they're kind of arguing for. If indeed inflation stays in that upper twos range, they could, they could lower it a little bit and still remain restrictive. And that's, I think, what they're going after.

Jeffrey Buchbinder (16:12):

Yeah, absolutely. Above neutral for sure. Very good. All right, so here's, I guess turn to the growth side. That was more the inflation slide side. So we just got our final read on first quarter GDP, right? And it's, it was negative, but it's really important to look at what the components mean going forward. So what, what's your, your message here from the different components of first quarter GDP?

Jeffrey Roach (16:40):

So in this case, it's another conversation about revisions. So last week we got the third and final estimate for Q1 GDP. How did the economy do in the first quarter? The reason why we have a number of revisions is because additional information comes in. So the government reports what happened in the first quarter earlier in the, in the months following the first quarter, then they get more data from tax receipts, they might get more data from actual transactions, all kinds of industry level data from auto sales and import export activity. So hence they get more information. That's the reason why here we sitting, you know, we're sitting in the latter parts of the month of June and we're getting another revision to Q1. Well, that's because they just, it takes time for some of that additional data to come through. Key takeaway, I think with this third round or third estimate for Q1 GDP, and that is this, the consumer was not as strong as was originally reported several weeks ago, so you can't even really see anything on that gray portion of the bi of the line.

Jeffrey Roach (17:53):

The bar charts, their services spending is the gray portion. And you see that really supporting growth in 20 23, 20 24. Well, Q1, 2025, you don't even see gray there hardly at all. You see two major colors, the dark blue, and that's net exports subtracting because a lot of early rush on imports before tariffs, and then of course managing inventories. That's your brownish color there. Supporting growth. Key takeaway here is Q2 is probably going to be pretty weak as well, not because of abnormalities in inventory building or net exports. It's going to be the fact that the consumer's just softer. So we saw last week real spending for the consumer for May was actually negative, so it actually declined from a very weak April number. So Q2 numbers will be somewhat weak, hence that's going to be one of the reasons why I think investors are really going to play up. The idea that we'll get three rate cuts outta the Fed independent of any the political drama behind rate cuts. The fact is, you know, you could perhaps have no change in July, but you have a September cut, October cut, and then a December cut 3 25 basis point cuts. That's certainly possible. And weak economic data will certainly support investors taking on that bet for three rate cuts.

Jeffrey Buchbinder (19:17):

And maybe we'll get a new Fed share named, and that will cause the market to potentially price in more cuts. Well have to see. I think President Trump said he expects to name a new fed chair Powell's successor by September, October. That, that that's a big deal.

Jeffrey Roach (19:35):

Yeah, that's right. And you, when you read stories from Alan Greenspan and Bernanki Yellen, it's really no surprise that presidents are putting pressure on Fed leaders to do what they want to happen. That's pretty common for the White House to try to pressure the, the Federal Reserve. Now granted even though that's nothing new, you certainly don't want to see a fed kowtow to the White House. That's certainly not good news. We want to keep that fed independence so far. I think we got it. Hopefully we'll keep that independence in the next, in the, in the coming months as well.

Jeffrey Buchbinder (20:13):

Yeah, and certainly Bernanki and Yellen had a little bit of a different way of expressing their dissatisfaction with, with the Fed, but we, we won't get into that. It's very clear that President Trump wants his own person in there, even though he appointed Powell, but clearly I think he maybe misread Powell's dovish ness. So thanks for that Jeff. Really, really interesting stuff. We'll get, you know, a little bit of a technical bounce in growth in Q2, but, but not a boomer for sure. So turning next to our third topic, so international or U.S. for the long term. And so, you know, international equities have really had a strong year, you know, 10 points plus ahead of us benchmarks depending on which one you look at. Then natural question as well, can international continue to outperform?

Jeffrey Buchbinder (21:08):

'Cause It's not as cheap after it's outperformed this year. They continue to outperform over the next several years strategically. And our answer actually is, is yes, tactically we still like the U.S. just as much we're neutral U.S. versus international. A tactical timeframe is like a year-ish, give or take six months. The biggest reason certainly that we would argue for a long-term allocation to international or even you know, above benchmark road of the U.S. is valuations. And here you see the PE for the U.S. market versus the non-US market. These are developed developed international markets, so not emerging. And you see here the gap is eight points. The trailing PE based on the MSCI U.S. Index, 24 MSCI, world ex U.S. developed 16 a little over well, 16 and a half. That is one of the biggest gaps in PE points that you will ever see.

Jeffrey Buchbinder (22:15):

So despite our performance this year, international is still cheap. Now, interna valuation is not all that matters. It's, it's not a good timing tool historically, and there are many other factors, certainly, and I would argue that the U.S. should always trade it a premium because of its innovation advantage. But nonetheless, valuations certainly over a strategic timeframe matter a lot. They are excellent predictors of performance. So international for the long term, we think probably looks a little bit better than the us. This is the same chart I just showed, but it's the spread in points. So about eight points of PE premium in the in the U.S. versus the non non-US market. Again, this is only a 15 year look. This is, this chart's in the weekly market commentary for this week, which you could find on lpl.com. If you went back further, you wouldn't find I don't think you'd find anything in the last three 30 or 40 years that's bigger than eight points of premium in terms of the us.

