A Strong Case for Staying the Course Amid Volatility

Jeff Buchbinder (00:00):

Hello everyone and welcome to LPL Market Signals. Jeff Buchbinder here with my friend and colleague, Jeffrey Roach. Jeff, we're bringing the Jeff and Jeff show to our audience on a very nice rebound in the stock markets today. How are you?

Jeff Roach (00:19):

Doing great. Hope you had a great weekend, and glad to share some excellent slides that I think will put a lot of this volatility in context. So this will be a good episode.

Jeff Buchbinder (00:33):

Yeah, I'd say Thursday of last week, I would've expected to talk about private credit today, but you know what, we just pushed that aside because of the volatility, and we're just going to try to provide you with some charts, some statistics that can help all of you get more comfortable with this market here. So, that's the main goal, but we've also worked in an economic update. So after you've looked at those wonderful disclosures, here is our agenda. We're going to start with just a recap of the market. Last week, of course, it was all about the Middle East and the four week now four week losing streak, four the S&P 500. Next is what we'll call knock on effects of the energy shock. So that'll be just Jeff's update on the economic environment. After that we'll show you these charts.

Jeff Buchbinder (01:31):

We have four charts that we think will help put this volatility in perspective. And maybe for those of you who are LPL advisors, reassure your clients that staying the course is the best approach here. Always difficult to do when you're in the middle of it, but we do think that is the best approach here, and it is almost always the best approach. And then we'll close with just a preview of the week ahead and there's really, frankly, not a whole lot of top tier economic data. So, Jeff, I think you're going to be pretty quick with that. That's right. All right. We'll start with the market recap. I mean, if you want to go long, go long, but <laugh>, I don't think there's enough economic data to really talk about to go more than a minute or so on that.

Jeff Buchbinder (02:16):

So we'll start with just a recap of last week's market action. Of course, the S&P 500 was down, fourth straight week. We broke the 200-day moving average. The decline reached about 7%, close to close, peak to trough, not quite, but pretty close. And I mean, Jeff, a percent and a half decline is not much, certainly, but when you combine it with the prior three weeks declines, certainly people are starting to feel it. Of course. You know, this morning we got the comments from President Trump about a five day ceasefire, and we've bounced back really nicely but clearly investors were nervous last week. And you know, we continue to see pressure in the equity markets.

Jeff Roach (03:14):

It is mostly a domestic international as well as you know, maybe the commodity space. You'll highlight this in a little bit, I think. But also maybe sector dispersion is a fair phrase to talk about, especially when you're looking at those sectors on the left side of your screen right now.

Jeff Buchbinder (03:35):

Yeah, energy worked, no surprise there. And really nothing else did last week, unfortunately. Although, I guess maybe it's worth noting that the banks did pretty well, relatively speaking, because of the Fed's relaxed bank capital requirements. I think beyond that, it's just a simple story of the more sensitive a sector is to energy prices, the worse you did. In fact, beyond that, small caps are certainly you know, high beta plays or riskier investments, all else equal. And you could see here, I mean, Russell 2000 wasn't down that much more than the S&P 500 last week, but actually entered correction territory. So, small caps certainly haven't provided diversification benefits during this sell-off. Really, the only thing that has is energy. Certainly precious metals haven't because gold is actually off to one of its worst starts to a month ever after one of its best starts to a year ever.

Jeff Buchbinder (04:47):

So a lot of volatility there. I think the main headline there is that, you know, when you have a sell-off and you get institutions offside, they sell where they have gains, they sell where they have the most liquidity, the easiest stuff to sell. So in the past that might have been Mag Seven, this past couple of weeks, it's been gold. There's also a fundamental reason for gold to be down. Gold does not like higher interest rates, and gold does not like a strong dollar. And so this crisis clearly has, or conflict has clearly resulted in those two things. So we still think at a high level, there's some tailwinds that make precious metals an attractive source of diversification over the medium term. But certainly, until this conflict ends, you may see continued volatility there. So Jeff, how about the bond market? You know, yields have been ticking higher, 10-yield, kind of a in the 4.30 range at last check. What are your thoughts on the bond market and, and maybe mixing in the debate here we've been having about the Fed, the market clearly not as confident we're going to get cuts.

