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 achieving their financial goals. 

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 # 1-260258 | (Exp. 04/15)


 

Seeds of Growth

March 26, 2014

Dear Valued Investor:

Spring is a time of renewal. As this wonderful season approaches (and hopefully brings milder weather), we believe the stage is set for renewed growth in the U.S. economy.

The seeds of growth in the economy have taken root underneath all of the snow and ice. Several recent data points underlie our optimism. The latest edition of the Federal Reserve’s Beige Book, which is essentially a “window on Main Street,” provided a positive assessment of the U.S. economy and still characterized growth as “modest to moderate,” despite significant weather impacts. In fact, the word “weather” showed up 119 times in the report, far more than it appeared when Superstorm Sandy struck in October, 2012. Many Beige Book comments pointed to optimism once the weather normalizes.

Despite the slower, weather-affected start to the year, we continue to expect economic growth, as measured by real gross domestic product (GDP), to reach 3% in 2014, based upon many of the drags of 2013 fading, including U.S. tax increases and spending cuts and the European recession, and growth accelerating from additional hiring and capital spending by businesses. We expect some bounce back from the severe winter weather, propping up near-term growth as postponed economic activity takes place.

Additionally, underlying fundamentals in the labor market suggest that the job market may be thawing. Businesses are directing more of their profits into spending on growth, with the private sector creating 162,000 net new jobs in February, despite weather-related power outages and transportation disruptions. Initial claims for unemployment insurance fell to 315,000 during the week of March 7, a level last seen on a sustained basis in mid-2007, prior to the onset of the Great Recession. Hiring expectations by small businesses have been moving higher as tracked by the National Federation of Independent Business.

We believe that this better growth should provide the foundation for attractive stock market returns this year. Despite recent stock market volatility, primarily driven by ongoing concerns about the Ukraine conflict and slowing growth in China, the S&P 500 is still near its all-time high. As we look toward the remainder of the year, we continue to expect a 10 – 15% gain for U.S. stocks, as measured by the S&P 500 Index (based on earnings per share for S&P 500 companies growing 5 – 10% and a rise of half a point in the price-to-earnings ratio).

Of course, it’s always important to be mindful of risks, despite the positive indicators in the economy and the markets. One of the most noteworthy right now is the conflict in Ukraine, which may continue to impact the U.S. markets after driving a more than 20% decline in the Russian stock market. Even following the secession vote in Crimea and sanctions imposed against Russia by the West, we believe it is unlikely that the conflict will drive a significant stock market decline in the U.S. Also, the slowdown in China, the world’s second largest economy, is worth watching, though we continue to discount the probability of a “hard landing.” We will be watching these geopolitical events closely as we continue to follow key economic indicators.

As we look to spring for renewed economic growth, and hopefully more potential gains for stocks, we believe the foundation is in place for you to pursue 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

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 me 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. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.  The Standard & Poor’s 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.  The economic forecasts set forth in this letter may not develop as predicted.  This research material has been prepared by LPL Financial.  Tracking #1-256277 | (Exp. 03/15)


 

Bumps on the Slope

February 28, 2014

Dear Valued Investor:

It’s not often that we can gain investment insights from an 18-year-old wunderkind.

Many of us marveled at the performance of American Mikaela Shiffrin at the Sochi Winter Olympics, where she became the youngest Olympic slalom champion. What makes Shiffrin remarkable is not only her success, but also her approach to the sport. Unlike many of her peers, while training, she focused more on technique and practice — the discipline of ski racing — rather than on competing. When Shiffrin lost footing and became airborne on the course, she was able to regain her position quickly as she had practiced her recovery many times before. Throughout all of her training, she took the long-term view.

It can be difficult to take the long-term view in investing, particularly when we are challenged by bumps on the slope.

February, for example, provided investors with mixed signals. Colder and snowier-than-usual weather adversely affected many economic reports, causing uncertainty over the health of the economy to linger. Several high-profile companies also cited the negative impact of weather on future earnings.

