Stocks are due for a pullback of up to 8% in the next 3 months, says LPL Financial

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Traders on the floor of the New York Stock Exchange.

  • The S&P 500 looks due to pullback by 5%-8% in upcoming months after a strong performance year-to-date.
  • LPL Financial outlined its view as the benchmark index has nearly doubled since last year’s low amid the pandemic.
  • The S&P 500 hasn’t had as much as a 5% pullback since October 2020.
  • See more stories on Insider’s business page.

The US stock market roared back swiftly from its pandemic-induced crash last year and the S&P 500 has notched a double-digit gain so far in 2021 – but its performance puts the benchmark in line for a pullback by up to 8% before the year ends, says LPL Financial.

The gauge of the largest listed companies in the US has advanced by nearly 18% this year, with record highs supported in part by expectations of robust growth in corporate earnings as companies work to regain their footing as the pandemic eases.

The S&P 500 finished 2020 up 16% by clawing out of the bear market it slid into in March 2020 as the coronavirus pandemic unfolded. The index also finished strongly in 2019, springing up by 29%.

“After more than a 90% rally off the March 2020 bear market bottom (and near double on a total return basis) we do think the odds are much higher of a standard 5-8% pullback during the historically troublesome August/September/October period,” said Ryan Detrick, chief market strategist, and Jeff Buchbinder, equity strategist, at LPL Financial, in a Monday note.

“This isn’t a bad thing though, as some type of break could be necessary before another move higher,” the strategists said in outlining what they consider six surprises in markets so far this year.

The S&P 500 through Tuesday’s session had risen by 98% since its crash and bottom on March 23, 2020. Its climb started after the index slid 34% from its peak set in mid-February 2020, with investors rattled by the prospect of an economic recession from the COVID-19 outbreak. The index staged a fast recovery in reaching an all-time high in August 2020.

“Historically, year two of a bull market can be choppy and quite frustrating. After the huge gains we saw the last nine months of 2020, we entered 2021 expecting there to be more give and take than we’ve seen this year,” said the strategists. “In fact, the S&P 500 hasn’t even had as much as a 5% pullback since October 2020, one of the longest streaks ever. That is very surprising indeed.”

The S&P 500 has been fueled by anticipation of improved earnings. Ahead of this week’s busy docket for financial results, S&P 500 companies were on track for their best profit growth since 2009, with Refinitiv estimating a rise of 78.1% year-on-year in the second quarter.

The strategists also said they’ve been surprised by the lack of volatility so far in 2021. The stock market’s fear gauge, the Cboe VIX Volatility index, has dropped by 22%, hovering around 17.

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US stocks rise as investors weigh growth concerns against strong corporate earnings

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Traders and investors braced for the jobs data on Friday.

  • Stocks were up Wednesday following a rebound rally in the previous session.
  • Cola-Cola and Verizon aided a rise in the Dow Jones Industrial Average.
  • Bitcoin and oil prices advanced.
  • See more stories on Insider’s business page.

US stocks edged higher Wednesday, with blue-chip stocks advancing on the back of earnings reports that outstripped Wall Street’s targets, while investors confronted questions about global economic recovery as COVID-19 infections rise.

The Nasdaq Composite, home to large-cap tech stocks, slipped while the Dow Jones Industrial Average gained ground. Stocks on Tuesday staged a comeback after a rout in the previous session that was triggered by reports about mounting coronavirus cases worldwide.

Here’s where US indexes stood at 9:30 a.m. on Wednesday:

The Dow on Wednesday found strength from shares of Coca-Cola, Johnson & Johnson and Verizon after each company posted quarterly results that beat analyst expectations and raised guidance.

COVID cases have been increasing on the spread of the Delta strain of the virus and could fuel worries about stagflation, or the combination of slowing economic growth and inflation.

“If the virus begins to spread rapidly again, that would curtail economic growth and prolong the inflationary supply chain disruptions that have affected so many industries including semiconductors and housing,” said Nancy Davis, portfolio manager of the Quadratic Interest Rate Volatility and Inflation Hedge Exchange-Traded Fund, or IVOL, in a note.

