Portfolio Compass | September 19, 2018

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COMPASS CHANGES

  • No changes.

INVESTMENT TAKEAWAYS

  • We expect double-digit S&P 500 returns in 2018 (including dividends), driven by earnings growth potentially in the mid-to-high teens in 2018 thanks to a combination of steady economic growth, better corporate profits, and tax cuts.*
  • We favor U.S. equities over developed international; we continue to have structural concerns with Europe.
  • We expect strong economic growth and attractive valuations to help emerging markets (EM) offset trade risk, tighter monetary policy, and pockets of stress. EM is showing signs of stabilization with attractive upside potential.
  • We emphasize a blend of high-quality intermediate bonds, with a preference for investment-grade corporates and mortgage-backed securities (MBS) over Treasuries, and a small allocation to less interest-rate sensitive sectors, such as bank loans or high-yield bonds, for suitable investors.
  • Our expectation for at least three Federal Reserve (Fed) rate hikes in 2018 and a moderate pickup in economic growth and inflation may be a headwind for fixed income.
  • Balance sheet normalization isn’t likely to impact Treasuries or MBS in the near term but is worth monitoring over time.
  • Tariffs and trade tensions continue to weigh on industrial metals and agriculture.
  • From a technical perspective, the S&P 500 price continues to operate above its 200-day moving average, increasing the likelihood of a sustained long-term bullish trend.


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IMPORTANT DISCLOSURES
All performance referenced is historical and is no guarantee of future results.
There is no assurance that the techniques and strategies discussed are suitable for all investors or will yield positive outcomes. The purchase of certain securities may be required to effect some of the strategies.
All indexes 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.
Stock and Pooled Investment Risks
The payment of dividends is not guaranteed. Companies may reduce or eliminate the payment of dividends at any given time.
Value investments can perform differently from the market as a whole. They can remain undervalued by the market for long periods of time.
Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal, and potential illiquidity of the investment in a falling market.
Investing in foreign and emerging markets securities involves special additional risks. These risks include, but are not limited to, currency risk, geopolitical risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks.
The prices of small and mid cap stocks are generally more volatile than large cap stocks.
Bond and Debt Equity Risks
Government bonds and Treasury bills are guaranteed by the U.S. 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. However, the value of fund shares is not guaranteed and will fluctuate.
Alternative Risks
Event driven strategies, such as merger arbitrage, consist of buying shares of the target company in a proposed merger and fully or partially hedging the exposure to the acquirer by shorting the stock of the acquiring company or other means. This strategy involves significant risk as events may not occur as planned and disruptions to a planned merger may result in significant loss to a hedged position.
Managed futures strategies use systematic quantitative programs to find and invest in positive and negative trends in the futures markets for financials and commodities. Futures and forward trading is speculative, includes a high degree of risk that the anticipated market outcome may not occur, and may not be suitable for all investors.
INDEX DEFINITIONS
The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The Bloomberg Barclays U.S. Municipal Bond Index covers the USD-denominated longterm tax-exempt bond market. The index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds, and prerefunded bonds.
The Russell 1000 Growth Index measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values. Russell 1000 Value Index measures the performance of those Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values.
DEFINITIONS
A cyclical stock is an equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies that sell discretionary items that consumers can afford to buy more of in a booming economy and will cut back on during a recession.
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 simple moving average is an arithmetic moving average that is calculated by adding the closing price of the security for a number of time periods and then dividing this total by the number of time periods. Short-term averages respond quickly to changes in the price of the underlying, while long-term averages are slow to react.
The Beige Book is a commonly used name for the Federal Reserve’s (Fed) report called the Summary of Commentary on Current Economic Conditions by Federal Reserve District. It is published just before the Federal Open Market Committee (FOMC) meeting on interest rates and is used to inform the members on changes in the economy since the last meeting
Technical analysis is a methodology for evaluating securities based on statistics generated by market activity, such as past prices, volume and momentum, and is not intended to be used as the sole mechanism for trading decisions. Technical analysts do not attempt to measure a security’s intrinsic value, but instead use charts and other tools to identify patterns and trends. Technical analysis carries inherent risk, chief amongst which is that past performance is not indicative of future results. Technical analysis should be used in conjunction with Fundamental analysis within the decision making process and shall include but not be limited to the following considerations: investment thesis, suitability, expected time horizon, and operational factors, such as trading costs are examples.
The PE ratio (price-to-earnings ratio) is a measure of the price paid for a share relative to the annual net income or profit earned by the firm per share. It is a financial ratio used for valuation: a higher PE ratio means that investors are paying more for each unit of net income, so the stock is more expensive compared to one with lower PE ratio.
Alpha measures the difference between a portfolio’s actual returns and its expected performance, given its level of risk as measured by Beta. A positive (negative) Alpha indicates the portfolio has performed better (worse) than its Beta would predict.
Beta measures a portfolio’s volatility relative to its benchmark. A Beta greater than 1 suggests the portfolio has historically been more volatile than its benchmark. A Beta less than 1 suggests the portfolio has historically been less volatile than its benchmark.
Idiosyncratic risk can be thought of as the factors that affect an asset such as a stock and its underlying company at the microeconomic level. Idiosyncratic risk has little or no correlation with market risk, and can therefore be substantially mitigated or eliminated from a portfolio by using adequate diversification.
This research material has been prepared by LPL Financial LLC.
To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.
Not FDIC 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.
Tracking #1-772887 (Exp. 09/19)
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Energy, Financials, and Technology to be Key Q1 Earnings Drivers

