U.S. Economy is Bouncing Back

 

May 22, 2015

Dear Valued Investor:

Many of us are spending our Saturdays out in the yard, helping our lawns bounce back from a tough winter. As the brown patches and bare spots that are reminders of colder days fade, our lawns’ roots are showing underlying strength. It’s heartening to see the new growth and greenery now emerging, just as we saw last spring.

Similarly, the U.S. economy is bouncing back after a largely weather-driven first quarter decline, just as it did a year ago. The April 2015 Employment Situation report showed enough strength to suggest the economy is gaining traction, with growth in “good old American know-how” jobs continuing. Encouragingly, wage growth in this important segment has also been above average. We continue to watch wages in all sectors, as more bounce is needed to ensure broad-based wage growth.

The most recent report on new claims for unemployment fell to its lowest level since 2000, and the four-week average for these claims is at a 15-year low. These healthy results are another indication that temporary factors affecting the economy in the first quarter are fading, keeping the Federal Reserve on track to potentially raise rates in the latter part of 2015.

There is continued confidence in the strength of the consumer, with consistent consumption patterns that we’ve seen before (in the early stage of the recovery from the Great Recession), i.e., consumers spending some, saving some, and paying down some debt. It was encouraging that March sales rebounded and were revised up, despite April retail sales disappointing many. Second quarter core retail sales are now running 2% ahead of the first quarter—a big improvement from the 0.5% first quarter gain. And again, temporary factors affecting first quarter retail sales have subsided.

These recent economic reports do not change the expectation that U.S gross domestic product (GDP) will grow 3%-plus over the remainder of 2015, consistent with growth rates during the previous business cycle. Looking ahead, consumer spending gains continue to look supportive of GDP growth in the coming months.

Spring is a time for renewal and a time for landscapes and lawns to bounce back. In our eyes, the U.S. economy is also bouncing back after a weak first quarter, and based on the many indicators we follow, it continues to have solid roots. To be sure, more is needed, and in the weeks ahead we will be watching the consumer, jobs, wages, and other key economic indicators for evidence this bounce back is occurring.

As always, if you have questions, please contact me.

Best regards,

David M. Muilenberg CLU, ChFC, AIF                                     

President                                                                                  

LPL Registered Principal

All economic performance referenced is historical and is no guarantee of future results. The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for your clients. Any economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful. This research material has been prepared by LPL Financial.  Securities offered through LPL Financial. Member FINRA/SIPC.  Tracking #1-383665(Exp. 05/16)

 

 


 

The Season is Young

 

April 24, 2015

Dear Valued Investor,

The beginning of April has kicked off the 2015 baseball season, as well as the release of economic data for first quarter 2015. So far this season, games have shown a nearly record low number of runs. While the start of the season may have disappointed fans of the long ball, we have to keep in mind that the season is very young. What happens in April isn’t always an indication of how the season will go. Similarly, it may be tempting to look at individual pieces of economic data—many of them affected by weather, the West Coast port strike, and the stronger U.S. dollar—and have concerns about the state of the economy.

We prefer to look at the bigger picture and take a longer-term view. Many of us were discouraged by the March jobs report. However, when we consider other indicators, we are encouraged by the overall health of the economy. For example, initial filings for jobless claims remain near the lows of the ongoing economic expansion. In addition, in the 12 months prior to the weather-impacted March report (ending in February 2015), the U.S. economy had created an average of nearly 275,000 jobs per month, exceeding 200,000 in each of those months—the longest streak in 20 years.

It is also encouraging that the Beige Book, the Federal Reserve’s qualitative assessment of economic, business and banking conditions on Main Street, continues to indicate solid, mid-cycle economic growth. The recent report indicates that the weak economic data in the past few months likely overstated the weakness in the U.S. economy at the start of 2015. That weakness is likely to get plenty of attention in late April when the initial estimate of first quarter 2015 gross domestic product (GDP) is likely to confirm tepid growth during the quarter.

Looking ahead, it’s important to note that some of the factors that depressed economic activity in the first quarter have already reversed. The weather has improved, the port strike has been settled, and the oil and gas industry has made significant progress adjusting to the new lower oil price environment. As a result, like last year’s second quarter which sprang back sharply from a weather-driven decline in first quarter GDP, we may see growth rebound in the current quarter. We are already seeing some encouraging signs; for example, housing starts bounced back in March after a sharp weather-driven decline in February.

Just like even the best hitters have an off night, or even an off week, there will always be some economic reports that are less encouraging than others. In today’s 24-hour media world, we have constant access to economic data. It’s important not to get distracted by any individual report that might seem discouraging. Instead, we are keeping our eyes on the bigger picture and larger trends.

