Focus on Fundamentals

 

October 2, 2017

Dear Valued Investor,

During the past several weeks, we’ve seen news headlines dominated by everything from extreme weather to heightened geopolitical risks, with speculation on policy changes in the U.S. an ongoing hot topic. With so many events competing for our attention, how do we know where to focus?

As investors, it’s important that as we acknowledge the impact of these worldwide events, we remember to separate our personal sentiment from our investment strategy. This can be easier said than done, which is why it’s important to rely on trusted economic and market indicators to guide us in the right direction. In other words, focus on fundamentals. The fundamental backdrop for the economy and markets continues to look solid, indicating that the market should be able to weather the ups and downs brought on by the dizzying news flow. Earnings estimates remain strong and economic indicators suggest that the potential for a recession this year or next remains low—both of which reduce the odds that a small correction turns into a big one. 

The Federal Reserve (Fed) is another consistent source of guidance on the economy. Although the Fed chose not to raise rates for the third time in 2017 at its September policy meeting, the meeting was not without action. The Fed announced that it would begin gradually shrinking its balance sheet, as expected, withdrawing some of the trillions of dollars it invested in the aftermath of the financial crisis. Perhaps more importantly, however, the announcement reflects the Fed’s confidence that economic growth and low unemployment will continue. Further supporting this position, the Fed indicated that a December rate increase is still likely.

When assessing this positive economic and market data, it’s important to consider the U.S. political environment. LPL Research maintains its view that the potential for fiscal stimulus remains and that we may see a tax deal out of Washington, D.C. early next year. This view does seem to be in the minority, however, and political divisions in Washington could impede a reduction in tax rates—corporate or individual (or both). Because consensus expectations for a tax agreement have declined, it does lessen the chance that stocks would fall sharply if a deal is not passed.

Against this generally favorable backdrop, the stock market has continued its steady advance—going ten months since the last 3% decline. While the market environment is positive, we should watch for a potential pullback. It’s healthy for a market to experience small declines, as a way to refresh and set up the next move higher. But be mindful that pullbacks can often be accompanied by potentially unnerving headlines, which is why it’s important to be prepared for them and remember the fundamentals. Based on the current environment, LPL Research notes that pullbacks can be viewed as opportunities to buy stocks at lower prices, especially for those who are underinvested relative to their long-term targets.

As is often the case in today’s world, we are faced with a myriad of concerns and headlines that could distract us from our long-term investment strategy. I will continue to monitor these key economic, market, and policy factors and assess how they may impact your portfolio and what, if any, changes should be made.

Our emotions naturally tend to influence our actions, but with a well-thought-out plan and the right guidance, we can ensure that we stay on course to reach our goals. As always, please contact me with any questions you may have.

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. The information in this letter has been prepared from data believed to be reliable, but no representation is being made as to its accuracy and completeness. Economic forecasts set forth may not develop as predicted. Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market. This research material has been prepared by LPL Financial LLC. Securities offered through LPL Financial LLC. Member FINRA/SIPC. Tracking #1-649279 (Exp. 09/18)

 


 

Have Stocks Overheated?

 

July 24, 2017

Dear Valued Investor:

The hottest part of the summer has arrived across the U.S., with many feeling the effects of heat and humidity with temperatures well into the 90s in many places. At the same time, the stock market has put together a pretty impressive hot streak of its own, achieving a series of record highs and avoiding a 5% pullback for over a year. Although this pullback “drought” is not unprecedented, it is rare, and provides a reminder that while it may be summer vacation time, we cannot become complacent.

So, have stocks overheated given this long stretch of calm? Here are several reasons to suggest conditions for investing may still be comfortable:

  • Earnings are on the upswing. Second quarter earnings season is underway and consensus estimates are calling for a second straight quarter of double-digit earnings growth for the S&P 500 Index. Corporate tax reform, still a realistic possibility in early 2018 despite the failed healthcare reform effort to date, provides upside to already solid earnings growth expectations in 2018.

  • The Federal Reserve (Fed) remains careful. The Fed will likely hike interest rates very gradually, minimizing the chances of a major market disruption or abrupt recession. The Fed may only hike rates once more this year, while the bond market is currently pricing in just one hike in all of 2018. During the economic expansion of the 1990s, the U.S. economy grew for seven years after the first rate hike of that cycle (the first hike of the current cycle came in December 2015).

  • The U.S. economy isn’t overheating. Consumers and businesses are not exhibiting the same type of overspending, overborrowing, or overconfidence seen at other major market peaks. While we are likely past the cycle’s midpoint, we are not at the end of this economic expansion and bull market.

  • Sentiment is balanced.* Balanced sentiment suggests investor optimism has not become excessive, reducing the odds of a selling wave pressuring the market in the near term and suggesting buyers still could potentially be lured off the sidelines and support stocks.

  • Valuations, in context, still look reasonable. Stock valuations have historically been higher when interest rates and inflation have been low. Given low interest rates and benign and falling inflation readings, the stock market should not be viewed as meaningfully overvalued.

These factors help give me comfort that the stock market is not overheating. However, there are some clear risks that could cool this market down, such as a difficult path ahead for tax reform and a tough 2018 budget battle looming on Capitol Hill this fall. Future developments will continue to be closely monitored.

So, as you head out to the beach this summer, use sunscreen and drink plenty of water, so like the markets and the U.S. economy, you don’t get overheated. Watch out for the riptides and jellyfish, but don’t let fear keep you out of the water.

As always, please contact me with questions.

Sincerely,

David M. Muilenberg CLU, ChFC

President

LPL Registered Principal

IMPORTANT DISCLOSURES: *Sentiment survey results are from the American Association of Individual Investors (AAII), an independent, nonprofit corporation.  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.  Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market.  Bonds are subject to market and interest rate risk if sold prior to maturity. Bond and bond mutual fund values and yields will decline as interest rates rise and bonds are subject to availability and change in price.  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. The AAII Investor Sentiment Survey is published in financial publications including Barron’s and Bloomberg providing a measure of the mood of individual investors.  This research material has been prepared by LPL Financial LLC. Securities offered through LPL Financial LLC. Member FINRA/SIPC. Tracking # 1-627227 (Exp. 07/18)

 


 

Investing is a Marathon, Not a Sprint

 

April 25, 2017

Dear Valued Investor:

The world’s oldest annual marathon was run on April 17 as amateur athletes from around the world descended on Boston, Massachusetts for the 121st running of the Boston Marathon. While elite athletes grab the headlines, over 25,000 entrants finished the marathon. Training for and running a marathon takes fortitude and patience, and many casual marathon runners aim simply to reassure themselves that they possess those qualities. No less of a test, investing to meet long-term goals can certainly try one’s fortitude and patience, but like a marathon, is achievable with the help of a good plan.

After an extended period of low volatility, markets have been in a bit more challenging environment over the last several weeks. The S&P 500 has retreated modestly since its last high on March 1, and long-term interest rates have declined over the same period, pushing bond prices higher. These kinds of consolidations can be reassuring and health for markets from a longer-term perspective, as what may have initially been overly optimistic expectations of the timing and impact of pro-growth policies in Washington, D.C. adjust to a still likely positive outlook but with a more realistic timeline.

Policy will continue to dominate the headlines, but prospects of better economic and earnings growth will be the foundation of any potential market advances. With improving business and consumer confidence, a more stable U.S. dollar, and a rebounding manufacturing sector, real economic growth in 2017 has the potential to come in near 2.5%, after averaging 2.1% during the current expansion. Earnings for S&P 500 companies could grow in the high-single digits in 2017, helped by steady economic growth, stable profit margins, and rebounding energy sector profits. Policy hopes could be dashed, but we continue to believe corporate American will get a tax cut within the next 9 to 12 months.

