This week at Focus, members of LPL’s Research Department had the opportunity to speak with hundreds of advisors about how our team can further enhance their value proposition to clients and better support them as they help clients pursue their financials goals. A number of advisors took the opportunity to ask our team some tough, market-related questions. Here are a few of the best, along with our responses:
Why is LPL Research still positive on U.S. equities if the S&P 500 Index already reached our full-year target return?
One key reason is that we think there are “alpha” opportunities in sector, size, and geographical selection that will still reward equity allocations. Also, our asset allocation decisions are predominantly based on a minimum of a 6- to 12-month time horizon, and we believe stock performance will likely outpace bonds and cash over that period. Shorter-term sentiment and technical indicators we track also lead us to maintain benchmark-like equity exposure despite the year-end forecast. Finally, with economic indicators still looking relatively strong, we think volatility might pick up but don’t believe a recession is likely. And consequently, we expect the bull market to continue. With that said, in some of our most conservative models, we have reduced risk.
What is LPL’s view on foreign developed markets, given their outperformance thus far this year?
While we are becoming more constructive on foreign developed equities, we still see some significant risks around the future of the European Union and the impact of Brexit, as well as Japan’s aggressive stimulus policy. While we recognize the relative outperformance, we do not want to chase it, but rather add to existing positions when we believe some of these risks have subsided. It is worth noting that international markets can outperform or underperform for relatively long stretches of time, and they had been lagging since 2007. So while the above mentioned risks have kept us cautious, if the trend holds and major risks moderate, there may be additional opportunities moving forward.
Please help me understand how exactly the Fed will unwind its balance sheet and what this means?
The reduction of the Federal Reserve Bank’s (Fed) $4.2 trillion balance sheet will take years, not months, due to the maturity schedule of the holdings and the portfolio size. By reducing the balance sheet, the Fed is hoping that they can reduce interest costs and better control short-term rates. Perhaps as soon as October (the exact date is still to be announced), the Fed will stop reinvesting approximately $6 billion of U.S. Treasuries and $4 billion in mortgage-backed securities per month as they mature. The market reaction is difficult to forecast, but the Fed has signaled that it wants to be transparent with the information it provides. We wrote about this extensively in a previous Bond Market Perspectives.