The equity markets have risen quite a bit in the last month and interest rates have eased a little bit since our last newsletter in October. The yield curve between long- and short-term interest rates is still inverted. That means that short term interest rates (the 13-week Treasury Bill is currently paying 4.125%) are higher than longer term (the 10-year Treasury Bond is currently paying 3.732%) rates. This is not usually the case, and even though the equity markets have risen quite a bit in the last month, the inverted yield curve for bonds is something to be wary of. Inverted yield curves sometimes presage recessions. At this moment, it is unclear to what degree this may or may not occur.

Internally, a shift has transpired in the equity markets:

First, a bit of background. Value and growth stocks are simply stocks that exhibit greater “value” characteristics (e.g., comparatively inexpensive relative to earnings) or “growth” characteristics (e.g., comparatively faster sales or earnings growth) than peers. The focus here is on relative performance. Value’s year-to-date performance is negative along with most every other asset class, just less negative than both the broad market (S&P 500) and significantly less negative than growth. Said another way, value has outperformed the broader market by ~10 percentage points year to date, and outperformed growth by ~20% points year to date.

This is an example of why asset allocation is so important. Growth and Value components are incorporated into all of LPL Financials’ managed programs and since November of last year, value has outperformed growth for the longest sustained period since 2003 – 2007. Owning these different equity asset classes helps to smooth the stock market ride as one class over performs another.

Will value keep outperforming growth? Well, value stocks are inherently cheaper than growth stocks, which can have several root causes. Typically, the assumption is these companies have lower growth prospects, and therefore investors are primarily paying for cash flows and profits “in the here and now”. This tends to make the average value stock less sensitive to interest rates compared to growth stocks. Of all the factors that have driven value’s outperformance, monetary policy is the one to watch over the next 12 months for the performance of value relative to growth. The FED’s (Federal Reserve) path forward on restrictive policy, guided by inflation and jobs data, will be a major contributor to whether value’s relative outperformance will continue.

Moving forward, November and December have historically been stronger periods for equity markets. This is a tendency, not a rule. We expect more volatility, and we do not know what the Federal Reserve’s reaction will be to the slightly lower inflation data that has come in as of late. The markets have reacted with hope that the raising of interest rates will slow – we will see. We have sent out our annual Buckaroo Calendar that so many of you tell us that you enjoy. If you haven’t received it, let us know and we will forward one to you. Thank you for your business and do not hesitate to contact us with any investment questions. ~ Mark and Elise

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change. References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and does not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results. All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy. All index data from FactSet. This research material has been prepared by LPL Financial LLC. Tracking #1-05347360 (Exp. 11/23).