In some respects, some policy risks have declined as President Trump has become more focused on his primary legislative agenda. While the president retains his emphasis on fair trade, trade tensions with China have abated some after the president shifted his emphasis from currency manipulation to enlisting China’s cooperation on the North Korean threat. The president’s tone on renegotiating NAFTA has also moderated. A more balanced approach to trade policy may have reduced one potential market concern.

Despite a steady economic and earnings backdrop supporting markets, there are still several risks that need to be carefully monitored. A policy mistake by a major government or central bank, geopolitical threats in the Korean Peninsula and Middle East, and elevated stock valuations are among the challenges markets face that may contribute to bouts of increased volatility. Don’t forget that opportunities can come from volatility. I encourage you to stick to your long-term plan and stay invested. Investing is a marathon, not a sprint.

As always, if you have any questions, please 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. Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market. Investing in specialty market and sectors carries additional risks such as economic, political, or regulatory developments that may affect many or all issuers in that sector. 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. This research material has been prepared by LPL Financial LLC. Securities offered through LPL Financial LLC. Member FINRA/SIPC. Tracking # 1-601408 (Exp. 04/18)

 


 

 March Madness

March 17, 2017

Dear Valued Investor:

It’s March, and that means one thing: March Madness. All across the country, people are filling out their brackets, studying the teams, and trying to pick that upset that will impress their friends and coworkers with their basketball acumen.

The anticipation of the NCAA college basketball tournament reflects the buzz of the markets thus far in 2017. The stock market has continued to march higher with impressive consistency. The S&P 500 followed January’s 1.9% gain with a 4.0% return in February, delivering the best monthly gain since 6.8% in March 2016 and extending its monthly winning streak to four. Not to be outdone, the Dow had an impressive 12-day win streak that ended on February 28, the longest streak since 13 in January 1987. The major indexes have also gone more than 100 days without a 1% decline, something that hasn’t been done in more than 20 years.

Against this backdrop, the Federal Reserve (Fed) has remained a focus for market participants. In a widely expected move that was fully priced into the bond market for several weeks, the Fed’s policymaking arm, the Federal Open Market Committee (FOMC), raised rates 0.25% (25 basis points). With this move, the FOMC affirmed its strength in the U.S. economy and upgraded its views on business capital spending. The Fed continued to indicate that any future rate hikes would be data dependent and gradual, good news for those concerned that the recent strength in the economy and markets would lead the Fed to take a more aggressive tightening stance. LPL Research continues to expect the Fed to raise rates twice more in 2017, consistent with the Fed’s guidance, and expect Fed policy to be more of a steadying hand than a disruption.

I am encouraged that the Fed recognizes the continued improvement in the U.S. economy that is evident in recent economic data. Importantly, about 60% of February 2017 economic reports exceeded consensus expectations. The improvement has been largely driven by two factors: anticipation of pro-growth policies out of Washington, D.C. (tax reform, deregulation, infrastructure spending, etc.), and the continued rebound from the period of slow growth in late 2015/early 2016 due to oil-related capital spending declines, tightening credit standards, a strong U.S. dollar, and slower growth in China.

Despite the Fed’s recent vote of confidence in the economy, the encouraging economic data, and strong start to 2017 for the stock market, I am still mindful of the risks that could introduce periods of “market madness” as periods of volatility are to be expected. A policy mistake by a government or central bank, uncertainty surrounding the new presidential administration, Brexit, China’s debt problem, and elevated stock valuations all present challenges. That said, I continue to encourage you to stick to your long-term plan and stay invested.

As always if you have any questions, please 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. Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market.  Investing in specialty market and sectors carries additional risks such as economic, political, or regulatory developments that may affect many or all issuers in that sector.  The Federal Open Market Committee (FOMC) is the branch of the Federal Reserve Board that determines the direction of monetary policy. The Dow Jones Industrial Average Index is comprised of U.S.-listed stocks of companies that produce other (non-transportation and non-utility) goods and services. The Dow Jones Industrial Averages are maintained by editors of The Wall Street Journal. While the stock selection process is somewhat subjective, a stock typically is added only if the company has an excellent reputation, demonstrates sustained growth, is of interest to a large number of investors and accurately represents the market sectors covered by the average. The Dow Jones averages are unique in that they are price weighted; therefore their component weightings are affected only by changes in the stocks’ prices.  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.  This research material has been prepared by LPL Financial LLC.  Securities offered through LPL Financial LLC. Member FINRA/SIPC.  Tracking # 1-591262 (Exp. 03/18)

 


 

Markets Off to a Better Start in 2017

 

January 19, 2017

Dear Valued Investor:

Markets are off to a much better start in early 2017 than in 2016. After ten trading days, the S&P 500 is up 1.3% year to date, compared to an 8% decline during the same period in 2016. You may recall that a year ago, in early 2016, markets faced a number of significant challenges. Numerous market indicators were signaling a high probability of recession. The so-called earnings recession was at its nadir. Oil was plummeting, causing worries about the health of the banking system and the high-yield bond market. And, the market and the Federal Reserve (Fed) had very different expectations for the path of monetary policy.

Today, many of these and other challenges during 2016 have been resolved. Most widely-followed indicators suggest a low probability of recession in the U.S. over the next year. Policy risk has ebbed after markets got through the Brexit vote in June 2016 and the U.S. presidential election in November 2016 mostly unscathed. The earnings recession has ended and global corporate profits are poised for an upswing. China’s economy and markets have stabilized. Oil prices have rebounded. And markets and the Fed are much better aligned with regard to the path of monetary policy over the next few years, which has helped alleviate many of the global imbalances that impacted the market in early 2016.

Still, some issues have not been resolved, and new challenges have emerged. While we know who the new president will be and what the new Congress looks like, it is not yet clear what the impact may be to U.S. trade policy, healthcare reform, and tax reform. Important elements of these policies need to be ironed out and addressing these issues will go a long way toward shaping 2017 for markets:

  • Will the president-elect use the threat of tariffs, or actual tariffs, to get better trade deals with our key trading partners?

  • Will the 20 million or so people that receive health insurance through the Affordable Care Act remain insured after the law is overhauled?

  • Will tax reform include a border adjustment tax to stimulate exports and curb imports?

  • Will bank regulation be eased despite the political backlash against the big Wall Street firms during the election?

Despite the continued political and policy uncertainty, the stock market finished 2016 on a high note, with a 3.8% return for the S&P 500 in the fourth quarter, bringing the 2016 return to an impressive 12%. Markets have gotten a lift from improving economic expectations, partly due to optimism surrounding potential pro-growth policies under a Trump presidency, although the U.S. economy had already begun to pick up some steam even prior to the election. Third quarter gross domestic product (GDP), reported on December 23, 2016, surprised to the upside and accelerated, purchasing manager surveys have indicated manufacturing was accelerating in late 2016 after a nearly two year slump, and consumer spending has remained firm, supported by strong consumer sentiment readings. Fundamentally, the U.S. economy and markets remained on solid footing as 2017 got underway.

All in all, the start of 2017 has been a lot smoother than the start of 2016, but we are mindful that risks remain. A policy mistake by a government or central bank, issues with the Trump transition, Brexit, China’s bad debt problem, and above-average stock valuations may present challenges to the relatively smooth ride we’ve seen for financial markets so far in 2017. No matter what emotions the election results and the inauguration might stir up, I continue to encourage you to stick to your plan and stay invested.