“Stagflation is a 60/40 portfolio’s worst nightmare, as stocks and bonds tend to fall together during stagflationary environments. Lower economic growth punishes stocks and inflation robs bond investors of their returns,” she said.

Around the markets, Cathie Wood has added to her bitcoin exposure with another purchase of shares in the Grayscale Bitcoin Trust after the cryptocurrency fell below $30,000 on Tuesday.

Ulta will open mini shops at 100 Target stores next month, the biggest cosmetics retailer in the US said Wednesday.

Gold slipped by 0.5%, to $1,801.17 per ounce. Long-dated US Treasury yields edged up, with the 10-year yield at 1.23%.

Oil prices gained ground, with West Texas Intermediate crude up 1.5% at $68.41 per barrel. Brent crude, oil’s international benchmark, gained 1.2% to $74.59 per barrel.

Bitcoin jumped 6%, to $31,586.92.

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These are the stocks to own in the second half of 2021 as markets navigate higher interest rates, according to Goldman Sachs

NYSE trader

Investors should not expect another strong six months for stocks after the S&P 500 finished the first half of the year up about 15%, Goldman Sachs said in a note on Friday.

Instead, the stock market is likely to consolidate sideways for the next six months as investors navigate higher interest rates. With the 10-year US Treasury yield currently at 1.43%, Goldman expects it to climb to a cycle-high of 1.9% by the end of the year.

That expected surge in interest rates will likely weigh on high growth stocks and benefit cyclical stocks, the bank said. To benefit from the market setup going into year-end, Goldman recommends investors buy stocks that have short duration, high growth investment ratios, and pricing power, according to the note.

While long duration growth stocks have outperformed their short duration value stock counterparts in recent weeks, Goldman expects this trade to reverse, especially if its forecast for higher interest rates materializes.

Some well-known stocks in Goldman’s short duration basket include Ford, CVS, Intel, and AT&T.

“Companies that have consistently invested for growth have outperformed the S&P 500 year-to-date and are best positioned to continue growing despite the expected slowdown in economic activity,” Goldman said.

Some well-known stocks in Goldman’s high growth investment ratios basket include Facebook, Alphabet, General Motors, and Costco.

“We recommend investors focus on stocks with high pricing power as demonstrated by their high and stable gross margins. High pricing power stocks outperformed in 2018 – 2019 as wage growth accelerated and profit margins declined,” Goldman explained.

Some well-known stocks in Goldman’s high pricing power basket include Activision Blizzard, Etsy, Procter & Gamble, and Adobe.

Goldman outlined its expectations that while the S&P 500 will end the year at 4,300, it will jump 7% to 4,600 by the end of 2022 as the unemployment rate falls to 3.5%.

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Retail investors are on track to plow $400 billion into stocks in 2021 with the day-trading boom still in its early innings, Goldman Sachs says

Reddit Wall Street Bets Retail Trading GameStop
  • Retail traders are set to pour a net $400 billion into the equity market this year, Goldman Sachs said.
  • That’s a hike from the analysts’ previous estimate of $350 billion.
  • Goldman’s basket of retail favorites has outperformed the S&P 500 by 3 percentage points.
  • See more stories on Insider’s business page.

Retail traders responsible for driving record rallies in meme stocks like GameStop and AMC Entertainment are on track to pour a net $400 billion into equities this year, Goldman Sachs analysts said.

In the Friday note, the analysts, led by David Kostin, raised their estimate for full-year household net equity buying forecast to $400 billion from $350 billion in light of “high cash balances and continued retail participation.”

Last year, households poured $367 billion into equities, while in 2018 and 2019, they were net negative on the asset class, the Goldman Sachs data showed.

“The retail bid is back,” the analysts wrote, noting that in the first quarter alone, households were the largest source of equity purchases, netting $172 billion.

The “renewed strength in retail activity” has pushed Goldman’s basket of “retail favorites” to top the S&P 500’s performance by 3 percentage points this month. Meanwhile, stocks with active retail trading activity have also outperformed the broad market.