Looking at the bigger picture, however, helps us regain our sense of balance. U.S. stock prices appear to be looking past weather disruptions and have rebounded back to near-record highs following a soft start to the year. We see underlying strength in most economic indicators including a continued recovery in the housing market, which is supported by easier mortgage availability, limited home inventory, and near-record housing affordability. Absent a severe storm in March, we expect more clarity on the health of the overall U.S. economy in April, when March economic data are released, and we still expect economic growth, as measured by real gross domestic product (GDP), to reach 3% in 2014, based upon many of the drags of 2013 fading, including U.S. tax increases and spending cuts and the European recession, and growth accelerating from additional hiring and capital spending by businesses.

The bond market also hit some bumps, as Puerto Rico was downgraded during the month by all three major credit rating agencies as a result of its large debt burden and multi-year recession. But, municipal bond market investors have been thinking longer term and appeared to take the downgrades in stride by noting Puerto Rico is not reflective of the overall market. Just last week, the broader bond market appeared to corroborate the move in stock prices by ignoring another batch of weather-impacted data and anticipating better growth. Bond investors also refocused on a Federal Reserve that remains on schedule to reduce bond purchases and eventually raise interest rates in late 2015.

Policymakers in Washington, D.C. appear to be taking the longer view as well by focusing less on partisan differences and more on overall economic health. Congress agreed to a “clean” debt ceiling increase without links to the Affordable Care Act or the Keystone XL pipeline. This “clean” bill acted as a positive for the stock market, which may have rallied on the perception that a more business-friendly legislative environment may be developing. We continue to expect a 10-15% gain for U.S. stocks in 2014, as measured by the S&P 500 Index. (Derived from earnings per share for S&P 500 companies growing 5-10% and a rise of half a point in the price-to-earnings [PE] ratio.)

As we look back at the concerns we’ve had during the past month, we realize — just as Mikaela Shiffrin did on her gold medal run — that we’ve been here before. We know we can trust the discipline and practice of sound investing and stay focused on our long-term goals. Even those of us who are industry veterans can take a lesson from the young champion.

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. To determine which investment(s) may be appropriate for you, consult me 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. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.  The Standard & Poor’s 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.  The economic forecasts set forth in this letter may not develop as predicted.  This research material has been prepared by LPL Financial.  Tracking # 1-250555 | (Exp. 02/15)


 

'Weather' of Financial Markets

February 4, 2014

Dear Valued Investor:  

Extremely cold weather in many parts of the country has made life challenging for many of us.  The polar vortex created colder temperatures in more parts of the midwest than in Antarctica and for those not suffering from cold, such as in the southwest, drought conditions pose a different set of challenges. 

Foul weather has also come over financial markets following a tranquil 2013. The weather turned frosty in early January when monthly jobs gains fell short of expectations after averaging gains of nearly 200,000. Cold weather that began in December may have adversely impacted the jobs report by keeping individuals from working.

More recently, a perfect storm has developed over emerging market countries. Weaker economic data from China, political instability in the Ukraine, Argentine currency devaluation, along with currency concerns from Turkey, Venezuela, and India, raised fears about the stability of emerging economies. These fears grew acute as the Federal Reserve reduced bond purchases in January.

Thankfully, the January chill will subside, and financial markets are likely to thaw along with it.  The U.S. economy, by far the world’s largest, remains resilient. The weaker-than-expected December 2013 jobs report has not been corroborated by other economic data, which generally remain positive.  In the last days of January, we learned that the economy grew 3.2% in the fourth quarter of 2013, continuing its acceleration. We still expect economic growth, as measured by real GDP to reach 3% in 2014, based upon many of the drags of 2013 fading, including U.S. tax increases and spending cuts and the European recession, and growth accelerating from additional hiring and capital spending by businesses.

Importantly, profit growth among U.S. companies, a key driver of stock prices over the long run, remains strong. With almost half of S&P 500 companies reporting, corporate earnings are on pace to grow 8% for the fourth quarter of 2013, suggesting that the acceleration in corporate earnings that began during the third quarter of last year continues. We still expect a 10-15% gain for U.S. stocks in 2014, as measured by the S&P 500 Index. (Derived from earnings per share for S&P 500 companies growing 5-10% and a rise of half a point in the price-to-earnings [PE] ratio.)