As always if you have any questions, please 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.  Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market.  Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values and yields will decline as interest rates rise, and bonds are subject to availability and change in price.  Investing in specialty market and sectors carries additional risks such as economic, political, or regulatory developments that may affect many or all issuers in that sector.  Commodity-linked investments may be more volatile and less liquid than the underlying instruments or measures, and their value may be affected by the performance of the overall commodities baskets as well as weather, geopolitical events, and regulatory developments.  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.  This research material has been prepared by LPL Financial LLC.  Securities offered through LPL Financial LLC. Member FINRA/SIPC.  Tracking # 1-573516  (Exp. 1/18)

 


 

Interest Rates are Raised

 

December 21, 2016

Dear Valued Investor:

The Federal Reserve’s (Fed) policy-making arm, the Federal Open Market Committee (FOMC), raised its target for the federal funds rate by 0.25% (25 basis points) last Wednesday as expected at the conclusion of its two-day meeting. By raising this key overnight borrowing rate, the Fed raised interest rates for the first time in 2016, and for just the second time since the Great Recession (the last time the Fed raised rates was December 2015). The Fed raised rates because it believes economic growth has picked up and should continue without the added support of very low interest rates. Although market participants largely expected this outcome, the big story in last Wednesday’s meeting is that the FOMC now expects to raise rates three times in 2017. At the September 2016 FOMC meeting, the Fed expected just two hikes in 2017, and the market and the Fed were aligned on that assessment before yesterday.

Fed Chair Janet Yellen emphasized, “Our decision to raise rates…[can] certainly be understood as a reflection of the confidence we have in the progress the economy has made and our judgment that that progress will continue and the economy has proven to be remarkably resilient. So it is a vote of confidence in the economy.”

Last Wednesday’s rate hike was well telegraphed, and the fed funds futures market had been pricing in a nearly 100% chance of a hike for some time. Though the potential for some bond market volatility in the short term exists, I don’t expect another broad-based bond sell-off (or a corresponding quick rise in rates) given that markets have had plenty of time to digest the possibility of a rate hike.

For the stock market, this decision is potentially positive as well. Stocks have historically done well during periods of rising but low interest rates, as higher rates tend to be accompanied by improving expectations for economic growth. I am encouraged by LPL Research’s recent review of 23 periods of rising rates, during which the S&P 500 rose 83% of the time.* Yet, rate hikes also reaffirm that we are in the mid-to-late stage of the economic cycle. In this part of the cycle, we can expect additional equity market volatility.

Now that a rate hike has occurred, many of us have questions about the pace of future rate hikes. The FOMC noted that it expects the pace of rate hikes to be gradual and that any future hikes will be data dependent and not on a preset course. Fed Chair Janet Yellen confirmed this strategy during her post-meeting press conference. And our view remains that the economy, labor market, and inflation will track to—or perhaps just above—the Fed’s forecasts for 2017, suggesting at least two 25 basis point hikes in 2017 are likely and quite possibly three.

Last Wednesday’s rate hike reaffirms that we are returning to a more typical economic environment, which is a welcome change from the environment we have lived in since the Great Recession. And although we have seen another change in Fed policy, what shouldn’t change is our commitment to the long-term investment goals that may ultimately be our blueprint for success.

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

Sincerely,

David M. Muilenberg CLU, ChFC, AIF

President

LPL Registered Principal

 

IMPORTANT DISCLOSURES *See Weekly Market Commentary: Can’t Stocks and Bond Yields Just Get Along? (December 12, 2016) The economic forecasts set forth in the presentation may not develop as predicted. 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. The Federal Open Market Committee (FOMC) is the branch of the Federal Reserve Board that determines the direction of monetary policy. The eleven-person FOMC is composed of the seven-member board of governors, and the five Federal Reserve Bank presidents. The president of the Federal Reserve Bank of New York serves continuously, while the presidents of the other regional Federal Reserve Banks rotate their service in one-year terms. This research material has been prepared by LPL Financial LLC. To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC 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  Securities and Advisory services offered through LPL Financial LLC, a Registered Investment Advisor  Member FINRA/SIPC  Tracking #1-564272 (Exp. 12/17)

 

 


 

Our Nation's 45th President is Elected

 

November 9, 2016

Dear Valued Investor:

Donald Trump has completed his landmark quest and will become the nation’s 45th President after a contentious and often divisive campaign. In addition, the Republican Party has retained control of both houses of Congress. This outcome marks a significant reversal from just a few weeks ago when a Hillary Clinton presidency was highly probable and even a Democratic party sweep of Congress was possible. 

While this outcome is certainly a shock to many, it is important to remember that the result isn’t a surprise to the plurality of American voters that spoke their collective will at the ballot boxes yesterday.  The strength of a democracy is not in whether we like the outcome, but rather in how we accept the result as the voice and will of our republic.

While many things are promised on the campaign trail, all newly elected Presidents enter with a constrained ability to enact their agenda unilaterally. As a result, immediate and sweeping political changes are a process, which give markets and the American public time to digest and react. Although often derided by partisans, the inability of a President to swiftly change policies is a strength of our political system, not a weakness of it.

Moreover, the current market volatility is not because Trump was elected President, as markets do not have political affiliations. Rather, it reflects the market’s adjustment to a surprise presidential winner and the market’s tentativeness regarding the vast uncertainty over which of President-elect Trump’s stated policies he will be able to enact. The first major step towards clarity will come with Trump’s choices for key administration officials; his selections will give a better sense of the priorities for the Trump administration. This should provide some path to further understanding and calm markets.   

For the first time in 10 years, the Republican party will have control of the Presidency and both houses of Congress. As in all things, this may solve some problems, and perhaps exacerbate others. For example, potentially divisive upcoming issues, such as the necessary expansion of the debt ceiling and reforms to the corporate tax code, could be easier to navigate. There is a common perception that the markets like divided government. While that may often be correct, it is not necessarily true at every point in time.

Most importantly, however, over time we have witnessed corporations and financial markets adapting smoothly to new political environments. The uncertainty surrounding the Trump presidency could be greater than a typical transition; therefore, the markets may take additional time to process any changes. However, the uncertainty itself is not unusual.   

Separating political views and emotions from investment decisions is difficult. Whether this election result was your favored outcome or not, what we have learned over the years is that although Presidents can set an overall tone for the markets, over the long term, it is the underlying fundamentals of the economy and the strength of corporate profits that matter more. Overall, we continue to be encouraged by the underlying fundamentals in the economy and the related resilience of the stock market. Recently, encouraging economic data, including a record 73 consecutive months of private sector jobs growth, high consumer confidence, and an increase in manufacturing activity, all suggest a recession in the next year is unlikely.[1] And, although the stock market has been essentially flat over the past three months, the S&P 500 has returned 5.2% year to date (through market close on November 8, 2016).

As this historic election cycle comes to a close, I suggest casting a “vote of confidence” for the U.S. economy and markets. While uncertainty will certainly be prevalent over the short-run, our political and economic systems are resilient and can, after a period of adjustment, adapt to new realities. As investors, we all need to try and put this election into perspective, as our investment horizons extend far beyond yesterday’s votes or any political cycle. And, the keys to your investment success of relying on independent investment advice and sticking to your long-term investment strategies should not change, regardless of who is in office.

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. 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. Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market. This research material has been prepared by LPL Financial LLC. Securities offered through LPL Financial LLC. Member FINRA/SIPC. Tracking # 1-553712 (Exp. 11/17)

 

 1 According to U.S. Bureau of Labor Statistics, ISM Manufacturing Index, and Consumer Confidence Index data as of 11/7/16

 


 

Fed Leaves Rates Unchanged 

September 26, 2016

Dear Valued Investor:

As expected, the Federal Reserve’s (Fed) policymaking arm, the Federal Open Market Committee (FOMC), opted not to raise interest rates at the conclusion of its two-day policy meeting on Wednesday, September 21.

The FOMC did upgrade its assessment of the economy from its July statement, and noted that the case for an increase in the fed funds rate had strengthened. But it decided to wait for evidence of further progress toward its objectives. The FOMC statement said the Committee would continue to monitor global economic and financial developments. Fed Chair Janet Yellen and the FOMC statement noted that future rate hikes are dependent on the economy, labor market, and inflation tracking toward the FOMC’s forecasts.

