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Market Hurdles May Lead to Attractive Opportunities

September 26, 2012  

Dear Valued Investor:

Wedged between a divided political landscape in an election year and an economy that is limping along with slow, albeit, positive growth, the Federal Reserve Bank (Fed) once again took action last week in an attempt to keep interest rates low, boost investor risk taking, and promote economic growth. By announcing an open-ended bond purchase program, the Fed will purchase $40 billion in mortgage-backed securities per month. This is in addition to the $45 billion in purchases that the Fed announced this past summer.

Between these two monetary policy actions, the Fed has essentially played the remainder of its chips in an "all-in" attempt to kick start the economy from slow to modest growth. These bold and unprecedented actions will hopefully produce short-term benefits, but undoubtedly come at long-term costs. Apparently this is a trade-off the Fed believes is important, similar to the theory that when one has a broken leg, go to the doctor and worry about the bill later.

While we can all debate the effectiveness and appropriateness of the Fed's actions, what is certain is that monetary policy is at least attempting to be part of the solution-unlike the gridlocked fiscal policy that remains stagnant in our nation's capital. Regardless of your political persuasion, Washington, D.C. has not done enough to help create the environment for this smoldering economic recovery to really catch fire. While policy interaction is perhaps just too much to hope for given the deeply divided political landscape and our nation's weighty debt burden, what is most needed is a boost of confidence and clarity as to the direction our country is headed.

Volatility will still be the name of the game. Concerns remain about Europe's ability and even willingness to make the tough decisions needed to bring real change to an overly debt burdened region. China's economy continues to slow given weak demand for its exports. In addition, there is the looming fiscal cliff that stands before the U.S. economy in early 2013. If the current policies remain in place, expiring tax breaks and mandatory spending cuts will serve as a whiplash-inducing brake on Gross Domestic Product (GDP) which, if unchecked, would turn slow growth into negative growth for our economy. As a point of reference, never before has fiscal spending slowed more than 2% in the United States without a recession and the fiscal cliff is currently a whopping 3.5% chasm.**

Despite these challenges before us, we see positive elements worth building on. The equity markets have shown remarkable resiliency despite the volatility brought on by macroeconomic concerns (e.g., European sovereign debt, U.S. November elections) and, year-to-date, the S&P 500 has surpassed even our belief for 8-12%* returns for the year. This is significant as there may not be a better barometer for confidence in the near future than the stock market and its potential to continue its march higher to post-recession highs, which would demonstrate the faith that today's current obstacles pale in comparison to the near-future opportunities for growth and economic prosperity. Most importantly, this confidence is not just blind faith. Recent data points on industrial production and retail sales have been encouraging as has the dramatic increase in consumer confidence, which could lead to a better-than-expected holiday shopping season. In addition, the housing market continues to improve as both sales and home prices are on the rise nationally. These real-time economic snapshots confirm that our forecast for the year of 2%* economic growth is still on track.

To be sure, as investors, we have many challenges ahead. But, with the Fed committed to stirring up blustery economic winds, consumers and businesses alike are navigating the economic landscape with a healthy mix of justified apprehension and careful optimism. We continue to believe this market presents an attractive entry point-an opportunity which you should consider with your advisor. As always, if you have questions, I encourage you to contact your advisor.

Sincerely,

Burt White
Chief Investment Officer
LPL Financial

 


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 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.

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.

Investing involves risk, including the risk of loss.

* LPL Financial Research provided this range based on our earnings per share growth estimate for 2012, and a modest expansion in the price-to-earnings ratio. For more information about our economic forecasts, please see our 2012 Outlook and 2012 Mid-Year Outlook publications.

** Since the end of WWII, according to LPL Financial, the U.S. Census Bureau, and the U.S. Treasury.

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.

Mortgage-Backed Security (MBS) is a type of asset-backed security that is secured by a mortgage or collection of mortgages. These securities must also be grouped in one of the top two ratings as determined by an accredited credit rating agency, and usually pay periodic payments that are similar to coupon payments. Furthermore, the mortgage must have originated from a regulated and authorized financial institution.

Quantitative Easing 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 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.

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