As always, if you have questions, I encourage you to contact me.

Sincerely,

David M. Muilenberg CLU, ChFC, AIF                                     

President                                                                                  

LPL Registered Principal

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. 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. Indexes are unmanaged and cannot be invested into directly. Economic forecasts set forth may not develop as predicted.  This research material has been prepared by LPL Financial.  Securities offered through LPL Financial. Member FINRA/SIPC.  Tracking #1-374703 (Exp. 04/16)

 


 

Market's March Madness - The Stock Market's Final Four

 


 

 

 

Monday Morning Outlook

2015: More Investment and Profits, Higher Rates, Dollar and Stocks

Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist

Date: 1/5/2015

Contrary to popular opinion, business investment is a key factor behind the current recovery. Productive investments have boosted profits to record highs and, in turn, those profits have driven stock prices to record highs. They should continue to do so.

Analysts have missed this surge in investment and profits for three reasons. First, many look at “nominal investment” – before adjustment for inflation. Second, spending on “structures” has been very weak. And, third, many analysts confuse real GDP growth with the health of corporate America.

It is true that real GDP (inflation-adjusted gross domestic product) has increased at an annual rate of just 2.3% since bottoming in Q2-2009. It is also true that nominal investment is lower today, at 12.8% of GDP, than it was in 2008 when it was 13.5% of GDP.

But, tablets and phones that cost a few hundred dollars today have capabilities that cost millions just 20 years ago. Shale oil drillers are successful on most of wells they drill versus much lower percentages of success in the days of wildcatters. 3-D printing reduces prices, while increasing flexibility in production. Low cost apps, websites, and the cloud undermine the need for brick and mortar investment.

In other words, smaller investments are creating larger returns that are less volatile and more predictable, at least for the businesses that are generating them. Real (inflation-adjusted) business equipment spending has increased at a 9.7% annualized rate in the past 21 quarters, four times faster than real GDP, while real intellectual property spending has increased 3.5% per year. Real spending on structures is up just 0.3% annually, well below real GDP growth. New technology is reducing demand for space.

So, even though overall nominal investment has fallen as a share of GDP, after adjustment for inflation, real business investment (excluding the building of new structures) has climbed to a new, all-time, record high. Investment has boosted productivity, efficiency and profitability.

This statement clashes with relatively weak government productivity statistics, and many of those who think investment has been weak argue that there are underlying structural problems in the economy.

If you are from the left, you argue that a widening income gap and greedy, cash-hoarding corporations are keeping the economy from its full potential. If you are from the right, you argue that uncertainty in government policy is holding back progress.

But overall corporate profits suggest the exact opposite. After-tax corporate profits have almost doubled since Q4-2008, up 12.6% at an annual rate.

Profits may be the “mother’s milk of prosperity,” but productivity is the mother. No economy can create these kinds of profits without having something special going on underneath. It’s certainly not being driven by demand, with real consumption up just 2.2% annualized so far in this recovery.

Unfortunately, the improvement in profits has been hard to see or hear through all the noise and confusion coming from politics and overly pessimistic forecasters. We believe productivity statistics woefully underestimate “true” productivity growth because new technologies are hard to measure.

But, just because they are hard to measure, doesn’t mean they aren’t real. In fact, we expect them to accelerate in 2015. Part of the benefit of higher output and productivity is lower energy prices. We think oil prices will stabilize this year in the $55-70 per barrel range. While this will slow (but not stop) growth in the energy industry, it will free up resources to boost spending in other sectors of the economy – more smartphone and clothing sales will offset lower spending on gasoline.

We expect the Fed to start raising interest rates this year, even though the new voting members of the Fed are likely more on the dovish side. But rate hikes in the next year will only make the Fed “less loose” not tight. The federal funds rate will likely end 2015 near 1%, but would have to rise to 3.5% or above to be considered anywhere near “tight.”

The new GOP-led Congress virtually guarantees that fiscal policy will stay on a more conservative course. In other words, big spending and debilitating regulation will remain on the sidelines. Yes, there is weakness in Europe (and potentially a socialist government in Greece), but the rising value of US currency signals more investment power for US corporations.

A strong dollar, along with rapid productivity growth, and a banking system that refuses to allow the money supply to surge along with Quantitative Easing, signals that inflation will remain subdued. We look for consumer prices, which rose less than 2% in 2014 to rise about 2.5% in 2015. This means that longer-term interest rates will likely rise as well and we expect the 10-year Treasury yield to rise to 3% by year-end.