The Fed dropped a strong hint to the markets that it is leaning toward raising rates in December. The FOMC’s language suggests to us that barring a very bad run of economic data between now and December, a surprise out of the U.S. presidential election or Brexit negotiations, an unexpected move from China, or a terrorist attack that disrupts economic activity for a long period of time, the Fed is likely to raise rates at the December FOMC meeting. One rate hike is not expected to cause a big disruption in financial markets, especially given yesterday’s signal from the Fed; however, a pickup in volatility would not be surprising following several months of steady and solid gains for stocks.

These are unusual times with unconventional monetary policy. As always, I am here to help you understand the complex investing environment and will continue to keep you informed of relevant developments. If you have any questions, I encourage you to contact me.

Thank you for your continued trust and confidence.

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.  The Federal Open Market Committee (FOMC) is the branch of the Federal Reserve Board that determines the direction of monetary policy. The eleven-person FOMC is composed of the seven-member board of governors, and the five Federal Reserve Bank presidents. The president of the Federal Reserve Bank of New York serves continuously, while the presidents of the other regional Federal Reserve Banks rotate their service in one-year terms.  This research material has been prepared by LPL Financial LLC.  Securities offered through LPL Financial LLC. Member FINRA/SIPC.  Tracking # 1-538086 (Exp. 09/17)

 


 

Market Watch | August 2016 

August 12, 2016

Dear Valued Investor:

This summer so far has been anything but quiet. Between the June Brexit vote, several headline-grabbing jobs reports, the winding path of oil prices, and all-time highs for stocks, there has been a lot of activity to absorb in these past couple of months. Not to mention that we are in the midst of a U.S. presidential election and the speculation that comes with it. Here are some of the highlights as we sift through the headlines and digest all the data.

To start, stocks have been on a roll lately. July saw a new all-time high for the S&P 500 (the first since May 2015) and a 3.7% gain for the month—putting the market on its first five-month winning streak in two years. Should stocks rise in August, one of the seasonally weakest months, it would mark the first six-month winning streak for stocks since early 2013.

In general, the U.S. economy has provided a favorable backdrop for stock market gains in July and early August. There is a strong backdrop for consumer spending, including an improving job market, low inflation and interest rates, rising home prices, and the seven-year bull market for stocks. During the second quarter, consumer spending posted its second highest quarterly growth since the end of the Great Recession. The 287,000 jobs created in June and 255,000 in July both handily topped economists’ expectations and recent trends.

One July data release that disappointed was second quarter 2016 gross domestic product (GDP). Real (inflation-adjusted) growth came in at an annualized rate of 1.2%, well below consensus expectations. But underperformance was largely driven by the inventory component, which pulled over 1% from second quarter GDP and will likely be reversed in the coming quarters.

Looking ahead, there are several potential market-moving events on the calendar. Central bank speculation will remain in high gear with the central bankers’ annual confab in Jackson Hole, Wyoming later this month. The Federal Reserve (Fed), European Central Bank (ECB), Bank of England (BOE), and Bank of Japan (BOJ) all meet in September. In its mid-July meeting, the Fed shored up the market’s confidence that the next rate hike was likely to come after the election, while markets expect the ECB, BOE, and BOJ to do more.

Oil also remains closely watched and may be influenced by reports of an OPEC meeting in late September. And with second quarter earnings season behind us, market participants will shift focus to the potential end of the earnings recession later this year.

All of this suggests a generally favorable backdrop for stocks, but not complacency. This bull market is one of the longest in history, stock valuations are above average, and August and September have been historically weak months. Through all of this, we must stay prepared for further stock market volatility. The good news is there do not appear to be signs that pronounced stock market weakness is coming, which means dips may be opportunities to buy. As this busy summer full of stock market action, central bank speculation, and political headlines continues into the fall, we must strive to maintain our long-term perspective, key to potential future success.

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.  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. Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market.  This research material has been prepared by LPL Financial LLC.  Securities offered through LPL Financial LLC. Member FINRA/SIPC.  Tracking # 1-525199 (Exp. 08/17)

 


 

 

LPL Research Midyear Outlook 2016:  A Vote of Confidence

 

July 19, 2016

Dear Valued Investor:

The recently released LPL Research Midyear Outlook 2016: A Vote of Confidence publication, http://Midyear Outlook 2016 - A Vote of Confidencecontains the guidance and investment insights to support you throughout the rest of this year. As we embark on the second half of 2016, the headlines and much of our attention will be focused on the 2016 presidential election, which can distract us with the barrage of promises and heightened political drama. Against that backdrop, however, we must strive to remain focused on our long-term investment plans.

LPL Research proposes a vote of confidence in the economy, the market, and most importantly, in our ability as investors to remain focused on our long-term goals. This is not always easy; but a vote of confidence means having the belief that someone or something has the ability to succeed. It is more than being positive or negative, a bull or a bear. It is about trusting our assessments of the opportunities—and risks—that may lie ahead, formulating a solid investment plan, and sticking with it through the ups and downs we may face in the coming months and beyond.

Our emotions were tested at the start of 2016, and again in late June. The S&P 500 had its worst start to a year ever; then, after coming back to within 3% of a new all-time high, met new opposition from the unlikely candidate of Brexit, as the United Kingdom voted to leave the European Union. Yet, two weeks after the vote on June 23 and the consequent volatility in the markets, the S&P 500 was back in positive territory—up over 4% for the year. This resilience has kept this bull market going, and the S&P 500 is expected to potentially post gains by the end of the year.

Looking ahead to the rest of 2016, LPL Research maintains confidence in its existing forecasts, with some minor adjustments. Periods of volatility are also anticipated throughout the rest of this year, but the expectation remains that we will not enter a bear market or economic recession. Here are some of the key influential factors to be watching for:

  • Federal Reserve (Fed) rate hikes. The forecast for Fed rate hikes in 2016 has been reduced from two to one, with additional rate increases next year.

  • International growth uncertainty. We are looking for clarity around future global growth, due to Brexit, the impact of the U.S. dollar, China’s debt problem, and earnings growth in Europe and Japan.

  • Corporate America investments. A pickup in economic growth and an energy sector turnaround may boost companies’ investments in their future growth, an element that has been lacking recently.

  • Second half turnarounds: oil, dollar, earnings. These three turnaround stories are key for the rest of 2016. Should the drags from oil prices and the U.S. dollar continue to ease, an earnings rebound may occur in the second half of the year.

The LPL Research Midyear Outlook 2016 provides the “vote of confidence” that the current economic recovery and bull market may continue through 2016 and beyond, with the investment insights and market guidance for what may lie ahead for the rest of this year.

As always, if you have any 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.  Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market.  Bonds are subject to market and interest rate risk if sold prior to maturity. Bond and bond mutual fund values and yields will decline as interest rates rise and bonds are subject to availability and change in price.  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.  This research material has been prepared by LPL Financial LLC.  Securities offered through LPL Financial LLC. Member FINRA/SIPC.  Tracking # 1-515364 (Exp. 07/17)

 


 

Summer is Heating Up

June 9, 2016

Dear Valued Investor:

June 2016 is full of major market events, which may go a long way toward determining the direction of the stock market for the rest of the year. Although for some, the approach of summer means it’s time to slow down and plan vacations, the markets and global economies are doing anything but that. As we approach the midpoint of this year and the kick-off to summer, events are ramping up—not slowing down—making this a good time for a check-in and look ahead.

