Why Own Bonds? January 21, 2014

Strong equity market performance in 2013 and still-low yields may cause investors to overlook the fact that bonds can still serve as an effective diversification tool. Following a year in which stocks returned 30% and bonds posted their worst return since 1994*, investor sentiment for stocks remains positive while bond sentiment is poor. The divergence in sentiment is evident in actual investment dollars. Inflows into stock mutual funds totaled $168 billion in 2013 versus a rare outflow for bonds, which totaled $82 billion. Our 2014 forecast calls for 10% to 15% returns for stocks and another challenging year for bonds with returns roughly flat^{^.}

The case for stock investing is strong but pullbacks can arrive without warning. As mentioned in our

Outlook 2014, we expect more volatility this year. In 2013, the stock market experienced only one brief pullback of just over 5%. Historically such calm is rare. Looking beyond 2014 the case for stocks over bonds is compelling, but for investors with shorter-term horizons protection against an equity market sell-off is prudent. After all, the average annual peak-to-trough decline in the S&P 500 from 1960 to 2013 has been 16%, and pullbacks can arrive without warning. Investors need to be prepared and bonds can help provide a buffer.

A look back at prior stock market pullbacks illustrates how bonds have historically provided good diversification benefits. Figure 1 shows all equity market pullbacks of 5% or more lasting three weeks or more over the past 10 years and the corresponding return for stocks and high-quality bonds. Figure 1 also illustrates the hypothetical return of a balanced 60% stock/40% bond portfolio and the dampening impact bonds can have on stock weakness. During stock market pullbacks in excess of 5%, bonds outperformed stocks on average by a double digit margin, a significant difference. Excluding the historic mid-2008 to early-2009 sell-off, the performance differential narrows but is still notable at a 9.6% advantage in favor of high-quality bonds.

In a few cases, both stocks and bonds declined together. This is a troubling outcome and reflects a failure of diversification, but it is rare. Still, bonds managed to outperform stocks on those occasions. In 2008, high-quality bonds provided a buffer but not without volatility, as investment-grade corporate bonds declined for the year and even high-quality mortgage-backed securities (MBS) suffered brief declines. While not all segments of the bond market perform similarly every time, an allocation to high-quality bonds has proven effective at offsetting stock market weakness.

Not About Yield

Today’s low-yield environment does not negate the diversification potential of bonds. During 2012, the stock market suffered two pullbacks greater than 5%, and bonds rose more than 1% over each period. The 10-year Treasury yield varied between 1.4% and 1.9% during the 2012 equity market sell-offs, much lower than today’s level.

In fact, during each stock market pullback in Figure 1 bond market performance is fairly consistent, averaging 1%, despite varied levels of interest rates. Two of the bond market’s strongest gains during stock market sell-offs occurred in 2010 and 2011, a post-recession period in which yields had already declined sharply.

Over short-term periods, price movement, not interest income, is the primary driver of bond performance. Interest income accrues slowly and although the primary driver of long-term bond returns, price changes, up or down, often overwhelm the impact of interest income over short periods of time. Therefore, a low-yield environment does not preclude bonds acting as a diversification tool.

Pension Buyers

Pension plans represent another investor group that can use bonds to address a specific objective. Pension investors, who have a very long time horizon and are therefore less sensitive to interest rate movements, use bonds to offset their long-term liabilities. Robust equity market gains in 2013 improved pension funding ratios broadly and reduced the need to take on additional risk to achieve investment goals. Following a year in which equities gained 30%, pension buyers took advantage of long-term Treasury yields near 4% and long-term corporate bond yields above 5% to better balance the risk-reward profile of their investment portfolios [Figure 2]. Pension buying, which has been a steady source of demand so far in 2014 and one reason why bonds are off to a good start, illustrates another way in which bonds can address specific investor objectives.

Conclusion

Low yields will likely translate into lower long-term bond returns, and therefore the hurdle for stock investors to beat bond performance over the long term is lower. However, for investors with shorter horizons or those simply unwilling to endure stock market swings, bonds can play a diversification role even in today’s low-yield environment. In conjunction with sectors that historically hold up better against rising rates, such as high-yield bonds and bank loans, an allocation to core bonds makes sense to help protect against potential stock market weakness.

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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 results. All indices are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. Past performance is no guarantee of future results.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

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.

Stock and mutual fund investing involves risk including loss of principal.

Corporate bonds are considered higher risk than government bonds but normally offer a higher yield and are subject to market, interest rate and credit risk as well as additional risks based on the quality of issuer coupon rate, price, yield, maturity and redemption features.

Mortgage-backed securities are subject to credit, default risk, prepayment risk that acts much like call risk when you get your principal back sooner than the stated maturity, extension risk, the opposite of prepayment risk, and interest rate risk.

Treasuries are marketable, fixed-interest U.S. government debt securities. Treasury bonds make interest payments semi-annually, and the income that holders receive is only taxed at the federal level.

Government bonds and Treasury bills are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.

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INDEX DESCRIPTIONS

The Barclays Aggregate Bond Index represents securities that are SEC-registered, taxable, and dollar denominated. The index covers the U.S. investment-grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities.

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.

______________________________________________________________________________________________________________________________

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

Member FINRA/SIPC

2013’s Top 10 Lessons for Investors December 26, 2013

Each year that passes contains some wisdom for investors, but along with that wisdom can be some folly. 2013 was a year that bestowed an abundance of each on investors.

The top 10 lessons of 2013 for investors need to be put into two categories:  those that investors can take to heart as sound wisdom for the year to come, and those they should try to forget as they prepare for 2014.

Lessons investors can take to heart for 2014:

1. Bonds can lose money. After a 13-year streak of annual gains, the bond market measured by the Barclay’s Capital Aggregate Bond Index fell about 2% on a total return basis in 2013, as interest rates rose from their all-time low in 2012.

2. Sentiment can matter more than fundamentals. Investors were willing to pay more for stocks, leading to a rise in the price-to-earnings ratio as they grew more confident in the durability of future growth. This brighter outlook drove most of the S&P 500 Index’s gain in 2013, not the mid-single-digit pace of earnings growth or lackluster 2% gross domestic product (GDP). This is not uncommon. Historically, stocks have posted the most consistent gains when GDP has been around 3%. When GDP for a quarter was within plus or minus a half of a percentage point of 3%, the S&P 500 has posted an average gain of 6.5% during that quarter — the highest of any 1% range in quarterly GDP and nearly triple the 2.4% gain when GDP was more than twice as strong.

3. Time heals all wounds. In fall 2013, the one-, three-, and five-year trailing returns for the stock market rose into the double digits, and money finally started flowing into U.S. stock funds after the five years of net outflows that followed the financial crisis.

4. Defensive stocks can lead the market higher. During the first four months of the year, the defensive sectors — those that are less economically sensitive and tend to fare better when growth is weakening such as utilities, telecommunications, consumer staples, and health care — led the overall market to double-digit gains. For the year as a whole, the defensive health care sector outperformed with a powerful gain of 39%, as measured by the S&P 500 Health Care Index. This was an unusually strong performance for a sector that tends only to be among the top-performing sectors in years when overall S&P 500 returns are low (2011) or negative (2008). While overall cyclical stocks generally fared the best, for parts of the year defensive stocks led the way up.

5. Annual returns are rarely average. The 27% gain in the S&P 500 Index (30% including dividends) in 2013 was well above the long-term average of 5% (10% including dividends). Historically, annual returns have only been in the 5 – 10% range in eight of the past 86 years.

Lessons that may have to be unlearned to pursue investment success in 2014:

6. Diversification is worthless. A passive, buy-and-hold portfolio of U.S. stocks did very well in 2013, whereas diversification, tactical positioning, or hedging generally acted as a drag on returns. History shows that 2013 was an outlier and that risk management tools like diversification have tended to benefit investors.

