Navigating The Markets

Compass Changes

• Upgraded U.S. stocks to neutral/positive from neutral.
• Downgraded hedged foreign bonds from negative/neutral to negative.

Investment Takeaways

• Our 2014 stock market return forecast remains for gains of 10-15%, supported by continued near-double-digit earnings gains in the second half.*
• Our negative foreign equities view reflects lackluster growth and structural impediments in Europe. We would like to see technicals improve to become more positive on EM.
• We view energy as an intriguing buy-the-dip opportunity following crude oil’s bear market decline to $80.
• A lower than benchmark weighting to bonds may be appropriate, as the yield does not compensate investors for the interest rate risk.
• The growth scare has faded but slowing growth in Europe, a strong U.S. dollar, and decelerating inflation may support bonds over the near term.
• We downgraded hedged foreign bonds as the rapid fall in European government bond yields and rise in prices has led to more expensive valuations.
• From a technical perspective, the S&P 500 has moved higher off key support at the 200-day simple moving average, increasing the likelihood for a buy-the-dip opportunity at these levels.

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*As noted in our Outlook 2014: The Investor’s Almanac, the stock market may produce a total return in the low double digits (10-15%). This gain is derived from earnings per share (EPS) for S&P 500 companies growing 5-10% and a rise in the price-to-earnings ratio (PE) of about half a point from just under 16 to 16.5, leaving more room to grow. The PE gain is due to increased confidence in improved growth allowing the ratio to slowly move toward the higher levels that marked the end of every bull market since World War II (WWII).

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.

Stock investing involves risk including loss of principal.

Preferred stock investing involves risk, which may include 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 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.

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