The month of June starts off with an OPEC (Organization of the Petroleum Exporting Countries) meeting and the monthly jobs report, followed by policy meetings for the Federal Reserve (Fed), European Central Bank, and Bank of Japan, as well as the anticipated “Brexit” vote on whether the U.K. will remain in the European Union. These events could be viewed as opportunities to provide clarity and potential resolution to issues that have been years in the making. The path of the Fed’s rate hike campaign could ramp up and place us firmly in the midst of a rate normalization cycle. We have endured a volatile two years for oil prices—another OPEC meeting may provide important confirmation that we are entering a period of greater stability. And after overcoming past threats, such as Greece, the EU may face the first country to exit after its more than 20 years in existence as the U.K. goes to the polls. How the U.S. and global economies react to these events will be watched closely by all market participants.

For the OPEC meeting, the market’s expectations are low and a production freeze seems unlikely, so any movement toward restraining supply could push oil prices higher. Although not much action is expected out of this meeting, with oil prices ranging from as high as over $100 per barrel in June 2014 down to $26 per barrel in February 2016, it still warrants close attention.

Concerning central banks overseas, major policy shifts at their June meetings are not expected, but a challenging growth environment in both the Eurozone and Japan suggests further loosening of monetary policy may be ahead in the coming months. Fiscal policy will also be on watch, such as Japan’s recent decision to push a scheduled sales tax increase all the way back to October 2019.

The markets will be particularly focused on the June 14–15 Federal Open Market Committee (FOMC) meeting. The market may still be under estimating the probability of an early summer rate hike and another by year-end—the LPL Research base case and a potential source of near-term volatility. After years of low interest rates, the second hike will reaffirm that we are finally normalizing rates. Thus, the outcome of this meeting (or the following one in July) could be the turning point here, as we watch how the U.S. economy and market participants can handle this shift.

Last but not least, should the British people vote to leave the EU, it may be seen as a lack of confidence in the second-largest economic region worldwide, which may spark other anti-EU movements across the continent, drag down economic activity in the U.K., or weaken London’s place as a global financial center. It could also lead to a spike in financial market volatility. The latest polls, however, do show “remain” ahead of “exit.”

All in all, we are in for a busy month in June. Instead of easing into a low-key summer, we will be watching these events and the impact they may have. Coupled with the age of the economic cycle and election-related uncertainty, stocks may experience continued volatility over the summer. Although these ups and downs can make for a bumpy ride, we expect a dip may be an opportunity to buy. As LPL Research prepares its market outlook for the remainder of the year, the continued expectation is for the S&P 500 to deliver mid-single-digit gains for the year and end 2016 slightly above current levels.*

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

Sincerely,

David M. Muilenberg CLU, ChFC, AIF

President                                                                                

LPL Registered Principal

*Historically since WWII, the average annual gain on stocks has been 7-9%. Thus, our forecast is roughly in-line with average stock market growth. We forecast a mid-single digit gain, including dividends, for U.S. stocks in 2016 as measured by the S&P 500. This gain is derived from earnings per share (EPS) for S&P 500 companies assuming mid-to-high-single-digit earnings gains, and a largely stable price-to-earnings ratio. Earnings gains are supported by our expectation of improved global economic growth and stable profit margins in 2016.  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.  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.  Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market.  This research material has been prepared by LPL Financial LLC.  Securities offered through LPL Financial LLC. Member FINRA/SIPC.  Tracking # 1-502078 (Exp. 06/17)

 


 

Staying Focused

February 22, 2016

Dear Valued Investor:

Staying focused on long-term goals can be difficult during periods of heightened volatility such as we have experienced over the last six months. Although the list of market concerns has grown, it remains important to see the full picture and remain committed to a long-term plan.

There are some legitimate concerns that have played into market uncertainty. U.S. economic growth during the final three months of 2015 was lackluster, fueling recession concerns. Domestic earnings have been falling. The Federal Reserve (Fed) seems intent on pursuing additional interest rate hikes, despite the message from financial markets that it might be a mistake. Oil prices may remain low for some time as we endure the slow process of supply adjustment, which suggests more energy company bankruptcies may be ahead. In addition, the uncertainty surrounding the U.S. presidential election may be weighing on confidence, as some of the candidates’ proposals are not perceived to be market friendly.

Looking abroad, China has fumbled its attempts to intervene and stabilize its financial and currency markets as the bumpy transition to a more services-based, consumer-oriented economy continues. Meanwhile, China’s economy is probably growing at a rate closer to 5–6% than its reported 6.5–7%, based on the most reliable and timely economic data available. European economic growth has stalled, and the health of European banks is being called into question, largely because of exposure to oil and China. Japan’s economy also contracted in the fourth quarter of 2015.

However, bright spots remain. The U.S. consumer and the services sector of the economy remain solid, evidenced by Friday’s (February 12) strong retail sales report for January 2016. Job gains have been steady and lifted wages, supporting consumer spending and home values. Low gas prices have also helped. Strength in the U.S. dollar, which has hurt exports and weighed on earnings for U.S-based multi-national corporations, has lessened. We also take some comfort in corporate fundamentals. Corporate profits are pausing—largely because of temporary factors—but are not collapsing. Excluding the commodity sectors, S&P 500 earnings are on track to rise a respectable 4% year over year in the fourth quarter of 2015 based on Thomson-tracked consensus estimates. Overall earnings are potentially poised to resume growth in the second half of 2016, and corporate balance sheets remain in excellent shape outside of the energy sector.

As disappointing as the start to this year has been, the year-to-date decline for the broad stock market, as measured by the S&P 500, is still less than the average maximum decline in any given calendar year (14%) or in any positive year (11%). Going back 40 years, the S&P 500 has been down 5% or more after the first six weeks of the year 10 other times besides this year. The rest of the year was down more than 10% only once, in 2008, so a big drop from here would be extremely rare by historical standards. Also keep in mind the long-term average gain for stocks is about 8%, which includes a lot of ups and downs.

It’s important to remember that the best investment opportunities are often at points when fear is at its highest, which is why we look at sentiment indicators to identify points where the sellers might be exhausted. This idea was captured well by Warren Buffett in October 2008 when he said, “Be fearful when others are greedy, and be greedy when others are fearful.” There is a lot of fear out there, suggesting that greed may be more profitable.

It’s important to continue to monitor a variety of market and economic indicators for signs of a recession, and the odds now remain low. What remains key to managing these market environments is maintaining a long-term perspective, staying diversified, and committing to a well-formulated investment plan.

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.  Economic forecasts set forth may not develop as predicted.  Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal, and potential liquidity of the investment in a falling market. Because of its narrow focus, specialty sector investing, such as healthcare, financials, or energy, will be subject to greater volatility than investing more broadly across many sectors and companies.  There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not ensure against market risk.  Investing in foreign and emerging markets securities involves special additional risks. These risks include, but are not limited to, currency risk, political risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks.  Commodity-linked investments may be more volatile and less liquid than the underlying instruments or measure, and their value may be affected by the performance of the overall commodities baskets, as well as weather, geopolitical events, and regulatory developments.  This research material has been prepared by LPL Financial.  Securities offered through LPL Financial. Member FINRA/SIPC.  Tracking #1-469126 (Exp. 02/17)

 


 

Facing Volatility

January 21, 2016

Dear Valued Investor,

Over the last few years, we have faced a variety of challenges in the market. Times of stress spark the need for discussion, reassurance, and often, historical context. In 2013, we started the year worried about the impending fiscal cliff, and later watched as the market had its “taper tantrum” over uncertainty regarding the Federal Reserve’s (Fed) actions. In 2014, the focus was on the harsh winter’s impact on the economy, and the market sell-off due to the Ebola outbreak and rise of the Islamic State militants. And last year, second-half fears triggered by the decline in oil prices, weakness in manufacturing, and a slowdown in China captured our attention.

