Tuesday, June 15, 2021
On this week’s LPL Market Signals Podcast, Chief Market Strategist Ryan Detrick and Equity Strategist Jeff Buchbinder discuss market highs and inflation concerns. Fixed Income Strategist Lawrence Gillum joins the podcast to discuss sustainable investing in the fixed-income market.
U.S. markets trade fractionally higher as growth stocks lead yesterday’s results
- U.S. equities are relatively quiet this morning as investors anticipate the results of Wednesday’s Federal Reserve (Fed) meeting.
- European stocks are higher through midday trading with the Euro STOXX up approximately 0.5% as European Union (EU) industrial production showed ongoing improvement.
- Asian markets finished mixed with Japan (Nikkei) up almost 1% and China (Shanghai Composite) down almost 1%.
Downgrading the technology sector after long-held positive view wasn’t easy
- As investors we fight against behavioral biases in our investment decisions.
- It’s easy to become attached to a long-held investment. Our technology recommendation was in place for a number of years. “FOMO,” or the fear of missing out, makes selling difficult.
- But we expect the macroeconomic factors that have driven the market’s shift toward value stocks in recent months to persist, justifying a neutral rather than positive view for tech.
- We discuss last week’s technology sector downgrade today on the LPL Research blog, available at 12p.m. ET.
There are three key drivers of stock returns: earnings, interest rates, and fear
Earnings are what give stocks value; interest rates and fear determine how much that value is discounted. S&P 500 Index returns have been robust year to date and we are encouraged by the slower pace of gains recently, which we believe helps give the market greater resiliency in the long run. We believe the fundamental backdrop remains sound, but there are still plenty of risks to keep an eye on. While not our base case, here are some of the main risks confronting stocks that are encouraging market participants to discount the value of future corporate earnings:
- Inflation may run hotter than expected for longer than expected, forcing the Fed to tighten policy.
- The federal government or Federal Reserve may make a policy mistake.
- The delta variant of COVID-19, which now makes up about 10% of cases in the United States, may slow down the recovery.
- The economic rebound may be fully priced-in to stock prices, making it more vulnerable to any negative catalyst.
- Geopolitical risk potentially escalates as China, Russia, and the U.S. find themselves increasingly at odds.
Large cap growth stocks led the way again on Monday, propelling the S&P 500 to a 0.2% gain despite less than 40% of the index ending the day higher. Tech stocks have reemerged lately, outperforming the S&P 500 by 4.2% since May 12, but intermediate-term technical trends still favor more value-leaning sectors.
Sustainable Investing Becoming Mainstream in Fixed Income
Sustainable investing is becoming more mainstream in fixed income markets and companies that recognize that changing dynamic may be able to avoid financially material impacts. Learn more in this week’s Weekly Market Commentary.
New Highs in Inflation and Stocks
On this week’s LPL Market Signals Podcast, LPL Research looks at the better than expected market highs, inflation concerns, and sustainable investing in the fixed-income market.
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