Jeffrey Buchbinder (23:16):

The only time maybe you'd see that kind of a gap would've been in the peak of the.com bubble. So very unique period. Very rare, certainly beyond that, I don't know if there's been one. So bottom line international's cheap. Strategically we think it probably makes more sense to overweight that relative to to the us but tactically we're neutral across all the regions. We just upgraded em last month. So we're neutral em, neutral U.S. neutral developed international, which is the EFA benchmark. So let's now turn to the week ahead, Jeff. And it's a busy week because we've got five days worth of data that we have to compress into four days. It's jobs week and the jobs report comes on Thursday because of the July 4th holiday. For those of you who are listening to us while you're on vacation, thank you for your special, extra special supportive LPL market signals, this patriotic edition. So Jeff, what do we what do we want to watch for with the jobs support and what else should investors be paying attention to? At least anybody who's <laugh> paying attention to economic data this week as they they head to the beach.

Jeffrey Roach (24:30):

Yeah, well, I think tomorrow starts it off. You get an early look on some of the ISM numbers. I referenced that in that matrix just a few slides ago. It's very helpful. We'll get ISM manufacturing and then later in the week in fact same day is a whole slew of other economic data. You get. ISM services component both very, very important because you're hearing directly from purchasing managers, sometimes it's not always the same of the hard data. The soft data does tend to pick up a little bit more of a, their purchasing manager's feelings, as it were, as they report what they, what they're seeing in their business. But besides the ISM surveys, jolts is going to be important because it just helps us understand what businesses are doing as it relates to hirings, separations, firings, and then what workers are doing in terms of quit rates.

Jeffrey Roach (25:24):

It gives us a really great look and an understanding of what's happening underneath the surface. Something that needs to be in conjunction with the analysis on the non-farm payroll report, which we get Thursday, normally it's the first Friday of the month, since Friday's a holiday, it's moved up a day. So non-farm payroll report comes from the Bureau of Labor Statistics. One of the most important economic reports that come out, certainly market moving. We do expect to see continued slow down in hiring. So expect that in the report on Thursday. Couple things you want to look at as well is what about those long-term unemployed people that's helpful as it relates to momentum for the upcoming months. And then you want to see employment to population ratio. That's the participation as it were. Are people giving up and not looking for work anymore that's within that report.

Jeffrey Roach (26:20):

So there's a couple of details that give us and help us develop a good narrative on the labor market. We're actually going to talk about this in our mid-year outlook, but I do think that it's one of those situations here that firms perhaps may adjust to slower aggregate demand, not by firing, but perhaps by dialing back the amount of hours worked. So look at the hours worked component in the non-farm payroll report. So busy, busy, busy week. I didn't mention another thing that comes out every Thursday on a weekly basis, and that's those that are filing to receive unemployment insurance benefits. That's a, a great leading indicator for how labor demand is in the economy, how the, the economy will fare going in the, in the months ahead. So look for a, a softer number. I don't expect a negative print on Friday, but certainly wouldn't be surprised if we see last month's revised down closer to a hundred. We've seen a, a pretty regular consistent downward revision in the numbers. So I think that's another thing to look for on Thursday morning, eight 30 Eastern.

Jeffrey Buchbinder (27:33):

We will, well, I will be watching, many of you may be not <laugh> because it's of the holiday coming up, but I will certainly be watching and very interested to see where, where the, the job treads go. I know not, not a lot of people are talking about doge, you know, and the, the job cuts there, which have kind of flowed through already and nobody's talking about the som rule anymore, right? The, you know, a certain bounce off. I think it was, was it half point per half a per percent bounce in you know, unemployment rate typically has signaled recession that that looks like. And actually by her own admission, Claudia Sm said it probably wouldn't work this time, or she didn't even

Jeffrey Roach (28:15):

That's right,

Jeffrey Buchbinder (28:15):

She didn't expect it to work. So we're, we're, we're sort of done with that. So, I mean, the, the odds of recession given that the, the tariff situation has gotten a little better, probably pretty low still, huh?

Jeffrey Roach (28:26):

Yeah, that's right. I think within all those categories of construction and, and financial services, professional business services, temp help leisure, hospitality, there's a number of categories that I think are worth highlighting. I think instead of focusing on the so-called SOM rule, which does refer to the the amount of a change, the speed of an uptick on unemployment over the 12 month low. So it has to have some type of shock to the system to trigger. I think you're seeing such a low unemployment rate just because we're coming out of a period of a very, very tight labor market. And that's that's what's I think, suppressing the unemployment rate lower than perhaps what it could be in a more normal cycle. But this, the last few years is anything but normal, I think. Jeff, wouldn't you agree on that one?

Jeffrey Buchbinder (29:16):

Oh, yeah, yeah. Going up a point to five is different than going up a point to eight <laugh> in terms of the unemployment rate. I mean, we're nowhere near five, but just the level matters not just the direction of travel. So very, very good point. These are all good things, right? Financial conditions are not indicative of a recession either <laugh>, right? So there's, there's really very little you can point to that she, that suggests that the market should be worried about a recession. And certainly it's not because we are at new highs. So we will end this discussion where we started. We'll celebrate the new highs on the S&P and the nasdaq, frankly, and we will also tell everybody to have a great fourth, everybody enjoy the holiday and hopefully not too much work this week. Jeff, you just got back from vacation, so maybe you should work hard this week, but nobody else should. If you haven't had your vacation yet,

Jeffrey Roach (30:12):

I'm certainly playing catch up for

Jeffrey Buchbinder (30:14):

Sure. I'm sure you are. So so thanks everybody for listening to another LPL Market Signals. We, we greatly appreciate your support on behalf of LPL research. Look for our midyear outlook next week. I think we're going to do a special market signals and maybe bring in more of our friends not just Jeff, but maybe we'll do kind of an around the horn and, and share our our midyear outlook with all of you. We'll have to try to put that together. So again, have a great holiday, have a great fourth Happy Birthday America, and we will see you next time. Take care.