Retail traders came into the spotlight earlier this year when they caused a massive rally in shares of video-game retailer GameStop. The rally spread to other stocks, too, including BlackBerry and AMC Entertainment. Since then, the term “meme stocks” has entered Wall Street’s vocabulary, as retail traders, mobilized on social media sites like Reddit and Twitter, continue to rally behind various companies.

In May, retail traders renewed their interest in the new class of stocks as they drove up shares of movie-theater chain AMC Entertainment. Other meme-stock classics also rallied, as retail traders added new stocks to the basket as well.

Retail traders will likely continue to favor stock markets, thanks to “anemic” money market and credit yields, Goldman Sachs said. Plus, a continued increase in inflation would make equities more favorable than bonds or cash.

Currently, households allocate 44% of their assets to equities, the analysts said. That nearly matches the 46% all-time high allocation from 2000, just before the dot-com bubble burst.

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Stock market bullishness is at a 13-year high, but euphoric sentiment also means it may soon be time to sell, Bank of America says

NYSE Trader
  • Bank of America said bullishness in the stock market is the highest in 13 years.
  • But its contrarian Sell Side Indicator is very close to tilting into an area that will signal to investors that it’s time to sell.
  • BofA said it still prefers cyclical stocks.
  • See more stories on Insider’s business page.

Investors are the most enthusiastic about stocks since the global financial crisis more than 10 years ago but the market is edging closer to indicating that it’s time to sell, Bank of America said Monday.

Wall Street’s bullishness on stocks is a reliable contrarian indicator, BofA said in a note showing that its Sell Side Indicator rose to a 13-year high of 59.8% in April from 59.4% in March. The indicator is based on the average recommended equity allocation of Wall Street strategists.

The indicator is also 50 basis points away – at 60.3% – from the contrarian ‘sell’ threshold.

“Increasingly euphoric sentiment is a driver of our more cautious outlook as we believe that vaccine deployment, economic reopening, stimulus, etc. are largely priced in,” said equity strategists led by Savita Subramanian. “We have not seen a 5% pullback in six months … nor have we experienced a 10% correction in 14 months.”

Pullbacks in stocks occur on average 3 times per year and corrections historically are a once-per-year phenomenon, BofA said. A correction is widely considered a decline of 10% or more in an index or an asset from its most recent high.

The signal to sell stocks is at its closest since May 2007, after which the S&P 500 dropped by 7% in the subsequent 12 months, said BofA. The indicator is currently pointing to 12-month returns of 6%, a “much weaker outlook” compared with an average 12-month forecast of 14% since the end of the global financial crisis.

Bullishness among investors was on display through Wall Street’s three widely watched indexes which in April hit record highs. April proved to be a good month for US equities, with the S&P 500 index climbing by 5.2% and the Nasdaq Composite gaining 5.4%. The Dow Jones Industrial Average rose 2.7% and crossed above 34,000 for the first time. Investors pushed stocks up as corporate earnings have come in ahead of analyst expectations and more economic data point to further recovery in the world’s largest economy from the COVID-19 pandemic.

Equity allocations since March 2020 have risen more than 3.5 times faster than they typically do following bear markets, the strategists said. Stocks crashed in March of last year as the coronavirus health crisis accelerated.

“Lofty valuations, juxtaposed against the potential for bad inflation, rising rates, and higher taxes on corporates and consumers. But we are bullish on economic / profits / capex growth, driving our preference for cyclical stocks,” wrote Subramanian.

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Stocks now represent a record-high percentage of financial assets among US households, reports say

Stock Market Bubble
  • Stocks now represent 41% of US households’ financial assets, according to data from JPMorgan and the Federal Reserve.
  • Robinhood tripled its revenue from payment for order flow in the first quarter amid a rise in retail traders.
  • Warren Buffett warns investors are “just as sure” of themselves as they were in 1989 before a mini-crash.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

Americans are now holding a higher percentage of their net worth in stocks than ever before, the Wall Street Journal reported on Monday based on data from JPMorgan and the Federal Reserve.

US households increased their equity holdings to a record 41% of their total financial assets in April.

