Washington and Markets

November 12, 2010

Dear Valued Investor:

Market participants breathed a sigh of relief in early November. The arrival of the long-awaited mid-term elections and the Federal Reserve (Fed) announcement of another stimulus program unfolded as anticipated.
Even though the major political headlines are out of the way, what happens in Washington during the remainder of the year will still hold influence over the markets. The most important item facing Congress is the looming expiration of the Bush tax cuts. Congress is likely to address the tax cuts in some way during the remainder of this year. Both parties risk a huge backlash if no action is taken and all tax rates revert to higher levels, which puts pressure on the 70% of the economy that is driven by consumer spending. Congress is likely to pass a one- or two-year extension of all the Bush tax cuts during the lame duck session, but it is a close call.

The market reacted favorably to election results and the Fed announcement, extending the trends in the markets and resulting in the S&P 500 reaching a new two-year high. However, the strong gains in September, October, and November were not powered by individual investors. For the first time in 25 years, a three-month gain in the S&P 500 of 10% or more was not accompanied by net inflows into individual investments — namely U.S. equity mutual funds and exchange-traded funds (ETFs). Fortunately, individual investor outflows have been more than offset by the buying of institutions and foreign investors. Nonetheless, individual investors have been net sellers of U.S. stock mutual funds every month since April of this year. In that time, they have pulled about $80 billion from the U.S. stock market*. This is not because individual investors have been avoiding investing entirely, however. Interestingly, they have been putting money to work in foreign stocks and U.S. bonds—including more aggressive emerging market stocks and high-yield bonds, as they reallocate money from cash and U.S. stocks.

Investors’ appetite for yield has prompted strong inflows into the high-yield bond market this year*. The potential for extending the dividend tax rate at 15% (as opposed to reverting up to 39.6% for the top bracket), combined with the increases in dividend payments that traditionally come in the first several months of the year, may prompt individual investors to migrate from high-yield bonds toward high dividend-paying stocks furthering the stock market’s gains. This upside potential is balanced by the threat of potential selling by foreign investors prompted by the ongoing weakness in the dollar. As a result, the volatility that has been the key characteristic of this year’s stock market performance is likely to continue in to 2011. As always, we encourage you to contact your financial professional if you have any questions.

Best regards,
Jeffrey Kleintop, CFAChief Market Strategist
LPL Financial

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Member FINRA/SIPC* Source: Investment Company Institute
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results.
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.
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 availability 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.
International and emerging market investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.
Asset allocation does not ensure a profit or protect against loss.
Stock investing involves risk including loss of principal.
This research material has been prepared by LPL Financial.
The LPL Financial family of affiliated companies includes LPL Financial and UVEST Financial Services Group, Inc., each of which is a member of FINRA/SIPC.

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

One and A Half Cents on the 4th Quarter

October 15, 2010

Dear Valued Client:

As the calendar turned to fall, the markets began to rise. While bonds posted a respectable 2.5% gain for the third quarter, measured by the Barclays Aggregate Bond index, the S&P 500 posted an outstanding 11% gain for the third quarter. This performance was driven by an unusually strong September. The gains during the quarter were far from steady. Volatility was high as the S&P 500 moved up and down—and up again—within a 10% trading range during much of the quarter. Despite the strong gains in September, the stock market ended the third quarter not far from where it began the year.

Investors may also look forward to the market posting gains by year-end as key drivers combine to lift stocks out of their third quarter trading range. Here is my “one-and-a-half cents” worth of insight on the potential positives investors are likely to see during October:

·         A one and a half (not double) dip for the economy. Slow, but positive economic growth is likely to support modest stock market gains in the fourth quarter.

·         One and a half chambers of Congress go to the Republican Party (GOP) in the mid-term election. The GOP is likely to take the majority in the House and will hold about half of the Senate. The return of political balance in Washington between the parties may slow the pace of legislative change and result in the “gridlock” the market has historically favored. In addition, depending on the outcome of the election, it is possible PAYGO (Pay-As-You-Go) rules that require budget offsets to any tax cuts are waived allowing the extension of many, if not all, of the Bush tax cuts into 2011.

·         “QE Version 1.5” from the Fed. At the Federal Reserve meeting on November 3, 2010 the Fed is likely to announce additional stimulus measures to improve economic growth. The coming bond purchases may be half the size of quantitative (QE) version 1 (the first round of QE the Fed enacted during 2008 and 2009).

Finally, the fourth quarter of mid-term election years is almost always favorable for stocks. The market’s reaction to mid-term elections, as uncertainty fades, has almost always been positive, with fourth quarter gains as measured by the S&P 500 index averaging 8% in mid-term election years. The only two exceptions to the gains in the fourth quarter of every mid-term election year since 1950 were 1978 and 1994, when the Fed was hiking rates aggressively, a critical factor that is highly unlikely to take place this quarter. So far, stock market performance in 2010 has tracked the typical pattern for U.S. stocks in mid-term election years, albeit with a bit more than the usual volatility.

The volatility that has been the key characteristic of this year’s stock market performance is likely to continue but should present opportunities for those investors patient enough to ride the market’s ups and downs.

Best regards,

Jeff Kleintop, Chief Market Strategist, LPL Financial

IMPORTANT DISCLOSURES

This research material has been prepared by LPL Financial.
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 me prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

Quantitative Easing (QE) 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 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 may involve risk including loss of principal.

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 Barclays 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.

The LPL Financial family of affiliated companies includes LPL Financial and UVEST Financial Services Group, Inc., each of which is a member of FINRA/SIPC.

Not FDIC/NCUA Insured | Not Bank/Credit Union Guaranteed | May Lose Value Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit

LPL Financial, Member FINRA/SIPC