I use my knowledge and experience to help you weather the storms, avoid the shoals, and fight off the pirates in your financial oceans.”

SCOTT STILLMAN,
CFP®, CLU®

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Patience May Be Rewarded

As we move into spring and leave behind the last signs of a long winter, many worries from a chilly start to the year for markets, unfortunately, are still with us. The S&P 500 Index had its worst April in more than 40 years, leaving the index down over 13% for the year. Previously highflying stocks have come back to earth, with many of them cut in half or more. And bonds, which have historically provided support during times of stock market volatility, have done little to protect portfolios.

The concerns that have contributed to the poor start are well-known. Historically high inflation, supply chains disruptions, China in another lockdown, geopolitical concerns, an aggressive Federal Reserve Bank (Fed) rate hiking campaign, and soaring yields have all contributed to the worries. Not to mention economic growth worries are spreading after the 1.4% decline in gross domestic product (GDP) during the first quarter.

Just as April’s dark storm clouds are often chased away by a brighter May, we remain optimistic that more sunshine could be coming. Yes, the GDP report showed an economy that contracted in the first quarter, but that was mainly due to drags on inventory and trade, while more important parts of the economy like consumer spending, housing, and private sector investment all accelerated compared to the fourth quarter. Additionally, 2011 and 2014 both saw negative first quarter GDP prints, followed by big rebounds in the second quarter to avoid recessions. We expect GDP to grow approximately 3% this year and avoid a recession thanks to a strong consumer and a healthy corporate earnings backdrop.

Inflation could be nearing a peak, offering a potential driver for improved confidence in the second half of this year. Used car and truck prices have come down significantly over the past two months, while shipping costs have also dropped nicely. These two bits of data suggest inflation may be past its peak, even if it may take a while for it to get back to normal. Add in supply chain normalization and the potential for a ceasefire in Ukraine to remove some upward pressure on commodities, and the Fed may not hike rates nine times as the bond market is currently pricing in.

From its early January peak, the S&P 500 has corrected 13.9% (as of April 29), right in line with the average yearly correction since 1980 of 14.0%. As uncomfortable as this year has been, this action is actually about average. Additionally, midterm years tend to be even more volatile, correcting more than 17% on average, but the index rebounded 32% on average in the 12 months following those midterm year lows. Lastly, the last 21 times the S&P 500 has been down double-digits since 1980, the index rallied back to end the year positive 12 times. Don’t give up hope yet.

The investing climate is quite challenging, but based on historical trends, we believe patience may be rewarded. Even if there may be some downside in the short term, consumer and business fundamentals remain supportive. Strong profits and lower stock prices mean more attractive valuations, and current levels may end up being an attractive entry point for suitable investors.

Please contact me if you have any questions.

They Say It Is Always Darkest Before the Dawn…

It has been a turbulent 2022 so far for investors. The S&P 500 Index is on track for its worst April in more than 40 years, the Nasdaq entered a bear market on April 26 with its more than 20% decline, and bonds, which typically provide ballast for diversified portfolios during periods of stock market volatility, have not protected.

Markets face a number of threats. The COVID-19 pandemic has contributed to a disappointing start to the year for the U.S. economy as evidenced by the -1.4% growth in gross domestic product (GDP) reported on April 28. COVID-19 continues to disrupt global supply chains amid intermittent lockdowns in some of China’s largest cities. Russia’s devastating assault on Ukraine, arguably the biggest geopolitical threat in Europe since WWII, has added to the worst inflation problem in the U.S. since the 1970s. The bond market is pricing in nine more Federal Reserve (Fed) rate hikes, after looking for only three when the year began. That’s a lot for investors to digest.

But during a market correction it’s easy to forget that this volatility is actually quite normal.

  • The S&P 500 Index has fallen 13% peak to trough this year, below the 14% average of all years.
  • During midterm election years, the average stock market correction is 17%, but stocks rebounded 32% on average in the 12 months following those midterm year lows.
  • Of the last 21 times the S&P 500 has been down double-digits since 1980, stocks rallied back to end the year positive 12 times.
  • During those 12 positive years, the average gain has been a stellar 17%.

