LPL Research Recommendations Report Card for 2024

Jeff Buchbinder:

Hello everyone and welcome to LPL Market Signals. Jeff Buchbinder here with you, with my friend and colleague Lawrence Gillum. We're going to talk some equities, we're going to talk some fixed income. Happy New Year, everybody. Happy New Year to you, Lawrence. Here's my question of the day, Lawrence. How long until we have to stop saying Happy New Year?

Lawrence Gillum:

Ooh that's a great question. I think what was it? Larry David said after like the fifth day or fourth day or something like that. So, but we'll keep it going. So Happy New Year to everybody out there.

Jeff Buchbinder:

Well, we're, yeah, I guess we're pretty close to the fourth day, but yeah, I think we'll keep it going for maybe another week. So it is Monday, January 6, 2025 as we're recording this. The topic of the day is a report card for LPL Research. We're going to go through our calls, tactical asset allocation calls from last year and tell you what we did well and what we didn't do well. We've certainly got some hits and misses. We'll also talk briefly about last week, which was disappointing in the sense that Santa Claus did not visit the stock market because we only got, well, we ended up about half a percent down for the last five trading days of last year, plus the first two trading days of this year for the S&P 500. These patterns, you know, you have to take them with a grain of salt, but historically stocks do better in years when they have positive returns during those periods.

Jeff Buchbinder:

Anyway, so we'll talk briefly about last week. We will also preview the week ahead, which is jobs week, where our expectation and the market's expectation just continues to be for the job market to slow. So, let's get to it. In terms of equity returns, so, well here you see the five trading days. This is most of the Santa Claus period, down 1.6%. So this isn't calendar week last week, because of the holiday. It's five trading days, not four trading days. But if you just looked at the four trading days last week, the S&P 500 was down a half a percent. The NASDAQ was similar to that, and the Russell 1000 actually was higher. So, oh, and I guess the recent period here, small caps have been a bit of an outperformer.

Jeff Buchbinder:

We had a little bit of weakness in some big tech names last week. That's where you see consumer discretionary, which was down over the last five trading days, down 3.3%. So it was an underperformer last week. And then tech was an underperformer as well, down 2.2% last five trading days, down about three quarters of percent just last week. We had some company stories. I mean, it was a low volume week. A lot of people were away. You didn't really have institutions active in markets. So we're not really going to draw any conclusions from the pattern. But I will say you had some big stock moves. Boeing was down almost 6% last week after the plane crash in South Korea. And then you had Tesla down about five. You had Apple weak. Tesla was down on weak deliveries. Apple was down on price cuts on iPhones in China. So, you know, that was really all. I don't think the economic data really had that much to do with how equities did. Although we did get a pretty decent ISM manufacturing report. International markets held up a little bit better. But, you know, same thing, with holidays we're not going to draw conclusions. We still like the U.S. more than international and EM. How about in the bond market? I mean, from what I saw, Lawrence not much movement. Kind of quiet.

Lawrence Gillum:

Yeah, it was pretty quiet last week in the bond market. You know, again, hard to draw any firm conclusions on, you know, a very light week, four days of trading, frankly, over the past week, given the Wednesday holiday. So, you know, rates on here we're showing the Ag flat for the week. You know, that kind of carried across most core bond sectors with the IG Corp Index, Investment Grade Corporate Bond Index, down about 20 basis points. Really, the, if there is a theme here, it's the, you know, the credit markets continue to outperform the core markets. They continue to outperform the rates market. That's, frankly, a carryover from 2024, where we saw really great performance out of the credit markets. The high yield credit markets, the muni high yield markets, the kind of the riskier segments of the fixed income markets.

Lawrence Gillum:

That kind of carried forward into last week as well. But you know, it was a quiet week. But December was a month to forget, frankly, because it was a pretty bad December. Just in general, Treasury yields up 10-year Treasury yield up higher by about 50 basis points. Ag down about 1.6%. So perhaps we're past the big selloff in the rates market given kind of current pricing in the fed funds rates markets, which we'll talk more about that in just a second, I'm sure. So but last week, quiet, hopefully we'll keep the quiet theme going into the rest of the month of January.

