Client Letter: Meltdown—Meltup?

letter-to-clients

Meltdown or Meltup?

Dear Clients:

Have you ever noticed that there are lots of words to describe a meltdown—catastrophe, calamity, disaster, crisis, cataclysm—and comparatively few words, if any, to describe the opposite?

As we clearly recall, in 2008 the financial meltdown stunned the economy and drove severe declines in the stock market. Those losses extended into 2009 with a 25% drop in the S&P 500 in the first nine weeks of the year. Reporters and pundits were forced to break out their thesauruses to find more ways to describe the meltdown. Then, suddenly, conditions began to improve. Over the following nine weeks the economy and markets demonstrated a rapid pace of improvement with stocks rebounding into positive territory for the year. This “meltup”—to try to coin a new term—was driven by the steady improvement in key economic indicators, the credit market, the labor market, and the outlook for profits.

Indicators of future profit growth have started to rebound over the past several months. The credit markets have demonstrated impressive signs of healing, with April being the best month ever for High Yield Bond performance, as measured by the Barclays High Yield Bond Index. An improving trend in the labor market is becoming apparent with fewer job losses reported each month so far this year. Finally, real-time data on the conditions in the markets and economy measured by the LPL Financial Current Conditions Index show continued improvement in May, suggesting further improvement in upcoming monthly and quarterly data.

While the meltdown may be behind us, a continued meltup is not assured. Financial conditions are getting less bad, but are still a long way from being good. Market participants are increasingly looking forward to steady improvement and a return to economic and profit growth by year-end. If the improvement begins to stall, the markets are likely to reverse course and retrace some of the gains of the meltup. While some volatility is to be expected in the months ahead, as the healing process is likely to be uneven, we believe a renewed meltdown that would drive stocks all the way back down to the lows of nine weeks ago is unlikely.

We stress the importance of a commitment to your long-term investment strategy. As always, contact me if you have any questions.

Sincerely,

Jeff Rose, CFP®

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This research material has been prepared by LPL Financial. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. High Yield/Junk Bonds are not investment grade securities, involve substantial risks and generally should be part of the diversified portfolio of sophisticated investors.

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