There is one common denominator among all of these topics and varying market challenges: fear. They all triggered a strong emotional reaction. Emotion is the most powerful fuel in humans. It drives us to love, to mourn, to cheer our favorite team, and to scream during horror films. Emotion is what makes life more than just a day-to-day routine; it makes it an adventure—full of rewards and sometimes disappointments. And while fear is not something we typically embrace, it is a necessary emotion. It helps us stay alert and seek security—whether that means locking our doors at night or increasing a life insurance policy after starting a family. However, in investing, emotion is often counterproductive to what it takes to be successful.

In an average lifetime, say about 80 years, we will experience roughly 9,000 down market days. We will experience about 13 recessions, approximately 20 bear markets, and too many pullbacks and corrections to even count. That is a lot of market declines. And every one of them will be marked with fear, worry, and the instinctive urge to seek safety. But history has shown that investing with fear as the catalyst is not a successful strategy. After all, very few of those 9,000 down market days in our life are actually a “Lehman Brothers” moment. Furthermore, fear causes us to sell at or near market bottoms and, more often than not, miss opportunities rather than add value with downside protection.

We are currently going through one of these periods of fear. This is best evidenced by examining investor surveys, such as the American Association of Individual Investors (AAII), which this week reported that bulls came in at only 18%, the lowest reading in nearly 11 years. Think about that last statement. The percentage of bullish/optimistic investors is at the lowest level in over a decade. That means that there are fewer bullish investors right now than at any time during the Great Recession. Meanwhile, the percentage of bears spiked up to 45%, the highest level in nearly three years. This degree of pessimism and the increased level of market volatility suggest to us that most of the potential stock market decline may be behind us.

Lately, China and oil are the most often cited catalysts for the fear. The oil market remains oversupplied, and we would not expect a major rally in oil until supply comes off the market. However, we do not think that low oil prices, in and of themselves, will cause a recession in the U.S. or lead to systemic contagion, such as what occurred during the financial crisis. Looking to China, the world’s second-largest economy is rebalancing to be more consumption based and less reliant on construction and infrastructure. This transition has been painful. However, China also has vast resources to ease this transition. Should China acknowledge its shortcomings and take concrete steps to fix its economy, this should boost, not further hinder, the global economy.

The challenges and consequences of declining oil prices and a slowing China are not new. Rather, the market has violently shifted from broadly accepting these risks to a virtual abhorrence of them. This is a common market paradigm, where market negatives can be accepted, even embraced, for long periods of time before suddenly becoming major concerns, sparking a sell-off. In a sense, a lack of confidence is driving a full repricing of risk, and that is being reflected in lower values for stocks. Although this is a scary experience, these are the periods where short-term panic can potentially lead patient investors to long-term profit.

With U.S. stocks firmly in correction camp and many segments already in a bear market (Japan, Europe, small cap stocks, etc.), we believe that selling pressure on stocks is moving to extreme levels. At these extremes, the market tends to ignore all positive news and focus (and reprice) purely based on the worst case scenario. However, we do not forecast that a worst case scenario is currently the highest probability event. In fact, we see the likelihood of a recession in the U.S. at roughly 20%, higher than a few months ago but still relatively remote. Supporting our view is the fact that corporate America, outside of the challenged energy sector, remains in very good shape and, we believe, is in a good position to grow profits in 2016—despite the drags from the energy sector, a strong U.S. dollar, and slower growth in China.

While we do not know for certain what lies ahead for this market, I believe the best course of action is to face it with a steadfast commitment to your investment plan; and instead of reacting to the urges of fear, maintain a patient, long-term orientation to the future.

As always, if you have any 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.  Economic forecasts set forth may not develop as predicted.  Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal, and potential liquidity of the investment in a falling market.  Because of its narrow focus, specialty sector investing, such as healthcare, financials, or energy, will be subject to greater volatility than investing more broadly across many sectors and companies.  There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not ensure against market risk.  Investing in foreign and emerging markets securities involves special additional risks. These risks include, but are not limited to, currency risk, political risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks.  Commodity-linked investments may be more volatile and less liquid than the underlying instruments or measure, and their value may be affected by the performance of the overall commodities baskets, as well as weather, geopolitical events, and regulatory developments. This research material has been prepared by LPL Financial.  Securities offered through LPL Financial. Member FINRA/SIPC.  Tracking #1-459467 (Exp. 01/17)


 

Balancing Confidence and Volatility

January 11, 2016

Dear Valued Investor:

While a new year means new beginnings—changing to a new calendar, signing up for a new gym membership, and struggling to remember to write 2016 on our checks—markets are starting 2016 off with the same growth concerns and heightened volatility that made the second half of last year a challenging one for investors. In fact, the calendar year 2015 was highlighted by essentially flat returns across stocks (S&P 500 advanced 1.4%), bonds (Barclays Aggregate Bond Index advanced 0.6%), and cash (which returned 0.2%). Notably, this was the first time in over 60 years that all three major investment categories were simultaneously unchanged—plus or minus 2%—over a full calendar year. 

With the Federal Reserve (Fed) raising rates for the first time in nine years, the arrival of the presidential election campaign season, and moving another year closer to the end of the current economic expansion, we expected more volatility in 2016, but we didn’t expect it so soon in the year. Normally, the first few trading days of the year are buoyant as investors look optimistically ahead. Instead, 2016 has started off on a sour note, as a rise in geopolitical tensions stemming from North Korea’s possible nuclear test, discord between two of the most powerful Middle Eastern countries, and the ongoing fear of terror attacks at home and abroad have all weighed on investor sentiment. Continued concerns arising from the slowdown of the Chinese economy have brought about volatile movements in global currencies and have driven down the price of oil to levels even lower than in the depths of the Great Recession.

While some investor confidence has been rattled by the recent volatility, overall consumer and corporate optimism remain constructive. To date, there are only limited signs that the market’s global growth concerns have begun to negatively affect U.S. economic activity. The labor market continues to showcase strength, with an average of 212,000 jobs created per month over the last six months. In addition, layoff announcements remain near all-time lows and new claims for unemployment insurance continue to hover near the lowest level in 42 years. Importantly, the Institute for Supply Management (ISM) services reading for December 2015 came in near all-time highs and indicates that the services sector, which represents over 80% of the U.S. economy, remains strong and has not been hindered by the global weakness in energy prices or manufacturing.

Risks remain, however, as continued declines in energy prices have delayed vital capital investment by a major segment of the U.S. economy, corporate earnings remain muted, and manufacturing remains weighed down by tepid global demand and a stronger dollar. Although the turmoil in the oil markets remains a top concern, the lower prices should help speed up the painful supply adjustment process and may bring about greater stability as the year unfolds. Should the supply-demand imbalance in energy stabilize as we expect, this could be a potential catalyst for additional capital spending and accelerated profit growth as 2016 progresses. 

Overseas, the Chinese economy continues to struggle as it embarks on what will be a lengthy transition from a manufacturing-based, export-led economy to a more consumer-led, domestic economy. Perhaps more importantly, the market seems to be losing confidence in the Chinese government’s ability to manage this transition as well as it managed its economy over the past 15 years. However, other emerging markets are still adding to global growth, and central bank actions in the Eurozone and Japan should help to boost growth in those countries. In addition, we continue to expect China’s growth to stabilize, as it has the resources to do more to stimulate its economy.

It is important to remember that investing is a marathon, not a sprint. It is about endurance. Volatility has always been a part of investing and always will be. In fact, over the last 15 years, every calendar year has seen at least one pullback of at least 6% and a median correction of 14%. So while volatility is normal (and even expected), it is always nerve-wracking. These short-term market flare-ups are often quick and severe, but fueled by feelings of fear and concern over perceived risks that may not be actual threats.