We will admit a double-digit gain in 2022 is unlikely, but a U.S. consumer willing and able to spend, which makes recession unlikely in the near term, and steadily rising corporate profits still make a positive year for stocks in 2022 more likely than not, in our view.

Inflation remains a big concern, but a number of factors could put downward pressure on prices beginning this summer. On the supply side, where most of the problem lies, supply chain normalization and more job-seekers coming off the sidelines could help ease pressure on goods prices and wages. An eventual cease-fire in Ukraine could remove some of the upward pressure on commodity prices. On the demand side, higher interest rates can help cool housing. The bond market is already doing some of the Fed’s work with the 10-year Treasury yield nearly doubling in four months to 2.8%. These factors could easily cut headline consumer inflation in half by year-end from the current annual pace of 8.5%.

The outlook for corporate profits remains quite positive and may help prevent stocks from pulling back much further. With about 180 S&P 500 companies having reported, double-digit earnings growth appears within reach while analysts’ estimates for 2022 have continued to rise. These numbers are excellent considering slow economic growth, supply chain disruptions, and inflationary pressures.

The investing climate is quite challenging, but history suggests patience will be rewarded. Even if there may be some downside in the short term, consumer and business fundamentals remain supportive. Strong profits and lower stock prices mean more attractive valuations. Our belief is that current levels will end up being an attractive entry point.

Please contact me if you have any questions.

Strong Profits and Lower Stock Prices…

As we move into spring and leave behind the last signs of a long winter, many worries from a chilly start to the year for markets, unfortunately, are still with us. The S&P 500 Index had its worst April in more than 40 years, leaving the index down over 13% for the year. Previously highflying stocks have come back to earth, with many of them cut in half or more. And bonds, which have historically provided support during times of stock market volatility, have done little to protect portfolios.

The concerns that have contributed to the poor start are well-known. Historically high inflation, supply chains disruptions, China in another lockdown, geopolitical concerns, an aggressive Federal Reserve Bank (Fed) rate hiking campaign, and soaring yields have all contributed to the worries. Not to mention economic growth worries are spreading after the 1.4% decline in gross domestic product (GDP) during the first quarter.

Just as April’s dark storm clouds are often chased away by a brighter May, we remain optimistic that more sunshine could be coming. Yes, the GDP report showed an economy that contracted in the first quarter, but that was mainly due to drags on inventory and trade, while more important parts of the economy like consumer spending, housing, and private sector investment all accelerated compared to the fourth quarter. Additionally, 2011 and 2014 both saw negative first quarter GDP prints, followed by big rebounds in the second quarter to avoid recessions. We expect GDP to grow approximately 3% this year and avoid a recession thanks to a strong consumer and a healthy corporate earnings backdrop.

Inflation could be nearing a peak, offering a potential driver for improved confidence in the second half of this year. Used car and truck prices have come down significantly over the past two months, while shipping costs have also dropped nicely. These two bits of data suggest inflation may be past its peak, even if it may take a while for it to get back to normal. Add in supply chain normalization and the potential for a ceasefire in Ukraine to remove some upward pressure on commodities, and the Fed may not hike rates nine times as the bond market is currently pricing in.

From its early January peak, the S&P 500 has corrected 13.9% (as of April 29), right in line with the average yearly correction since 1980 of 14.0%. As uncomfortable as this year has been, this action is actually about average. Additionally, midterm years tend to be even more volatile, correcting more than 17% on average, but the index rebounded 32% on average in the 12 months following those midterm year lows. Lastly, the last 21 times the S&P 500 has been down double-digits since 1980, the index rallied back to end the year positive 12 times. Don’t give up hope yet.

The investing climate is quite challenging, but based on historical trends, we believe patience may be rewarded. Even if there may be some downside in the short term, consumer and business fundamentals remain supportive. Strong profits and lower stock prices mean more attractive valuations, and current levels may end up being an attractive entry point for suitable investors.

Please contact me if you have any questions.

Long-term Returns Come With a Cost: Volatility

The calendar had barely flipped to 2022 and investors were reminded that even attractive long-term stock returns come with a cost: volatility. The S&P 500 Index fell nearly 10% from January 3 through January 27 amid fears that the Federal Reserve (Fed) will have to get a lot more aggressive to fight inflation, before staging a 4% rally over the last two days of the month to end January down 5%. After such a steady march higher in 2021, the dip may have caught some investors off guard.