Jeff Roach (06:07):

Right. There are definitely a couple of pressure points pulling in all kinds of different directions. So you have you have some weak growth coming into the year. Q4 of last year was pretty weak, but the previous quarters were pretty strong. Expectations for 2026 are pretty decent from a growth standpoint, particularly because of the headwinds from pretty large tax returns as well as tailwinds from the OBBBA Act, and there's those pressure points. But also you have inflation coming in hot as we expected the first part of this year. We don't think inflation's going to ease up until later this year. And then on top of that, you just have just the unknowns on how the Fed's going to manage through this crisis. I think it's really important to remember, you know, the Fed doesn't need to manage through these what is expected, you know, these or short term shocks.

Jeff Roach (07:05):

They are still trying to figure out the longer term trajectory on inflation and full employment. But because of the shock in oil markets, you know, some investors were starting to put on bets that the Fed would hike at their next, when they take their next action. I don't think that that's going to be the case. I think they're going to be able to hold for a while, as long as the economy holds steady, they can wait and see, be patient, see what happens, see how things shake out for how long oil prices will remain elevated. So I don't think that those investors are right in putting money on the table for a rate hike. Think the more reasonable, I think expectation is the Fed's not going to cut as much as they otherwise would. Certainly, they're not going to cut as much as they thought they would back in December.

Jeff Roach (08:04):

So a number of pressure points, I think key takeaway here is, you know, this is most likely going to resolve itself by the summertime. Yes, it'll take some time to kind of unwind some of the challenges in trying to come to a deal as the president says. But this is not going to be a headline grabber, I think in the summertime. That's kind of my expectations. It's going to be way too costly to keep it going for that long. And I think a lot of the countries will be incentivized to keep this shorter than you know, four, five months long kind of engagement.

Jeff Buchbinder (08:49):

Yeah. We still don't exactly have visibility into how the Strait of Hormuz opens up fully, but a five day ceasefire is probably being interpreted by the market today as meaning oil prices might have peaked. And clearly, you know, President Trump doesn't want this to drag on for months and get closer to the period where you would expect it to really influence midterms. So I'm in complete agreement. This is probably several weeks, not several months.

Jeff Roach (09:21):

Yeah. Yeah. And, and

Jeff Buchbinder (09:24):

Who know how much effect it's going to have on the bond market and on oil prices.

Jeff Roach (09:28):

Right. So I think it's extremely important to remind the listeners this is a midterm year. So all the unique pressures because of that, I think will play into the favor of a resolution at some point. Maybe not a very clear cut resolution, but at least a step in the right direction where you don't have the challenges to global supply like you do today.

Jeff Buchbinder (09:59):

Absolutely. So thanks for that, Jeff. Let's keep moving. So here's your S&P 500 chart. Big news Friday, broke the 200-day moving average. Now, returns after 200-day moving average breaks are not typically that much worse than average returns, depends on the economic environment you're in. So don't necessarily take that as a sell signal. And by the way, we're bouncing right back up toward the 200-day, and if the ceasefire holds and talks are productive and the Strait can open soon, there's almost no way we're going to stay below the 200-day moving average. So don't be alarmed by that. But it is certainly noteworthy. I think it's also noteworthy that the RSI 14 pretty much touched 30, the oversold mark. That's a very logical place for a bounce, and sure enough, that's pretty much what's played out.

Jeff Buchbinder (11:01):

So we'll keep watching that. Clearly the breadth has been deteriorating. It's getting close to the point where you would say on that basis, this is a natural place to bottom, we're not washed out. It's not capitulation, but the breadth metrics are pretty close to where you would say this is typically where stocks would reverse higher. So let's go to the economic update, Jeff. I think the headline that we've talked about, actually, you wrote about this last week in the Weekly Market Commentary. It's all about how long this crisis lasts, this energy shock. And at least the market and I think correctly is interpreting the events over the last 48 hours to mean that it's probably not going to last very long. But if it does this chart's pretty reassuring.

Jeff Roach (12:02):

Yeah, that's right. You look at the yellow line, you basically say, we've been net importers of petroleum products for quite some time, decades upon decades, but since 2020, we're no longer net importers, meaning we have a little bit more energy independence than several major countries around the world. So think Japan, Japan is in a very, very different situation. They rely a lot on internal or external oil suppliers, particularly out of the Middle East, and we're just not in that scenario. I think the second thing to remember too is just the overall usage of petroleum products. Oil in particular, crude oil in particular per, you know, thousand unit of our economy, our gross domestic product. So oil intensity is a really important ratio. Debt ratio has declined and has consistently declined over the last several decades. So we're no longer net importers.