7. Risks are never realized. The key risks of 2013 were not realized:a recession from higher taxes and spending cuts, a default from government brinkmanship over the debt ceiling, a European financial crisis from Italian election debacle and Cyprus bank bailouts, a collapse in the housing market due to rising interest rates, etc. But that did not mean the risks were not threatening; any of them could have resulted in a very different outcome for the year. Risks may not always be as well behaved.

8. Stocks go up in a straight line. In 2013, the S&P 500 Index jumped 27%, but it saw only one notable pullback along the way. The pullback was less than 6% from peak to trough and lasted just one month. That compares to an average year that holds four market pullbacks of greater than 5% with at least one major pullback that has a peak-to-trough decline of 15.8% in the S&P 500 over the past 20 years. More volatility may be in store in the years ahead.

9. Dividends do not matter. The S&P 500 Dividend Aristocrats Index, composed of companies that have increased dividends every year for the last 25 consecutive years, performed in line with the overall S&P 500 in 2013. Instead, it was those companies that used their cash to do the most buybacks that outperformed. The S&P 500 Buyback Index, which focuses on the 100 companies in the S&P 500 that are doing the most buybacks, posted a total return of 45% — outperforming the S&P 500 by 16%. However, in an income-hungry market, dividends are likely to be attractive to many investors in the years ahead.

10. Policy is all that matters. In 2013, all eyes were on Washington as investors and the media obsessed over the fiscal cliff, sequester, tapering, shutdown, and debt ceiling. In 2014, the economy and markets will likely be more independent of policymakers as growth accelerates and high stakes fiscal battles are avoided.

These lessons are helpful for pursuing investing success in the year ahead. The accumulated wisdom from lessons learned over many years suggests that with long-term interest rates remaining historically low, corporate earnings likely to grow in the high-single digits, job growth improving, and inflation remaining below 3%, conditions are ripe for stocks to again reward investors in 2014.

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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 results. All indices are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. Past performance is no guarantee of future results.

The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

Stock and mutual fund investing involves risk including loss of principal.

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.

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

____________________________________________________________________________________________________________________________
INDEX DESCRIPTIONS
The Barclays Capital U.S. Aggregate Index is comprised of the U.S. investment-grade, fixed-rate bond market.

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 S&P Healthcare Index is comprised of companies in this sector primarily include healthcare equipment and supplies, health care providers and services, biotechnology, and pharmaceuticals industries.

____________________________________________________________________________________________________________________________

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 or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit

Member FINRA/SIPC

Get Ready for Market Storm Angel December 19, 2013

Winter Storm Dion shut down airports, schools, and businesses in parts of the United States last week in the midst of the holiday shopping season, but it is unlikely to have had a measureable economic impact or to cause a storm in the markets.

Yes, winter storms have names. For several hundred years names have been assigned to hurricanes and tropical storms; the World Meteorological Organization is in charge of assigning names to those events. But just a year ago, starting with the 2012 – 13 winter storm season, The Weather Channel announced it would start naming winter storms in an effort to raise awareness and preparation.

If this indeed works, then it may be a great idea to apply to the stock market. Perhaps we should name the stock market declines, or market storms, as they unfold during the year in order to raise investor awareness and preparation. An average year holds four market storms that have a magnitude of greater than a 5% decline with at least one major storm that has a peak-to-trough decline of 15.8% in the S&P 500 over the past 20 years. Even when excluding recession years, the average annual peak-totrough stock market decline is still over 10%, the magnitude that defines a major storm.

We forecast a 10 – 15% gain for the S&P 500 in 2014*. However, we expect that gain to be accompanied by a few named market storms next year and could even see a major storm of 10% or more develop. There was little need to name the pullbacks in 2013 since all but one were less than 5%. The biggest of them was a peak-to-trough decline of just 5.8%, the smallest such move in a year since 1995. So, in 2013 there were clearly no major storms in the markets — much like the 2013 Atlantic hurricane season, which was the first since 1994 to end with no major hurricanes. In contrast, we believe 2014 is likely to mark the return of volatility.

The Market Storm Names proposed here for 2014 [Figure 1] also happen to be the top dog names for the year. Given Wall Street vernacular, it may seem like naming pullbacks after famous bears like Gentle Ben, Fozzie, Yogi, Winnie-the-Pooh, or Teddy would make more sense, but, counter-intuitively, this just makes them sound too cuddly. Also, the storms are not bear markets; they are just temporary pullbacks on the way to double-digit gains we are forecasting for the year.

The 2014 Farmer’s Almanac predicts a major winter storm for February 2014. In our Outlook 2014 entitled The Investor’s Almanac, we forecast a rise in stock market volatility in 2014 — as some market storms are likely to develop. We expect those storms to be driven by the emergence of occasional “growth scares,” as economic activity may not accelerate in a straight line. Temporarily weak data on jobs or demand — more than actions by policymakers — are likely to drive the market storms in 2014.

When may Market Storm Angel — the first of the 2014 market storms — arrive? Weak economic data readings led to 5% or more pullbacks in the spring of each of the past four years. We may again see some seasonal weakness in the economic data that could fuel a market storm in the early months of the year. However, a spring pullback in the S&P 500 Index is very likely to be from higher than current levels, so there is no need to take action now. Instead it may be helpful simply to prepare mentally for a stormier market in 2014 than we experienced in 2013.

More market storms are not necessarily a bad thing for long-term investors. Greater volatility may provide an opportunity to buy the dips in the market and for active managers to outperform their benchmarks. In fact, the average U.S. large cap active manager has historically outperformed the S&P 500 most of the time during periods of heightened volatility, defined by the VIX being more than 2 points above its 3-year average. That compares to outperforming just 38% of the time when market volatility is lower, as measured by the Morningstar U.S. Large Cap Blend category.

Whether naming a market storm raises awareness in a positive way or prompts beneficial actions is debatable, and this proposal to name market storms is a bit tongue-in-cheek in keeping with the fun spirit of the holiday season. But it is important for individual investors to be aware of and prepare for greater volatility as they allocate to stocks in their portfolios.

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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 results. All indices are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. Past performance is no guarantee of future results.

The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

Stock and mutual fund investing involves risk including loss of principal.

_____________________________________________________________________________________________________________________

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 Rest of 2013 November 19, 2013

The LPL Financial Research Outlook 2014 comes out next week, so this week is a great opportunity to take a shorter-term look at the rest of 2013. It has been an amazing year for stock market investors with the strongest gain in a decade and a record for the annual outperformance of stocks over bonds, measured by the S&P 500 Index and the Barclays Aggregate Bond Index since its inception in 1976. But it may get even better. After all, November marks the turn in the calendar to what has been the best six months of the year for equity markets, on average, following the weakest six-month period from May to October, whose start is marked by the adage, “Sell in May and go away.” In fact, the S&P 500 has been up 20% by the start of November seven times since WWII. Every time, the index has always added to those gains — by an average of 6%.

What may drive additional gains? The market will focus on several things:  holiday shopping, seasonal patterns, and the December Federal Reserve (Fed) meeting.

Holiday Shopping

As Black Friday approaches, market participants turn their attention to holiday shopping as a barometer of the health of the economy and as an indicator for potential leadership by the companies in the consumer discretionary sector.

The National Retail Federation projects 2013 holiday sales to rise 3.9% this year, slightly ahead of last year’s 3.5% increase. We believe this expectation for a close-to-average year  holiday sales have increased 3.3%, on average, for the last 10 years) will likely be exceeded for a few reasons:

• The wealth effect.   History shows that this year’s gain for the S&P 500 suggests a high-single-digit gain for retail sales [Figure 1]. When people feel wealthier, they tend to spend more. Adding to this wealth effect, home prices are up double digits too.
• More discretionary income.  Gasoline prices are down by about 5 – 10% from last year, and 1.3 million more people have full-time jobs than a year ago, according to the Bureau of Labor Statistics.
• Fading drags.  We are starting to see a rebound in weekly retail sales from the shutdown-induced stall in October. And the year-over-year comparisons will benefit from the November 2012 impact of Superstorm Sandy.