Nikolaos Panigirtzoglou, an analyst at JPMorgan, released the findings from data going back to 1952 that includes 401(k) retirement accounts. The analyst said appreciating share prices coupled with increased buying were the main factors for the elevated allocations.

The news comes just two weeks after FINRA announced margin debt – the amount of money investors borrow from their brokers – hit another record high in March, topping $822 billion.

The rise in interest in equity markets and the use of debt to invest in them comes amid a boom for retail traders.

New apps like Robinhood and Webull have taken the market by storm, adding millions of new investors and traders over the past few years.

Robinhood has grown so much it was able to more than triple the revenue it earns from payment for order flow in the first quarter of 2021.

The rise in revenue from active trading came after Robinhood added some 3 million new members in the first quarter of 2020 alone during the height of the pandemic, per Bloomberg.

A new study from the University of Western Australia found that trading activity among retail investors spiked during the pandemic as investors had more time and money to invest in online trading.

Robinhood and other trading apps have repeatedly graced the top of Apple and Google’s app stores amidst the meteoric rise in retail trading.

And while many market commentators are cheering the inclusive move, some have issued warnings.

Warren Buffett warned about the self-confident nature of Wall Street and the new breed of retail investors in Berkshire Hathaway’s annual shareholder meeting on Saturday.

“We were just as sure of ourselves, and Wall Street was, in 1989 as we are today. But the world can change in very, very dramatic ways,” the ‘oracle of Omaha’ said.

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US stocks hover near record highs as traders digest strong mega-cap bank earnings

NYSE traders
  • The S&P 500 stuck close to record highs as the first-quarter earnings season kicked off.
  • Goldman Sachs, JP Morgan Chase and Wells Fargo each turned in better-than-expected results.
  • Coinbase will make its trading debut on Wednesday.
  • See more stories on Insider’s business page.

US stocks clung near record highs Wednesday as the first-quarter earnings season began its shift into high gear with blowout earnings results from big banks including Goldman Sachs.

The S&P 500 sought to build on its record close Tuesday that was led by tech stocks. Shares in that sector were also higher on Wednesday, giving a boost to the Nasdaq Composite.

The new quarterly earnings season started out with JP Morgan Chase JP Morgan Chase and Wells Fargo each turning in profit that surpassed Wall Street’s targets. Goldman Sachs beat revenue and profit expectations, aided by strong trading and investment banking revenue.

Here’s where US indexes stood at 9:30 a.m. on Wednesday:

A light economic calendar will “leave plenty of time for investors to watch the debut of Coinbase to the public markets. The listing couldn’t come at a better time for the company as crypto-currencies have been on absolute fire with both bitcoin and ether trading at record highs and riding what looks to be their seventh straight day of gains,” said Paul Hickey, co-founder of equity research firm Bespoke in a note.

Around the markets, Credit Suisse reportedly put $2 billion of Archegos-linked stocks on the market after the hedge fund’s meltdown. Part of the stock offering included Discovery Communications whose shares were lower Wednesday.

The First North American bitcoin ETF surges beyond $1 billion under management.

Gold fell 0.5% to $1,737.50 per ounce. Long-dated US treasury yields rose, with the 10-year yield at 1.634%.

Oil prices rose. West Texas Intermediate crude gained 2.2% to $61.50 per barrel. Brent crude, oil’s international benchmark, moved up 2.1% to $65.05 per barrel.

Bitcoin surged to $64,115.

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Retail stock traders are 33% less active than last month – and Goldman says the slowdown could continue as the economy reopens

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  • Trading activity among retail investors has dropped by 33% in April from last month, Goldman Sachs said in a note Monday.
  • The reopening of businesses and an increase in COVID-19 vaccinations may have contributed to the slowdown.
  • Stock buying by retail investors is still above pre-pandemic levels.
  • See more stories on Insider’s business page.

Retail trading activity has slowed down by more than a third in April, in part as people focus on getting back out after a year of COVID-19 restrictions and businesses restart as millions of Americans receive vaccinations, according to Goldman Sachs.

There’s been a 33% drop in broader volumes in US cash equity trading, or single-stock trading, this month from March, the investment bank said, citing data from retail brokerage Charles Schwab.