Jeff Buchbinder:

Well, I guess the markets are loud today because stocks are up really nicely. I think 1% at last check here midday on Monday's trading session. So certainly liking the headlines today. I think one of the headlines was that the market likes is that tariffs might not be as broad as maybe the market had feared. We also had you know, the big tech contractor in Taiwan Foxconn, which I guess formerly called Hon Hai is up you know, beat on revenues, strong growth, and that's carrying over into the tech, big tech names in the U.S., particularly NVIDIA. So that is helping. And then we got some pretty decent data out of China, actually, over the weekend. So market's getting a little bit of a lift here today on Monday to start off the week.

Jeff Buchbinder:

And you know, we're just talked about the Santa Claus rally that we were down roughly half a percent during that period. So not a positive indicator. However, there's also the first five days of January indicator, which has some predictive ability, at least it seems, on the month of January and the year. So we'll look at that one more closely as we get closer to the fifth trading day. We're off to a very good start there, though. This is a chart. This doesn't include today's activity, but the S&P 500 rallied nicely on Friday and ended up right at the 50-day. So the, you know, of course the gains today, if they hold, will put us nicely above the 50-day and certainly keep this uptrend in place. The weak breadth metrics have, you know, kept us kind of on guard for a pullback.

Jeff Buchbinder:

I mean, we got a little bit of pullback, but again, we discount any pullbacks, you know, between Christmas and New Year's when it's light trading. But we're still on guard for a pullback here because of the breadth. But the uptrend is still strong, and certainly we're not having discussions about pulling away from the equity market. We still have a neutral tactical view on equities. We still recommend investors remain fully invested. Nice trend. The you know, here's the Santa Claus rally stats, though again, we did not get there. If Santa does not show you're in the bottom panel here, bottom section of numbers, and then you end up on average with a slight decline in January, you're actually down a little bit more than you're up in January. But the yearly returns aren't terrible,

Jeff Buchbinder:

certainly. Average gain of 5%, up two thirds of the time. That's not too far off from our base case expectations for the year. Our 2025 outlook has kind of mid to high single digit return forecasts implied by the S&P 500 fair value target, you know, high single digits that's not terrible, especially after back-to-back 20% up years. But, that is, if you believe in this indicator we're a little bit skeptical <laugh>, but if you believe in this indicator then you're probably looking at a modest up year after a flat January. Actually when we come back next week, we'll probably show you the first five days January indicator. So over to you, Lawrence, for the 10-year yield. I mean, we've made a move here. I guess part of it is the solid economy, part of it is the Fed. What do you think is going on here and what's your near-term outlook for the 10-year?

Lawrence Gillum:

Yeah, so this it's been mostly one way higher for Treasury yields, particularly in the month of December, as I mentioned, 10-year Treasury yields higher by about 50 basis points. In December up about a full percent since the Fed started cutting rates. So there's really is a kind of, I would call it a kind of a back to normal looking Treasury yield curve right now because if you remember, we've had a very inverted yield curve. The expectations out of the fixed income markets was that a recession was going to happen, the Fed was going to cut aggressively. Those things don't seem to be happening. So this is really the unwinding of a lot of these call them negative outlooks for the economy. So, you know, the increase in yields, I think is just, it's, we talked about this in our outlook piece.

Lawrence Gillum:

It's just kind of getting the yield curve upward sloping again. And that is, I would argue, a healthy development, as long as the economy can withstand a you know, a higher 10-year Treasury yield, which for all intents and purposes, it looks like it can, at least you know, at least initially. But in terms of the drivers of the move higher, we have seen inflation expectations tick up a little bit, better economic growth. But really the big move higher has been twofold, pricing out, you know, a number of rate cuts by the Fed throughout 2025, 2026, but then you've also seen something that's kind of technical within the fixed income markets. The Treasury term premium has started to increase as well. The Treasury term premium that's just one of these wonky fixed income things we talk about.

Lawrence Gillum:

It's the additional compensation that investors require or demand to own longer maturity securities. That was negative up until recently. It's starting to kind of revert back to its longer-term averages. So, and I think, you know, as long as the economy continues to perform well, as long as the Fed doesn't necessarily need to cut rates aggressively, we could see yields continue to move higher. There's been some, you know, discussion about 5%, 6% on the 10-year. I think 5% is realistic, 6% might be a kind of a worst case scenario. But it wouldn't surprise me if we do get that 4.75 or perhaps even touch 5%, as long as the economic data continues to come in kind of in line or even better than expectations.