Jeff Roach (13:04):

We no longer have the same level of oil intensity in how we produce the goods and services that we do in this country. That allows us a little bit of more insurance, or maybe we're insulated a little bit better than some of the other G10 countries. And I think the reason why that's important is it helps us understand, okay, when should we revise our baseline forecast? That's kind of the big question here. That's the million dollar question. So we have not revised much our baseline. Granted, there's going to be a little bit of challenges, not only from the oil shock and the attacks late February, but a little bit of this rebound from the government shutdowns that impacted Q4 numbers. That's going to show up on the flip side in Q1 for this economy. So remember, it's going to be a little bit choppy for a number of reasons, not just because we have a war going on in the Middle East but we're fairly insulated, or at least we're more insulated today than we were just pre-COVID from shocks in the oil market.

Jeff Roach (14:19):

Certainly a lot more insulated than we were in the 1970s and 80s. I think that's kind of your key takeaway from some of the understanding here in the oil markets.

Jeff Buchbinder (14:31):

Yeah, I'll throw a statistic out there to help put that in perspective. So this is from Wolf Research. If, let's say, I don't want to call it a worst case, but in a negative scenario, let's say we have $5 gasoline prices at the pump through June, that is an incremental $86 billion for consumers to spend on gas. That is not a huge number. In fact, it'd be way more than offset by tax refunds this year. So I think that's a, maybe a good stat to put this into perspective. We're not going to be crushed by just a few months. I mean, we're not even to April yet, right? More than a few months of elevated gas prices. And I mean, in Massachusetts, gas prices are high, nothing like California, but they're not five bucks, not even premium, in fact, not really close <laugh>. So I think we've got some cushion here, especially in the cheaper areas of the country in the Midwest where gas prices are a lot lower. So thanks for that, Jeff. Let's keep moving here. And here's another chart that you're going to tie to this Mideast conflict here about younger workers. So what's your message here?

Jeff Roach (15:53):

Yeah, yeah, it goes to basically saying, what are the two biggest unknowns that would impact the trajectory for the economy? So, oil shocks, one. Second is you could say the AI shock. What kind of shock? And where will it show up the most? You know, we made the case in the first shock with oil shocks. We say, okay, we have a fundamentally different type of scenario in terms of our own production that allows us to be little bit more insulated. And then I think the second shock is the AI shock. Well, who's going to be the most insulated from that kind of shock? It's actually your older workers. So, let me make that case, and I'll tell you why I am showing this chart relative to the thesis I just developed here. So this shows you the change in, basically the change in employment relative to population by age.

Jeff Roach (16:52):

So you think about the last several years particularly the change throughout COVID, you know, the work from home, the spike in productivity, partially because of the work from home scenario. And then of course, in more recent years, the last 24 months, this pivot and this investment in AI, who's going to be the most insulated from that kind of shock? The people that have some experience in the labor force already. So far, right of the chart, employment to population is actually higher since just before COVID for the 35 to 44 year olds. But the, pretty much 16 to 24 been very much impacted. Just a lot less demand for those kind of workers relative to the population. Have a little bit of decline, 25 to 34, but you can see the trajectory here as you age up, <laugh>, typically that is a good proxy for higher level of experience.

Jeff Roach (18:03):

And understanding of your industry, of where you work. You're going to be more insulated from the AI shock. So you got your two shocks, oil and AI. I have one more chart that I think that ties into this as well. Say, okay, what does this mean for the United States specifically relative to other countries? It means because we're insulated at some level. Now, granted, it's not a, you know, a pure insulation, it's not completely irrelevant, but these shocks will not hit us relative to other countries. It means that the economy will at least not have as high of a risk of recession as other economies will have. And also the domestic currency, the U.S. dollar is experiencing some appreciation relative to other major currencies. I'm just showing a couple here, but this is pretty much across the board. Most currencies depreciated relative to the dollar or U.S. dollar appreciated.