Seasonal Patterns

End-of-year seasonal patterns are frequently a focus of market participants due to the tendency of fund managers and individuals to tidy up portfolios for tax and other reasons around year end. However, there is not likely to be much tax loss selling this year, given the broad and powerful gains, but we can expect a lot of capital gains distributions from funds that could prompt some volatility.

The “January effect” of outperformance by smaller company stocks has tended to start in mid-December in recent years after they have been dumped for tax loss selling and other reasons.

But what may lead the market higher? Based on the above analysis, it could be the consumer discretionary sector. This sector typically has a pretty consistent pattern of outperformance in November and December. The industrials sector also tends to outperform historically, while financials and energy tend to lag.

Fed Meeting

The Fed meeting on December 17 – 18 may be the biggest event during the rest of 2013, and it will be closely watched by market participants. Although it is a long shot that the Fed will announce tapering its bond-buying program at that meeting, the statement, accompanying economic projections, and press conference will be scrutinized for insights regarding whether tapering will begin in January, March, or beyond.

Bond yields may rise in response to improving economic data ahead of the meeting, continuing the slow-but-steady rise in yield from the 2.5% on the 10-year Treasury seen in late October. However, we are unlikely to see a sharp rise that would have a strong negative impact on the stock market.

A Strong Close

A strong close to a strong year may be in store for stocks. A pass on tapering by the Fed may boost stocks headed into year-end, meaning the S&P 500 finishes the year with a “Santa Claus rally” — the tendency for the stock market to post gains between Christmas and New Year’s Day, a period that has averaged a 1.5% return since WWII.

______________________________________________________________________________________________________________________________

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 results. All indices are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. Past performance is no guarantee of future results.

The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

Stock and mutual fund investing involves risk including loss of principal.

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.

The Consumer Discretionary Sector: Companies that tend to be the most sensitive to economic cycles. Its manufacturing segment includes automotive, household durable goods, textiles and apparel, and leisure equipment. The service segment includes hotels, restaurants and other leisure facilities, media production and services, consumer retailing and services, and education services.

Energy Sector: Companies whose businesses are dominated by either of the following activities: The construction or provision of oil rigs, drilling equipment and other energy-related service and equipment, including seismic data collection. The exploration, production, marketing, refining and/or transportation of oil and gas products, coal and consumable fuels.

Financials Sector: Companies involved in activities such as banking, consumer finance, investment banking and brokerage, asset management, insurance and investment, and real estate, including REITs.

Industrials Sector: Companies whose businesses manufacture and distribute capital goods, including aerospace and defense, construction, engineering and building products, electrical equipment and industrial machinery. Provide commercial services and supplies, including printing, employment, environmental and office services. Provide transportation services, including airlines, couriers, marine, road and rail, and transportation infrastructure.

______________________________________________________________________________________________________________________________

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 Capital U.S. Aggregate Index represents securities that are SEC-registered, taxable, and dollar denominated. The index covers the U.S. investment-grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities.

______________________________________________________________________________________________________________________________

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 or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit

Member FINRA/SIPC

Chasing Returns November 12, 2013

While corporations are likely to remain buyers of their own stock in the coming year, 2014 may finally be the year that individual investors as a group begin to buy stocks as they chase market returns.

For the U.S. stock market, it appears the rolling five-year has been the return that investors have most closely followed based upon their investing behavior in recent years [Figure 1]. The five-year trailing annualized return for the S&P 500 has been weak, especially when compared with bonds, in recent years.

In fact, even as recently as the end of August 2013, the difference in the five-year annualized return between stocks and bonds was only about 2%, hardly enough to compensate investors for the volatility they experienced [Figure 2]. Yet that difference has started to soar and may lead to investors chasing returns into the stock market.

In the past few weeks, the five-year return has soared into the double digits — reflecting not only a strong recent trend in the stock market, but the dropping off of much of the horrific declines in the fall of 2008, when the financial crisis took hold. The gap between stock and bond market returns over the past five years as of the end of last week widened to 10%. As of March 6, 2014, five years from the bear market low in the S&P 500 — even assuming no additional gains in the stock market between now and then — the five-year annualized return may have exceeded bonds by 20%!

The one-, three-, and five-year trailing annualized returns are now in the double digits for the first time this cycle [Figure 3]. This may prompt many investors to reconsider the role of stocks in their portfolios — especially as interest rates rise and bond performance lags.

In fact, a great rotation back to stocks may already be underway. Net inflows have been positive into bond funds over the past five years, while funds that invest in U.S. stocks saw net outflows, according to ICI data. But the month of October 2013 saw the biggest monthly inflows to funds that invest in U.S. stocks in years (excluding January’s seasonal peak for inflows) — despite the concerns over the government shutdown and debt ceiling. It is no surprise that this took place just as the five-year trailing return for stocks began to soar into double digits.

Although corporations will likely remain buyers of their stocks in the coming year, 2014 may finally be the year that individual investors as a group begin to buy stocks in contrast to the net selling they have done since the bull market began nearly five years ago. This may help to continue the rise in the valuations that defined this year’s outstanding gains for stocks.

______________________________________________________________________________________________________________________________

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 results. All indices are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. Past performance is no guarantee of future results.

The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

Stock and mutual fund investing involves risk including loss of principal.

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.

______________________________________________________________________________________________________________________________

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 Capital U.S. Aggregate Index represents securities that are SEC-registered, taxable, and dollar denominated. The index covers the U.S. investment-grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities.

______________________________________________________________________________________________________________________________

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 or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit

Member FINRA/SIPC

Summer of Love August 6, 2013

Summer of Love

It has been a summer of love for the stock market. As the temperatures heated up, so did the stock market. From June 24 to August 2, 2013, the S&P 500 Index rose 9%, pushing stocks up about 20% for the year. The last time we saw stocks perform the way they have this year in both pattern  and magnitude was 1967 [Figure 1]

During 1967’s Summer of Love, the Haight-Ashbury neighborhood of San Francisco became the center of a cultural movement known as the Hippie Revolution, but there was a lot more going on economically and socially that offer parallels to today that could explain the stock market similarity:

• Bond yields rose over the course of 1967, but most notably from April to August when the 10-year Treasury note rose about one percentage point — similar to this year’s move over the same time period.

• Gross domestic project (GDP) averaged a lackluster 2% in the first half of 1967, not too far from the 1.4% growth seen in 2013’s first half.

• Earnings per share growth for S&P 500 companies was pretty flat on a year-over-year basis then and now.

• Protest politics took place around the world in 1967; this year, Egypt and Brazil are two of the hot spots for protest-driven societal change.

• Recent events still bring forth faint echoes of the race and gender equality struggles of 1967.

• Detroit’s bankruptcy was almost 46 years to the day that the Detroit riots of 1967 broke out and are considered to be the seminal event that started the erosion of the tax base that left the city to declare bankruptcy in 2013.

• President Obama’s Affordable Care Act and other programs have drawn comparisons to President Johnson’s Great Society programs passed in the mid-1960s, which included Medicare, the extension of welfare, and environmental activism, and were seen as part of a host of large government spending programs that would speed economic growth as they came into effect in 1967 and beyond.

• The National Security Agency’s (NSA) Project MINARET began in 1967, intercepting electronic communications of U.S. citizens without warrants or judicial oversight. This controversial program can be compared with the revelations in 2013 regarding NSA spying on U.S. citizens.

It can be dangerous to look back selectively. Of course, there are lots of differences between now and 46 years ago, and there is no assurance that stocks will continue to follow the 1967 pattern. Nevertheless, if the pattern in the stock market mirroring 1967 that has unfolded so far this year holds in the second half, we may see a volatile market with a slower pace of gains — but more record highs ahead. That historical flashback happens to be consistent with our market forecast for the second half of the year.

