Tariff Ruling Reaction and Strategic Allocation Snapshot

Jeffrey Buchbinder (00:00):

Hello everyone, and welcome to LPL Market Signals, I'm Jeff Buchbinder, here with my friend and colleague, Dr. Jeffrey Roach, the Jeff and Jeff show today. Jeff be grateful that your weather is better than mine.

Jeffrey Buchbinder (00:14):

We hope the best for you, Jeff, to dig out.

Jeffrey Buchbinder (00:18):

I appreciate that. Yep. Right before I jumped in this seat, I did a little bit of shoveling but only some, let's call it maintenance shoveling because I have a plow guy who's going to do the heavy lifting because a foot and a half of wet snow is tough to move for me <laugh>, so I just don't do it. But I respect anybody who does. So it is February 23rd, 2026 as we're recording this. So stocks are down a little bit on Monday afternoon just to touch under 1% as I last checked which I guess you could say is giving back the gains we got on Friday. So here's our agenda. Market recap. Friday, we were up about 1% on the Supreme Court tariff ruling, but we're pretty much giving all that back today. We're going to walk through our blog from Friday, which is on LPL.com, talking about key takeaways for investors after the tariff ruling.

Jeffrey Buchbinder (01:19):

Next our weekly market commentary is on strategic asset allocation. So LPL research has updated its strategic asset allocation for this year. We typically just update it once a year. So we'll walk through some of our thinking there and show you the updated allocations. And then we'll close with a preview of the week ahead where it's an interesting variety of things going on, including the State of the Union, NVIDIA's earnings results, and the PPI inflation report. So starting with the recap I mean, the Supreme Court was the big news I think of last week, but Jeff, as you know, we did have some, some meaningful economic data that I want to get your comment on. But here's your five day look back, I guess at the S&P 500 1.2%. So this is not including today's session a fairly risk on kind of sentiment because you had the NASDAQ up 1.3% Russell 2000 small cap index up 1.9.

Jeffrey Buchbinder (02:26):

So you started to see a little bit of dip buying after all of the AI disruption. But as I'll show you in a minute, with the chart of the S&P, we have been stuck in a very tight range. In fact, bespoke had an interesting analysis. Essentially, the range has been as tight as it's been in 60 years for the S&P 500, based on high and lows year to date through this point in time. It's really, it's really been a tight trading range. So Jeff talk to me about how the economic data, you think kind of filtered through the markets last week. We got the GDP, we got PCE we got Fed Minutes.

Jeffrey Buchbinder (03:14):

Yeah, I think those, those were the three big ones. Of course, there were some other important data, unemployment, insurance claims, et cetera. But I would say the top three from last week we had a very weak Q4 GDP number. Now, granted, no surprise, because the government shutdowns that occurred during Q4 subtracted 0.9 of a percentage point, so almost a full percentage point off because of that now that rebound will show up in Q1 of this year. So there's the give and take there, but that was, that was an important look, you still have a fair amount of contribution from intellectual property products. So that's one key important point to make. Second, of course, PCE, a little bit disappointing, but not surprising. This was for December data. The month on month numbers for both headline and core were at 0.4.

Jeffrey Buchbinder (04:13):

We really need to see that run closer to 0.1 and 0.2% month on month, and that will allow us to see those annual rates of inflation decelerate. And then the third was the minutes from the January meeting. What I thought found interesting, no surprise of course, that there was some dissension. We knew that from the statement no cut rates right from their January meeting. But what they started to highlight in the minutes was a little bit of concern on the amount of leverage within the hedge fund industry. So basically what they're saying is, hey, we always talk about inflation unemployment, but we also need to make sure we're looking at the financial stability component. And that's why hedge fund leverage is an important part. That was one of the things that was interesting to me because that's again, one of the things is as we look at, just look at where the risks are to the market leverage is, is certainly a rising risks. Those are the three from last week. And that contributed, I think a little bit to, to the movements, I would say somewhat of a rosy outlook in the sense that the, the Fed still considers 2026, 2027, even going into 2028. They expect above trend growth, which I might say is maybe a little bit overly optimistic.

Jeffrey Buchbinder (05:47):

They believe in the AI productivity boom.

Jeffrey Buchbinder (05:50):

They do. And that's something we highlighted in our outlook as well as the, the Navigator, which is the new economic piece that I'm publishing. But it's hard to, it's hard to say that that can last that long, right? There's always the ebbs and flows of a business cycle, and that's why it was noteworthy. Can we keep growing above trend for that long? Remains to be seen.

