Navigating The Markets

Compass Changes

• Downgraded foreign-unhedged to negative from negative/neutral.
• Downgraded foreign-hedged to negative/neutral from neutral.

Investment Takeaways

• Our 2014 stock market forecast calls for gains of 10-15%, based on our forecast for 5-10% earnings growth and modest price-to-earnings (PE) multiple expansion.*
• We favor small caps and cyclical sectors, as we expect U.S. economic growth to improve over 2014, though small cap performance may wane as we move toward the latter stages of the business cycle.
• Improving fundamentals, attractive valuations, and a positive technical picture make emerging market (EM) equities a potentially attractive second half opportunity.
• A lower-than-benchmark weighting to bonds may be appropriate, as the yield does not compensate investors for the interest rate risk.
• We downgraded foreign bonds, as year-to-date strength has led to more expensive valuations, and the decline in yields is now extreme by historical comparison.
• From a technical perspective, over the short term, new S&P 500 Index all-time highs may potentially set up a price move higher toward 2010.

* 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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