The Fed’s unanimous decision in late January to further reduce bond purchases while also not mentioning emerging market weakness is a vote of confidence for the U.S. economy. The Fed’s move was widely expected in a year in which policymakers, including those in Congress, will have less influence over financial markets. After agreeing to a two-year budget deal in December, well in advance of a mid-January deadline, we expect Congress to come together to avoid another debt limit showdown in coming weeks. Already this year, Congress has come together to pass several bills, including an omnibus budget for 2014, in a bipartisan fashion. In a midterm election year, Congress is unlikely to want to draw another bout of negative publicity witnessed last October.

Investors questioning whether the economy can stand on its own will likely translate into passing storms in the market this year.  As growth in the economy and corporate earnings heats up in 2014, we expect the chills investors got in January to fade. 

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. To determine which investment(s) may be appropriate for you, consult me 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. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.  The Standard & Poor’s 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.  The economic forecasts set forth in this letter may not develop as predicted.  This research material has been prepared by LPL Financial.  Tracking #1-242159 | (Exp. 01/15)


 

Recent QE Announcements

December 24, 2013

Dear Valued Investor:

At its eighth and final meeting of the year, the Federal Reserve’s (Fed’s) policymaking arm, the Federal Open Market Committee (FOMC), announced that it will begin scaling back its bond-buying program known as quantitative easing (QE). This is the beginning of the infamous taper that has garnered so much press this year. Citing less fiscal drag and the “cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions,” the Fed will now buy $75 billion per month in QE—$10 billion less than the current monthly $85 billion.

Ahead of the meeting, most market observers believed there was a slightly lower probability of a December taper than a delay until early 2014. So, in that regard, last Wednesday’s action by the Fed was a small surprise. However, the big surprise was the market’s reaction: stocks, as measured by the S&P 500 Index, experienced sharp gains to all-time highs and the bond market movement was relatively muted. This is a far cry from the extreme “taper scare” we experienced during the spring/summer that sent stock prices down and bond yields higher with the mere mention of the word “taper.” There are many reasons why the market reacted so positively to the decision to taper this week.

• First and foremost, the market was better braced to handle tapering given the continued improvement in the labor market and fewer potential fiscal headwinds caused by Washington, D.C. in 2014. When the market first began to digest tapering back in the spring/summer of 2013, the view by many was that “tapering” meant “tightening.” In other words: a taper would be the beginning of the Fed withdrawal of its accommodative policies of keeping interest rates low, boosting the economy, and fueling recovery in the job market. However, the Fed was clear in its statement this week that a taper does not equate to tightening and that if the economy weakens (or if inflation does not accelerate) it could do more QE, if needed.

• Secondly, the Fed accompanied its announcement to taper with language promising to keep rates lower for longer. It was this “enhanced guidance” from the Fed that was the real catalyst for the market’s positive reaction. Previously, the Fed had signaled that at an unemployment rate below 6.5%, it would begin to entertain the prospects of removing its “ZIRP” (zero interest rate policy). However, in this week’s statement, the FOMC altered its time horizon of maintaining exceptionally low interest rates to “well past the time that the unemployment rate declines below 6.5%.” Therefore, the Fed essentially signaled a path of lower interest rates for longer than previously indicated.

• Lastly, the market was so fixated on whether the Fed’s actions this week would be hawkish (either through tightening or tapering) or dovish (very accommodative), it missed that the Fed actually had a different “animal” on its mind. Instead of being a hawk or a dove, the Fed’s statement was a bull—as in a very bullish and confident assessment of the economic landscape. The FOMC statement noted the “underlying strength of the broader economy.” This rosy view of the economy provides a much-needed boost of confidence for many market participants and investors that the U.S. economy is indeed getting markedly better.

In a sense, the Fed made somewhat of a “trade” with the market. On one side, the Fed reduced QE by $10 billion per month. While on the other side, the Fed delivered a very bullish and confident view on the economy and signaled that it would keep interest rates lower for longer. When the market looks at this “trade,” it sees it as a good one. The market is more than willing to give up $10 billion in purchases now (via the taper) in exchange for a bullishly confident Fed that is likely to keep rates lower for longer. After all, it is the Fed’s zero interest rate policy, not its soon-to-be tapered bond purchases, that has the biggest impact on maintaining lower rates and boosting economic growth.