Jeffrey Buchbinder (06:21):

Very good. So just wrapping up the, kinda the equity recap, it is encouraging that we got some pretty good breadth last week. I mean, all sectors have been up over the last five trading days that goes back before the holiday last week except staples, and that was really a Walmart problem market did not like their cautious outlook, although, frankly, I think maybe there was a little bit of an overreaction to their comments about the consumer. But nonetheless it was a pretty broad week where you saw some dip buying in tech, but you also saw the cyclicals and most of the defensives move higher, a little bit more balanced performance between growth and value. And you had gains overseas other than Hong Kong. I mean, Japan pretty flat other than Hong Kong, all major markets up last week. The bond market, commodities, currencies here.

Jeffrey Buchbinder (07:20):

I mean, there's been a lot of talk about the dollar weakening on the deficit impact of the tariffs. We'll get more to the tariffs here in a minute. But you see here on this five day look, the dollar's actually up down a little bit today down a little bit Friday, but it really hasn't moved in a meaningful way since the initial bounce off of 96. That's again, the key level we're watching for a breakdown in terms of the bond market. So a little bit of upward pressure on bond yields last week after the tariff ruling, because it could mean more deficit spending. It probably does mean more deficit spending in the very short term. Other than that, I mean, it's been a pretty quiet bond market. I mean, a good bond market, right? The AGG up 1.2% year to date. And then on oil, you know, obviously the anticipation of military action in Iran is putting upward pressure on oil prices crude up 4.7% last week. So that is certainly something to watch. I'm sure President Trump will comment on that in his State of the Union Tuesday evening. Anything else here jump out at you, Jeff?

Jeffrey Buchbinder (08:34):

I think you know, we show the prices on bonds, but just flip to the corresponding yields, you know, as we're recording here on, on Monday the 23rd, you know, the 10-year at 4.025 that's very encouraging, right? That's something that the markets can handle. We're certainly not, despite some of the hotness on the inflation front, we're certainly not seeing any type of pressures in the bond market. So that's something encouraging.

Jeffrey Buchbinder (09:04):

Very much so. So here's your S&P 500 range bound. This chart's basically looked the same for the last couple months, right? Where we haven't been able to break through 7,000, and at the same time, the hundred day has held, and this sort of green dashed line that Adam Turnquist drew pretty close to the hundred day you know, kind of like 6,800 range. So we, we stayed in that range until we break out of it. I don't think you're going to see us do anything different on our U.S. equity allocations or at least high level in terms of adding risk or removing risk wait for a technical signal. So continuing, Jeff, your brief comments on inflation you, I thought this chart was interesting because it takes out housing and housing has been, you know, a little bit of a, kind of a thorn maybe in the ed's side, right? That with particularly in the CPI with the owner's equivalent rent. So what's your, what's your message here by breaking out the housing component of PCE?

Jeffrey Buchbinder (10:13):

Yeah, just to highlight what really matters is, you know, outside of some of the stuff that's imputed artificial, right? So if you own a home, like two thirds of American households have home ownership there, at least they're holding a mortgage if they still own some, some debt on that. And most of those mortgages are fixed rate, meaning there's no change month to month on the cost of living. So it's, it's good to say, okay, outside of housing, what kind of services, financial services, insurance, healthcare services, education services, what is, what does that look like? And at this point you look at the black line there, the core services ex housing, you're, you're pushing it a little bit above 3%, and we've flatlined the last several months, meaning we really need to see some improvement the first part of this year in order to see inflation decidedly ease up, which we actually do believe in 2026.

Jeffrey Buchbinder (11:16):

We'll see inflation closer to 2.3% by the end of the year. But we are certainly in a time where Fed's going to be on hold and inflation's running a little bit hotter. And we have to kind of work through, kind of be patient work through this temporary period of nagging inflation. So, just real briefly, what I'm showing here, it's a little bit choppy, but the gray columns are the month on month changes. That's what I mentioned just earlier. You want to see a 0.1 or a 0.2. So we're hovering at a 0.3 0.4 almost month on month that needs to come down, and that will eventually pull down some of those other rates of changes. And what I'm showing in the in the gray, in the yellow, there are just different rates of changes, six month annualized, three month annualized and then the year on year numbers, that dark black line. So be patient. I do think though, we'll get a lot more clarity once we get into the second quarter, but we have to be patient during this first quarter of 2026.