Jeff Buchbinder:

Yeah. So that's more of a near term outlook, right? I mean, we're still at yes, four and a quarter for a long term, you know, one year plus outlook, right?

Lawrence Gillum:

Right. So for the end of the year, I still think we are going to have rates lower because perhaps paradoxically, the longer interest rates stay higher, the, you know, the greater chance of an economic slowdown. You know, we've talked about how the economy's less interest rate sensitive right now. That's not going to last forever. People are going to want to move eventually and get a new mortgage on a house. And you know, eventually that's going to bite into you know, consumer balance sheets. But so I think as we get through the year, we're likely going to see interest rates around, you know, 4, 4.25 because of kind of an incremental slowing in the economy, nothing that would be, you know, cause the Fed to cut rates aggressively, but I think there could be some maintenance cuts in 2025 towards the back half of the year that aren't really priced in right now.

Jeff Buchbinder:

Yeah. Not a lot of people can, want to sell their house and buy a new one right now, <laugh>. Right. But if you are in a position to take on a new mortgage, would you tell those folks to wait based on your outlook for the 10-year?

Lawrence Gillum:

I mean, I think that we're, so, I mean, I don't think we're getting, getting back into that zero interest rate policy. I think zero percent is behind us. The 3% mortgages are really behind us as well. You know, there's five to 6% is kind of, you know, I would say it's probably a more normal mortgage rate. So if we get back to around 4% on the 10-year, maybe you get five, five and a half or even 6% mortgage rates. I think that's kind of, you know, the lowest you're going to see absent any sort of economic contraction. So you know, you don't want to wish, frankly, for a lot lower mortgage rates because that means the 10-year Treasury yield is significantly lower, which means the economy has weakened substantially as well. So I think five to 6% is kind of what to expect on a go forward basis.

Jeff Buchbinder:

Yeah. Although you get lower house prices and maybe a better time to buy. So, tough call certainly. But thanks for that, Lawrence. I guess the bottom panel here is the point I just mentioned, right? The rates are up partly because the economy's been strong and you know, most, the outlook for most economists including ours, is that it's going to be pretty good going forward. I know you watch this relationship, you know, yields versus the economic surprise indexes, whether it's from Citi or Bloomberg. Looks like these have disconnected lately. So would you interpret this to, you know, to mean that maybe yields have to come down?

Lawrence Gillum:

I would say if you look at the middle chart and the bottom chart, I think those are pulling in opposite directions. And that's, and right now that Treasury term premium chart is kind of winning the day. If the economic data comes in, the economic data surprise data is still positive. So that means there is still positive surprises out there. It's just kind of decreasing relative to what it was. If we start to see those you know, economic surprise or that economic surprise index turn negative then you could start to see yields fall a little bit. But until that happens, that Treasury term premium is really, I think, going to continue to push, you know, yields marginally higher.

Jeff Buchbinder:

I guess economists are doing a pretty good job of forecasting right now, because that's pretty close to neutral, right?

Lawrence Gillum:

Right.

Jeff Buchbinder:

I guess in theory, where you want to be.

Lawrence Gillum:

We'll see how Friday goes with the jobs report.

Jeff Buchbinder:

Yeah, that's the big one. Yep, for sure. That might really be the only economic report that matters this week. So let's go to our report card. So you know, we went through all of our tactical asset allocation calls, equities, and fixed income. We didn't get into alternatives, but certainly the majority of our allocations in stocks and bonds. So we went through all of our calls in our Weekly Market Commentary this week, which you can find on lpl.com, and just walk through the winners and the losers. And thankfully we got more winners than losers. It was a really good year, all in all, we had some misses, but really good year. The I think the toughest test possibly of the year was to stay in equities despite all the really credible bearish arguments.

Jeff Buchbinder:

Certainly, I think the number one bearish argument was probably, you know, narrow led concentrated market and high valuation big tech, right? And so we stayed in the market all year, right? Our tactical asset allocation recommendation on equities was neutral all year. It was very tempting to downgrade at points. Even when you know, the S&P 500 went above our year-end target, actually pretty significantly above our year-end target. So we thought, you know, equities were overvalued certainly for the majority of last year, but as we always say valuations aren't great timing tools. So we were looking for something else to tell us to sell, and we never saw it. So shout out to Adam Turnquist for the use of technical analysis which was certainly a big piece and our expanded quant work certainly supported staying in as well, despite the fact that the market was led by these certainly expensive big tech names.