Our stock market model (the Capitalized Profits Model) uses after-tax corporate profits discounted by the 10-year Treasury yield. Partly because profits have risen so strongly, but mostly because the 10-year Treasury yield is artificially low, this model still suggests that the S&P 500 is massively undervalued.

Using the fourth quarter average of the 10-year Treasury yield (2.28%), our models say the “fair value” of the S&P 500 is 4,465. But this number is artificial because the discount rate is being held down by Federal Reserve forward guidance. Using a 4% 10-year discount rate gives us a “fair value” calculation of 2,545 right now. So, if at the end of 2015, the 10-year Treasury yield were 4% and profits also rose by the average increase of recent years (around 10%), the market would be fairly valued at 2,800.

A year-ago, we forecast the S&P 500 would end 2014 at 2,150. We missed this target – it closed the year at 2,059 – but our bullishness was vindicated. The total return (including dividends) for the S&P 500 during 2014 was 13.7%, the third consecutive year of double-digit returns.

In 2015, we expect a fourth year of double digit returns and are forecasting a 15% increase in the S&P 500 to 2,375.

Surprises for 2015 could include an attempt by Greece to exit the Euro, which would end in disaster for Greek citizens but likely strengthen the dollar more. Also, the Supreme Court could undermine a great deal of Obamacare by striking down federal subsidies to those buying health insurance in many states.

In the midst of all this noise, we expect real GDP to grow 2.5%, another Plow Horse year, with a chance that growth will come in at a stronger 3%.

The bottom line is that while many analysts have turned more positive this year, finally agreeing with us, there is still a great deal of pessimism, fear and misunderstanding. The fear seems to be receding, but the economic and financial market punditry has mostly missed a world-changing surge in technology. They’re not likely to miss it again in 2015. Optimism is finally catching on. Stay long.

This information contains forward-looking statements about various economic trends and strategies. You are cautioned that such forward-looking statements are subject to significant business, economic and competitive uncertainties and actual results could be materially different. There are no guarantees associated with any forecast and the opinions stated here are subject to change at any time and are the opinion of the individual strategist. Data comes from the following sources: Census Bureau, Bureau of Labor Statistics, Bureau of Economic Analysis, the Federal Reserve Board, and Haver Analytics. Data is taken from sources generally believed to be reliable but no guarantee is given to its accuracy. 

 


 

Economic Expansion in 2015

 

January 12, 2015

Dear Valued Investor,

Happy New Year. The Hollywood blockbuster Back to the Future, released 30 years ago in 1985, has been garnering some headlines lately because its sequel, Back to the Future II, was set mainly in 2015. Although some of the film’s depiction of 2015—flying cars, sneakers with automatic shoelaces, time travel and the Cubs winning the World Series—has yet to happen (sorry, Cubs fans), some things about life in 2015 did come true. Flat-panel TVs, hands-free gaming, cameras everywhere, video chatting, and yes, even drones, all appear as staples of everyday life in 2015.

Back to the Future II doesn’t tell us much about the economy in 2015. But how might 2015’s economy compare with 1985’s, which is often thought of as part of the roaring 1980s and, in some respects, a golden age for the U.S. economy?

Although 1985 was only the second full year of economic expansion after the back-to-back recessions of the early 1980s (1980 and 1981–82), the year would see 4.2% economic growth as measured by real gross domestic product (GDP), well above the long-term average (1960–2014) growth rate of 3.1%. The economy created an average of 175,000 private sector jobs per month and the unemployment rate was 7.3% as the year began. The Federal Reserve (Fed) raised rates in early 1985, but then cut rates in the second half of the year, while inflation as measured by the Consumer Price Index (CPI) ranged between 3.5 and 4.0% for much of the year. Exports accounted for just over 6% of GDP.

As noted in LPL Research’s Outlook 2015: In Transit publication (to review, see our website at www.discoveryfinancialllc.com), 2015 is expected to mark the sixth year of the economic expansion that began in June 2009, and that the odds of recession in the next  year remain low, suggesting that the current economic expansion may match, or even surpass, the expansion that began in 1982. LPL Research expects real GDP growth just over the long-term growth rate of 3.0%, led by business spending, housing and the consumer. The Fed is expected to begin raising rates later this year, and the economy is expected to consistently create between 225,000 and 250,000 jobs per month. Inflation is likely to be pulled down by falling oil prices in early 2015; but later in the year, as wages begin to accelerate, inflation may turn higher. In 2014, exports accounted for 14% of U.S. GDP, nearly double 1985’s level, making the U.S. economy more vulnerable to global growth in 2015 than it was in 1985.