Jeffrey Buchbinder (12:31):

So still enough to support two rate cuts this year, Jeff, second half,

Jeffrey Buchbinder (12:37):

Well, it certainly supports the first half of the year where the Feds on hold economy's growing, there's no urgency in taking action. And then by the time we hit summertime and the fall, I think the Fed will be able to say, yep, we've seen some easing, particularly in the services side, and that will allow the Fed to ease up a little bit but still remain somewhat restrictive about the inflation rate, but be able to ease up at least two times, I think in 2026.

Jeffrey Buchbinder (13:11):

Yeah, and that's certainly consistent with what the market believes. So thanks for that, Jeff. Let's move on to the tariffs. I mean, of course, this is what everybody's talking about. We just listed eight takeaways in a blog that we did on Friday after the ruling. Actually, the situation kind of maybe moved even quicker after that than we thought in the direction where we had anticipated it to go. And I think where most people anticipated it to go, which is Trump finding a different way to put tariffs back on. So that's indeed what's happened. So turns of eight takeaways, why don't, Jeff, why don't I give you the first couple here. So what do you think is the economic impact of the ruling and, and the pivot in terms of you know, economic growth?

Jeffrey Buchbinder (13:58):

Yeah, that's right. So, you know, so when you think about the stimulus, that was what we were going after that first one, by the way, excellent. Jeff, you and Lawrence covered a lot of the, the lay work there, putting that up in a timely fashion. So three cheers to you. Fantastic work in putting that up for our clients. But just, you know, it, I think after Friday's ruling, you realize, alright, the average effective tariff rate is going to be lower going forward. We don't know how much more, but the fact that it's going to be a little bit lower, we're not at the extremes where we were, you know, April, May of last year certainly a lot more uncertainty given the fact that, you know, the administration is pivoting from, you know, one strategy to another. But I think in the end, it's going to be this short term jolt because there's going to be some, some winners, winners and losers, but there's going to be some opportunities for things to not be quite as costly.

Jeffrey Buchbinder (15:05):

Now, granted I think, as you said, we do have to be very careful. That doesn't mean tariffs are going away. It just means it's another strategy that the administration has to use in order to implement. So short-term stimulus I do think you know, the third point there, just a reminder, you know, you think about particularly small businesses that don't have the size, the economies of scale to adjust to these policy shocks. You know, there's the uncertainty matters, particularly for those smaller businesses that, you know, are stuck with whatever's hitting them at the ports. I do think though the inflation impact, I think tying it into what we've talked about in the last couple of slides, I do think you know this, this first part of the year is going to be a little bit sticky as it relates to the inflation side, because of the uncertainty in tariffs. Hopefully we move past this, we can survive it, move past it to get to the latter half of the year. But certainly tariffs are still a favorite word. <Laugh> the president, one of his favorite words, so they're not going away. But perhaps they're not going to be as onerous as they might were, they might could have been, I guess as we saw working our way through 2025.

Jeffrey Buchbinder (16:34):

Yeah. So this pivot is probably going to land a point or two below where the I-E-E-P-A tariffs would've landed. So we were probably tracking a 10, now we're going to maybe be tracking a nine or eight and a half, something like that. That is very manageable. I mean, it's, gosh, it could only be six points above where we were during the Biden administration. That is not that significant. It's more significant for certain countries, of course, like China, but it's not dramatic enough to cause Wall Street to change profit margin expectations for corporate America, or even frankly, inflation forecasts meaningfully. So that kinda relates to this fifth bullet here, Jeff. Don't expect Fed rate cut up expectations to move much. There's just not enough change here to really move the needle. Now, when you get into the refund discussion, then it's possible that we could move the needle a little bit on the treasury market, right?

Jeffrey Buchbinder (17:40):

Because if the treasury has to give out those refunds, then there's a funding gap, right? That was revenue that they essentially already spent with the one big beautiful bill that revenue goes away, they'll have to replace it some other way and issue more maybe T-bills and whatnot to, to plug that gap. So there could be some additional short-term financing needs that they have to fill, but that'll be stuck in the courts for a while. It appears. And lower courts, not the Supreme Court. It could take a year, and President Trump thinks it's going to take several years, like the end of his term. But most of the policy experts that I've read suggest that maybe, you know, six to 12 months they'll figure out how to do that and maybe they will have to start giving some refunds. So that's where you have potential impact on treasuries and maybe upward pressure on interest rates.