“We believe recently mixed equity performance and accelerating re-opening of the economy amid increased vaccination pace could partially explain the recent slowdown in retail activity,” Goldman Sachs equity analyst Alexander Blostein wrote to clients in a note published Monday.

The slowdown by retail investors reconciles with a decline in off-exchange market share by more than 400 basis points quarter-to-date compared with the same period in the first quarter of the year, “drifting to low 40%’s and closer to historical levels after reaching as high as 50% at various points in [the first quarter],” Blostein said.

Other firms that track activity by retail investors in recent weeks have also noted a slowdown. Investors who have received $1,400 stimulus checks in March as part of the US government’s COVID-19 stimulus efforts may have opted to purchase other goods and services, save the cash or pay down debt.

At the same time, the government has ramped up the availability of coronavirus vaccines to the US population, spurring many businesses to reopen their doors after closing them during the worst of the pandemic.

Still, retail trading remains significantly above pre-pandemic levels and features many structural changes such as zero-commission trading, said Blostein.

“While the degree to which retail will normalize is uncertain, further moderation in retail participation is likely to create meaningful headwinds to both US cash equity and option volumes.”

Retail investing has come into focus following the surge in interest in the stock market during pandemic, as well as volatility in so-called meme stocks that were stoked on social media sites such as Reddit. Video game retailer GameStop and movie-theater chain AMC Entertainment have been among the most popular names among retail investors looking to make a profit by squeezing short-sellers in the stocks.

A study by Schwab released last week showed that 15% of all US stock markets investors began investing in 2020. The median age of new investors is 35 years.

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3 reasons why volatility could come roaring back to a stock market that’s drifting along near record highs, according to UBS

NYSE Trader
Traders at the New York Stock Exchange.

  • A key tracker of stock-market volatility at its lowest since early 2020 at the same time that US stocks are at record highs.
  • Investors should anticipate Wall Street’s so-called “fear gauge”, or VIX, to come off those lows in the coming months, said UBS.
  • Volatility may pick up pace as investors wrestle with inflation worries and COVID-19 variants.
  • See more stories on Insider’s business page.

Wall Street’s key measure of stock-market volatility is at its lowest since the COVID-19 crisis took off in the US last year, but that calmness will likely break over the next few months, according to UBS.

The US stock market has soared to record highs in 2021 on the back of accelerating coronavirus vaccinations worldwide and roughly $5 trillion in financial aid deployed by the US government to mitigate the pandemic’s economic damage. The vaccinations and stimulus packages have been laying the groundwork for a further reopening of the world’s largest economy as people begin to rebuild work and school routines and spend the money sent to them by Uncle Sam.

The S&P 500 index has shot above the 4,100 level and the Dow Jones Industrial Average tracking blue-chips is at its strongest levels, driven by cyclical sectors such as energy and industrials that stand to benefit from increased economic activity.

Wall Street’s so-called “fear gauge,” at the same time, has dropped below the 17 level, the lowest since early February 2020, before the World Health Organization declared the coronavirus outbreak a pandemic. But don’t expect the Cboe volatility index to continue to stay that low, said the world’s largest wealth manager in a note published Friday.

UBS noted a news report that at least one investor bought about $40 million in VIX call options that indicate the buyer expects market volatility to pick up pace over the next three months. One or more investors anticipated the VIX to reach above the 25 level and rise towards 40 by mid-July, Reuters reported, citing trading data.

“We see reasons to expect periodic bouts of higher volatility in the near term,” said Mark Haefele, chief investment officer at UBS Global Wealth Management, in the note.

Growth vs inflation

Firstly, investors may be torn between optimism over accelerating economic growth and worries over higher inflation. Among the signs that recovery is taking further hold was the recent and strongest reading in services-sector activity since 1997 from the Institute for Supply Management. European growth should also strengthen as vaccinations increase.

“Still, as pent-up demand meets supply constraints, a pickup in inflation could well unsettle investors,” said the investment bank. This week, Dallas Federal Reserve President Robert Kaplan said inflation could rise “well in excess of 2.5%,” over the summer, which would be well above the Fed’s 2% target.