By the end of this year, the expansion that began in June 2009 could possibly become the fourth-longest post-WWII expansion, just behind the 1982–1990 expansion that lasted 92 months. As for the flying cars, time travel and the Cubs, let’s leave that to Hollywood.

As always, if you have any questions, I encourage you to contact me. Have a great year!

Sincerely,

David M. Muilenberg CLU, ChFC, AIF                                     

President                                                                                  

LPL Registered Principal

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. 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. Indexes are unmanaged and cannot be invested into directly.  Economic forecasts set forth may not develop as predicted.  All investing involves risk including loss of principal.  This research material has been prepared by LPL Financial.  Not FDIC/NCUA Insured | Not Bank/Credit Union Guaranteed | May Lose Value  Not Guaranteed by Any Government Agency | Not a Bank/Credit Union Deposit  Tracking #1-342323 (Exp. 01/16)

 


 

Oil Prices & the Economy

 

December 23, 2014

Dear Valued Investor,                                                                                                                      

Oil prices may be turning into the Grinch of this holiday season. Oil has dropped by more than 40% in just the past three months and contributed to volatile stock markets. LPL Financial Research does not believe the sharp drop in oil prices is a sign of significant deterioration in the U.S. or global economy. The stunning collapse does have wide-ranging impacts on the economy and markets, but LPL Research believes the risks associated with low oil prices can be manageable and that the positives outweigh the negatives.

Lower oil prices benefit the U.S. economy in a number of ways. By saving U.S. consumers tens of billions of dollars at the gas pump and in home energy bills, it is estimated that the $50-plus drop in the price of oil since June 2014 boosts U.S. gross domestic product by roughly 0.5%. That is significant, but it is important to keep in mind that U.S. consumer spending totals $12 trillion per year, and that consumers spend an average of just 4% of their incomes on energy. Still, this is a benefit to consumers, especially for those at lower income levels who spend a bigger portion of their incomes on energy.

The U.S. manufacturing sector is also a beneficiary of lower energy costs. Although not nearly as energy intensive as they used to be, industrial companies benefit from lower oil prices via lower transportation and production costs. Just a penny drop in fuel prices can save tens of millions of dollars for an airline. And lower oil and other commodity prices mean lower raw material costs.

These are all good things, but there are offsetting factors. Lower energy prices will slow—but not stop—the U.S. energy renaissance. Less U.S. energy production may mean slightly fewer energy jobs (energy jobs are about 2% of total U.S. jobs) and less business investment for future projects or expansion. The oil and gas industry drives a significant portion of business investment, so services, equipment, and infrastructure companies that service the oil producers will feel some impact.

Sharply lower oil has already impacted financial markets. The roughly 20% drop in the S&P 500 energy sector, which composes 8.3% of the S&P 500, may continue to drive increased volatility for the broad stock market indexes. The fixed income markets are also impacted, as energy composes about 15% of the high-yield bond benchmark, the Barclays High Yield Bond Index. Lower oil prices are likely to crimp profitability and may impact the ability of weaker companies to meet their debt obligations. However, it is expected that much of this negative impact is factored into market prices, and widespread defaults across the sector are not expected, should oil prices stabilize somewhere near current prices.

Most importantly, the U.S. economy is doing quite well, and I think it may get a bit better in 2015, as highlighted in LPL Research’s recently published Outlook 2015: In Transit publication. Please see our website to review this article at www.discoveryfinancialllc.com.  I do not believe oil’s sharp decline should be interpreted as a sign that an economic downturn is forthcoming. It is very difficult to predict where oil prices are going from here, but the oil market has likely overreacted to supply pressures and should begin to stabilize over the next several months, as lower prices help buoy demand and discourage some of the higher cost production. Although the severity of the drop in oil prices has been alarming and brings some risk to markets, at this point, in terms of what it means for the economy, I believe the positives outweigh the negatives.

As always, if you have questions, I encourage you to contact me.

Sincerely,

David M. Muilenberg CLU, ChFC, AIF                                     

President                                                                                  

LPL Registered Principal

IMPORTANT DISCLOSURES: The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. 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. Indexes are unmanaged and cannot be invested into directly.  Economic forecasts set forth may not develop as predicted.  All investing involves risk including loss of principal.  Because of its narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies.  The Barclays U.S. Corporate High Yield Index measure the market of USD-denominated, noninvestment-grade, fixed-rate, taxable corporate bonds. Securities are classified as high yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below, excluding emerging markets debt.  This research material has been prepared by LPL Financial.  To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is not an affiliate of and makes no representation with respect to such entity.  Not FDIC/NCUA Insured | Not Bank/Credit Union Guaranteed | May Lose Value  Not Guaranteed by Any Government Agency | Not a Bank/Credit Union Deposit  Tracking #1-338405 (Exp. 12/15)


