Shattering Anxiety Barriers with LPL’s Ryan Detrick

Episode 78 of The Investopedia Express with Caleb Silver (March 21, 2022)

The U.S. stock market just experienced its strongest weekly surge since November 2020, fueled by renewed buying enthusiasm. The Nasdaq soared over 8%, the S&P 500 climbed more than 6%, and the Dow Industrials rose by 5.5%, all despite the Federal Reserve's quarter-point interest rate hike and its forecast of at least six additional hikes this year. The Fed aims to raise the overnight lending rate to approximately 2.4% by year-end and anticipates inflation to ease by mid-2022, with a significant drop in 2023. While interest rate hikes help curb soaring prices, persistently high costs also naturally dampen consumer spending, as evidenced by February's retail sales growth of only 0.3% compared to January.

The Fed has revised its U.S. GDP growth forecast down from 4% to 2.8%, a substantial adjustment that has caught the bond market’s attention. The flattening yield curve—where long-term bond yields fall closer to short-term yields—signals cautious investor sentiment and often precedes economic slowdowns. While an inverted yield curve is a strong recession indicator, we haven't reached that point yet, but the bond market remains a critical barometer of economic health.

Introducing Ryan Detrick

Ryan Detrick, CMT, serves as the chief market strategist at LPL Financial and is affiliated with the Financial Industry Regulatory Authority and the Securities Investor Protection Corporation. Before joining LPL, he was a senior portfolio manager at Haberer Registered Investment Advisor and spent over a decade at Schaeffer’s Investment Research, frequently appearing on CNBC, Bloomberg TV, and Fox Business as the company’s primary spokesperson.

Episode Highlights

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Investors today face numerous concerns—from inflation and geopolitical conflicts to rising interest rates and market uncertainty. When anxiety builds, it’s crucial to reflect on historical market behavior to glean insights about potential future trends.

Ryan Detrick, echoing Mark Twain’s sentiment that “history doesn’t repeat itself, but it often rhymes,” returns to share his valuable perspective amidst the current market volatility. Welcome back, Ryan!

Ryan: “I’m honored to be here. Thanks for accommodating my schedule. Whether Mark Twain actually said that quote or not, it’s a powerful reminder to study history. I’m excited to discuss the market with you today.”

Caleb: “Ryan, the market seems quite volatile and reactive to headlines lately. Fund managers are increasingly holding cash. Is this a familiar pattern during uncertain times, or is this truly unprecedented?”

Ryan: “It may feel unique, but historically, midterm election years like 2022 often experience significant volatility—about a 17% peak-to-trough correction. If investors hold through the lows, gains exceeding 30% can follow within a year. We also anticipated an aging economic cycle and Fed rate hikes. While last year’s correction was modest at 5.2%, history suggests a bumpier year often follows. The recent strong bounce is encouraging and may signal the start of a new bullish phase.”

Caleb: “These sharp daily gains after prolonged declines—how common are they? Do they indicate market bottoms?”

Ryan: “One-day gains of 1-3% are normal during volatile periods. Remarkably, three consecutive 1%+ gains are rare and historically precede strong market performance. Over the past 20 years, such sequences occurred only ten times, and the S&P 500 rose every time in the following year, averaging 25% gains. This recent surge could mark the beginning of a sustained upward trend.”

Caleb: “With the Fed planning multiple rate hikes to return rates to pre-pandemic levels, there’s concern about the impact on markets, especially tech stocks. Are these hikes as damaging as feared?”

Ryan: “Not necessarily. Historically, the first rate hike in a cycle often occurs mid-expansion, with markets continuing to rise for years afterward. The last seven first hikes saw the S&P 500 higher six times a year later, with peaks averaging three and a half years later. Although this cycle includes unique inflation challenges and a flat yield curve, the Fed’s actions reflect a strengthening economy. Earnings forecasts remain positive, and corporate optimism supports the outlook. Recession risks appear limited in the near term.”

Quick Insight

Recessions are marked by widespread economic decline lasting several months, impacting GDP, income, employment, and production. Since WWII, the U.S. has experienced 13 recessions, averaging one every six years.

Caleb: “Retail sales dipped slightly recently, and consumers are adjusting post-holiday. While spending persists, concerns about rapid rate hikes slowing borrowing and business investment remain. How serious are these risks?”

Ryan: “They’re valid concerns, but we’re skeptical about the Fed executing six or seven hikes this year—four or five seems more plausible. Historically, even with multiple hikes, markets have performed well, as seen from 2004-2006. Despite geopolitical and economic uncertainties, markets often rebound strongly after rough starts. The recent surge, despite challenging news, suggests underlying resilience. Cash levels among fund managers are at pandemic highs, indicating significant buying power on the sidelines.”

Quick Insight

Bank of America’s Global Fund Manager Survey reveals bearish sentiment and recessionary expectations, yet equity allocations remain intact, suggesting cautious optimism and potential market support.

Caleb: “Energy and financial sectors have led this year. Will this trend continue?”

Ryan: “We favor cyclical value stocks, including energy and financials. Despite energy’s sharp commodity price rise, it remains underrepresented in the S&P 500, presenting potential for gains. Financials benefit from rising yields and a healthy consumer, with strong performance in regional banks and insurance. Tech is more neutral due to rate pressures but holds selective opportunities. A diversified portfolio emphasizing value is prudent.”

Caleb: “Should investors rotate from growth to value now, or wait for a market cycle shift?”

Ryan: “A balanced approach makes sense. Value currently outperforms growth, but growth could see short-term rebounds. Our models suggest a slight tilt toward value (53% value, 47% growth). Dollar-cost averaging remains a sound strategy amid uncertainty.”

Caleb: “With bonds underperforming lately, is the traditional 60/40 portfolio still viable?”

Ryan: “Bonds are diverse; beyond Treasuries, options like bank loans and high-yield bonds offer value. While stocks are pricey and bond yields moderate, U.S. fixed income remains attractive globally. Maintaining some bond exposure supports portfolio stability.”

Caleb: “What’s the biggest overlooked risk for investors?”

Ryan: “U.S.-China relations are a major geopolitical wildcard. Trade tensions and political dynamics impact markets significantly, as seen in past tariff episodes. The ongoing conflict in Ukraine adds complexity, and investors should monitor these developments closely.”

Caleb: “And the greatest hidden opportunity?”

Ryan: “Financials stand out. Despite recent runs, relative to tech and communications, financial stocks have room to outperform over multi-year cycles. History shows value sectors can thrive during extended market adjustments.”

Caleb: “Ryan, your market expertise is invaluable. What’s your favorite investing term?”

Ryan: “Dollar-cost averaging. Investors who consistently invest, regardless of market swings, tend to succeed long-term. It’s about steady, measured progress rather than chasing big wins.”

Caleb: “Wise words. Thanks for joining us, Ryan. Listeners, follow Ryan and LPL Financial for ongoing market insights.”

Ryan: “Thank you, Caleb. You can find us at lplresearch.com, listen to our LPL Market Signals podcast, or follow me @RyanDetrick on Twitter. Appreciate the opportunity and hope to chat again soon.”

Term of the Week: Moral Hazard

This week’s finance term, suggested by Hazel from Southampton, NJ, is 'moral hazard.' It refers to the risk that one party in a contract may act opportunistically or take excessive risks because they do not bear the full consequences. This concept also applies to situations like the Federal Reserve’s bailout of banks during the Great Financial Crisis, where support potentially encouraged risky behavior by removing the threat of failure. Thanks, Hazel, for a thought-provoking term!

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