Jeff Buchbinder:

So that's the Magnificent Seven I'm referring to, which is kind of this turquoise colored line that's way above all the other lines. <Laugh> equal weighted Mag Seven was up like, what, 65% something like that last year. And then the S&P still strong, but up about 23 on a price basis. The equal weighted indexed did even worse because you lose the boost from the big tech names that become smaller weights. Related to that, you know, it was tough to stick with growth last year, and we did. We were in growth all year. That was the right answer, certainly. Based on the Russell 1000 style indexes, growth outperformed by 18 points over value. And here, again, same story. The big techs, despite being expensive and despite being, you know, upwards of 40% of the market, the momentum was there, it remained strong pretty much throughout the year.

Jeff Buchbinder:

We never broke the uptrend. So we've stuck with growth, you know, at some point we will rotate into value. Probably going to come in 2025 at some point as the earnings growth gap narrows, right? And remember, fundamentals back up the strength in big tech because that's where you're getting the strongest earnings growth. That's where you're getting all this AI investment. So at some point, that'll slow the earnings for the value side will pick up, particularly cyclical value. They just haven't really closed the gap very much just yet. So at some point, valuations matter, we're just not there quite yet. So these are kind of all tied together. Again, because here's the U.S. over international right bottom line, U.S. tech led was so strong that the other markets in the world without as much big tech and AI weren't able to keep up.

Jeff Buchbinder:

You also had a 7% gain in the U.S. dollar last year, which made it hard for international to keep up as well. And you end up with, you know, again, the S&P 500 up 23 the EM index up eight, and then the EAFE index for developed international up even less than that. Europe had a tough year in particular. So U.S. dominated, we favored the U.S. all year, underweighting EM, and that was certainly a profitable trade. So that's kind of high-level style and cap or asset type, we'll say and style cap. Actually, we didn't really add any value because we were pretty neutral the whole year. I do want to quickly mention sectors before I hand it over to you, Lawrence. Made two good calls in sectors, in particular, really good actually. Communication services was the number one rated sector, number one performing sector for the entire year.

Jeff Buchbinder:

And we had that sector overweight for the entire year. So that was a huge win. It was up over 40. We also had real estate as an underweight all year, and that sector was only up five. So that was certainly a win. We, by the way, continue to like comm services really strong earnings growth. There's a lot of AI in there, with the biggest holdings in the comm services sector, Alphabet and Meta. And the technicals continue to look quite strong. Valuations aren't even that high, frankly, relative to the market. So continue to like comm services and continue to underweight real estate, kind of mixed fundamentals. Not terrible, but you've got interest rate sensitivity there. We'd prefer economic sensitivity to interest rate sensitivity. So still recommending an underweight to real estate. And then lastly, the big miss was energy. We recommended energy for the first eight months of the year, and it underperformed by eight percentage points.

Jeff Buchbinder:

We just put too much weight on the capital allocation decisions, which were better and not enough weight on the price of oil, which really weighed on the sector for much of 2024. So we did downgrade the energy sector in September and then again in October, which was a smart move because you had more underperformance from September through year end. But did detract a little bit from our asset allocation in the first eight months of the year. So there was our big miss. Consumer discretionary was a little miss. We underweighted consumer discretionary in the first part of the year when it did quite well but did go to neutral later in the year. And you know, kind of mitigated, I guess, the potential for more opportunity costs by being short consumer discretionary. So that was another miss. But again, high level, all in all, we did pretty well getting more hits than misses. So how about the fixed income side, Lawrence? I think probably say the same thing. More, more hits than misses there too.

Lawrence Gillum:

Yeah, I would think so too. I mean, you could really argue that last year was a pretty kind of disappointing year for fixed income markets. I think the Ag was only up about 1.2%, so it underperformed its coupon payments. So, you know, it was kind of a challenging year for fixed income. A couple things stand out in terms of hits within the fixed income markets, though. We had a general overweight to fixed income funded from cash. And we kind of we exited that position when interest rates, the 10-year Treasury yield was around 3.6ish percent. So we made you know, that was a good call to overweight fixed income relative to cash, that trade worked well. And since then, we've kind of been neutral fixed income neutral duration as we've seen the, you know, interest rate environment change and continue to move higher.

