Wednesday, September 8, 2021
This week in the latest LPL Market Signals podcast, Ryan Detrick and Lawrence Gillum discussed global central bank policy, recently weakening economic data, and where stocks and bonds could go the remainder of this year.
In today’s blog we will focus on their discussion on stocks and bonds.
The S&P 500 Index was up more than 20% by the end of August for the first time since 1997 and it has made a new high every single month this year so far (9 for 9). Incredibly, it made 53 new highs before August was over, the most ever. Any way you slice it, this year is historic for the bulls.
The catch (and there’s always a catch) is the S&P 500 hasn’t pulled back 5% all year, with the last 5% pullback last October. Not to mention September is the worst month for stocks the past 10 years, 20 years, and since 1950.
But history says that great starts to a year tend to see continued strength the final four months. “Looking at the previous top 10 starts to a year ever, the final four months have gained eight times,” explained LPL Financial Chief Market Strategist Ryan Detrick. “So should we see any seasonal weakness, we’d use it as an opportunity to buy before likely continued strength.”
As shown in the LPL Chart of the Day, 2021 ranks as the 6th best start to a year ever. The previous top 10 best starts to a year averaged a return of 4.0% the rest of the year, with a very solid median return 5.4%.
Turning to bonds, we continue to expect higher yields due to the growth and inflation outlook, with a target of 1.75% on the 10-year treasury yield by year end. This of course could pressure bonds, as they trade inversely with yields.
From a portfolio point of view, we would keep overall interest rate sensitivity muted and favor mortgage-backed securities and short- to intermediate-maturity investment grade corporates. As a result of our higher rates call, we suggest being underweight longer maturity high grade corporates or long-term treasuries, which are more sensitive to rising rates. So sum it up, taking a more of a defensive posture as it relates to interest rate sensitivity makes a lot of sense the remainder of 2021.
Also, the potential this week for a European Central Bank (ECB) announcement on tapering could push European yields higher, which in turn could push U.S. yields higher as well.
You can watch the full podcast below, directly from our YouTube channel. The discussion on stocks and bonds starts at the 23:30 mark.
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