<![CDATA[– We believe growth will be broad-based in the first quarter, though earnings gains are expected to be particularl strong in the energy, financials, and technology sectors.
– Based on consensus estimates, we could see positive earnings growth in all 11 sectors.

Click here to download a PDF of this report.
 
Source:
LPL Research, Thomson Reuters 04/05/18
Important Disclosures:
All market indexes discussed are unmanaged and are not illustrative of any particular investment. Indexes do not incur management fees, costs and expenses, and cannot be invested into directly. All performance referenced is historical and is no guarantee of future results. Earnings estimates may not develop as predicted.
Because of its narrow focus, investing in a single sector, such as energy or manufacturing, will be subject to greater volatility than investing more broadly across many sectors and companies.
The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security.
Tracking #1-719078 (Exp. 04/19)]]>

Midterm Years Tend to See Larger Pullbacks

<![CDATA[– During midterm years, the S&P 500 Index has gained only 0.1% on average between May and October, the worst out of the four-year presidential cycle.
– However, that pattern may not hold this year, as the past few years the May through October period stocks have been strong.

Click here to download a PDF of this report.
 
Source:
LPL Research, FactSet 05/03/18
Important Disclosures:
Please note: The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1950 incorporates the performance of predecessor index, the S&P 90.
The S&P 500 Index is 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. All performance referenced is historical and is no guarantee of future results. Estimates may not develop as predicted.
The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security.
Tracking #1-729051 (Exp. 05/19)]]>

European Stocks Remain in a Long-Term Relative Downtrend Versus the U.S.

<![CDATA[– European stocks have meaningfully underperformed their U.S. counterparts over the past several years.
– In recent months, softer economic data, weaker earnings, and Italy fears have weighed on European stocks.

Click here to download a PDF of this report.
 
Source:
LPL Research, FactSet 06/01/18
Important Disclosures:
The MSCI Europe Index is a free-float-adjusted, market capitalization-weighted index that is designed to measure the equity market performance of the developed markets in Europe.
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.
All indexes 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. Al performance referenced is historical and is no guarantee of future results.
The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security.
Tracking #1-738545 (Exp. 06/19)]]>

Fed Changes Language as Policy Rate Converges on Neutral

<![CDATA[– The projected longer-run neutral policy rate and the current rate have been converging from both directions.
– At some point, probably in the next year, they’ll be close enough for the Fed to stop calling its policy stance accommodative.

Click here to download a PDF of this report.
 
Source:
LPL Research, Federal Reserve, Bloomberg 06/13/18
Important Disclosures:
Past performance is no guarantee of future results.
The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security.
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This May Bode Well for the Remainder of 2018

<![CDATA[– When the S&P 500 Index has been up 3% or more heading into the start of summer (like 2018), then the full year has been higher an incredible 35 out of 35 times.
– In this case, the rest of the year actually became stronger than the average year.

Click here to download a PDF of this report.
 
Source:
LPL Research, FactSet 06/20/18
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.
The economic forecasts set forth in the presentation may not develop as predicted.
Investing involves risk, including loss of principal.
Past performance is no guarantee of future results.
All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, sales charges, or expenses. Index performance is not indicative of the performance of any investment.
The modern design of the S&P 500 stock index was first launch in 1957. Performance back to 1928 incorporates the performance of the predecessor index, the S&P 90.
Tracking #1-742959 (Exp. 06/19)]]>

Is Trade Risk Fully Discounted in Industrials?