Lawrence Gillum:

The 10-year Treasury yield's about a percent higher than close to where we exited that trade. So I think that was a good trade on the margin. But the big winner within the fixed income markets was our allocation to preferreds. We've had a allocation to preferreds since March of 2023. That was right after the regional banking issues with Silicon Valley Bank. The, you know, we had the concerns that the regional banking system was in danger because of some of their positioning that was offsides relative to you know, what the Fed was doing in terms of rate hikes. The, you know, a lot of their safe fixed income asset exposures were heavily underwater. And that caused a lot of kind of frustrations for regional banks in general.

Lawrence Gillum:

So we got that proverbial baby with the bath water sell off in March of 2023. We added to that, or we initiated a position in preferreds then. And we've kept it going up until towards the end of last year, it turned out to be kind of, and I'll use 2023 and 2024 in terms of winners. Each year was up about, you know, over 9% in preferreds in 2023. And another you know, close to 10% in 2024. So really good fixed income returns, because of that preferred trade. We've reduced our allocation and kind of downgraded our recommendation preferreds. We still like preferreds, just not as well as we did kind of call it 20% ago when we got you know, initially involved in preferreds. But so there's still a good story.

Lawrence Gillum:

What we're showing on the screen though is you know, the misses, if you want to call it a miss. And this is really kind of an error of omission versus commission, I guess, in that we didn't have a lot of exposure to the corporate credit markets. You know, if you look at you know, the high-yield market, it was up close to 9% last year as well. We've not been interested in the high-yield corporate credit market, frankly, because of valuations. And that's what we're showing here. These are, you know these are spreads relative to Treasury securities. The tighter those spreads are, the lower those numbers are, the less attractive, the more expensive they are. The corporate credit markets have been expensive for a while.

Lawrence Gillum:

So we didn't really get interested in high-yield markets last year. High grade, same story, high grade. These investment grade corporate issuers, they outperformed the broader index last year. We had an underweight recommendation for high grade or investment grade corporate bonds. I will say though, that we did have an underweight to the sector, but we've liked the short to inter intermediate part of the corporate credit universe. And that did outperform the broader index. But we still nonetheless had an underweight recommendation there. So it really came down to valuations. You know, our expectation was an economy that was going to slow and maybe we thought we would see, you know, wider spreads at some point in the year last year, and it just never came to fruition. So we kind of missed out on that, if you will. But you know, our allocation to preferreds, I think offsets what we got wrong in the corporate credit markets.

Jeff Buchbinder:

Yeah. So maybe a bit of an opportunity cost by not, you know, pairing an overweight to credit with the overweight to preferreds. But managing risk isn't a bad thing. Sometimes the risk doesn't appear when you manage for it, but it will at some point. And you know, we'll probably still be here cautious on corporate credit when it does. It's also important to keep in mind, and you alluded to this, Lawrence, when you have an overweight, you have to fund it from something. You have to be underweight something else relative to your benchmark. So the fact that we, you know, moved from credit to preferreds certainly was a decent trade and not a miss.

Lawrence Gillum:

Yeah. I guess the perfect trade, if you will, would be underweight kind of securitized that underperformed the index broadly, and then kind of overweight corporate credit. But from a risk management perspective, that probably would be too risky alongside an equal weight allocation to equities. So you know, I think on a risk adjusted basis, it still made sense, but you know, we're hard graders here in LPL Research.

Jeff Buchbinder:

<Laugh>, there you go. Hard to get straight A's from this team. And, you know, you could have put a winning chart in here and you chose the losing chart. So how about that?

Lawrence Gillum:

I'm going to wear my losers proudly.

Jeff Buchbinder:

High integrity, there's no sugar coating here.

Lawrence Gillum:

No place to hide.

