Don’t Let Recent Bumpiness Throw You…

February 8, 2018 | posted in: Financial Insights, LPL Weekly Market Commentary | by
…the Fundamentals are Looking Good for the Year Ahead.

According to LPL Research, “After 18 months of extraordinary calm, volatility returned these past several days, as trading volumes surged and equity markets plunged. The primary culprit was higher than expected wage growth in the January jobs report, which may have increased fears that the Federal Reserve (Fed) would be more aggressive with interest rate hikes in 2018. However, the selling pressure unmasked a variety of issues, including investor complacency and the difficulty of unwinding crowded and complex trades involving leverage, or borrowed money.

Though never any fun to endure, pullbacks are a normal course for long-term investing. It is important to note that that this market weakness is occurring against the backdrop of solid growth in the U.S. economy and corporate profits. Fiscal policy changes may help support growth in personal consumption and business investment. Moreover, this growth is not simply a domestic phenomenon, as global economies are exhibiting similar patterns boosting both demand and earnings.

We view the recent weakness as an opportunity for suitable investors to put excess cash to work, or, to rebalance diversified portfolios back toward longer-term target allocations. We believe inflation will grow moderately and that the Fed will gradually raise rates three times in 2018 and maintain its balance sheet reduction plan. The yield on the 10-year Treasury currently hovers near the low end of our projected trading range (2.75%–3.25%) and the curve has actually steepened this past week, pointing toward future growth.

Fourth quarter earnings season has been very strong and corporate guidance for 2018 profitability is positive, causing consensus earnings projections to accelerate. Even before the recent equity weakness, forward-looking market price-to-earnings ratios declined to levels more appetizing to long-term investors, in our opinion. Considering this, we will continue to position portfolios toward beneficiaries of the current monetary and fiscal policy dynamics, including value, small caps, financials, industrials, and technology. We maintain our year-end fair value estimate of 2,850–2,900 for the S&P 500 Index. For more on our 2018 forecasts, please see the LPL Research Outlook 2018: Return of the Business Cycle.”

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