<![CDATA[– Volatility can create attractive investment opportunities.
– Industrials may be one such opportunity amid trade fears, with recent underperformance approaching 2015–2016 lows.

Click here to download a PDF of this report.
 
Source:
LPL Research, Bloomberg 06/22/18
Important Disclosures:
All indexes 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. Al performance referenced is historical and is no guarantee of future results.
The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security.
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 Industrials Index is market capitalization weighted index that tracks the performance of industrial companies.
Tracking #1-745296 (Exp. 07/19)]]>

Over the Second Quarter of 2018, the LPL Financial Current Conditions Index (CCI) Rose 12 Points to 247

<![CDATA[– The CCI is in the upper end of the range it has held since 2010.
– A decline in stock market volatility and improved retail sales were the main contributors to the CCI’s improvement, while wider credit spreads and a small decline in shipping traffic were slight offsets.

Click here to download a PDF of this report.
 
Source:
Source: LPL Research 07/25/18
Important Disclosures:
A CCI score of zero represents the baseline conditions in 2009, and subsequent CCI scores should be interpreted as a coincident measure of economic health in relation to this starting year.
A change in the sponsor of the retail sales component of the index starting in September 2015 required a recalibration of the data from the change forward. The change had a minimal impact on the level and direction of the index and resulted in a net change of under five points from its prior value in any month affected.
The VIX is a measure of the volatility implied in the prices of options contracts for the S&P 500. It is a market-based estimate of future volatility. When sentiment reaches one extreme or the other, the market typically reverses course. While this is not necessarily predictive it does measure the current degree of fear present in the stock market.
How the Index Is Constructed: To create the index we found 10 indicators that provided a weekly, real-time measure of the conditions in the economic and market environment. We then standardized these components compared with their pre-crisis 10-year average, equally weighted their standardized scores, and aligned the resulting index with zero at the start of 2009. Because our index is tailored to the current environment, the components of the CCI are periodically changed to retune the index to those factors most critical to the markets and economy, so it may continue to be a valuable investment decision-making tool. The current component measures include: BAA Spreads, Business Lending, Commodities, Fed Spread, Initial Jobless Claims, Money Market Fund Assets, Mortgage Applications, Retail Sales, Shipping Traffic, VIX Index. For a more detailed explanation of each measure please go to: http://lpl-research.com/CCIDefinitions.pdf.
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. All performance referenced is historical and is no guarantee of future results. All indexes are unmanaged and cannot be invested into directly.
Tracking #1-723561 Exp. 07/19]]>

LPL Financial Research Q2 2018 Earnings Season Dashboard

<![CDATA[– Very impressive S&P 500 earnings growth (+24.7% YoY), earnings beat rate (80%), earnings surprise (4% above 06/30/18 expectations), revenue growth (+9.4% YoY), and revenue surprise (1.3%).
– Forward four quarter estimates have impressively risen 0.5% during reporting season with 97% of results in, suggesting tariffs have had little broad impact on companies’ outlooks.

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Source:
Thomson Reuters, LPL Research 08/24/18
Important Disclosures:
Note: Revenue and earnings growth statistics are a blend of actual results and Thomson Reuters consensus forecasts for companies that have not yet reported. Trailing earnings cover the four quarters ending Q2 2018 and include estimates for Q2 2018, while forward earnings cover the four quarters beginning Q3 2018.
Any revenue forecasts presented are based on Thomson Reuters consensus. Any earnings forecasts are based on Thomson Reuters consensus, plus the long-term historical average for upside to estimates of 3%.
Past performance is not indicative of future results.
The economic forecasts set forth may not develop as predicted.
All indexes are unmanaged and cannot be invested into directly.
The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
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.
Because of their narrow focus, specialty sector investing, such as healthcare, financials, or energy, will be subject to greater volatility than investing more broadly across many sectors
and companies.
Tracking #1-732285 (Exp. 10/18)
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Recession Watch | Second Quarter 2018

<![CDATA[Our Recession Watch Dashboard is showing an overall low risk of recession starting within the next year.

Click here to download a PDF of this report.
 
Source: LPL Financial 08/06/18
Important Disclosures:
Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market.
NYSE Composite Index measures the performance of all stocks listed on the New York Stock Exchange. The NYSE Composite Index includes more than 1,900 stocks, of which over 1,500 are U.S. companies.
Tracking #1-723776 (Exp. 07/19)]]>