Navigating the New Bull Market: Be Careful but Not Bearish, Says LPL

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The S&P 500 just crossed over into the bull market pasture, rising last week to 20% higher than its October 2022 low. This optimistic development strengthens the argument that the U.S. might not be headed for a recession and further stock market increases await.

But amid the cheers, fed by the lack of a bank meltdown after a handful of lender failures and by Washington’s debt ceiling agreement, some find it better to proceed cautiously. LPL Financial is a prominent voice in the circumspect, but not the bearish, camp. “We think it makes sense to be a bit careful here,” Jeffrey Buchbinder, LPL’s chief equity strategist, wrote in a commentary. “Importantly, though, neutral is not bearish.”

“There are a lot of reasons to expect the market to go higher between now and year-end,” Buchbinder observed in the research note, co-authored with Adam Turnquist, the firm’s chief technical strategist.

Last year was a rough one for investments, and asset managers took it heavy, as the S&P 500 tumbled 19.5%. Rising inflation, higher interest rates, a threatened recession and war in Ukraine gave investors the heebie-jeebies. But Buchbinder and Turnquist are right about the ample reasons for stocks to keep going up: Inflation seems to be ebbing, the Federal Reserve appears near the end of its tightening campaign, the recession has not appeared and the Ukraine conflict has thus far not widened.

Yet according to LPL, the party might come to an end sooner rather than later because, among other factors, it is likely a recession will appear, at last, later this year or in 2024’s first half. Previously, the house’s prediction had been for a soft landing—a slowdown, yet no recession.

The robust job market and high household savings have delayed the coming economic contraction, the report said. Still, cracks are appearing in that façade, namely slowdowns in the trucking and freight industries. A slowing economy will not necessarily harm the stock market in the run-up to the recession, the LPL strategists contended (although it surely will once the downturn arrives).

“The average loss for the S&P 500 during the six months before a recession has been 1.4% historically, based on data since 1970, though the index did gain nearly 10% ahead of the 1980 and 1990 recessions,” they wrote.

What’s more, narrow leadership of the market, thanks to overbought Big Tech stocks, is not sustainable, they continued. Bonds are much more attractive nowadays due to higher yields, and those loftier rates also lower the value of future cash flows from the tech giants.

So LPL plans to lighten its recommended stock exposure a bit. The old asset allocation blueprint was 63% stocks, 35% bonds and 2% cash. The new benchmark shifts a chunk of equities into fixed income, making the breakdown 60/38/2.

As Buchbinder put it, “That higher hurdle for stocks to outperform bonds and the increasing likelihood of recession within the next six to nine months are the primary reasons for our move to neutral.”