Volatility is expected to remain heightened for the remainder of 2016, which is common as the business cycle ages, and in turn, makes sticking to your long-term investment plans even more important to avoid locking in losses and missing out on opportunities. This current pullback, which is now approximately 5% year to date and 7% from the November 2015 highs, could continue over the short term as fear and concern trump much of the good news coming from the U.S. economy. What remains as the key to weathering these short-term bouts of volatility is a commitment to a well-formulated plan, a long-term focus, and good headphones to tune out the noise of short-term negativity. 

While a new year often brings about new resolutions, it is important to maintain these time-tested investment habits and a long-term perspective. 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.  Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal, and potential liquidity of the investment in a falling market.  Because of its narrow focus, specialty sector investing, such as healthcare, financials, or energy, will be subject to greater volatility than investing more broadly across many sectors and companies.  Investing in foreign and emerging markets securities involves special additional risks. These risks include, but are not limited to, currency risk, geopolitical risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks.  Bonds are subject to market and interest rate risk if sold prior to maturity. Bond and bond mutual fund values and yields will decline as interest rates rise and bonds are subject to availability and change in price.  Commodity-linked investments may be more volatile and less liquid than the underlying instruments or measures, and their value may be affected by the performance of the overall commodities baskets as well as weather, geopolitical events, and regulatory developments.  There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not ensure against market risk.  INDEX DESCRIPTIONS  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 Barclays U.S. Aggregate Bond Index is a broad-based flagship benchmark that measures the investment-grade, U.S. dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM pass-throughs), ABS, and CMBS (agency and non-agency).  The Institute for Supply Management (ISM) Index is based on surveys of more than 300 manufacturing firms by the Institute of Supply Management. The ISM Manufacturing Index monitors employment, production inventories, new orders, and supplier deliveries. A composite diffusion index is created that monitors conditions in national manufacturing based on the data from these surveys.  This research material has been prepared by LPL Financial.  Securities offered through LPL Financial. Member FINRA/SIPC.  Tracking #1-454824 (Exp. 01/17)

 


 

Understanding the Latest Correction

October 2, 2015

Dear Valued Investor:

The late baseball legend Yogi Berra was known for many memorable quotes, including one that is relevant for investors today, “it’s like déjà vu all over again.” The renewed downturn in stock prices feels like déjà vu all over again. Just when it appeared the August lows were the bottom and a rebound had begun, stocks retested the recent low on Monday, September 28. The ongoing correction rekindled the painful memories of 2008 and a difficult summer of 2011.

Corrections can be especially nerve-racking for investors when the reasons for the sell-off keep shifting. Fears over China’s slowdown shifted to oil prices and then to the possible implications—negative of course—of a possible Federal Reserve interest rate hike.

And speaking of déjà vu, the latest threat to the stock market appears to be another potential stand-off in Washington, similar to what we experienced most recently in 2013. But, as is often the case in Washington, lawmakers appear to be coming together in the final hours on an extension that would avoid a government shutdown. The specter of another possible furlough of workers and spending halts will likely be avoided.

Difficult memories stay with us, which helps explain why investors are lacking the confidence needed to move higher. Stocks were higher just a few months ago and on pace for a good year. But the challenges that emerged over the summer, coupled with above-average valuations for the U.S. stock market, eroded confidence. Concerns over the energy sector and the headwind of a strong dollar on U.S. multinational companies have overshadowed the strong profit growth produced by the remainder of corporate America. Excluding the impacts of energy and a strong dollar, corporate earnings are still likely to rise by 6% for 2015.[1]  Over the long term, earnings growth drives stock prices, not concerns we believe to be short term, such as a deceleration in China or potential gridlock in Washington—both of which we’ve seen before.

We remain vigilant for signs of a recession; but so far, the data we closely follow that have historically provided early warning signs are not indicating the near-term possibility of a recession. Improvement in consumer spending reported this week was dismissed by investors even though it bolstered expectations for another consecutive quarter of 2–3% economic growth, far from recession. We continue to look for signs of overborrowing, overspending, and overconfidence to determine whether complacency has settled in more broadly.

The lack of top-tier economic data in the past few weeks may have undermined confidence. With no new data to effect a positive change, negative sentiment has reappeared. The absence of consistent signposts during periods when investor sentiment is weak can often lead to a “sell first” mentality.

Healing may begin soon, however, as another batch of top-tier economic reports will be released in the second half of this week, including the Institute for Supply Management (ISM) and the monthly employment report. The ISM is a measure of manufacturing activity, and therefore, is likely to be impacted by both energy and a strong dollar; but this broad measure may help to confirm or deny the extent of a slowdown indicated by regional surveys, which may help restore confidence. And the jobs report, scheduled for Friday, October 2, is one of the truest measures of the economy’s strength.

During these situations it is always helpful to take a longer-term view. After noteworthy market declines, questions arise if it is the time to sell or an opportunity to add. In recent years, opportunities to step in and buy have been few and far between due to the consistent strength of the market. We believe an opportunity might be here now. Stock gains may not match the extraordinary gains of prior years, but as long as the earnings trajectory remains positive for the year, we expect current weakness to remain a correction and not something more severe, and the market may begin to move higher.

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

Sincerely,

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. Any 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 #1-425535 (Exp. 09/16)

[1] According to Thomson Reuters estimates.

 

 


 

Stock Market Volatility 

August 25, 2015

Dear Valued Client:

August brings with it the end of summer, but in recent years, bouts of stock market volatility have been common. It is quite normal for stock prices to decline at some point almost every year. In 30 of the 34 calendar years since 1980, the stock market, as measured by the S&P 500 Index, declined into negative territory at some point. At times like these, when markets are moving lower, we need to remind ourselves that market downturns are part of investing. However, the duration of the current bull market with its lack of notable pullbacks has made us more sensitive to any pullback. Four years have passed since the last correction (a decline of more than 10%) in August 2011. Yet, these downturns in the markets are typical and actually serve as a foundation from which markets can move higher. As we noted in our Outlook 2015: Some Assembly Required, periods of volatile markets were likely to increase, but this does not indicate that it is the end of the economic cycle or the bull market that we have found ourselves in following the Great Recession.

A combination of worries has led to the latest episode of market turbulence, including:

China slowdown fears: As the world’s second largest economy, the market has become concerned with the steadily slowing economic conditions in China. Due to China’s currency being pegged to the strong U.S. dollar, the Chinese yuan appreciated and created a strong headwind for China’s export-oriented economy. These slowing economic conditions have created concern that China will not be able to continue to achieve strong levels of economic output.  However, unlike Europe and Japan, which have already aggressively been embarking on accommodative policies to spur economic growth, China has just begun to utilize its significant capacity to unveil monetary and fiscal policies as an economy-boosting growth driver.

Lower oil prices: The market is concerned that lower oil prices signal the return of deflation. However, cheaper energy costs are a benefit to consumers who enjoy cheaper prices at the pumps, and businesses find manufacturing costs lower given more modest energy input costs.  Thus, the decline in oil prices, largely on the back of increased supply given the energy renaissance unfolding in the United States, is a bigger economic and earnings benefit than drag.  

Earnings slowdown: Oil price declines weigh heavily on the earnings of energy companies, which have dragged down profit growth to a near standstill.  However, the underlying strength of corporate America is masked behind the likely transitory headwinds caused by the energy industry.  In fact, excluding the energy sector, S&P 500 company earnings grew at a strong 9% year-over-year in the second quarter of 2015, and we believe the overall earnings picture will only improve over the remainder of 2015.

A first interest rate hike: The possibility of a Federal Reserve (Fed) interest rate increase in September, even if low, has added to investors’ concerns.  The Fed is unlikely to be hasty and the release of its July meeting minutes suggested some apprehension over a potential September rate hike. We believe the Fed will take note of global events and hold off from raising interest rates until later this year or early next. 