________________________________________________________________________________________________________________________________________________________________________________
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 results. All indices are unmanaged and cannot be invested into directly.

The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

Stock investing involves risk including loss of principal.

Earnings per share (EPS) is the portion of a company’s profit allocated to each outstanding share of common stock. EPS serves as an indicator of a company’s profitability. Earnings per share is generally considered to be the single most important variable in determining a share’s price. It is also a major component used to calculate the price-to-earnings valuation ratio.

Gross domestic product (GDP) is the monetary value of all the finished goods and services produced within a country’s borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory.
______________________________________________________________________________________________________________________________________________________________________________
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.

S&P 500 Indices are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. Past performance is no guarantee of future results.

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 or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit

Member FINRA/SIPC

Midsummer Madness July 30, 2013

Eight times a year, the outcome of the Federal Reserve’s (Fed’s) Federal Open Market Committee (FOMC) meeting becomes the focal point for market participants. Four times each year, the first look at the health of the economy in the prior quarter (via the Bureau of Economic Analysis’s (BEA) report on gross domestic product [GDP]), dominates the headlines. Similarly, at the start of each month, the Report on Business from the Institute for Supply Management (ISM) and the monthly labor market report from the U.S. Department of Labor are the centerpieces of any trading week. This week (July 29 – August 2, 2013), all four of these key events are on the docket. How rare is this? In the 708 weeks between January 1, 2000 and today (13 years and seven months), all four of these often market-moving events have all occurred in the same week just seven times, most recently in the last week of January of this year. Historically, these weeks have exhibited 20% more volatility than an average week over this time span.* Add in the 135 S&P 500 companies expected to report their earnings results for the second quarter of 2013 this week, and this week is unlikely to be just another boring mid-summer week for financial market participants.

In addition to those four key events, markets will digest vehicle sales for July, pending home sales for June, home prices for May, as well as key data in China (Purchasing Managers’ Index [PMI] for July) and Japan (industrial production and vehicle sales for June 2013) along with the Bank of England (BOE) and the European Central Bank’s (ECB) monthly policy meetings.

FOMC in Focus:
Tuesday, July 30 & Wednesday July 31, 2013

• This is the fifth of eight FOMC meetings this year.
• ƒƒThis meeting will not include a press conference from Fed Chairman Ben Bernanke, and the FOMC will not be releasing a new economic forecast at the conclusion of this meeting. In recent years, markets have been conditioned not to expect many changes to Fed policy at FOMC meetings that do not include press conferences and new forecasts from the FOMC.
• ƒƒThe GDP report for the second quarter of 2013 will be released at the start of the second day of the two-day meeting, and the report will likely show that the economy barely expanded in the quarter. The FOMC will likely acknowledge this in the statement.
• A lack of communication between the Fed and the markets — especially the bond market — in May and June 2013 led to an uptick in market volatility. The FOMC will likely want to use the statement that follows this week’s meeting to further clarify its position on tapering quantitative easing (QE), but at the same time strengthen its commitment to keep the fed funds rate near zero, even as it is winding down its QE program.
• As noted in our Mid-Year Outlook 2013, we expect that the Fed will begin to slow its QE program this fall, dependent on the economy meeting the Fed’s above-consensus forecasts. We expect that the Fed will maintain the fed funds rate near zero the rest of this year and all of next year.

Q2 GDP in Focus:
Wednesday, July 31

• The consensus of economists (as measured by Bloomberg News) is looking for a very modest 1.0% annualized increase in real GDP for the second quarter of 2013. Estimates have moved sharply lower over the past four weeks, as several of the high-profile reports on the economy for May and June that feed into GDP (inventories, exports and imports, retail sales, durable goods shipments) fell short of expectations.
• The impact of higher taxes, the sequester, cooler-than-usual weather in most of the nation for most of the spring, as well as weak economies in Europe and China all acted as impediments to growth in the second quarter.
• ƒThe second quarter GDP report may be more difficult than usual for markets to interpret. Every July, the government agency (BEA) that compiles the GDP data releases revised data on GDP and its components going back three years. The revised data are based on new information from individuals, corporations, and businesses across the economy that was not available to the BEA initially.
• ƒThis year, the GDP accounts are undergoing what the BEA calls a “comprehensive revision.” Every five years or so, the BEA incorporates both new data and new methodology into its revisions of GDP. Overall GDP and its components are subject to revision all the way back to 1929!
• This year, the most significant changes to the way the BEA calculates GDP come from the treatment of intellectual property (IP). Currently, items like corporate spending on research and development (R&D) or television and film rights are not counted as final GDP. The comprehensive revision will count IP as final GDP, and that will provide a one-time boost to the level of GDP. The market — and the Fed — are well aware of these changes, and although the financial media will likely make a big deal of these changes, the market is not likely to react much.
• Overall, while the quarter-to-quarter wiggles of GDP growth may change — and perhaps show a deeper Great Recession and a slightly stronger recovery — the pattern of GDP is likely to stay the same.
• As noted, in our Mid-Year Outlook 2013, we expect that the U.S. economy will continue to grow at about 2% in 2013, supported by housing, as well as consumer and business spending, offsetting the drag from government spending.

July ISM in Focus:
Thursday, August 1, 2013

• ƒƒThe consensus of economists (as measured by Bloomberg News) is looking for a 52.0 reading on the ISM for July, after the 50.9 reading in June.
• A reading above 50 on the ISM indicates that the manufacturing sector is expanding.
• A reading below 50 on the ISM indicates that the manufacturing sector is contracting, and an ISM reading at 42 indicates that the overall economy is in recession.
• The ISM has been in a narrow range between 49 and 54 for the past 12 months.
• The Markit PMI — released several weeks ahead of the ISM report — has been gaining acceptance among market participants as a good proxy for the ISM report, and may, over time, diminish the importance to the markets of the ISM report. The Markit PMI reading for July 2013 was strong. At 53.2, it was above consensus expectations of 52.6 and also above the June 2013 reading of 51.9.
• Over the second half of 2013, we continue to expect the manufacturing sector is likely to be boosted by “onshoring” of jobs, relatively cheap and plentiful supplies of energy, and decent pace of capital spending.  Weakness in Europe and China and a stronger dollar continue to be drags on the manufacturing sector.

July Employment Report in Focus:
Friday, August 2

• The consensus of economists (as measured by Bloomberg News) is that that the economy created a net new 185,000 jobs in July 2013. The economy has created around 200,000 jobs per month over the past three, six, and 12 months. This figure is derived from a survey of business establishments.
• The consensus is looking for the unemployment rate (measured from a survey of households) to tick down to 7.5% in July from 7.6% in June. Generally speaking, the economy needs to create around 150,000 jobs per month to keep the unemployment rate steady.
• The shift in weather from a cool, damp June to a more normal July should lead to a rebound in weather-sensitive areas of employment like leisure and hospitality, food services and recreation.
• Teachers and other education workers employed by state and local governments are always a wild card this time of year, as most local governments end their fiscal years on June 30. State and local governments have shed teaching jobs in each of the past three months (April, May, and June), and a bounce back could occur in July.
• Our view is that the health of the labor market as measured by the monthly job count (around 200,000 per month) has met the Fed’s expectations of a “real and sustainable” improvement in the labor market. But other measures of the health of the labor market — hiring rates, the quit rate, and the unemployment rate — still show that the labor market is not yet back to normal See the Weekly Economic Commentary: Real and Sustainable: Revisited from July 8, 2013 for more details.

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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 results. All indices are unmanaged and cannot be invested into directly.

The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

* Between January 2000 and December 2012, the median percent difference between the high price and low price of the week for the S&P 500 was 2.9%. In the weeks where there were all four of these events in the same week, the median percentage difference between the high price and low price of the week for the S&P 500 was 3.5%.

