1. LPL believes stocks may be due for a pullback, which may have begun with the drop that occurred Sept. 3–4. The S&P 500 is near the firm’s bull-case scenario of a fair-value target of more than 3,450; LPL’s base-case target of 3,300 is under review. Analysts also expect a pickup in volatility ahead of the November U.S. presidential election.
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2. Historically, stocks have generated positive returns whoever holds power. Strictly from a markets perspective, a potential Democratic sweep of the Senate and presidency could bring higher corporate, individual, capital gains and dividend tax rates that may be expected to translate into lower stock values. But it could also bring more fiscal spending and lower tariffs.
A Trump victory may help keep taxes low, but it also may lead to escalating tensions with China, more tariffs and further decoupling of the two countries’ trade relationship, all of which could potentially lead to bouts of market volatility.
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3. LPL acknowledges that stock valuations are high, but does not think they are irrational. Why? It cites three reasons: the massive stimulus from the federal government and the U.S. Federal Reserve; depressed interest rates that reduce the attractiveness of bonds and enhance the value of future corporate profits; corporate profits, which are on the upswing with many winners in the current environment; and potential vaccine availability within the next six to 12 months.
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4. LPL’s preference for growth stocks will continue until it becomes clearer that the U.S. economic recovery is more durable, even as it recognizes that growth stock valuations look stretched and value style will eventually blossom.
LPL has warmed to small-caps as the new bull market has taken hold, and in August selectively added some exposure in its tactical model portfolios. On the sector side, the firm recently upgraded materials to positive on U.S. dollar weakness and strong technical momentum, and downgraded financials to negative in a corresponding move.
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5. LPL continues to favor cyclical sectors in general, but with an emphasis on the sectors its analysts think are best positioned for the economic challenges presented by the pandemic, namely communication services, health care and technology.
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6. China has led the way out of the global crisis by containing the virus and reopening its economy. LPL notes the consensus of Bloomberg’s economists that calls for 2% growth in China’s GDP in 2020, compared with an 8% contraction anticipated in Europe and 5% expected in the U.S. But it says U.S.-China tensions appear likely to remain high, at least through the Nov. 3 election, and warrant continued scrutiny given the risk to supply chains and the sectors that are most global, such as industrials and technology.
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7. The fact that all of this year’s gains in the S&P 500 have come from Apple, Amazon, Microsoft, Facebook and Nvidia and that these top five weights are roughly 24% of the index is of concern. Still, in LPL’s view, though these high-fliers may be due for a pause, the underlying strength in profits for technology, e-commerce and digital media companies provides much stronger support for these stocks than the top performers when the bubble burst 20 years ago.
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8. The weaker U.S. dollar, attractive stock valuations and massive stimulus by Japan enhance the attractiveness of developed international equities relative to U.S. equities for domestic investors. However, LPL expects the U.S. economy to hold up better than Europe’s in the near term, and remains concerned about structural challenges facing both Europe and Japan. The firm continues to maintain limited exposure to developed international equities on a tactical basis and emphasize U.S. equities, and, if suitable, to hold a modest emerging markets allocation. On a strategic basis, it is comfortable allocating about 20% to 25% of equities to non-U.S. positions.
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9. Tactically, LPL continues to focus on mortgage-backed securities to potentially provide a little more resilience in a rising-rate environment without losing much income generation. Incremental value continues to be evident in investment-grade corporate bonds compared with U.S. Treasuries, given the improving economic environment. LPL says it would position bond exposure with above-benchmark credit sensitivity and below-benchmark interest-rate risk.
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10. No, at least not in the foreseeable future. The Fed’s stimulus programs have provided tremendous support for the corporate credit markets. Interest rates remain very low, making the debt cheap to service. Moreover, as the effect of the pandemic subsides, LPL expects economic expansion to support improvement in corporate profits. Until interest rates rise or credit spreads widen out materially — or both — it does not worry about corporate America’s ability to manage its debt load.
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Why have stocks done so well recently in an extraordinarily challenging economic environment and with the coronavirus still besieging the world?

Ryan Detrick, chief market strategist for LPL Financial, noted in a statement that this question came up a lot in late August during the firm’s virtual annual national conference for its financial professional.

There were other questions as well, so LPL pulled them together into a Q&A. The key theme to the answers, Detrick said, was that markets continue to look forward, not backward.

LPL’s goal, he said, is to try discern what markets are seeing, and even to be a little ahead.

His analysis comes as the volatility gauge  officially known as the CBOE Volatility Index, or VIX   has been rising over the past 30 days from about 22 in mid-August to near 30 on Thursday. (It was above 80 roughly five months ago.)

Check out the gallery for condensed versions of LPL’s answers to 10 investor questions.

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