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Predicting Better Days Ahead, LPL Leans Into Equities

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What You Need to Know

  • The S&P 500 historically rallies in the two quarters following sharp two-quarter declines.
  • July tends to be a good month for stocks, strategist said.
  • Shallow bear markets typically reach bottom at seven months.

LPL Financial’s strategic and tactical asset allocation committee has raised its equity allocation by three percentage points to 65% this month as the firm sees cause for optimism for the second half of the year.

“We fully understand the bear case right now and acknowledge optimists are scarce,” LPL Equity Strategist Jeff Buchbinder said in a blog post yesterday. “But based on the market’s track record after sharp downdrafts and favorable seasonal forces in July, we think now may be a good time for those with some dry powder to nibble at this market.”

The 65% equities allocation compares with a 60% benchmark, he noted.

History appears to favor a bullish view now, according to Buchbinder.

Stocks historically have rallied following big two-quarter slides like the market just experienced, with the S&P 500 index gaining 21.5% on average in the two quarters following a more than 20% two-quarter fall, Buchbinder said, noting that the index fell 20.6% in the first half of this year. Average performance in the following year has been 31.4%, he said.

There’s no guarantee that these patterns will repeat this time, but they should offer encouragement that stocks may see better days, Buchbinder noted.

He also noted that stocks have tended to do well in July, with the S&P 500 gaining an average 2.5% during the month in the past decade. April, November and December are the only months that have been better for stocks since 1950, according to Buchbinder’s post. And shallow bear markets like the current one often reach their bottom at seven months, which happens to be July this time, he said.

Upcoming inflation data, third-quarter earnings reports and Fed comments late this month will help show whether July 2022 follows the historic trends, Buchbinder said, adding that LPL likes the chances.