Waiting for New Highs

Waiting for New Highs

March 01, 2023

Financial markets have experienced quite a bit of change this year in just two short months. We started the year
hopeful that stocks would benefit from a better economic and monetary policy environment by the spring, but recent
developments suggest that may be further out than we initially thought. We remain confident that a new bull market
will come—it just may require a bit more of our patience before we get there.

When 2023 began, we had hoped for a new bull market to bloom in the spring, prompted by the end of the Federal
Reserve’s (Fed) interest rate hiking campaign. Following recent data pointing to stronger growth and higher inflation,
rate hikes may extend into the summer and potentially delay the start of a new bull market. Against that backdrop, even
though stocks pulled back in February, this year’s modest two-month gain for the S&P 500 Index feels like a victory.

Recent evidence of consumers’ resilience has been encouraging. Over 500,000 jobs were created in January, according
to the U.S. Bureau of Labor Statistics, nearly triple economists’ expectations (the February report is scheduled for
March 10). The unemployment rate is at its lowest level since the 1960s. Retail sales rose a better than expected 3% in
January month over month, as consumers benefited from the healthy job market and excess savings, while motivated
by the diminished COVID-19 threat (with perhaps a small assist from mild winter weather). However, that consumer
strength was accompanied by a series of hotter than expected inflation reports for January, fueling more concerns about
higher interest rates and, in turn, weighing on the stock market.

Rewards for investors will come—they always do—but they will require more patience than we had hoped. In an
environment where inflation has been frustratingly slow to come down, with a Fed still very much intent on
combatting it, our patience is being tested. The risk that the Fed tightens too much and drives the U.S. economy into
recession has risen. Higher interest rates also put stress on stock market valuations, so the longer we worry about the
Fed, the less likely we are to see that bull market arrive this spring. Corporate America is not in a position to help
much, given earnings declines are likely during the next two or potentially three quarters.

Still, we remain steadfast in our belief that investors’ patience will be rewarded. As Warren Buffett wrote in his latest
annual letter to shareholders, “There has yet to see a time when it made sense to make a long-term bet against
America.” Stocks have generated annualized returns of over 9% since the advent of the S&P 500’s predecessor index,
the S&P 90, back in 1927—and that includes the Great Depression, World War II, the dotcom crash, the 2008–2009
financial crisis, 9/11, and numerous other economic and geopolitical shocks. Stocks may be volatile until the direction
and ultimate destination of interest rates becomes clearer, but new highs will come—eventually.

In closing, we expect investors who put money to work in the coming weeks to be rewarded with solid gains this year.
The next bull market may not arrive in time for spring, but stocks may still ramp up this summer as inflation eases and
the Fed finally hits pause on rate hikes.

Important Disclosures

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 do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

All index data from FactSet.

The Standard & Poor’s 500 Index (S&P500) is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

For a list of descriptions of the indexes and economic terms referenced, please visit our website at lplresearch.com/definitions.

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