In short, the Fed delivered a holiday surprise for the market—instead of the perceived lump of “taper” coal, the market got a bullish forecast by the Fed via a signal that it will remain “highly accommodative” with low interest rates for a longer period of time. I view last Wednesday’s decision by the Fed as reaffirming our overall constructive view on markets and the economy in 2014. We continue to believe that 2014 marks a return to a focus on the fundamentals of investing rather than reading the tea leaves in policy statements or assessing the veracity of politicians’ threats. That is one of the best presents we, as investors, could receive.

Merry Christmas & Happy New Year!

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 or be construed as providing specific investment advice or recommendations for any individual security. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. All indexes mentioned are unmanaged and cannot be invested into directly. The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful. Stock investing involves risk, including the risk of loss. Quantitative easing is a government monetary policy occasionally used to increase the money supply by buying government securities or other securities from the market. Quantitative easing increases the money supply by flooding financial institutions with capital in an effort to promote increased lending and liquidity. The Standard & Poor’s 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. S&P 500 is an unmanaged index which cannot be invested into directly. Past performance is no guarantee of future results. This research material has been prepared by LPL Financial. Tracking Number #1-231769 | Exp. 12/14


 

Shutdown of the U.S. Government 

October 8, 2013

Dear Valued Investor,

The United States and Iran have been opening up new channels to communicate and negotiate, punctuated by a phone call last week between the U.S. and Iranian Presidents, after many years of a standoff.  Ironically, this historic event occurred while a domestic standoff in Congress has shut down the U.S. government for the first time in 17 years.

The failure in Washington is disappointing, if not a surprise.  However, history tells us it is not necessarily a bad thing for investors.  The 16 government shutdowns over the past 37 years, which have ranged from one to 21 days, have not been particularly negative for stock market investors, averaging only a 2% decline for the S&P 500.  More importantly, from a longer-term perspective, they preceded above-average returns.  The S&P 500 Index has risen 11% on average in the 12 months following the shutdowns, compared with 9% for all periods.  Notably, in the last government shutdown 17 years ago in late 1995, the S&P 500 rose 21% in the subsequent 12 months.

As the government shutdown began on the morning of October 1, stocks actually rose after falling modestly in the preceding days.  That reaction makes sense, since selling stocks into short-term political uncertainty has been costly for investors in recent years. 

Of course, the shutdown is not the only issue facing investors from Washington. We are also approaching a breach of the debt ceiling on October 17, leading to the remote-but-heightened threat of default on some U.S. obligations if lawmakers fail to increase the limit on total U.S. federal government debt.  Fear over the threat posed by the debt ceiling seems well contained at this point.  For example, the VIX, often called the “fear gauge,” is currently around 16, and not at the 48 level seen in August, 2011, when the debt ceiling was last the subject of a battle in Washington, and stocks fell 17%.  Also, default concerns currently seem minimal with the discount on the one-month T-bill at just six basis points versus 17 basis points at the peak of fear in early August, 2011.  Perhaps this is because the economic and fiscal backdrop in the United States, and especially Europe, is much improved relative to the 2011 episode. 

While it is good news that the markets have been relatively steady, without a negative market reaction, there is less pressure on politicians to compromise.  Furthermore, the longer the shutdown goes on and the closer we get to the debt ceiling deadline, the more the market is forced to make politicians act.  We continue to monitor events closely and believe this is not a time for indiscriminate selling but rather a time to look for opportunities to buy on weakness.

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

Best regards,

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. To determine which investment(s) may be appropriate for you, consult me 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. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.  The Standard & Poor’s 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.  The VIX is a measure of the volatility implied in the prices of options contracts for the S&P 500.  It is a market-based estimate of future volatility.  When sentiment reaches one extreme or the other, the market typically reverses course. While this is not necessarily predictive it does measure the current degree of fear present in the stock market.  The economic forecasts set forth in this letter may not develop as predicted.  This research material has been prepared by LPL Financial.  Tracking #1-206891 | (Exp. 10/14)  


 

LPL Financial Research - The Word Du Jour

www.youtube.com

LPL Financial Research's Chief Investment Officer, Burt White, defines the Fed's word of the day, taper, and discusses the factors that have influenced its timing and the impact it will have on the markets.  How much will the Fed taper?  LPL Financial Research's prediction is for "TaperLite."  .

