Recession Watch Update

Market participants are always on watch for potential signs that the economy may be moving into a recession. Almost all recessions are associated with large stock market declines, and 70% of the bear markets since the end of World War II have been associated with recessions. Given this relationship, the search for the catalyst of the next market downturn often focuses on recession threats. This is part of the reason LPL Research pays close attention to the business cycle when evaluating market prospects. Based on our analysis, we believe the likelihood of a recession in the next year remains low, but we are likely to see increased volatility as we move later into the cycle.

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Jackson Hole Preview

The Great American Eclipse of 2017 is now over, which may have some believing that the most exciting part of the week has passed. However, for central bank watchers, the fun isn’t over, as the Federal Reserve’s (Fed) annual Jackson Hole Symposium takes place from August 24–26. This gathering of global central bankers began in 1978 and tends to be closely watched by markets. Though it may not be as exciting as an eclipse, this meeting has been significant historically. Central banks have used the conference to signal upcoming changes to policy, such as the Fed’s quantitative easing (QE) programs in 2010 and 2012, and the European Central Bank’s (ECB) QE program in 2014.

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Taking A Little Risk Off The Table

We think it is a good time to consider taking a little risk off table. Two weeks ago we wrote about how stocks are probably due for a pullback given their steady advance and some of the risks facing markets. This past week (August 16), we slightly reduced equity exposure in some of our model portfolios. By doing so, we acknowledged that those risks had begun to stack up during a seasonally weak period and that the trade-off between upside potential and downside risk, at least in the near term, had become a bit less favorable. This week we discuss some of the details behind that tactical decision and reiterate our positive longer-term view.

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Bottom Line: Impressive Earnings Season

Corporate America delivered another outstanding earnings season, with double-digit earnings growth, solid upside to forecasts, and generally upbeat outlooks from corporate management teams. We have been particularly impressed with the breadth of earnings gains and upside to revenue forecasts. Strong earnings continue to provide support for the stock market at elevated valuations, with the potential for more support from a reduced corporate tax rate next spring. Here we provide an overview of the nearly completed second quarter 2017 earnings season.

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Slow Evolution of Consumer Spending

Consumer spending dominates the composition of the U.S. economy, trending at about 70% of gross domestic product (GDP). But how have consumers fared in the aftermath of the Great Recession and financial crisis that began 10 years ago? Data show that relative to other economic recoveries, consumer spending has rebounded at a much slower rate. And, there does seem to be some truth to the widely circulated idea that consumers have shifted their spending patterns, focusing more on experiences. However, this shift should not be overstated. There has been strong growth in consumer spending in traditional goods as well. Consumers have not taken on additional debt relative to incomes or GDP. Growth in spending may be slower than in other recoveries, but it also may be more durable.

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Buy The Dip? What Dip?

Buy the dip? What dip? Beyond the double-digit gains in stocks this year and all of the all-time highs (29 for the S&P 500 Index already this year), perhaps the biggest story for the S&P 500 in 2017 is the absence of pullbacks. Here we discuss the lack of pullbacks, what could cause the next one, and how technical analysis could help us decide whether to buy the dip.

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The 411 on Q2 GDP

The advance estimate of real GDP (GDP adjusted for inflation), released on July 28, showed the U.S. economy grew at an annualized rate of 2.6% in the second quarter, slightly missing consensus expectations of 2.7%, but accelerating from a downwardly revised 1.2% in the first quarter. Diving into the numbers, the data showed that consumer spending rebounded after a weak first quarter and business spending on equipment grew at an annualized rate of 8.2%, the highest growth in almost two years. The two disappointments were residential construction, which slowed after a strong first quarter, and inventories, which were expected to bounce after a sharp contraction in the first quarter but were basically flat [Figure 1].

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