Jeff Buchbinder:

<Laugh>. That's right. But again, overall a pretty good, it was a tricky year in some respects for equities and fixed income, so handled it well. And I think you know, for those of you, you know, listening for LPL advisors and followed our advice, I hope you would agree that it was a good year. So let's keep going and move on to the week ahead before we wrap. And I think this is going to be a fairly quick discussion because the payrolls report on Friday is really, I think, the big event of the week. And I mean the other, so, you know, in talking to our economist, Jeff Roach, on our internal call this morning, it was all about jobs for him. Even the other data points, the JOLTS report, job openings and labor turnover, that quits rates, that's labor market, right?

Jeff Buchbinder:

He said with the ISM, what we should be watching most closely is the labor, the employment component, right? Which I think was a little bit soft in the manufacturing, ISM, right? And then payrolls and wages obviously are important for the labor market as measures. So and then the Fed cares about the labor market. <Laugh> really more than the broad economy, you could argue. That's their mandate labor. And we get Fed meeting minutes for the last meeting, the December 18 meeting. So that's about labor. So basically, I told you that the whole week is about the job market. What do you think, Lawrence?

Lawrence Gillum:

Yeah, I think that's right. Just adding to that, there's a couple Fed speakers this week as well out there. And these are, I mean, if you look at kind of past commentary from some of these speakers for this week they have been kind of more on the hawkish side, more concerned about, you know still relatively healthy job market and still relatively high inflationary pressure. So but it, yeah, I mean, whatever happens on Friday or with the job market on Friday is really going to kind of set the tone for the weekly performance for markets just in general. I think, you know, Fed officials can come out and say whatever they're going to say, but if there's a big miss in either direction, frankly, on the jobs report on Friday that's going to supersede anything else that happened, you know, throughout the week. So it's all about the jobs week on Friday.

Jeff Buchbinder:

Yeah, I mean, just based on the move in yields the market, you would think would digest a slight miss pretty well, you know, something around a hundred thousand probably wouldn't be too disappointing for markets. Well, I mean, we'll have to see, but with consensus at 160, anything between 100-200 I would think would be fine. We did 227 last month. It's when you get these really big surprises that the market gets confused and tends to move, you know, like we had a, you know, a few months ago with that really low number, the hurricane distorted number, what was that, September? So barring that, it'll probably be pretty calm. And rates have moved so much here, Lawrence, that I mean, anything could happen, but I think the odds that the jobs report drive a sharp surge in yields from here, probably low.

Lawrence Gillum:

Hope you just didn't jinx us.

Jeff Buchbinder:

I hope I didn't jinx us. <Laugh>.

Lawrence Gillum:

The range of expectations.

Jeff Buchbinder:

This is an equity strategist talking about the bond market and the economy. Yeah. So, you know, take it with, for what it's worth,

Lawrence Gillum:

The expectations for Friday's job number though, 120 to 200,000. So it's still a pretty broad expectation. So to your point, I think if it's within that 120 to 200,000, maybe it's kind of expected, if you will. But if we get another kind of blowout report that's, you know, above 200 to, you know, 225 or something like that, then there still is one point, call it six cuts priced into the market for next year. If we continue to get a hot jobs number, though, those could get priced out as well, which would push bond yields higher, but hopefully, you know, it's more in line. We talked about economists getting it right, hopefully they're getting it right for Friday as well.

Jeff Buchbinder:

Well, we can blame Jeff Roach if that number is strong because we could continue to hear from him. I'm saying this obviously in jest, but <laugh>, we continue to hear that there's a plethora of evidence that the labor market is slowing. So the bias going into this payroll and it is, right, the bias is down. We're, you know, down 60, 70,000 jobs based on consensus. You would think that, again, based on the other data, the whole mosaic, that, you know, you're probably more at risk of a weaker number than a really strong number. So, I'll make that case. Could be wrong, been wrong on calling the jobs report before, many times <laugh>. But you know, the weight of the evidence, you know, supports this slowing job market thesis from Jeff Roach and our team. So, Friday's the biggie and we will certainly be closely watching Fed expectations after that. So thanks for that, Lawrence. Any closing remarks or should we wrap it up?

Lawrence Gillum:

Oh, no, let's wrap it. It's a busy week and hopefully everyone is you know, well rested after the holiday break and ready for some, you know, market excitement.

Jeff Buchbinder:

Yeah. First Market Signals of 2025, first of many. So thanks for, for joining. Thanks for your interest in LPL Research and the LPL Market Signals podcast. Everybody. Have a wonderful new year. Take care, and we'll be back with you next week.