 

Midterm Elections

 

November 14, 2014

Dear Valued Investor,

The months of polls, punditry and posturing are finally over. After months of uncertainty and waiting, the midterm elections are done, and there is a resolution.  As expected, the Republican Party regained control of the U.S. Senate and added to its majority in the U.S. House of Representatives. Although a few Senate races have yet to be decided, the Republicans control at least 52 seats—and  could control as many as 54. The important numbers in the Senate are 51, 60, and 67. The Republicans are over 51, which gives them a simple majority, but they are still short of the filibuster-proof 60, and far short of the 67 needed to override a veto, making sweeping legislative change unlikely.

Republicans made major gains, and the House has not been so dominated by one party since 1946. This is an interesting development, but does it mean that significant changes are on the horizon? Does change in the Congress mean change for you? Not really. The business environment might be slightly friendlier after the midterms, but I do not expect significant changes. 

The next key date in Washington, D.C. comes in mid-December 2014, when the continuing resolution to fund the government expires. The subsequent key date will be mid-March 2015, when the U.S. Treasury will hit the debt ceiling once again. At the margin, the Republicans’ control of Congress raises the risk they will demand concessions for passing a funding resolution for next year, or for raising the debt limit. However, given the backlash following last year’s government shutdown, as well as initial comments from likely Senate Majority Leader Mitch McConnell (R-KY), it is likely that Congress will avoid such a standoff.

Although major changes from the new Congress are not expected, LPL Financial Research is watching possible movement on several key legislative issues. Republican control of the Senate and House could have positive implications for energy and financial services companies by easing the regulatory landscape. For the energy sector, Republicans may be able to speed up permits for oil and gas exploration and gain approval for the construction of the Keystone XL pipeline, providing a potential boost to energy and industrial sector growth. Regulatory pressures on banks, including capital requirements, may be eased. Tax reform is possible, although more likely to happen at the corporate level than an individual level. And although Republicans will not be able to repeal the Affordable Care Act, changes to the law are likely, including the probable elimination of the medical device tax.

Clearly, elections have implications for policy and the direction of the country. Ultimately, however, LPL Financial Research believes stock market performance will depend more heavily on economic growth, corporate earnings, and valuations in the months ahead. In the end, these factors will weigh more heavily on the direction of stock prices than modest legislative changes. LPL Financial Research continues to believe these factors may support further stock market gains. 

Stay tuned for LPL Financial Research’s upcoming Outlook 2015 publication, for a closer look at policy considerations and the forecast on the economy, stock market and bond market for investors next year.

As always, if you have questions, I encourage you to contact me.

Sincerely,

David M. Muilenberg CLU, ChFC, AIF                                     

President                                                                                  

LPL Registered Principal

IMPORTANT DISCLOSURES:   The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. 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.  This research material has been prepared by LPL Financial.  The economic forecasts set forth may not develop as predicted.  Securities offered through LPL Financial. Member FINRA/SIPC.  Tracking # 1-326495 (Exp. 11/15)

 


 

Recent Market Volatility

 

October 16, 2014

Dear Valued Investor,

I do not believe the volatility seen in recent weeks is immediate cause for alarm when viewed in the context of historical trends. There is precedent for moves of this magnitude—both up and down—that have taken place during an overall expansion in the economy and favorable period for stocks. Market pullbacks are actually quite common, but the lack of them in recent years has caused investors to be less accustomed to them. Considering this context and the current market environment, I think it is unlikely that recent volatility is an early signal of a recession or bear market. Looking at historical evidence of the S&P 500 Index, volatility has been customary for a bull market:

  • The mid-2000s cycle saw a similar series of 5–7% pullbacks, never a 10%.

  • It has been three years since the market has experienced a 10% pullback; on average the expectation is for one 10% drop per year.

  • In a typical mid-cycle year, stocks experience four 5% pullbacks per year, and this year (and last) there has only been one.

  • A three-digit absolute value drop is a smaller relative percentage drop than in prior bull markets, given the higher overall level of the widely followed market indexes.

The S&P 500 rose or fell by at least 1.5% each day for three days on October 7–9, 2014, marking the first time since November 2011 that the S&P 500 experienced such wild swings over three consecutive trading days. That last bout of volatility accompanied the U.S. debt ceiling debacle and the threat of the Eurozone breakup. In the period following the late 2011 volatility, the S&P 500 went on to return 7.3% over the next three months and 14.6% in the next year. Prior to that episode, May 2010—around the so called “flash crash”—was the last time the market experienced three days or more of 1.5% swings. Markets endured similar volatility in late 1998 as the Asian financial crisis swirled. Following those episodes, markets recovered quickly and the economy continued to expand.

