At the end of each year, LPL reviews what it got right and what it got wrong.
In a recent commentary by LPL Research, the firm reviewed its equity hits and misses in 2017.
“Postmortems can help us learn from our missteps and reinforce the processes that led to our successful recommendations,” LPL says.
According to LPL, its bullish call on emerging markets (EM) equities was one of its biggest hits in 2017. The MSCI EM Index returned 38% for the year, and EM equities benefited from the synchronized global economic expansion, commodity stability, a weak U.S. dollar and relative political stability.
LPL says it maintains this recommendation for 2018.
LPL also favored technology throughout 2017. The technology sector, which was the year’s top performing sector with a 39% return, benefited from strong earnings growth. Tech also benefited from several powerful trends such as mobility, cloud computing and artificial intelligence, according to LPL.
LPL also maintain this recommendation as 2018 begins, although it notes outperformance may moderate.
According to LPL, it favored health care throughout most of the year. The sector outperformed the S&P 500 Index during the period it was recommended. LPL tempered its enthusiasm for the sector in November.
“We correctly predicted the spending from the Affordable Care Act would remain intact, although uncertainty remains as 2018 begins,” LPL says.
Stock Market Forecast
LPL started 2017 with a mid-single digit total return forecast for the S&P 500, which it then slightly raised to 6–9% midyear.
“While directionally correct, the increase still fell well short of the stellar 22% return the S&P 500 produced last year,” LPL admits.
LPL’s high-single digit earnings forecast for 2017 was accurate — consensus is currently 10%, according to LPL. However, LPL did not anticipate the degree that valuations would expand.
LPL says it warmed up to small cap stocks during the year due to potential policy benefits.
“Our catalyst (tax reform) came through, but small caps did not react as favorably as we anticipated,” LPL says.
The firm has maintained this recommendation for 2018 on the potential that small caps would eventually benefit from the new tax law.
Master Limited Partnerships
LPL says its biggest miss in 2017 was master limited partnerships (MLP).
The primary reason for the underperformance was weakness in the energy sector itself, as the sector lost 1% for the year. According to LPL, MLP performance was particularly disappointing given that market interest rates remained low. However, LPL still maintains this recommendation due to strong U.S. energy production, deregulation and rich yields.
— Check out Bob Doll’s 10 Predictions for 2018 on ThinkAdvisor.