Gross domestic product (GDP) is the monetary value of all the finished goods and services produced within a country’s borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory.

The Federal Open Market Committee (FOMC), a committee within the Federal Reserve System, is charged under the United States law with overseeing the nation’s open market operations (i.e., the Fed’s buying and selling of United States Treasure securities).

Quantitative easing is a government monetary policy occasionally used to increase the money supply by buying government securities or other securities from the market. Quantitative easing increases the money supply by flooding financial institutions with capital in an effort to promote increased lending and liquidity.

Purchasing Managers’ Index (PMI) is an indicator of the economic health of the manufacturing sector. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment.

The S&P/Case-Shiller U.S. National Home Price Index measures the change in value of the U.S. residential housing market. The S&P/Chase-Shiller U.S. National Home Price Index tracks the growth in value of real estate by following the purchase price and resale value of homes that have undergone a minimum of two arm’s-length transactions. The index is named for its creators, Karl Chase and Robert Shiller.

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.

Markit is a leading, global financial information services company that provides independent data, valuations and trade processing across all asset classes in order to enhance transparency, reduce risk and improve operational efficiency. The Markit Purchasing Managers’ IndexT (PMIT) is a composite index based on five of the individual indexes with the following weights: New Orders – 0.3, Output – 0.25, Employment – 0.2, Suppliers’ Delivery Times – 0.15, Stocks of Items Purchased – 0.1, with the Delivery Times Index inverted so that it moves in a comparable direction.

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

Member FINRA/SIPC

Listening to the leaders May 14, 2013

Leading Indicators Continue to Point to Slow Economic Growth, but no Recession

The April Index of Leading Economic Indicators (LEI), due out on Friday, May 17, 2013, caps off a busy week for economic reports in the United States. This week includes reports on:

• The consumer: Retail sales for April 2013 and the University of MichiganIndex of Consumer Sentiment for early May 2013;
• Housing: Housing starts and building permits for April 2013 and the National Association of Homebuilders sentiment index for May 2013;
• Manufacturing: Empire State Manufacturing Index for May, the Philadelphia Fed Manufacturing Index for May 2013, industrial production and capacity utilization for April 2013; and
• Inflation: Consumer Price Index (CPI) and Producer Price Index (PPI) for April 2013.

On balance, these reports are likely to continue to show that the U.S. economy is growing at around 2.0% in the second quarter of 2013, that inflation remains muted, and that the odds of a recession in the next year to 18 months remains low. Policymakers at the Federal Reserve (Fed) will digest all of this data, and likely conclude that its quantitative easing (QE) program — the purchase of $85 billion per month of Treasury securities — should continue over the remainder of 2013.

LEI Updates

If you have not seen the LEI lately, there have been several changes made to its components, although as before, virtually all of the components of the LEI are known before the data are actually released. So in theory, the LEI itself should not be a surprise to market participants, the media, or pundits. Of course, that will not prevent anyone from ascribing movements in financial markets on Friday, May 17 to the LEI data, but we are always quick to point out that the S&P 500 itself is a component in the LEI.

In December 2011, the Conference Board, the private “think tank” that compiles and releases the data each month, made four changes to the LEI:

• The Conference Board’s proprietary “Leading Credit Index” (LCI), an aggregate of several well-known financial market and credit market metrics like swap spreads, investor sentiment, margin account, etc., replaced the inflation adjusted M2 money supply.
• The Institute for Supply Management’s (ISM) New Orders Index replaced the ISM’s Supplier Deliveries Index.
• The U.S. Department of Census’ new orders for non-defense capital goods excluding aircraft replaced new orders for non-defense capital goods.
• A combination of consumer expectations and business and economic conditions replace the University of Michigan’s Consumer Expectations Index.

LEI Places Very Low Odds of Recession in Next 12 Months

According to the consensus estimates compiled by Bloomberg News, the LEI is expected to post a 0.2% month-over-month gain in April 2013. The expected 0.2% month-over-month gain would put the year-over-year gain in the LEI at 2.1%. The LEI is designed to predict the future path of the economy, with a lead time of between six and 12 months. Since 1960 — 640 months or 53 years and four months — the year-over-year increase in the LEI has been at least 2.1% in 397 months. Not surprisingly, the U.S. economy was not in recession in any of those 397 months. Thus, it is highly unlikely that the economy was in recession in April 2013, despite the impact of the sequester, the fiscal cliff (spending cuts, payroll tax increases, income tax rate increases, etc.), the recession in Europe, or the slowdown in China.

But the LEI is designed to tell market participants what is likely to happen to the U.S. economy, not what has already happened. Three months after each of the 397 months that the LEI was up 2.1% or more, the economy was in recession in just two of the 397 months — both in 1973. Six months after the LEI was up by 2.1% or more on a year-over-year basis, the U.S. economy has been in recession in just six of the 397 months or 2% of the time. Looking out 12 months after the LEI was up 2.1% or more, the economy was in recession in just 27 of the 397 months, or 7% of the time. Based on this relationship, the odds of a recession within the next 18 months and two years increase to between 10% and 15%.

On balance, the LEI says the risk of recession in the next 12 months is negligible (7%), but not zero. We would agree. But, the still-fragile state of the economy, and the uncertainty surrounding domestic fiscal policy, the recession in Europe, and the ongoing slowdown in China are telling us that the risk of recession is much higher than 7%. Our view remains that — aided by the Fed’s QE program, the early stages of a housing recovery, and a nascent manufacturing recovery — the U.S. economy is likely to grow at around 2.0% this year. The full impact of the sequester, the looming debate over the federal debt ceiling, weak exports, and ongoing contraction in both federal and state and local government spending are all acting to restrain growth, and these factors are likely to be in place for most of this year. A dramatic deterioration of the fiscal and financial situation in Europe, a fiscal or monetary policy mistake here in the United States or abroad, or an exogenous event (a major terror attack, natural disaster, etc.), among other events, may cause us to change our view.

______________________________________________________________________________________________________________________________________________

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 results. All indices are unmanaged and cannot be invested into directly.

* Over the last three quarters (third quarter of 2012, fourth quarter of 2012, and first quarter of 2013) , real GDP growth has averaged 2.0%.

Gross domestic product (GDP) is the monetary value of all the finished goods and services produced within a country’s borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory.

The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

Stock investing involves risk including loss of principal.

Quantitative easing is a government monetary policy occasionally used to increase the money supply by buying government securities or other securities from the market. Quantitative easing increases the money supply by flooding financial institutions with capital in an effort to promote increased lending and liquidity.

The Federal Open Market Committee (FOMC) , a committee within the Federal Reserve System, is charged under the United States law with overseeing the nation’s open market operations (i.e., the Fed’s buying and selling of U.S. Treasury securities).

The Congressional Budget Office is a non-partisan arm of Congress, established in 1974, to provide Congress with non-partisan scoring of budget proposals.

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INDEX DESCRIPTIONS
The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.

The Empire State Manufacturing Index is a seasonally-adjusted index that tracks the results of the Empire State Manufacturing Survey. The survey is distributed to roughly 175 manufacturing executives and asks questions intended to gauge both the current sentiment of the executives and their six-month outlook on the sector.

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.

The index of leading economic indicators (LEI) is an economic variable, such as private-sector wages, that tends to show the direction of future economic activity.

The Leading Credit Index constitutes financial market indicators including bond market yield curve data, interest rate swaps, and Fed bank lending survey data.

The NAHB/Wells Fargo Housing Market Index gauges builder perceptions of current single-family home sales and sales expectations for the next six months as “good,” “fair” or “poor.” The survey also asks builders to rate traffic of prospective buyers as “high to very high,” “average,” or “low to very low.” Scores from each component are then used to calculate a seasonally adjusted index where any number over 50 indicates that more builders view conditions as good than poor.