LPL Financial Research believes the current market volatility is being driven by a number of factors: a host of geopolitical issues, including the spread of Ebola; the rise of Islamic State militants in Iraq and Syria; ongoing concerns about the underlying health of the Chinese economy; and most importantly, persistent economic weakness in Europe. Although the geopolitical situation has deteriorated in recent weeks, in my view, the concerns about global growth (which LPL Financial Research has consistently cited as a major threat to equity markets) are sparking this latest bout of volatility. Despite these risks, a number of positive factors in the global economy and U.S. economy may offset.

  • The U.S. economy continues to expand at a pace well above its long-term average, the labor market has created over 2 million jobs in the past year, and the unemployment rate is 5.9%, according to the U.S. Commerce Department and the Bureau of Labor Statistics.

  • While the Federal Reserve (Fed) will end its bond-purchase program (known as quantitative easing) later this month, Fed policymakers have indicated there is no hurry to raise rates, and when they do, rate hikes are likely to be modest.

  • The European Central Bank is preparing to add a much needed dose of monetary stimulus to the European economy, following the results of European-wide bank stress tests later this month. In addition, Chinese authorities stand ready to invigorate their economy.

  • Valuations on the S&P 500 remain near historical averages, and while no longer cheap, remain reasonable given the interest rate and earnings environment.    

  • Other economic and market indicators that have typically been good predictors of increased fragility of the economic cycle and potential market downturn may be signaling the continuation of the bull market.

  • Concerns around global growth have driven oil and gasoline prices sharply lower, which may support consumer spending.

  • The decline in bond yields in 2014 has lowered borrowing costs for corporations, which in turn lower expenses and help support profitability.

Although pullbacks are unwelcome, they are often a short interruption in the context of a longer-term bull market, such as the current one that began in March 2009 and has returned 218% cumulatively as of Thursday, October 9 (23% average annual return). LPL Financial Research’s view remains that the U.S. economy is expanding and the upcoming corporate earnings season is likely to reveal that growth is robust. While the geopolitical issues may spark profit taking, they will not end the recovery.

As always, if you have questions, I encourage you to contact me.

Sincerely,

David M. Muilenberg CLU, ChFC, AIF                                     

President                                                                                  

LPL Registered Principal

IMPORTANT DISCLOSURES:  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.  This research material has been prepared by LPL Financial.  The economic forecasts set forth may not develop as predicted.  The S&P 500 Index 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.  Indexes are unmanaged and cannot be invested into directly. The returns do not reflect fees, sales charges, or expenses. The results do not reflect any particular investment.  Securities offered through LPL Financial. Member FINRA/SIPC.  Tracking # 1-318029 (Exp. 10/15)

 


 

August GDP Displays Fundamental Strengths

 

August 11, 2014

Dear Valued Investor,

August is a time when many of us plan vacations with family and friends in order to reconnect. The recently released report on second quarter economic growth, as measured by gross domestic product (GDP), shows the U.S. economy is also taking the time to “reconnect” this summer, with the economy’s underlying fundamental strength reconnecting with economic growth after weather-related weakness in the first quarter.

Inflation-adjusted, or real, GDP rose at a 4.0% annualized rate in the second quarter of 2014, and revised data show GDP growth was 3.5% or higher in three of the past four quarters dating back to the third quarter of 2013. The exception was the 2.1% decline in GDP in the first quarter of 2014, which now looks even more like a weather-related outlier, resolving the disconnect between underlying economic strength and economic growth. GDP is the broadest measure of the nation’s economic output, and the report is closely watched. The data released so far for the third quarter—vehicle sales, the Institute for Supply Management (ISM) manufacturing index, initial jobless claims, and employment, among others—suggest the underlying economy also had decent momentum as the third quarter of 2014 began.

Manufacturing data justifies the strength seen in the GDP report. The July 2014 ISM reading was 57.1, well above consensus expectation (56), and also well above 50—again, resolving a disconnect. If sustained over the final two months of the quarter, this level of ISM is consistent with above-average GDP growth. A reading above 50 on the ISM indicates the manufacturing sector is expanding, while a reading below 50 signals the manufacturing economy is contracting.

Looking at job growth, the July 2014 Employment Situation report further resolved the disconnect and supports our view that the economy is strengthening. The economy generated 200,000 jobs or more per month over the past six months, the longest stretch of 200,000-plus monthly job gains since 1997, when the economy was growing at nearly 4.5%. As the weather normalized from the harsh winter of 2014, job growth accelerated to 260,000 per month for the four months ending in July 2014.