Jeffrey Buchbinder (18:36):

But short of that, based on what we know now, this isn't a dramatic change. The last point I will make here is on the tariff losers that got a little bit of a bounce, you know, like apparel makers that buy a lot of stuff overseas and import it, sell it the automakers are highlighted a lot as tariff losers. You did get a little bit of a bounce in those areas, you know, retail and, and autos on Friday, as I wrote in this blog Friday and shared with the financial press, we're not chasing that trade <laugh>, right? We don't think that you want to go out here and buy the tariff losers. Most of them are in consumer discretionary. We continue to have a pretty cautious outlook on consumer discretionary. Again, the tariffs are coming back on. We've already seen that with this 15% global tariff that Trump is going to do under section 122 that can last five months. We just don't think that's a great case. Now, consumer discretionary will be driven by other factors. It may be a winner, it may be a loser, but don't play retail just because you think the tariff regime is going to be easier to us. That doesn't make a lot of sense. So anything else to add there on the tariff situation, Jeff, before we move on?

Jeffrey Buchbinder (19:57):

No, it's a, it's a moving target. You know, you got a number of these sections, as you just said, 122 you know, section 2011, section 3011. This is certainly a moving target and remains to be seen here on what happens.

Jeffrey Buchbinder (20:17):

Yeah, as we have in bullet three, trade policy uncertainty remains. I don't think anybody would debate that point <laugh> at this point. I mean, maybe we know a little bit more about how this is going to play out now than we knew on April 2nd <laugh>, but there's still a lot of uncertainty, no doubt. So check out that blog. It's on LPL.com under the research banner. And we think we can help people kind of make sense of all this for investors in particular. So let's turn to the strategic asset allocation Weekly Market Commentary. Actually that's in the same place on LPL.com. We update this typically once a year. It's usually early in the year, but market movements sometimes change that schedule. The, I think the main difference between strategic and tactical, I mean, other than the timeframe, right?

Jeffrey Buchbinder (21:16):

Tactical is typically a year or less, strategic, three years or more. Biggest difference is how you treat valuations in a strategic time horizon. A longer time horizon. Valuations are more predictive. So we use them more in a tactical time horizon. Valuations don't really tell you much of anything about where the market's going within the next six to 12 months. So we use that to kind of shape our strategic views here, which, which will become more clear here in a minute after I make a couple more comments on the next slide. But this is the equity risk premium. So again, we use valuations more. It is negative right now. So that means you're getting essentially less in earnings yield than you're getting in treasury yield earnings yield being the inverse of the PE. So if you're not really getting compensated for taking equity risk based on this valuation metric, you probably want to be a little bit careful with your equity allocations. So we do that, that in a strategic asset allocation framework we use equity certainly for balance as Craig Brown who put this together ahead of our Strategic Asset Allocation process. We use equities for balance, not bravado.

Jeffrey Buchbinder (22:42):

So this chart shows you the relationship between starting PEs and long-term returns, specifically 10 years. So the higher the starting PE and we are high right now, kind of in the mid twenties, the lower your next 10 year return is expected to be, this relationship is pretty tight. And therefore, in a longer term asset allocation construct, we think it makes sense to use valuations more. So this is really backing up that, that decision. And, you know, the PE of like 23, 24 times you could argue, is maybe telling you you're going to get price returns of two to three and then maybe another percent and a half of dividend yield. So we're talking about low to mid single digit returns for equities based on this relationship. Hopefully we do better with the productivity boom from AI, but that's what this relationship is saying. So what do we do with that?

Jeffrey Buchbinder (23:42):

We put a little bit of caution in our strategic asset allocation. So you can see here a little bit of an equities underweight under a little bit underweight large, more underweight small in part because of the volatility that you tend to get with small, a little overweight, large foreign and emerging markets. Because that's where you find the cheapest valuations, pretty straightforward. And then on fixed income, we're a little underweight, just traditional core bonds. And we use that to help us fund alternatives as a diversifier, what we call a purposeful diversifier. So we've got a little bit of TIPS, Treasury inflation, protected securities, some real assets, things like commodities, things like infrastructure, and then alternatives, you know, strategies like global macro managed futures things like that. Market neutral less correlated to the broad equity market, but can still generate returns especially in an environment where we have a lot of dispersion and you know, diverging performance of different asset classes.

Jeffrey Buchbinder (24:53):

So that's what we're doing with kind of the equity underweight in the U.S. and the fixed income underweight as well. Funding alternatives. So smoothing out the ride here but we think still pretty attractive return profiles. So that is that check out our weekly market commentary if you want more. And then LPL advisors can also find a more detailed strategic asset allocation document that accompanies these, these changes. And by the way, these changes are pretty, pretty minimal. Directionally speaking, we were positioned the same way last year. So let's move on and preview the week, Jeff. So, you know, the State of the Union is usually not much of a market mover, but I guess there's a possibility that some policy announcements or policy proposals move markets. I would argue the NVIDIA earnings is probably the event of the week that has the most market moving potential. But you, you know, tell me if you think I'm wrong, what on the economic calendar could be meaningful for folks to watch?

