Stock market weakness late last week caused investors to ask whether the long-awaited market pullback may be at hand. This week, we review the drivers of the market’s impressive rally back to the break-even point for the year, share our thoughts on whether the gains are justified, and take a look at some timely data for clues on the state of the economic recovery.
Leading Indicators Elicit Cautious Optimism
Leading economic indicators continued to rebound in June, albeit at a slightly slower pace than in May.
Yesterday, The Conference Board released its June report detailing the latest reading for its Leading Economic Index (LEI), a composite of data series that tend to lead changes in economic activity. As seen in the LPL Chart of the Day, since the index’s April trough it has posted historically elevated back-to-back monthly increases, rising 2% in June following May’s 3.2% advance. Still, the index has only recovered to an absolute level of 102 compared with January’s all time high of 112.
Dollar Weakness May Continue
The US dollar was remarkably strong during the first quarter of 2020, benefitting from the flight to safety and rallying to nearly a 10% year-to-date gain at the stock market’s low point on March 23. However, as equity markets have recovered, and the US has continued to fight the COVID-19 pandemic, the dollar has given up nearly all of those gains. We think this trend may continue, and if so, it would have important implications for a range of asset classes.
Let’s Get Real About Yields
While the 10-year Treasury yield has traded in a narrow range since early April, the equivalent real yield, represented by the yield on 10-year Treasury inflation-protected securities (TIPS), has continued to fall and could go lower. Real yields remove the impact of inflation. As shown in the LPL Chart of the Day, while the 10-year Treasury set a new all-time low for yields way back in February, declining 10-year TIPS yields are still above where they were in late 2012.
An Earnings Season To Forget
This earnings season may be one to forget. We will see one of the biggest year-over-year quarterly declines in S&P 500 Index profits ever, and we will hear a lot about uncertainty facing corporate America as COVID19 continues to impact many companies in the United States and globally. But it may not all be negative.
Retail Sales Beat Again
Retail sales data for June was reported on Thursday, handily beating expectations for the second consecutive month. As shown in the LPL Chart of the Day, June saw a 7.5% increase month over month, compared with Bloomberg’s consensus expectations for a 5% gain. This comes on the heels of a more than 18% gain in May, but also following by far the lowest reading ever, a 14.7% decline in April.
LPL Financial Research Midyear Outlook 2020: The Trail to Recovery
LPL Financial Research is looking ahead for new ways to face current challenges and prepare for better times. Use our Midyear Outlook 2020 to chart a path to eventual economic and market recovery. Plus, learn how stocks may predict the next president!
It’s still going to be a challenging environment with significant uncertainty that may lead to more volatility for the next few months, especially with the highly anticipated presidential election in November. Still, we continue to encourage investors to focus on the fundamental drivers of investment returns and their long-term financial goals.
LPL Research’s Midyear Outlook 2020 provides our updated views of the pillars for investing—the economy, stocks, and bonds. As the headlines change daily, we encourage you to continue to look to these pillars as trail markers on your investment journey, and to the Midyear Outlook 2020 to help provide perspective on facing these challenges now and preparing to move forward together.
IMPORTANT DISCLOSURES
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. The economic forecasts may not develop as predicted. Please read the full Midyear Outlook 2020: The Trail to Recovery publication for additional description and disclosure. This research material has been prepared by LPL Financial LLC.
Midyear Outlook 2020
Dear Valued Investor,
We are at the midpoint of 2020, and it would be an understatement to say it’s been a challenging year so far in the United States and around the world. We’ve faced health, social, and economic crises that continue to impact our communities and our economy.
That’s why we’re looking ahead for new ways to face these challenges together and to prepare now for better times. LPL Research’s Midyear Outlook 2020: The Trail to Recovery charts a path forward.
Election Preview
2020 is an election year, and as we get closer to November, we expect this to replace COVID-19 and the recession at the top of investors’ minds. The makeup of Congress may influence stock market performance, and how stocks and the economy perform prior to the election may forecast who will win.
The Best Quarter Since 1998
What a quarter the second quarter was, with the S&P 500 Index adding 20.0%, for the best quarter since 1998 and the best second quarter since 1938. Of course, stocks fell 20% in the first quarter, so what we really have is a bad case of whiplash in 2020 thus far.
“A 20% quarterly gain is quite rare, but the catch is previous large quarterly gains have actually led to continued strength,” according to LPL Financial Senior Market Strategist Ryan Detrick. “In fact, a quarter later stocks have been higher the past 8 times after gaining at least 15% during the previous quarter.”