For those whose anxiety levels may have risen a bit last week, here are some numbers that may provide reassurance:

  • Even in positive years for the S&P 500, on average the index experiences a maximum peak-to-trough decline of 11%. This year’s max drawdown is now 9.8%.
  • After a correction of 10-15%, the index has experienced an average one-year gain off the lows of 22% and has risen in 12 of the 13 one-year periods.
  • The average stock market gain one year after the first Fed rate hike of an economic cycle has been 11%, with gains the past eight cycles dating back to 1983.
  • When investor sentiment is most negative, as it was during the past two weeks based on the American Association of Individual Investors (AAII) investor sentiment survey, stocks have risen an average of 11% in the next year.

This data argues that stock investors should stay the course. But remember that gains in 2022 will likely be tougher to come by than in 2021. They may be more modest and happen later in the year, as is typical during midterm election years.

The good news is that an inflation peak may be near as the COVID-19 Omicron variant loses its punch. Slower, but still solid, economic growth this year will help cool inflation as Fed rate hikes take hold. We’re already seeing backlogs and bottlenecks start to clear. We expect more people to jump back into the labor force later this year, easing wage pressures. We may also get some help from lower oil prices, though that may have to wait for Russia-Ukraine tensions to die down.

These uncertainties make the road ahead for stocks tougher. But with U.S. consumers and businesses in excellent shape, the U.S. economy may grow 4% this year, well above the pace of the last decade. Corporate America is showing once again during fourth quarter earnings season that it is thriving with S&P 500 earnings poised to increase by more than 25% year-over-year.

Perhaps the stock market in 2022 will be like the exciting NFL playoff games played during the past two weekends—with a lot of back and forth between the bulls and the bears before the bulls grind out a hard-fought win late in the game.

Please contact me if you have any questions.

Outlook 2022: Passing the Baton

Our resurgent economy grew at over a 6% pace in the first half of 2021 and is on track for over 5% growth for the year by the time 2021 draws to a close. During the early recovery, we had a hand up from stimulus and policy that saw us through a period of unique challenges. In 2022, the economy may be ready for a handoff, back to a greater emphasis on the individual choices of households and businesses. How smoothly that handoff is executed may determine the course of the recovery.

As the U.S. economy moves more to mid-cycle, our forecast is 4.0–4.5% gross domestic product (GDP) growth in 2022. Fiscal and monetary policies played big roles in the economic recovery in 2021, but we see the baton being passed in 2022—from stimulus bridging a pandemic recovery to an economy growing firmly on its own, with consumers, productivity, small businesses, and capital investments all playing a part in the next stage of economic growth.

As the world moves past COVID-19 globally, Europe and Japan could be ripe for potentially better economic growth in 2022. Meanwhile, emerging market economies may disappoint as growth in China could be constrained by regulatory crackdowns.

2021 was the year nearly everything was in a shortage, and it translated to added inflationary pressures. Record numbers of ships waiting at ports, a lack of materials, unfilled job openings, higher commodity prices, and a myriad of supply chain disruptions have added to price pressures. We believe inflationary pressures may steadily decrease over the next year as conditions improve.

We expect solid economic and earnings growth in 2022 to help U.S. stocks deliver additional gains next year. If we are approaching— or are already in—the middle of an economic cycle with at least a few more years left, then we believe the chances of another good year for stocks in 2022 are quite high. We favor U.S. over developed international, tilt value over growth, and prefer cyclical sectors over defensives.

We expect interest rates to move modestly higher in 2022 based on near-term inflation expectations above historical trends and improving growth expectations once the impact of the COVID-19 Delta and Omicron variants recede. However, an aging global demographic that needs income, higher global debt levels, and rebalancing into fixed income from equities may keep interest rates from going much higher over the next year. Nonetheless, with starting yields still low by historical standards, bond returns are likely to be flat to the low-single digits in 2022.

LPL’s Outlook 2022: Passing the Baton provides insight and analysis for the next set of challenges the economy and markets may face. Happy holidays, and please contact me if you have any questions.

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Scott.Stillman@LPL.com