Some might still be concerned by the increase in the unemployment rate in July. However, while the unemployment rate rose to 6.2% in July 2014 from 6.1% in June 2014, it declined by more than a percentage point over the past year and is nearly four percentage points below its post-financial crisis high of 10.0% in 2010.

On balance, the reports released last week and during July all but confirmed the 2.1% drop in GDP in the first quarter was an aberration due to severe weather. Looking ahead, the data in hand continue to suggest the U.S. economy is reconnecting with its fundamentals and may be poised to grow above its long-term run rate in the second half of 2014.

Right now, many of us are cherishing these precious last few weeks of summer. As you enjoy this time, I continue to believe the foundation is in place for you to make further progress toward potentially achieving your financial goals in 2014.

As always, if you have questions, I encourage you to contact me.

Sincerely,

David M. Muilenberg CLU, ChFC, AIF                                     

President                                                                                  

LPL Registered Principal

IMPORTANT DISCLOSURES:  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 reference is historical and is no guarantee of future.  This research material has been prepared by LPL Financial. The economic forecasts set forth may not develop as predicted. Securities offered through LPL Financial. Member FINRA/SIPC. Tracking # 1-296365 (Exp. 08/15)


 

 

Economic Growth in 2014

 

June 2, 2014

Dear Valued Investor,

With Memorial Day behind us, school is ending in many parts of the nation and summer vacation destinations are a hot topic of conversation. But, we were recently reminded of the significant impact the unusually cold and snowy winter of 2013–14 had on the U.S. economy. The Bureau of Economic Analysis of the U.S. Department of Commerce released revised figures on economic growth for the first quarter of 2014 as measured by gross domestic product (GDP). The GDP data are closely watched, as GDP is the broadest measure of the nation’s economic output. The pace of GDP growth is a critical driver of corporate earnings, which in turn, is the key driver of stock market performance.

The GDP data revealed the economy contracted at an annualized 1% pace in the first quarter, just the second time since the end of the Great Recession in mid-2009 that the economy contracted. Could the first quarter GDP report be a harbinger of another wrenching recession? We don’t think the weather-related economic weakness is the start of another recession or even a slowdown in growth. We continue to expect that economic growth will rebound and expand 3.0% in all of 2014.* In fact, the return to a more normal weather pattern nationwide has already led to a sharp snapback in economic activity. The U.S. economic data released thus far for April and May, 2014, suggest that economic growth will accelerate in the second quarter to well above the economy’s long-term average growth rate after a weather-induced slowdown in growth in the first quarter of 2014.

Importantly, many of the other indicators that can provide an early warning of recession are not signaling a downturn in the economy. The Index of Leading Economic Indicators (LEI)—compiled by the Conference Board—a private sector think tank—is comprised of ten indicators and designed to predict the future path of the economy, with a lead time of between six and 12 months. The year-over-year increase in the LEI in April, 2014, was 5.9%. Since 1960—652 months, or 54 years and four months—the year-over-year increase in the LEI has been at least 5.9% in 211 months. Not surprisingly, the U.S. economy was not in recession in any of those 211 months. Thus, it is highly unlikely that the economy is in a recession today, despite the below-zero reading on real GDP in the first quarter of 2014. Looking out 12 months after the LEI was up 5.9% or more, the economy was in recession in just nine of the 211 months, or 4% of the time.

On balance then, we would agree with the LEI indicator that the risk of recession in the next 12 month is negligible at 4%, but not zero. However, a dramatic deterioration of the fiscal and financial situation in Europe, a fiscal or monetary policy mistake in the United States or abroad, or an exogenous event (a major terror attack, natural disaster, etc.), among other events, may cause us to change our view that the odds of a recession in the United States remain low. But for now, based on the LEI, it looks like we are still in the middle of the economic cycle that began in mid-2009. ?

As we look forward to enjoying the summer sun, we continue to believe the foundation is in place for you to make further progress toward achieving your financial goals in 2014. As always, if you have questions, I encourage you to contact me.

Sincerely,

David M. Muilenberg CLU, ChFC, AIF

President

LPL Registered Principal

* As noted in the Outlook 2014: The Investor's Almanac, LPL Financial Research expects GDP to accelerate from the 2% pace of recent years to 3% in 2014. Since 2011, government spending subtracted about 0.5% each year from GDP growth. Government spending should be less of a drag on growth which would result in +1% increase for 2014.

