Economic Updates

LPL Research Midyear Outlook 2021: Picking Up Speed is designed to help you navigate the risks and opportunities over the rest of 2021 and beyond. While the speed can be exhilarating as economic growth accelerates, it can also be dangerous. Midyear Outlook 2021 looks ahead for opportunities, but also watches for new hazards created by the reopening.

With the U.S. economy reopened, the growth rate may peak in second quarter 2021, but there is still plenty of momentum left to extend above-average growth into 2022. Inflation must be closely watched, but LPL Research believes recent price pressures are transitory, and that the strong economic recovery may continue to drive strong earnings growth and support further gains for stocks in the second half of 2021. The strong economic recovery and potentially higher inflation expectations may help push interest rates higher and lead to flat or potentially negative core bond returns in the second half.

The LPL Research team’s Midyear Outlook 2021 covers the economy, policy, stocks, and bonds. Prepare for a fast-paced second half with the economic insights and market guidance in LPL Research Midyear Outlook 2021: Picking Up Speed.

View the digital version: LPL Research Midyear Outlook 2021

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 2021: Picking Up Speed publication for additional description and disclosure. This research material has been prepared by LPL Financial LLC.

With Election Day a mere five days away, we at LPL Research thought we would add one last election forecaster to the mix of what we’ve presented over the last several months—as much because of what it might tell us about the American electorate as what it might tell us about the election.

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The 10-year Treasury yield is historically low, so low that it could climb a full 1% before the end of the year and still be the lowest year-end yield on record, with room to spare. Historically low rates come with a genuine concern that they can reverse and climb higher, which could be painful for Treasury investors. The good news: As shown in LPL’s chart of the day, four out of five of the worst years for estimated 10-year Treasury returns have been mid- to late cycle, which is not the stage that we’re in now.

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Real-time economic data continues to show a slowdown, at the same time we’re entering two months of the year that historically have been troublesome for stocks. Meanwhile, gold is breaking out to new all-time highs, confusing many as to what it all means. Stocks are likely due for a breather, but it isn’t out of the ordinary to see both gold and stocks trend higher together.

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Dear Valued Investor: “The stock market takes an escalator up, and an elevator down.” Classic Wall Street saying. The last week has sure felt like taking an express elevator down, as the end of February brought a historic stock market sell-off, with the S&P 500 Index moving from an all-time high to a 10% correction in only six days—the quickest such move ever. Along the way, the Dow Jones Industrial Average (Dow) experienced multiple 1,000-point drops, including Thursday’s biggest one-day point drop ever, adding to fears. As the coronavirus spreads around the globe, what was once a promising start to 2020 now has the S&P 500, Dow, and Nasdaq Composite all negative year to date. To put the recent market weakness in perspective, in an average year the S&P 500 may pull back from its highest point to its lowest point 14% on average. Even in years in which the S&P 500 finished higher, it had a pullback of 11% on average. In 2019, when stocks gained more than 30%, we saw two pullbacks of more than 5% during the year. After a historically calm stretch to end last year and start this year, larger than normal volatility shouldn’t come as a surprise. We didn’t expect stocks to pull back this quickly, but we’re still within the normal range of market volatility. Download Full Letter

It could be a momentous week for U.S. monetary policy. The Federal Reserve (Fed) is expected to cut its policy interest rate for the first time in 10 years on July 31, the last day of its next policy meeting [Figure 1].

The Fed has strongly hinted toward a rate cut at this meeting, even prepping investors for this decision with a language shift at its June meeting. Still, this is uncharted territory for much of Wall Street, as well as the current set of Fed central bankers.

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These next two weeks are pivotal for the global economy. The Federal Reserve’s (Fed) next policy meeting starts June 18 with a policy announcement due June 19. In the following week, global leaders will convene at the G-20 Summit in Japan, and we’ll likely get clues on the state of the U.S.-China trade talks.

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The economic expansion just turned 10 years old, tied for the longest on record, according to the National Bureau of Economic Research. It’s only fitting with this milestone that economic skepticism is peaking once again. Many investors, especially in the bond market, have been bracing for an economic slowdown and calling for Federal Reserve (Fed) intervention as global trade disputes rattle financial markets [Figure 1].

The trade situation is unnerving, and we’re aware an escalation could eventually wear on an aging expansion. It’s important to remember, though, that with sound fundamentals and a measured Fed, the U.S. economy has navigated several global crises in this cycle. We think both supportive factors are still in place.

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The bond market has been baffling recently. While U.S. stocks surged earlier this year, the 10-year Treasury yield quietly crept lower, puzzling market participants as the typical relationship between stocks and bonds (higher stock prices, higher yields) broke down at a rapid pace.

Then, the alligator jaws snapped shut. The S&P 500 Index has dropped about 6% since reaching a record high on April 30, and the decline of long-term government bond yields across the globe picked up speed [Figure 1]. Last week, the 10-year yield posted its biggest weekly drop in over four years to close at a 20-month low of 2.12%, and parts of the yield curve have flipped back into inverted territory (long-term rates falling below short-term rates).

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It’s been a difficult year for Wall Street forecasts. The Federal Reserve’s (Fed) pause and global uncertainty have forced many economists and market prognosticators to adjust their 2019 predictions. LPL Research is in that camp, too: We adjusted a few of our 2019 economic and fixed income forecasts in February.

Near-term forecasting has been a futile effort this year, thanks to headline risk from trade and political headwinds. However, our Five Forecasters (in the Recession Watch Dashboard), which measure the longer-term health of the economy and financial markets, point to a continued economic expansion. This week, we’re highlighting two of the five leading indicators we watch: the Conference Board’s Leading Economic Index (LEI) and the U.S. yield curve. For analysis on the other three indicators, check out this week’s Weekly Market Commentary and today’s Macro Market Movers Blog.

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