Jeff Roach (19:04):

Look at green line there is euro, left axis and Swiss franc, which is a little bit unusual. You can even see that in that copper line is typically fairly steady. The last several weeks we've had a decent appreciation in the U.S. dollar because of the structure that I just referenced in the last two slides. So something to obviously watch for something that's extremely important as it relates to how the U.S. can hold its own relative to the rest of the world, and certainly how the U.S. will be impacted on some of this crisis. Just like you said, Jeff, one more stat here on the reference to thinking about dollar the price you pay dollar per gallon you pay relative to how that impacts households. I think it's helpful to think of it, you know, just kind of broadly speaking back of the envelope here is you have to have a pretty long duration of high prices, and the magnitude of the increase in prices on oil needs to be high enough for it to matter.

Jeff Roach (20:13):

So think of it this way, you know, prices at the, at you know, crude needs to be hovering around $140 a barrel which we're not there, we're not really that close as we're recording today. But you have roughly $140 barrel, and that needs to last for a couple of months before you really need to revise forecasts for 2026. I think that's kind of your bottom line key takeaway from some of the data that I just shared.

Jeff Buchbinder (20:47):

Yeah, so we have cushion, which is good, but the other countries in the region don't, right? And Europe doesn't because their natural gas flow has you know, been curtailed significantly, right? I got to think natural gas prices in Europe must be nearing a double, and that's on top of what they had to deal with Ukraine and Russia. So, it's just a really tricky situation for Europe in particular, and also Japan and other Asian countries. So the way this strong dollar translates, it's less return internationally in an environment where you have weaker economies internationally. That tells you that we're in a period of U.S. outperformance. Now how long that lasts is anybody's guess because It depends on how long the conflict lasts. Today, certainly as we're recording this, you know, on the Monday, you're seeing international stocks in many cases outperform the U.S. because they've experienced more pain.

Jeff Buchbinder (21:56):

They've got maybe more to gain when this passes. So we're not making any tactical asset allocation changes this week, but if you're, you know, thinking about what's going to outperform over the next few weeks, U.S. or international, that's the context that we would that we would use to make that decision. So thanks for that, Jeff. Let's switch gears and talk about, you know, how we emotionally stay the course. This is just, it's a very tough time for folks to stay invested. We understand that, especially the move late last week and then into Monday has been dizzying <laugh>, right? So we've put together four charts that I think can help you stay the course and maybe help you take the emotion out. I mean, we all know that long-term returns are attractive, but when you're in these short-term periods of volatility it's tough to hang in there. So first point I'll make is that corrections happen on average once a year.

Jeff Buchbinder (22:59):

We're not even there yet, right? We know we had a correction last year around the whole tariff scare in April. This year, we haven't had our first one yet. We're about 3% short at the Friday lows. It's totally normal to get one per year. So that doesn't necessarily prevent us from having a good year in the market. We continue to believe that we will have a solid positive year in the stock market despite a likely correction at some point. So this next chart shows you how, and I've showed this here before. I'm sure many of you have seen this before. It's my favorite chart. It shows the max drawdown each year next to the annual return. And so what you see is a lot of very attractive returns. Of course, during this period, the average return for the S&P has been 10%.

Jeff Buchbinder (23:58):

At the same time, you see a lot of drawdowns that are more than 10%. In fact, the average is 14. So if there was such a thing as an average year, you'd be down 14 during the year and you'd end up up 10. That is a very powerful statistic. So what have we seen this year? You know, I think we're down 3.1% year to date, something like that. Max drawdown is about 6.7. We're not even normal yet, so we're going to get more volatility. It's almost assured we're going to get positive returns. We think those are not assured, but we think they're very likely certainly. And we'll probably put another dot on here that looks like, or diamond that looks like a lot of these in the past. So keep this in mind. It should help you get comfortable staying the course. Market timing can be costly. Next chart. So what this tells you is it's punishing to miss the best days.

Jeff Buchbinder (25:04):

Typically, the best day in a year is going to be about a three, 4% year, sometime day, I'm sorry. And it could even be stronger, right? These big up days, if you miss them, they're typically below the 200-day moving average, kind of like today. And they're typically during growth scares or some sort of geopolitical shock. Not too dissimilar to today. So we're not up three, you know, as we're recording this. We're not even up two, but it's a pretty strong rally nonetheless. We think the odds are that when you're tempted to market time, try to move out and move back in. Those are probably going to be the times when it's not prudent to do so. In fact, if you just missed the best three days of a year, there goes your return, right? Since 1990, returns are zero, effectively flat, if you miss the three best days.

