Shifting from Bonds to Alternatives for Additional Diversification Benefits
The LPL Strategic & Tactical Asset Allocation Committee (STAAC) determines the firm’s investment outlook and asset allocation that helps define LPL Research’s investment models and overall strategic and tactical investment thinking and guidance. The committee is chaired by the chief investment officer and includes investment specialists from multiple investment disciplines and areas of focus. The STAAC meets weekly to closely monitor all global economic and capital markets conditions to ensure that all the latest information is being digested and incorporated into its investment thought.
Key changes from September report:
- Upgraded consumer discretionary from underweight to neutral.
- Downgraded energy from neutral to underweight.
- Upgraded alternatives from neutral to overweight.
- Downgraded fixed income from overweight to neutral.
- Downgraded preferreds from strong overweight to overweight.
- Raised year-end S&P 500 target range to 5,400-5,500.
Investment Takeaways
Stocks rose in September for the fifth straight month, defyingSeptember’s weak track record historically. Investor sentiment was supported by firming expectations for a soft landing, the half point rate cut by the Federal Reserve (Fed), resilient earnings growth expectations, and further broadening out of market performance beyond technology. As October began, focus among market participants shifted from the Fed to the port worker strike, escalating violence in the Middle East, and polling data with the election just one month away.
Within fixed income markets, Treasury yields were lower in September as the Fed kicked off its rate cutting campaign. Markets continue to expect deep rate cuts from the Fed. Current market pricing has the Fed cutting interest rates nearly 2% over the next 12 months. Given current expectations, absent further softening in economic data, Treasury yields may remain rangebound around current levels. Nonetheless, rate cutting expectations helped generate positive returns for most fixed income asset classes with the Bloomberg Aggregate Bond Index higher by 1.3% in September. Credit sensitive sectors, high yield and emerging market debt, outperformed during the month.
LPL’s STAAC maintains its tactical neutral stance on equities while watching for signs of a potential stock market correction given elevated valuations, heightened U.S. political uncertainty, and geopolitical threats. Increased exposure to alternative investments offers diversification benefits, while a slightly reduced fixed income position reflects the Committee’s expectation for range- bound interest rates.
- The Committee has updated its 2024 year-end fair value forecast for the S&P 500 to 5,400 – 5,500 to reflect the combination of a possible soft landing, earnings resilience, expected range-bound interest rates, and potential election-related volatility.
- The Committee remains comfortable with a balanced approach to market cap. High-quality small cap stocks are attractively valued, but large cap companies enjoy superior earnings power and tend to outperform late cycle as the economy slows.
- The AI-fueled earnings on the growth side help justify rich valuations, but our technical analysis work has started to turn a bit toward value, which remains more attractively valued than normal. Staying close to neutral seems prudent.
- Quantitative and technical analysis underpins this month’s downgrade of energy and upgrade of consumer discretionary.
- The STAAC’s regional preference remains U.S. over developed international and emerging markets (EM) due largely to superior earnings and economic growth in the U.S. and significant volatility in the Japanese yen. For traders, stimulus-fueled strength in EM is notable.
- Despite the recent downgrade, the STAAC continues to hold an overweight tilt in preferred securities as valuations remain attractive. However, the risk/reward for core bond sectors (U.S. Treasury, agency mortgage-backed securities (MBS), investment-grade corporates) is more attractive than plus sectors. In our view, adding duration isn’t attractive at current levels, and the STAAC remains neutral relative to our benchmarks.
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IMPORTANT DISCLOSURES
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. Precious metal investing involves greater fluctuation and potential for losses.
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-to-earnings 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.
The Strategic and Tactical Asset Allocation Committee (STAAC) is a division of LPL Research.
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