The Philadelphia Fed Manufacturing Index is a survey produced by the Federal Reserve Bank of Philadelphia, which questions manufacturers on general business conditions. The index covers the Philadelphia, New Jersey, and Delaware region. Higher survey figures suggest higher production, which contribute to economic growth. Results are calculated as the difference between percentage scores with zero acting as the centerline point. As such, values greater than zero indicate growth, while values less than zero indicate contraction.

The Producer Price Index (PPI) program measures the average change over time in the selling prices received by domestic producers for their output. The prices included in the PPI are from the first commercial transaction for many products and some services.

Purchasing Managers’ Index (PMI) is an indicator of the economic health of the manufacturing sector. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries, and the employment environment.

The University of Michigan Consumer Sentiment Index (MCSI) is a survey of consumer confidence conducted by the University of Michigan. The Michigan Consumer Sentiment Index (MCSI) uses telephone surveys to gather information on consumer expectations regarding the overall economy.

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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

Navigating the Markets April 23, 2013

Navigating the Markets

Compass Changes

• ƒUpgraded health care to neutral from negative/neutral
• Upgraded emerging market debt to neutral/positive from neutral
• Upgraded oil commodity from neutral/negative to neutral
• Downgraded precious metals commodities from neutral/positive to neutral
• Downgraded technology from neutral/positive to neutral

Investment Takeaways

• ƒOur near-term stock market view is slightly cautious, given our Base Path expectation for modest single-digit returns in 2013.*
• We continue to favor cyclical sectors over defensives over the balance of the year, but our near-term views are balanced.
• Higher-yielding, fundamentally sound segments of the bond market remain attractive, but low yields and valuations temper our enthusiasm.
• We upgraded our emerging market debt view following under performance during the first quarter.
• We see the oil commodity as near fair value following the latest correction, while deteriorating technicals drive our lowered precious metals view.
• From a technical perspective, the S&P 500 may turn lower over the next few weeks; next support is at 1540, followed by 1500.

Broad Asset Class Views

LPL Financial Research’s views on stocks, bonds, cash, and alternatives are illustrated below. The positions of negative, neutral, or positive are indicated by the solid black compass needle, while an outlined needle shows a previous view.

Equity & Alternative Asset Classes

Maintain Slightly Cautious Stock Market View as S&P 500 Remains Near All-Time Highs

Our near-term stock market view is slightly cautious, given our Base Path expectation for modest single-digit returns in 2013.*
ƒ
Our views are generally aligned across market cap, with a slight preference for large and mid caps. In our Base Path scenario in Outlook 2013, we expect the market to favor the stability, lower valuations, and higher yields associated with large caps.
ƒ
We maintain a modest preference for growth over value due to growth’s potential to perform well in slow-growth environments, although our conviction has lessened as our sector views have become more balanced.
ƒ
Our neutral emerging markets (EM) view reflects higher near-term risks as China implements measures to curb its property markets and has produced uneven growth.
ƒ
Our large foreign view is neutral. Although bold policy actions and valuations are supportive, and the outlook in Japan has improved, Europe remains mired in recession and the Eurozone debt crisis is not yet over.
ƒ
Fed policy remains supportive of precious metals, but US dollar gains, little inflation pressure, and the rotation into equities have driven a technical breakdown in the gold commodity price.
ƒ
Now that the oil commodity has pulled back into the high $80s, we believe it is near fair value.

All performance referenced herein is as of April 16, 2013, unless otherwise noted. * LPL Financial Research provided these forecasts based on: a low-single-digit earnings growth rate supported by modest share buybacks combined with 2% dividend yields and little change in valuations for the S&P 500. Please see our Outlook 2013 for details.

Real Estate/REITs may result in potential illiquidity and there is no assurance the objectives of the program will be attained. The fast price swings of commodities will result in significant volatility in an investor’s holdings. International and emerging markets involve special risks such as currency fluctuation and political instability. The price of small and mid-cap stocks are generally more volatile than large capstocks. Value investments can perform differently from the market as a whole. They can remain undervalued by the market for long periods of time. Precious metal investing is subject to substantial fluctuation and potential for loss. These securities may not be suitable for all investors. Alternative strategies may not be suitable for all investors and should be considered as an investment for the risk capital portion of  the investor’s portfolio. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses. Stock investing may involve risk including loss of principal.

Equity Sectors

More Balanced Sector Mix After Health Care Upgrade to Neutral

We continue to favor cyclical sectors over defensives over the balance of the year, but our near-term views are balanced as we anticipate a modest pullback in the S&P 500.

While we continue to expect a pickup in business spending, our lowered technology view reflects a weaker earnings outlook and deteriorating technicals. Industrials is our favored way to play a potential pickup in business spending.

Our recent decision to lower our materials view reflected the risk to China’s growth and strength in the US dollar amid concerns that the Federal Reserve (Fed) will soon pare back  stimulus.

Our energy view remains neutral due to our expectation that elevated inventories will prevent a rebound in crude oil prices from current levels in the high $80s.

Our upgraded, neutral health care view reflects our desire to balance out the economic sensitivity of our sector mix, policy clarity, and a strong technical picture.

Our utilities view is modestly negative due to interest rate risk and rich valuations, although our outlook is less negative amid improved technicals.

Our consumer staples view is neutral despite rich valuations due to the potential to benefit from lower commodity prices and the potential for a pullback.

Our financials view is modestly negative. Bank fundamentals have improved some, but the challenging regulatory and interest rate environment persists and loan growth is stalling.

Because of their narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies.

Fixed Income

Focus on Higher-Yielding Segments Due to Better Valuation and as Buffer Against Rise in Rates

• A range-bound environment persists in the bond market. Lingering uncertainties augur for a stable rate environment, which favors intermediate bonds that still possess a substantial yield advantage relative to short-term bonds.
• By committing to refrain from raising interest rates until unemployment falls to 6.5%, intermediate maturity bonds may also benefit from Fed policy as investors seek higher yields amid a low-yield world.
• We continue to find municipal bonds among the more attractive high-quality bond options, and valuations remain attractive following a difficult March.

Focus on Higher-Yielding Segments Due to Better Valuation and as Buffer Against Rise in Rates

• We upgrade emerging market debt following underperformance during the first quarter relative to other higher-yielding segments of the bond market, thereby providing an opportunity for investors.
• Higher-yielding, fundamentally sound segments of the bond market such as high-yield bonds, bank loans, and preferred securities remain attractive, but we temper our enthusiasm due to a strong start to 2013. Lower yields and higher valuations augur for lower returns going forward.
• Bank loans remain attractive due to a much narrower yield differential to high-yield bonds.

All bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and are subject to availably and change in price. High-yield/junk bonds are not investment-grade securities, involve substantial risks, and generally should be part of the diversified portfolio of sophisticated investors. Mortgage-backed securities are subject to credit, default risk, prepayment risk that acts much like call risk when you get your principal back sooner than the stated maturity, extension risk, the opposite of prepayment risk, and interest rate risk. International and emerging market investing involves risks such as currency fluctuation and political instability and may not be suitable for all investors. Bank loans are loans issued by below investment-grade companies for short term funding purposes with higher yield than short-term debt and involve risk. Treasury inflation-protected securities (TIPS) help eliminate inflation risk to your portfolio as the principal is adjusted semiannually for inflation based on the Consumer Price Index – while providing a real rate of return guaranteed by the U.S. government. Corporate bonds are considered higher risk than government bonds but normally offer a higher yield and are subject to market, interest rate and credit risk as well as additional risks based on the quality of issuer coupon rate, price, yield, maturity and redemption features. Foreign Bonds – Hedged: Non-U.S. fixed income securities generally from investment-grade issuers in developed countries, with hedged currency exposure. Foreign Bonds – Unhedged: Non-U.S. fixed income securities normally denominated in major foreign currencies.