Despite these transitory issues that are contributing to market concerns, U.S. economic data still points to continued expansion.  The current economic recovery has been gradual by historical comparison, but the benefit is that the slower pace of recovery has contained the excesses that typically accompany the end of a bull market or economic expansion. It is these excesses, not age, that end bull markets. The economic data demonstrate that we are not overspending, overhiring, overbuilding, or creating any of the other “over” conditions that lead to excesses. The market valuations were getting a bit overheated—though not to excess levels—and this pullback resets those valuations to more normal levels. All economic indicators to date point to us being just past half time of this economic cycle so there is more potential for positive market returns.           

While volatility may linger until we get the next major economic data release on September 4, 2015 (the August jobs report), we believe the significant selling we have experienced in the past few days represents investor capitulation and likely presents an attractive entry point into stocks. But, as investors with long-term horizons, we look for those strong returns that come with long-term market exposure. However, in order to garner those gains, we have to weather the volatility. Therefore, we need to maintain our long-term focus and perspective as we move through some of these market bumps.

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. Any 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 #1-413328  (Exp. 08/16)

 


 

Monday Morning Outlook

IMF Can't End Dollar's Reign 

Brian S. Wesbury, Chief Economist

Robert Stein, Deputy Chief Economist

Date: 8/10/2015

Ever since Quantitative Easing began, a group of so-called Monetarist/Austrian thinkers have predicted “hyper-inflation” and the demise of the dollar as the world’s “reserve currency.”

In spite of the fact that gold has fallen and inflation remains low, scare stories about other countries dumping their Treasury securities, US interest rates skyrocketing, and a return of the trauma of 2008 proliferate. And, if that’s not enough, according to the pouting pundits of pessimism, the Federal Reserve won’t able to address the problem because long-term rates will be headed up, rather than down.

Now, these pundits have another flash point of fear because the International Monetary Fund is considering adding the Chinese currency, the yuan, to the basket of currencies it recognizes as “reserve currencies.” The yuan would bring the IMF’s list of key currencies to five, along with the dollar, yen, euro, and British pound. (Notice how no one is worried that the euro, yen, and pound already have that status.)

The idea that the IMF’s decision could trigger a selloff of US dollars and Treasuries makes no sense. The IMF’s “currency,” called Special Drawing Rights (SDRs), is an accounting tool only; it’s not used as a store of value across time. By contrast, the key issues that decide whether the dollar maintains its status are the foreign appetite to own dollar-denominated securities, particularly Treasury debt, and the dollar’s share of international transactions. And in those two areas, the dollar is doing better than ever.

Back in 2005, foreign entities – foreign central banks, foreign companies, foreign individuals – were willing to own $2 trillion of US Treasury securities, equivalent to about 15% of US GDP and 4.5% of global GDP. Today, foreign entities are willing to hold about $6.2 trillion in Treasury debt, 35% of the US GDP and 7.9% of global GDP.

Even with these large holdings, there is likely more growth ahead. Imagine what’s going to happen as India’s economy continues to expand. As the Indian central bank issues more local currency, it must decide how to back it, and will likely choose dollars. Right now, India owns just $100 billion of US Treasuries, while China owns about $1.3 trillion. As India grows, demand for US Treasury securities will rise.

SWIFT – a global transaction settlement platform - tracks the share of global bank activity settling in various currencies. Since early 2012, the share settling in US dollars has risen to 45% from 31%. Meanwhile, the share settling in euros has dropped to 28% from 42%. The share in the Chinese yuan is up, but is still only 2%. This low level for the yuan suggests that it is not yet used enough for the IMF to include it in its SDR basket, but more importantly it means no matter what the IMF does, the Yuan is not a threat to the dollar.

No one should become completely complacent. The dollar “could” eventually lose its reserve currency status. But to lose that status, another country (or region) has to issue a currency that is stronger and safer than the dollar over long periods of time. The Swiss Franc probably passes that test, but the Swiss economy is just too small relative to the world economy for it to be a key reserve currency.

The dollar’s status as the world’s key reserve currency isn’t going away, and neither are the stories about the imminent demise of that special status (see Wesbury 101 on the topic).

 

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.

 


 

Greece:  Post-Referendum Assessment

July 8, 2015

Dear Valued Investor:

The Greek people had their voices heard on July 5 and decisively voted “no” on the Greek referendum to accept the latest bailout deal from creditors. This outcome, which was surprising to many, will potentially raise the level of economic and financial market volatility in the weeks ahead, as global investors assess the risks associated with an increasingly likely Greek exit (Grexit) from the Eurozone and from the Eurozone’s common currency, the euro.

Here in the U.S., the uncertainty surrounding the possibility of a Grexit may lead to:

  • Slower global economic growth, which may hurt U.S. export growth at the margin

  • A delay in the Federal Reserve (Fed) raising interest rates, and a slower pace of rate hikes

  • A stronger U.S. dollar for longer, as the European Central Bank (ECB) will likely speed up its bond buying program, i.e., quantitative easing (QE)

  • An overall increase in economic and market uncertainty

The longer the uncertainty, the greater the potential impact. The market and economic disruption ahead of a potential Grexit may modestly slow U.S. economic growth and could push the first Fed rate hike into early 2016. But ultimately, the Fed will make the decision on when—and by how much—to raise rates based on the U.S. economy’s progress. For now, the Fed remains on track to potentially hike rates for the first time in this cycle in late 2015; but the longer the uncertainty around Greece lingers, the greater the odds that the Fed doesn’t hike rates until early 2016.

We all know the stock market does not like uncertainty, but the risk of contagion is expected to be manageable and, for the U.S. market, the impact to be relatively short term. The economic backdrop in Europe has improved, and peripheral European countries such as Italy, Spain, and Portugal—where contagion risks are centered—are in much better shape than they were when the Greek debt crisis began five years ago. In addition, the vast majority of Greece’s debt is owned by supranational entities like the ECB and the International Monetary Fund (IMF), and not by private investors, as was the case with Lehman Brothers.

Safety nets are a big reason why market impact from Greece is likely to be limited. The ECB’s long-term bank lending facility remains largely unutilized but has 300 billion euros of capacity; and the European Union’s rescue fund, the European Stability Mechanism (ESM), is now fully operational and has several hundred billion euros of capacity. Finally, last week the ECB added several corporate bond issuers to its list of eligible issuers for its QE program. By widening the pool of available bonds to purchase, the ECB increases its ability to fight off the spread of Greece-related debt fears across the Eurozone. These safety nets were gradually put in place in recent years and represent a key difference from 2008 and 2011.

Greece’s latest crisis is not expected to lead to the end of the U.S. economic expansion or the bull market. Heightened uncertainty may be setting up an attractive buying opportunity, particularly in Europe. But regardless of whether Greece remains in or exits the Eurozone, patience is recommended. Market volatility may potentially remain high over the next several weeks and months as we await further information on Greece’s path.

As always, if you have questions, please 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. Economic forecasts set forth may not develop as predicted.  Investing in foreign and emerging markets securities involves special additional risks. These risks include, but are not limited to, currency risk, geopolitical risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks.  Bonds are subject to market and interest rate risk if sold prior to maturity. Bond and bond mutual fund values and yields will decline as interest rates rise, and bonds are subject to availability and change in price.  Quantitative easing (QE) refers to a central bank’s current and/or past programs whereby the bank purchases a set amount of Treasury and/or mortgage-backed securities each month from private banks. This inserts more money in the economy (known as easing), which is intended to encourage economic growth.  This research material has been prepared by LPL Financial, Member FINRA/SIPC. Securities offered through LPL Financial  Tracking # 1-398606 (Exp. 07/16)

 


 

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

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