Jeff Buchbinder (26:03):

So we would, again, just stay the course. Don't try to market time. It's very difficult. If you do try to do it, make sure you have a very clear plan as to when to get back in, because a lot of people when they move out because they get too nervous, they don't get back in. And that's when you really miss some positive returns. Alright, last one here is just probability of gains over rolling monthly periods. So the one that stands out to me is the three year statistic. If you take all three year rolling returns for the S&P 500 by month, 85% of them are positive.

Jeff Buchbinder (26:44):

Now, I didn't put a stat in here for this, but if you look at the times when the market's down, these stats get even better. So 85% odds are pretty good, but I would argue from here, the odds of positive returns over the next three years are north of 90. When you factor in how far off of highs we are. So stay the course. And actually, if you get longer term horizon, you know, 10 years, 92% you got, if you've got 15 years, you're talking about a hundred percent. So very, very likely to have gains if you stay for the long term. If you can think about these statistics when you're in the middle of a volatile period, it can help you do what's best, which is stay the course. Now at the same time, make sure you have your, you know, bucket of conservative money if you're near or at retirement. But for folks who have longer term time horizons, and most of you listening, have at least a 10 year time horizon of investing. I hope I have a lot more than that personally, <laugh>, and you too, Jeff. If you have that kind of a long-term time horizon, staying the course is, is going to be rewarded. So that's the message there. Hopefully, that helps. So, Jeff, you have any perspective on this?

Jeff Roach (28:03):

Well, I think it's just a reminder that in the moment you have to tell yourself these stats because in the moment you don't feel that way. So yeah, it's on average 14% draw down in a given year. Okay. We could, you know, keep telling yourself <laugh>, but these are powerful stats. They're very helpful, particularly when you think about holding through and sticking with a plan despite these whipsawed events with one headline. And then after another headline certainly feel a little bit whipsawed over the last week or so. And I just have I think we'll wrap it with a week ahead. What does the calendar look like? And in this case probably the biggest will be this ADP metric. So this is a private sector metric that comes out weekly that gives us a little bit of higher frequency look into how firms are adding to their payroll.

Jeff Roach (29:07):

So ADP, payroll processing company allows us to get a kind of an early peak. We've had a surprise weakness on some headline payroll numbers. Still a little bit messy because we've had government shutdowns and government reopenings and all the unusual impacts on tighter immigration. All of that is weighing on our official monthly non-farm payroll numbers. So, it's important to watch the private sector metrics on how this is going because, so goes the labor market, that's how consumer spending goes, right? So look at wages, look at disposable income growth and even from the corporate side, how are businesses feeling about the outlook? Are they adding capital expenditures or are they adding labor to their mix of production? And then we do have a couple other stars here import prices, and that's February that's going to be pre-Iran invasions.

Jeff Roach (30:15):

And so that's going to be somewhat stale. Not as important, but certainly if there's any surprises that happened even in the early part of February, that'll play into understanding the trajectory for inflation in the very, very near term. And then we have claims that comes out every Thursday morning, start there. And then on Friday we have a revision to the March data. So you, just for our listeners to make sure they understand, this, University of Michigan comes out with a preliminary estimate earlier in the month. That's why if you were watching Market Signals a little bit ago, it'll say "MAR" for March "p" for preliminary. This is just the final estimate. That's why we got the that highlighted. And it's always worth tracking from a sentiment standpoint, just like we often look at sentiment, the bull bear feelings from the investor side of things. This is the sentiment on the consumer side of things. So outside of this calendar, it's clearly going to be a focus on potential deal making between the Iranians and U.S. and Israel.

Jeff Buchbinder (31:26):

No doubt everybody's going to have both eyes. <Laugh> turned to the Mideast headlines this week. But this data will be interesting, especially I think the consumer confidence data as we move into March and the weekly more real time measures of the job market. So, good stuff, Jeff. Thanks for that. I guess I failed to mention this upfront, but it today is the anniversary of the COVID lows. March 23rd, 2020 was the bottom in the S&P 500. That was a drawdown of 34%, which was then followed by about a 200% return from there to today. So been quite a quite a runup since then. Certainly not a day that we remember fondly or not a time period we remember fondly March 2020, but that was sure, a major low no doubt. So happy anniversary to that low. We all remember that one, I think fairly clearly even at this point. So with that, we'll wrap. Thank you everybody for listening to another episode of Market Signals. Thank you, Jeff, for bringing your economic perspective and couple of really interesting charts. We will be back next week with another episode. We will see you then. Take care and have a good week, everybody.