Richard Suder, CFA, CFP®, ChFC, CLU, CRPS, AAMS

Catalysts on the Horizon

Unfortunately, all of the potential catalysts are a month or more away while the economic data continues to disappoint.

In the meantime, we continue to find yield-producing investments attractive, including High- Yield Bonds, which offer investors a return while waiting out the volatility in the stock market.

It Has Been a Long, Cold Summer

A busy week for data capped off by the August employment report

While temperatures have been well above normal this summer, the economic data has been downright chilly, raising the odds of more policy action from the Federal Reserve later this year.

Missed Opportunity 

In the first quarter, the markets were focused on a slowdown in China, in the second quarter the concern moved to a slowdown in Europe, and in the third quarter the growth scare has shifted to the United States. In each of the prior quarters, markets made their low at the midpoint of the quarter as a policy announcement turned the tide on investor sentiment.

It appears that the Fed missed the opportunity to turn sentiment around with their mid-quarter policy announcement last week. Without a potent policy driver, the fear surrounding the U.S. outlook may not dissipate as quickly this quarter as it did during the first two quarters of the year and linger into the fourth quarter.

The mid-quarter policy driver during the fourth quarter may be the mid-term elections held in November. This event may be potent enough to turn sentiment around and produce gains for the year in line with our forecast for modest single-digit gains.

Uncertain Fed Means Certain Outcome

In his recent testimony to Congress, Federal Reserve Chairman Ben Bernanke used the phrase "unusually uncertain" to describe the U.S. economic outlook. However, based on the Fed’s own words, this current level of uncertainty is actually common at this stage of the economic cycle.  The response by the Fed to uncertainty over the economic environment has been anything but uncertain. They always provide the economy with one last booster shot of stimulus.  We believe the Fed will remain on hold this week, but could undertake additional stimulus if the uncertainty lingers later this year. 

While information on the economy, European bank stress tests, and corporate earnings helped to lift the markets last week, it may have been the hint that tax rates may not be going up as much as expected in 2011 that got investors the most excited.

The potential for much higher tax rates on dividends and capital gains appears to be discounted by the market, suggesting a potential relief rally as the tax uncertainty is resolved.

However, we do not expect Congress to act on taxes until after the November elections.

Elevated volatility has been an enduring characteristic of the markets in recent years. Friday’s sharp pullback of about -2.9% in the S&P 500 after a 7% run up in the prior nine days was a reminder that volatility remains high even on a daily basis. This is due, in part, to the current stage of the economic cycle notorious for highly volatile markets. But there are longer-term forces at work likely to keep volatility above average, as well.

How to Thrive in Volatile Times

We believe thriving in volatile markets requires incorporating volatility themes into your portfolio, including: a focus on yield, utilizing volatility-thriving investments, and a tactical rebalancing approach.

·         A higher yield may benefit portfolios by providing a consistent income component that is received regardless of volatile price movements. There are several ways to help benefit from a focus on yield, including High-Yield Bonds, Real Estate Investment Trusts (REITs), Emerging Market Bonds, and Dividend Paying Stocks.

·         Higher correlations among asset classes and shorter economic cycles mean alternative investment strategies play a bigger role in portfolio construction. Alternative styles such as Global Macro strategies benefit from heightened volatility helping to, not only potentially improve returns, but also help reduce portfolio risk.

·         A volatile market that produces multiple rallies and pullbacks, but remains largely range-bound, creates many opportunities to enhance performance through tactically re-balancing portfolios by taking profits when markets are at the top of the range and seeking attractive opportunities at the low end of the range.

Tighten your seatbelts. It may take a long time before economic and market volatility eases again. 

The fundamentals support the view that the recent spate of softer economic data is the typical soft spot that occurs one year after the start of a recovery. Last week’s economic data that drove a 5% decline in the S&P 500 is being viewed as clear evidence of a failing recovery. However, it is actually typical of an economy transitioning from the first year of recovery to a multi-year period of sustainable growth.  