DEFINITIONS:

EQUITY AND ALTERNATIVES ASSET CLASSES
Large Growth: Stocks in the top 70% of the capitalization of the U.S. equity market are defined as Large Cap. Growth is defined based on fast growth (high growth rates for earnings,
sales, book value, and cash flow) and high valuations (high price ratios and low dividend yields).

Large Value: Stocks in the top 70% of the capitalization of the U.S. equity market are defined as Large Cap. Value is defined based on low valuations (low price ratios and high dividend
yields) and slow growth (low growth rates for earnings, sales, book value, and cash flow).

Mid Growth: The U.S. mid-cap range for market capitalization typically falls between $1 billion and $8 billion and represents 20% of the total capitalization of the U.S. equity market.
Growth is defined based on fast growth (high growth rates for earnings, sales, book value, and cash flow) and high valuations (high price ratios and low dividend yields).

Mid Value: The U.S. Mid Cap range for market capitalization typically falls between $1 billion and $8 billion and represents 20% of the total capitalization of the U.S. equity market. Value
is defined based on low valuations (low price ratios and high dividend yields) and slow growth (low growth rates for earnings, sales, book value, and cash flow).

Small Growth: Stocks in the bottom 10% of the capitalization of the U.S. equity market are defined as Small Cap. Growth is defined based on fast growth (high growth rates for earnings,
sales, book value, and cash flow) and high valuations (high price ratios and low dividend yields).

Small Value: Stocks in the bottom 10% of the capitalization of the U.S. equity market are defined as Small Cap. Value is defined based on low valuations (low price ratios and high
dividend yields) and slow growth (low growth rates for earnings, sales, book value, and cash flow).

U.S. Stocks: Stock of companies domiciled in the U.S.

Large Foreign: Large-cap foreign stocks have market capitalizations greater than $5 billion. The majority of the holdings in the large foreign category are in the MSCI EAFE Index.
Small Foreign: Small-cap foreign stocks typically have market capitalizations of $250M to $1B. The majority of the holdings in the small foreign category are in the MSCI Small Cap EAFE Index.

Emerging Markets: Stocks of a single developing country or a grouping of developing countries. For the most part, these countries are in Eastern Europe, Africa, the Middle East, Latin
America, the Far East and Asia.

REITs: REITs are companies that develop and manage real-estate properties. There are several different types of REITs, including apartment, factory-outlet, health-care, hotel, industrial, mortgage, office, and shopping center REITs. This would also include real-estate operating companies.

Commodities – Industrial Metals: Stocks in companies that mine base metals such as copper, aluminum and iron ore. Also included are the actual metals themselves. Industrial metals
companies are typically based in North America, Australia, or South Africa.

Commodities – Precious Metals: Stocks of companies that do gold- silver-, platinum-, and base-metal-mining. Precious-metals companies are typically based in North America, Australia, or South Africa.

Commodities – Energy: Stocks of companies that focus on integrated energy, oil & gas services, oil & gas exploration and equipment. Public energy companies are typically based in North America, Europe, the UK, and Latin America.

Merger Arbitrage is a hedge fund strategy in which the stocks of two merging companies are simultaneously bought and sold to create a riskless profit. A merger arbitrageur looks at
the risk that the merger deal will not close on time, or at all. Because of this slight uncertainty, the target company’s stock will typically sell at a discount to the price that the combined
company will have when the merger is closed. This discrepancy is the arbitrageur’s profit.

Long/Short is an investment strategy generally associated with hedge funds. It involves buying long equities that are expected to increase in value and selling short equities that are
expected to decrease in value.

EQUITY SECTORS

Materials: Companies that engage in a wide range of commodity-related manufacturing. Included in this sector are companies that manufacture chemicals, construction materials, glass,
paper, forest products and related packaging products, metals, minerals and mining companies, including producers of steel.

Energy: Companies whose businesses are dominated by either of the following activities: The construction or provision of oil rigs, drilling equipment and other energy-related service and equipment, including seismic data collection or the exploration, production, marketing, refining and/or transportation of oil and gas products, coal and consumable fuels.

Industrials: Companies whose businesses: Manufacture and distribute capital goods, including aerospace and defense, construction, engineering and building products, electrical
equipment and industrial machinery; provide commercial services and supplies, including printing, employment, environmental and office services; provide transportation services,
including airlines, couriers, marine, road and rail, and transportation infrastructure.

Consumer Discretionary: Companies that tend to be the most sensitive to economic cycles. Its manufacturing segment includes automotive, household durable goods, textiles and apparel, and leisure equipment. The service segment includes hotels, restaurants and other leisure facilities, media production and services, consumer retailing and services and education services.

Technology: Companies that primarily develop software in various fields such as the Internet, applications, systems and/or database management and companies that provide information technology consulting and services. Technology hardware & equipment include manufacturers and distributors of communications equipment, computers and peripherals, electronic equipment and related instruments, and semiconductor equipment and products.

Financials: Companies involved in activities such as banking, consumer finance, investment banking and brokerage, asset management, insurance and investment, and real estate, including REITs.

Utilities: Companies considered electric, gas or water utilities, or companies that operate as independent producers and/or distributors of power.

Health Care: Companies in two main industry groups: Healthcare equipment and supplies or companies that provide healthcare-related services, including distributors of healthcare
products, providers of basic healthcare services, and owners and operators of healthcare facilities and organizations or companies primarily involved in the research, development,
production and marketing of pharmaceuticals and biotechnology products.

Consumer Staples: Companies whose businesses are less sensitive to economic cycles. It includes manufacturers and distributors of food, beverages and tobacco, and producers of non-durable household goods and personal products. It also includes food and drug retailing companies.

Telecommunications: Companies that provide communications services primarily through a fixed line, cellular, wireless, high bandwidth and/or fiber-optic cable network.

FIXED INCOME

Credit Quality: An individual bond’s credit rating is determined by private independent rating agencies such as Standard & Poor’s, Moody’s and Fitch. Their credit quality designations
range from high (‘AAA’ to ‘AA’) to medium (‘A’ to ‘BBB’) to low (‘BB’, ‘B’, ‘CCC’, ‘CC’ to ‘C’).

Duration: A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. Duration is expressed as a number of years. Rising
interest rates mean falling bond prices, while declining interest rates mean rising bond prices. The bigger the duration number, the greater the interest-rate risk or reward for bond prices.

Munis – Short-term: Bonds issued by various state and local governments to fund public projects. The income from these bonds is generally free from federal taxes. These bonds generally have maturities of less than three years.

Munis – Intermediate: Bonds issued by various state and local governments to fund public projects. The income from these bonds is generally free from federal taxes. These bonds
generally have maturities of between 3 and 10 years.

Munis – Long-term: Bonds issued by various state and local governments to fund public projects. The income from these bonds is generally free from federal taxes. These bonds generally
have maturities of more than 10 years.

Munis – High-yield: Bonds issued by various state and local governments to fund public projects. The income from these bonds is generally free from federal taxes. These bonds generally
offer higher yields than other types of bonds, but they are also more vulnerable to economic and credit risk. These bonds are rated BB+ and below.
Treasuries: A marketable, fixed-interest U.S. government debt security. Treasury bonds make interest payments semi-annually and the income that holders receive is only taxed at the federal level.

TIPS (Treasury Inflation Protected Securities): A special type of Treasury note or bond that offers protection from inflation. Like other Treasuries, an inflation-indexed security pays interest every six months and pays the principal when the security matures. The difference is that the underlying principal is automatically adjusted for inflation as measured by the consumer price index (CPI).

Mortgage-Backed Securities: A type of asset-backed security that is secured by a mortgage or collection of mortgages. These securities must also be grouped in one of the top two ratings as determined by a accredited credit rating agency, and usually pay periodic payments that are similar to coupon payments. Furthermore, the mortgage must have originated from a regulated and authorized financial institution.