COVID-19 strains

Investors have so far looked through news about variant strains of COVID-19. “This optimism could be put to the test by the spread of new variants of the virus, especially in areas where the vaccination effort has been progressing well, such as in the US.”

UBS noted “pockets” of rising infections in Ohio and Wisconsin.

Trading activity

Volatility has been “sporadically heightened” by a rise in institutional and retail activity in the options market, along with the increased share of growth stocks in major equity indexes, said UBS.

“In the first quarter we saw retail activity driving volatility in individual stocks, such as GameStop, which spilled over into broader market swings,” said Haefele.

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US companies are expected to see their strongest profit growth in nearly 20 years after downward revisions were ‘too aggressive’

oil texas
First-quarter earnings projections for the energy sector have more than doubled.

  • Earnings for S&P 500 companies are expected to rise by 6% in the first quarter of 2021, according to FactSet data.
  • A 6% increase would mark the largest rise since the firm starting tracking the bottom-up EPS estimate in early 2002.
  • The energy and materials sectors are on track to post double-digit increases in earnings.
  • See more stories on Insider’s business page.

Expectations for quarterly earnings growth are at their strongest in about two decades as analysts pencil in the impact of the US economy’s acceleration out of recession, led by projections for earnings in the energy sector to more than double.

A big wave of financial reports should hit Wall Street in mid-April, with big banks including JPMorgan Chase, Goldman Sachs and Wells Fargo among the companies that will kick off the first-quarter earnings season for 2021.

Ahead of that, Wall Street analysts are looking for S&P 500 500 companies overall to post a 6% increase in bottom-up per-share earnings, according to FactSet. A 6% rise would represent the largest increase since the financial-data firm began tracking the earnings estimate in the second quarter of 2002. Earnings, on average, are currently expected to come in at $39.86 per share.

The bottom-up EPS estimate is an aggregation of the median first-quarter earnings-per-share estimates for all of the companies in the S&P 500, FactSet said in a note published Thursday.

The projected 6% increase stands out in part because a bottom-up EPS estimate usually decreases during a quarter. FactSet said during the past five years, the estimate has recorded a decline of 4.2% during a quarter, and during the past 15 years, it has tended to post a decrease of 5.1%.

Analysts “may have been too aggressive in their downward revisions to EPS estimates during the first half of 2020 at the height of the COVID-19 lockdowns,” wrote John Butters, senior earnings analyst at FactSet, in looking at the factors behind the boost in first-quarter projections.

The global economy sunk into recession last year as the coronavirus pandemic forced businesses worldwide to close or reduce operations to curb the spread of the respiratory disease. The US economy contracted by 33% in the second quarter of 2020.

But analysts in the third quarter of 2020 began raising their earnings expectations for that quarter and beyond. FactSet foresees US gross domestic product expanding by 5.7% in 2021, higher than the projected 4% rate on December 31.

Read more: Goldman Sachs says buy these 33 stocks now as profits rebound for companies that suffered the most during the pandemic

Rising commodity prices and interest rates also appear to be fueling upward revisions. Oil prices have jumped by more than 20% to top $59 a barrel during the first quarter and the yield on the 10-year Treasury note quickly scaled up above 1.7% during the first three months of this year from 0.92%.

The highest percentage increases in bottom-up EPS estimates are for the energy, materials, and financials sectors as they are “likely benefitting from either higher commodity prices (Energy and Materials) or higher interest rates (Financials),” said Butters.

Per-share earnings estimates for the energy sector have shot up by 123%, to $2.55 from $1.14, the largest boost in projections among the 11 sectors tracked on the S&P 500 index. The financial sector is forecast to post a collective earnings increase of about 13% for the first quarter.

“Finally, companies in the S&P 500 have been much more optimistic in their EPS guidance than normal,” said Butters, noting that 61 companies have issued positive first-quarter guidance, well above the five-year average of 35.

“If 61 is the final number for the quarter, it will mark the highest number of S&P 500 companies issuing positive EPS guidance for a quarter since FactSet began tracking this metric in 2006,” he said.

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