CFA Institute Financial NewsBrief

CFA Institute Financial NewsBrief brings you the latest financial and investment news. Our editors handpick key articles from hundreds of publications, do a brief summary of each and provide links back to the original sources.  In other words, we do all the research...and you get the news you need, without the fluff.  Please click here to read NewsBrief by date.

LPL Financial Research is pleased to present our 2010 Outlook. Here we offer our perspective on how 2010 will unfold so you may best position your investment to work with the tail, head, or crosswinds as they impact the markets.

As 2010 gets underway the markets are likely to continue to perform well as they have through 2009. However, following a solid start, we expect a challenging second half of 2010. We anticipate the extraordinary global policy efforts that created a tailwind for markets in 2009 will fade or even transition to headwinds that may contribute to a renewed slowdown in the economy and a potentially challenging latter half of 2010 for investors.

The Strength Of Partnership

Advancing Your Perspective,

Focused on Delivering Superior Investment Advice

This brochure highlights how the research team partners with advisor to best meet the needs of clients and broadly describes the team’s structure and processes. 

Mixing it Up,

 Asset Allocation: Building One Portfolio At  A Time

LPL Financial Research provides advice and implements both strategic and tactical asset allocation models. This brochure walks through our asset allocation process, what factors are considered when creating portfolios and our investment philosophy. 
 

Moving Beyond the Numbers,

Selecting Manages for Success

LPL Financial Research continues to set the industry standard for independent and unbiased investment research across a wide array of investment product types.  This brochure outlines our manager selection and due diligence process in five easy steps for your client to understand. Emphasis is placed on how our independence allows for conflict-free manager recommendations.
 

Portfolio Compass

The Portfolio Compass provides an easy-to-read snapshot of LPL Financial Research’s views on the Economy, Equities and Fixed Income as well as our Current Conditions Index. This publication illustrates our current views and will change as needed, generally meant to capture positioning for a 3- to 12-month time horizon.

This is bi-weekly report is client approved and is comprised of five components: The CCI Index, and the Economic, Equity Asset Class & Commodity, Equity Sectors and Fixed Income Compasses.

Compass Points

This biweekly update provides an in-depth look at the latest tactical investment thoughts from Research as presented in the Portfolio Compass. This publication covers a broader investment landscape and presents ideas to assist with portfolio strategy and to customize client investment solutions. The publication is published every other Wednesday along with the Portfolio Compass.

Thematic Insights

Produced bi-weekly and designed to help you make informed investment decisions during these turbulent times, this commentary bridges the gap between an investment opportunity and the implementation of it.

Rock, Paper, Scissors:

Our Sophisticated Investing Approach

LPL Financial Research believes that fundamental, valuation, and technical factors form the basis of a sound investment decision-making process. While few think of Rock Paper Scissors as a sophisticated framework, the interdependencies of the three factors and the multiple scenario outcomes lead to a complex model for making decisions.

The Search for Income

Current Conditions Index

The CCI is an objective and transparent real-time measure of conditions in the markets and economy. We have redefined the CCI relative to a range of market and economic conditions rather than our expectations. These conditions range from Strong Growth on the positive side to Crisis on the negative side. 

Bond Market Perspectives

This publication will be a weekly client approved update on major news and themes driving fixed income markets and how it affects your client portfolios

The White Paper

From the desk of Chief Investment Officer and Research Managing Director, Burt White, The White Paper offers insight in to the current economic climate and ongoing market events.

Market Insight

Market Insight is a bi-annual review of the world's capital markets written by the LPL Financial Research team. Published in the third week of April and October.

Weekly Market Commentary

The Weekly Market Commentary provides the LPL Financial outlook for the financial markets through timely insights focused on identifying, evaluating, and capitalizing on the risks and opportunities in domestic and global capital markets. This publication is authored by Jeffrey Kleintop, CFA, the LPL Financial Chief Market Strategist.

Weekly Economic Commentary

Weekly Economic Commentary provides a recap of the previous week's hot topics and an outlook of upcoming events.

Sector Strategy