IMPORTANT DISCLOSURES  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 reference is historical and is no guarantee of future.  This research material has been prepared by LPL Financial.  The economic forecasts set forth may not develop as predicted.  Securities offered through LPL Financial. Member FINRA/SIPC.  Tracking # 1-277220 (Exp. 05/15)


 

 

Assessing the Impact of the Fiscal Cliff

 

April 16, 2014

Dear Valued Investor,

Now that tax day has arrived and 2013 tax returns have been filed, we can assess the impact of the fiscal cliff. Remember the fiscal cliff: the deal in Washington that raised taxes and averted the fiscal cliff at the beginning of 2013? Though it may have been a big story a year ago, it may be having a big impact in 2014.

Tax collections from individuals in the first quarter of 2014 were up 15% — totaling an additional $35 billion. This higher tax burden may have weighed on consumers and investors this year, as they may have had to forego purchases or sell stocks to cover their tax liability. This is a big contrast to 2013, when tax refunds were up a whopping 15%, amounting to a record share of after-tax income and may help to explain the better pace of consumer spending and market performance in the first quarter of last year.

The fiscal cliff was resolved with a rise in payroll taxes for all workers, higher marginal rates for high-income earners, the resumption of the phase out of exemptions and deductions, and an increase in the maximum tax rates on capital gains and dividends. Much of that was felt last year.  But, historically, most taxes that are not withheld during the year from paychecks are paid in the following year in the weeks leading up to tax day. That means that this year we may have seen a significant portion of the fiscal cliff deal impact on the economy and markets with a one-year lag.

Now that tax day has arrived, perhaps any drag at stores or in the markets due to the higher tax burden may fade. Already, there are signs the consumer is spending again. Yesterday’s report from the Commerce Department surprised with a strong jump in sales at American retailers with a pickup in categories ranging from cars to furniture and clothing. Clearly, more favorable weather and other factors are helping boost the confidence of consumers, too. Last week’s reading from the Bureau of Labor Statistics on first-time filings for unemployment benefits fell to the lowest level in seven years. As the economic outlook improves, and any selling to fund tax payments subsides, stocks may continue their upward trend.

Paying your taxes is no fun, but doing them may be even worse. Does it feel like filing your tax return has become more complicated than ever and you get fewer and fewer breaks? You may be right. After all, 100 years ago the Form 1040 was short and, after a simple income section, it had only seven lines of deductions to complete. Check out this line from the good old days of 1913, when things like losses due to shipwrecks were considered a General Deduction:

“4. Losses actually sustained during the year incurred in trade or arising from fires,

     storms, or shipwreck, and not compensated for by insurance or otherwise.”

I am hoping you didn’t have any shipwreck losses in 2013. And I think it is likely, with help from rebounding economic strength, that the economy and markets will avoid disasters in 2014.

As always, if you have questions, I encourage you to contact me.

Sincerely,

David M. Muilenberg CLU, ChFC, AIF

President

LPL Registered Principal

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.  No strategy assures success or protects against loss.  This research material has been prepared by LPL Financial.  Tracking # 1-264143 | (Exp. 04/15)


 

 

High-Speed Electronic Trading

 

April 2, 2014

Dear Valued Investor:

Is the stock market rigged in favor of high-speed electronic trading firms?  Perhaps, but that shouldn’t matter to most investors.

Recent media reports and a new book by author, Michael Lewis, have focused on a form of high-frequency stock trading where professional traders use sophisticated computers and complex programming to see stock orders coming in and position themselves ahead of the orders as middlemen between existing buyers and sellers. All of this is done very rapidly, over and over again, often netting the high-frequency trader a few pennies on the stock price.

While short-term traders fight it out at lightening speeds over these pennies, long-term investors are generally above the fray.  If you are an investor focused on the longer term fundamentals of an investment, generally speaking, you have little to fear over the very small price moves caused by high-frequency trading. 

High-frequency trading has been gathering headlines for 15 years. But, in recent years, this trading has shown some signs of stressing the fabric of the markets, for example, with the May 6, 2010, "flash crash," when the Dow Jones Industrial Average dropped 1,000 points in just minutes, then rebounded by the end of the day. Investors should bear the risk of their investment; they should not have to bear the risk of whether the markets are functioning fairly or effectively. In response, regulators have taken some action. The Dodd-Frank legislation, passed in 2010, effectively restricted high-frequency trading by the big banks. Yet, not everyone sees high-frequency trading as a negative; some mutual fund companies have publically noted that using such strategies reduces transaction costs and benefits the investors in their funds.

In short, high-frequency trading may create small inefficiencies over the short run, but for long-term investors it has little impact on a