A FULL SERVICE

FINANCIAL CONSULTING FIRM

Global Portfolio Strategy | June 2, 2022

Key changes from May report:

  • § Upgraded view of energy to positive from neutral
  • Downgraded view of communications services from neutral to negative

Stocks staged a furious late-month rally to break even in May, but the S&P 500 Index ended the month down more than 12% year to date. The index fell more than 20% from its January 3 high on an intraday basis on May 20 but avoided closing 20% below the all-time high, keeping the bull market alive.

Market participants remained on edge due to high inflation and the risk that the Federal Reserve over tightens monetary policy to combat it, sending the economy into recession. The lack of a cease-fire in Ukraine, ongoing COVID-19 lockdowns in China, and weakness in retail earnings further pressured investor sentiment.

The intense pressure on bonds over the first four months of the year eased up some in May, as the 10-year U.S. Treasury yield pulled back from near 3% to 2.83%.

The Strategic and Tactical Asset Allocation Committee (STAAC) made only minor asset allocation changes for June, including shifting from communication services to energy, which translated into a modest value tilt. Our S&P 500 Index year-end fair value target range remains 4,800— 4,900, based on a price-to-earnings ratio (PE) of 20.5 and our 2023 earnings per share (EPS) estimate of $235.

INVESTMENT TAKEAWAYS:

  • § We continue to recommend a slight overweight to equities versus bonds on the belief that recession fears may be overdone.
  • We suggest a slight tilt toward the value style in the short term, though we would expect an improved macroeconomic environment to create a more favorable environment for the growth style later this year, including falling inflation and stable interest rates.
  • § We would expect large caps to lead during this period of economic uncertainty, though attractive valuations and a U.S. focus may provide support for small caps in the near term.
  • § We continue to recommend a slight underweight allocation to fixed income as higher rates may put additional pressure on bond returns.
  • Although we’ve seen a meaningful move higher in yields this year, broadening inflationary pressures and the reduction of Federal Reserve (Fed) policy support may push yields still higher in the months ahead. Our year-end target for the 10-year Treasury yield is 2.25% to 2.5% but expect yields to stay elevated in the 2.75% – 3.0% range in the near term.
  • § Shorter maturity corporate credit and high yield bonds (for income-oriented investors) are starting to look more attractive.

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IMPORTANT DISCLOSURES

This material has been prepared for informational purposes only, and is not intended as specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors and they do not take into account the particular needs, investment objectives, tax and financial condition of any specific person. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing. Any economic forecasts set forth may not develop as predicted and are subject to change.

Stock investing involves risk including loss of principal. Because of their narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies. Value investments can perform differently from the market as a whole and can remain undervalued by the market for long periods of time. The prices of small and mid-cap stocks are generally more volatile than large cap stocks. Bonds are subject to market and interest rate risk if sold prior to maturity

Bond values will decline as interest rates rise and bonds are subject to availability and change in price. Corporate bonds are considered higher risk than government bonds. Municipal bonds are subject to availability and change in price. Interest income may be subject to the alternative minimum tax. Municipal bonds are federally tax-free but other state and local taxes may apply. If sold prior to maturity, capital gains tax could apply. U.S. Treasuries may be considered “safe haven” investments but do carry some degree of risk including interest rate, credit, and market risk. Bond yields are subject to change. Certain call or special redemption features may exist which could impact yield. Mortgage backed securities are subject to credit, default, prepayment, extension, market and interest rate risk.

Credit Quality is one of the principal criteria for judging the investment quality of a bond or bond mutual fund. Credit ratings are published rankings based on detailed financial analyses by a credit bureau specifically as it relates to the bond issue’s ability to meet debt obligations. The highest rating is AAA, and the lowest is D. Securities with credit ratings of BBB and above are considered investment grade. Duration is a measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. It is expressed as a number of years.

Alternative investments may not be suitable for all investors and should be considered as an investment for the risk capital portion of the investor’s portfolio. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses.

Event driven strategies, such as merger arbitrage, consist of buying shares of the target company in a proposed merger and fully or partially hedging the exposure to the acquirer by shorting the stock of the acquiring company or other means. This strategy involves significant risk as events may not occur as planned and disruptions to a planned merger may result in significant loss to a hedged position.

Commodity-linked investments may be more volatile and less liquid than the underlying instruments or measures, and their value may be affected by the performance of the overall commodities baskets as well as weather, geopolitical events, and regulatory developments. The fast price swings in commodities and currencies will result in significant volatility in an investor’s holdings.

Investing in foreign and emerging markets securities involves special additional risks. These risks include, but are not limited to, currency risk, geopolitical risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

Earnings per share (EPS) is the portion of a company’s profit allocated to each outstanding share of common stock. EPS serves as an indicator of a company’s profitability. Earnings per share is generally considered to be the single most important variable in determining a share’s price. It is also a major component used to calculate the price-toearnings valuation ratio.

Gross Domestic Product (GDP) is the monetary value of all the finished goods and services produced within a country’s borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory.

All index data from FactSet.

For a list of descriptions of the indexes referenced in this publication, please visit our website at lplresearch.com/definitions.

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