Investment-Grade Corporates: Securities issued by corporations with a credit ratning of BBB- or higher. Bond rating firms, such as Standard & Poor’s, use different designations consisting of upper- and lower-case letters ‘A’ and ‘B’ to identify a bond’s investment-grade credit quality rating. ‘AAA’ and ‘AA’ (high credit quality) and ‘A’ and ‘BBB’ (medium credit quality) are considered investment-grade.

Preferred Stocks: A class of ownership in a corporation that has a higher claim on the assets and earnings than common stock. Preferred stock generally has a dividend that must be paid
out before dividends to common stockholders and the shares usually do not have voting rights.

High-Yield Corporates: Securities issued by corporations with a credit rating of BB+ and below. These bonds generally offer higher yields than investment-grade bonds, but they are also
more vulnerable to economic and credit risk.

Bank Loans: In exchange for their credit risk, these floating-rate bank loans offer interest payments that typically float above a common short-term benchmark such as the London
interbank offered rate, or LIBOR.

Foreign Bonds – Hedged: Non-U.S. fixed income securities generally from investment-grade issuers in developed countries, with hedged currency exposure.

Foreign Bonds – Unhedged: Non-U.S. fixed income securities normally denominated in major foreign currencies.

Emerging Market Debt: The debt of sovereigns, agencies, local issues, and corporations of emerging markets countries and subject to currency risk.

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IMPORTANT DISCLOSURES

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. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indexes are unmanaged and cannot be invested into directly.

Past performance is no guarantee of future results.

For the purposes of this publication, intermediate-term bonds have maturities between 3 and
Stock investing involves risk including loss of principal.

Preferred stock investing involves risk, which may include loss of principal.

Distressed investing involves significant risks, including a total loss of capital. The risks associated with distressed investing arise from several factors including: limited diversification,
the use of leverage, limited liquidity, and the possibility that investors may be required to accept cash or securities with a value less than their original investment and/or may be required to accept payment over an extended period of time.

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.

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 or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit

Business Capital Spending April 3, 2013

On March 28, 2013, the Bureau of Economic Analysis (BEA) of the U.S. Department of Commerce reported that corporate profits of all U.S.-based corporate entities — as measured in the National Income and Product Accounts (NIPA) — hit an all-time high in the fourth quarter of 2012. The bulk of companies in the S&P 500, a subset of the companies in the NIPA profits data, will report their earnings for the first quarter of 2013 in the coming weeks.

Strong overseas economies (especially in emerging markets), restrained hiring, modest wage gains, low interest rates, solid worker productivity, and an economic cycle that is just three months shy of its fourth birthday have all contributed to the record level of profits.

Economy-wide, corporate cash levels remain at all-time highs, as firm managements remain reluctant to commit to more hiring, spending, and expansion, given the severity of the Great Recession, the sluggish pace of economic growth in the current recovery, and the uncertainty surrounding the legislative and regulatory outlook in Washington.

Putting Profits and Cash to Work

Companies can choose many paths in putting their profits and cash to use. Choices include, but are not limited to:

• Starting or increasing dividend payments to shareholders;
• Buying back shares;
• Buying other companies;
• Increasing hiring;
• Ramping up research and development; and Investing in new plant and equipment or, as it is commonly known, business capital spending.

The official name for business capital spending in the government’s gross domestic product (GDP) accounts is gross private nonresidential investment. In plain English, business capital spending is what businesses spend on:

• Structures: Factories, office buildings, office parks, utilities, shopping malls, amusement parks, hotels, restaurants, mines, and oil wells.
• Equipment and software: Computers, computer software, communication equipment, medical equipment, industrial equipment, engines and turbines, transportation equipment, furniture, construction machinery, etc.

Most Business Capital Spending Has Been on New Equipment and Software

To put business capital spending into perspective, in recent quarters, 75% of business capital spending has been on equipment and software, with only 25% of business spending on structures, according to NIPA. Overall business capital spending (on both equipment and software and structures) accounts for around 11% of GDP. The all-time peak, hit in the mid-2000s, was 12%. Although real GDP is back to an all-time high, overall business capital spending has not yet recovered its pre-Great Recession peak. Of the other major components of GDP (consumer spending, business spending, housing, exports, imports, and government spending), business capital spending joins housing and government spending as components that have not yet recovered their pre-Great Recession highs.

Overall business capital spending has not yet hit new all-time highs. However, the equipment and software portion of business capital spending hit a new all-time high in early 2012, driven primarily by spending on upgrading computers and software, to help make existing employees more productive. Spending on industrial equipment and transportation equipment — used by businesses to make and transport goods — has yet to recover its pre-Great Recession peak. Businesses remain reluctant to spend on these big ticket items, and for those firms without big cash stockpiles, banks remain reluctant to lend to small and medium-sized businesses to make these big ticket purchases.

Mining and Power Generation Lead Spending on Structures

Over on the structures side of business capital spending (malls, office parks, warehouses, factories, utilities, hotels, mining, and oil exploration, etc.), the only areas where business capital spending is back to pre-Great Recession peaks are in mining and power generation. These areas are of course benefitting from the nascent energy renaissance in the United States, which has led to increased production of natural gas and oil supplies. Spending on traditional business structures — largely dependent on rising employment — like offices, manufacturing facilities, and warehouses, remains moribund. Business spending on new malls, restaurants, hotels and recreational facilities like amusement parks also remains quite depressed in some cases at just 50 – 60% of pre-Great Recession peaks, as the economy continues to work down the excesses of the decade-and-a-half long housing boom that ended in the mid-2000s.

Caution Ahead?

Looking ahead, profit growth — a key driver of future business capital spending — is poised to slow, after surging in the past four years from the depths of the Great Recession. Increases in the equity market are also one of the key drivers of future business capital spending. Just last week, the S&P 500 — a broad measure of equity prices in the United States, hit a new all-time high. The S&P 500 is up more than 10% over the past year and is up nearly 130% since March 2009. Low interest rates, and willingness of banks (and markets) to lend to businesses are also key drivers of business spending. Thanks to the Federal Reserve (Fed), interest rates remain low, providing low borrowing costs for corporations looking to borrow via bank loans or the bond market to fund business capital spending. Although borrowing costs are low, demand by businesses — especially small businesses — for bank loans remains muted. In addition, banks’ lending standards for small businesses for loans to finance capital spending remain tighter than they were during the mid-2000s economic recovery.

Pent-up demand and lack of business capital spending in recent years — especially in structures, where spending has lagged — should lead to stronger spending in the coming years. For example, the average age of business structures is nearly 22 years, the highest since the mid-1960s. The recent ramp-up in energy production also suggests more spending in this area in the coming years to update and improve the nation’s energy infrastructure (pipelines, terminals, etc.).

While most of the indicators point to an ongoing improvement in capital spending in the coming quarters and years, the looming uncertainty in Washington, along with the sluggish pace of hiring, suggests that businesses are likely to remain cautious in deploying their profits and cash. The mechanics of business capital spending, including the long lead times for many business spending projects, are also at play. Since the end of World War II, the average economic expansion has lasted about five years, although the expansions since 1982, on average, lasted for almost eight years. Still, this June will mark the fourth anniversary of the current economic recovery. Although, in our view, there are few signs that the recovery is in any danger, firms may not want to commit to multi-year projects if managements believe another recession is right around the corner.

____________________________________________________________________________________________

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 results. All indices are unmanaged and cannot be invested into directly.

The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

Gross domestic product (GDP) is the monetary value of all the finished goods and services produced within a country’s borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory.

The National Income and Product Accounts (NIPA) is the official government system of collecting, processing, and reporting assorted production and income measures used to track aggregate activity in the macroeconomy. This system of accounts, maintained by the Bureau of Economic Analysis in the Department of Commerce, is the source of official estimates of gross domestic product, net domestic product, national income, personal income, disposable income, gross national product, and related measures that are published quarterly and annually.

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.

____________________________________________________________________________________________

 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 isnot 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

____________________________________________________________________________________________

Member FINRA/SIPC

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