 


 

Sometimes Saying Nothing is the Most Powerful Message

September 23, 2013

Dear Valued Investor:

Just three days following the fifth anniversary of the Lehman Brothers bankruptcy and the birth of the Financial Crisis, the Federal Reserve (Fed) remained firmly committed to keeping the full force of its easy monetary policy in place.  On September 18, the Federal Open Market Committee (FOMC) of the Fed released its most anticipated statement of the year on monetary policy. But what was most profound was not what was said, but rather what was absent.

The market’s strong consensus was that the Fed would announce a reduction in its $85 billion per month in bond purchases, a program referred to as quantitative easing or QE.  The reduction in QE, more commonly referred to as tapering, was anticipated to start in September at $10 billion (the Fed reducing asset purchases from $85 to $75 billion) and accelerate until the program completely unwound sometime in mid-2014. 

However, the Fed surprised the market by making no changes to its policy at all.  Instead of Taper or even TaperLite, we got ZeroTaper.

The news sent risk assets strongly higher as the S&P 500 and the Dow finished the day at all-time highs.  Bond prices, which were hurt by the fear of an impending Fed taper (and thus the start of its unwinding of its easy monetary policy), rallied significantly, as the 10-year Treasury yield fell from 2.88% to 2.69%.

So why did the Fed elect not to taper?  Fed Chairman Ben Bernanke hinted at several reasons.  First, the Fed is concerned about the fiscal battles in Congress over the continuing resolution to fund the government and increasing the debt ceiling, given that these events have been negative catalysts for the market and economy in recent years.  In addition, the Fed worried that the U.S. economy is not accelerating fast enough and stands to grow at under 2% GDP (gross domestic product) rates, which is dangerously close to “stall” speed.  Lastly, the rapid increase in bond yields, from as low as 1.6% in May 2013 to 3% a few days ago for 10-year US Treasuries, had the Fed concerned as these interest rates directly affect important consumer and business lending, including mortgage rates.

In a sense, by not tapering, the Fed “smacked” the wrist of the market for driving yields of longer-term bonds and thus interest rates so much higher, so quickly.  Remember that the Fed directly controls short-term interest rates through its federal funds rate target, but the market establishes long-term rates through its assessment of future economic growth and inflation expectations.  The Fed was disappointed in the way the market took its hint of a taper and extrapolated it into an imminent full-scale exit from its easy monetary policy.  After all, the market had moved yields up almost 100% (1.6% to 3.0%) in just a few months.  As such, the Fed wanted to make sure that it got the market’s full attention and used the surprise “silence” of no taper to reinforce that the Fed will maintain its low interest rate policy for an extended period.

We see the Fed’s decision to keep both feet on the easy monetary policy gas pedal as modestly bullish for equities, a risk to the dollar, and a platform to enable a small rebound for bonds.  By forecasting inflation of 2% or less over the coming three years, the Fed signaled it may take longer than anticipated to ultimately raise rates or remove stimulus, both of which are bond-friendly over the intermediate term.  This means the severe bond market sell-off we have experienced over the last few months is likely over for now, and that yields may hold in a relatively tight range for the remainder of the year.

Despite the dovish actions of the Fed, we do have to remain mindful that risks persist.  The debt ceiling debate begins in earnest and Middle East geopolitical concerns continue.  And while the Fed decided not to taper now, it signaled that tapering is just around the corner.  Because a Bernanke-led Fed introduced QE policy in the first place, it does make some sense that the Fed also starts its path toward exiting it before Bernanke leaves office in January 2014, rather than leaving the lingering uncertainty for a new Fed leadership.  The end result is that the taper talk and market nervousness over it will re-emerge leading up to the next FOMC meetings in October and December. 

The Fed was all bark and no bite by postponing a reduction in bond purchases and clearly showed concern over rising interest rates and the potential impact on the economy.  The Fed has itself in a bit of a bind as it wants to signal a gradual exit from easy monetary policy, but market expectations and slowly improving economic conditions continue to warrant perhaps a faster unwind.  But for at least one meeting, the Fed made clear its intention to do whatever it takes to keep rates low and the economy improving.  And, it did so with the most powerful tool of all…silence.

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 materi