Jeffrey Buchbinder (26:01):

Well, I think you're right within Nvidia and your side of the world there, you know, when you think about macro, there's not much major events for global central banks. Of course, European Central Bank, bank of Japan, Bank of England even the People's Bank of China, Bank of Canada pretty much went through my list as I was preparing for the podcast. This is not a, a busy week in that regard. Part of it perhaps is because it's set up for the following week when you get non-farm payrolls, but this week we, we get a little bit more insight on how the consumer's feeling, although this is going to be a little bit interesting because the data was collected before the announcements of the Supreme Court ruling. So perhaps that could have put a little bit of a damper on some of those confidence numbers.

Jeffrey Buchbinder (26:57):

So that's that first star on the left side of the screen. The right side of course, is PPI is producer price index. That's valuable for Market Watchers because it gives us a little bit of that pipeline to inflation. So what, what's the, the pressure points? Where are the pressure points and where are the risks as it eventually rolls into the consumer, where it hits the consumer's pocketbook? So at this point we're, we're on a lighter than normal macroeconomic calendar. So even just not in the U.S. even across the globe, perhaps more attention will be on Nvidia because of that.

Jeffrey Buchbinder (27:37):

Yeah, possibly, I think you know, based on positioning, you know, institutional investor and retail investor positioning, it doesn't look like the market's setting up for a big move in Nvidia, one way or the other. So that, I'm not comfortable making a call up or down, but I am comfortable saying that you're probably going to get, not going to get this massive, you know, 10% plus move on these numbers. That I think is, is less likely. But you know, the market is looking for confirmation that this AI investment is, is still coming, is open. AI pulled back a little bit on their expectations for how much they plan to invest in AI infrastructure over the next several years. That has certainly weighed on some of those AI names. We'll have to see, but I mean, if there's one company that can increase market confidence that this spending is coming, it's livid <laugh>.

Jeffrey Buchbinder (28:37):

So, you know, we're already pricing in about what, 650 billion in Capex from the hyperscalers this year. I'm not going to say that number's going to go up after this report but certainly the market could get more confident that it's actually going to be spent after this report. And he has a way of getting people fired up about the potential uses of AI. So hopefully he will reassure markets that all of these business models are not going to be destroyed. You know, in software, in financial services, legal services, trucking and logistics. The list goes on and on of these areas that have been weak because of concerns about AI disruption. So that'll be an interesting element to look at too. And then I'll also note the State of the Union is probably going to focus on affordability. That's kind of the big midterm buzzword.

Jeffrey Buchbinder (29:37):

And so I would expect Trump to reiterate some of his proposals about, you know, restricting institutions from buying a bunch of houses and capping credit card rates and all of those sorts of things. So look for that as a thread throughout the comments. So that's where you could potentially get a new proposal that could be market moving. We'll have to see, but certainly he's focused on that, he and the Republican party. And then certainly Iran's in the news every day. And so I think the market will be very carefully listening for clues as to what might happen there. It seems like a limited targeted strike is kind of consensus. But we'll see. The talks are still ongoing. I think that's, and then the tariffs are, he'll reiterate his, his belief in tariffs and we'll make sure that people know that this pivot is likely to work.

Jeffrey Buchbinder (30:35):

And I agree, I think the pivot is likely to work. And so we're going to land in the, like I said, maybe 9% range, eight, 9% range on an actual realized U.S. tariff rate, very manageable. So that's all I have. So I think we'll go ahead and wrap up there. Jeff, unless you have anything to add, I'm going to go shovel,

Jeffrey Buchbinder (30:59):

Well said Jeff, and we'll wrap it from here.

Jeffrey Buchbinder (31:04):

To be clear, just shoveling around the edges, not doing a foot and a half of wet snow without a snowblower, <laugh>, if anybody in the western birds of Boston has a snowblower they want to bring over, let me know <laugh>. So thanks Jeff for joining. Another LPL market signals. I guess with that we'll wrap. So thanks everybody for joining. Thanks for listening to another episode of LPL Market Signals. Be safe. For those of you in the Northeast, this is a nasty, nasty storm. So take care, have a great, great week, and we will see you next week.