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Weekly Market Commentary 3/18/2013

Weekly Market Commentary 3/18/2013

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Weekly Market Commentary
Weekly Market Commentary

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Published by: monarchadvisorygroup on Mar 19, 2013
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07/06/2013

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Member FINRA/SIPCPage 1 o 4
Jeffrey Kleintop, CFA
Chief Market StrategistLPL Financial
LPL FINANCIAL RESEARCH
Weekly Market Commentary
March 18, 2013
The Market’s March Madness
Highlights
It has been a sweet sixteen weeks or the S&P500. The broad stock market index has hadonly three down weeks out o the past sixteen,tying a record unbroken or over 20 years.As the NCAA basketball tournament getsdown to its own sweet sixteen late this week,it is a good time to reect on the sixteencompeting drivers o the markets that maymake or an exciting showdown in the weeksand months to come.There will likely be some upsets that resultin volatility as these actors ace o againsteach other.
It has been a sweet sixteen weeks or the S&P 500. The broad stockmarket index has had only three down weeks out o the past sixteen. Whilethis stretch is tied by the same period a year ago, it is important to note thatthere has not been a sixteen-week period with ewer weeks o losses inover 20 years — since the period ending September 1, 1989.March has been maddening or investors in the past ew years (2010 2012)as the S&P 500 raced higher in March only to reverse all o those gains in apullback o about 10% that began in late March or April. It later took stocksat least fve months to climb back to the peaks o March.As the NCAA tournament gets down to its own sweet sixteen at the endo this week, it is a good time to reect on the competing drivers o themarkets that may make or an exciting showdown in the weeks and monthsto come.
1
Stocks’ Sweet Sixteen
Source: LPL Financial 03/18/13
EmploymentHousingConfidenceGasoline PricesFederal ReserveEuropeGeopoliticsFiscal Cliff
EconomyPolicySweetSixteenEliteEightFinalFourSweetSixteenEliteEightFinalFourCHAMPIONSHIPFundamentalsMarketDynamics
EarningsValuationsCreditCorporate CashMomentumVolumeVolatilityInterest Rates
As we narrow down stocks’ “sweet sixteen” potential drivers this year, theour “regions” o market-moving actors vying or investor attention are:economy, policy, undamentals, and market dynamics.
 
WEEKLY MARKET COMMENTARY
LPL Financial Member FINRA/SIPC Page 2 o 4
Economy
 
Employment
– Job growth has been picking up with more than 200,000jobs created in three o the past our months and frst-time flings orunemployment benefts have started to all ater stabilizing around350,000 or over a year.
 
Housing
– The powerully rebounding housing market, as seen in datasuch as housing starts and building permits, is a positive or growth.
 
Confdence
– Last week’s University o Michigan data showed thatconsumer confdence ell sharply in the preliminary reading or March tothe lowest level in over a year.
 
Gasoline Prices
– Retail gasoline prices are back up near the “danger zone”that coincided with stock market pullbacks in each o the past ew years.
Policy
 
Federal Reserve
– “Don’t Fight the Fed” rally is intact, but as theFederal Reserve publicly contemplates ending the latest stimulusprogram, the stock market may suer the same sell-o that surroundedthe ending o prior quantitative easing programs, so-called QE1 and QE2.
 
Europe
– With the Eurozone back in recession, an inconclusive electionleaving no government in Italy, a political scandal hampering the ability toimplement needed reorms in Spain, Greece unlikely to meet the termso its own bailout, and Germany pushing hard terms on any aid aheado its all elections, the events in Cyprus could provide the catalyst oranother Europe-driven spring slide in the world’s stock markets.
 
Geopolitics
– The hot spots are heating up again given the power grabollowing the death o Chavez in Venezuela, the coming elections in Iran,dierent actions vying or power in war-torn Syria, and North Koreaannulling its cease fre agreement.
 
Fiscal Cli 
– A fscal drag on gross domestic product (GDP) o about2%, and showdowns over the continuing resolution unding thegovernment and the debt ceiling still to come, may weigh on investorsentiment as the recently implemented sequester threatens to halt labormarket improvement with an estimated cost o 750,000 jobs, accordingto the Congressional Budget Ofce.
Fundamentals
 
Earnings
– Earnings are the most undamental o all drivers o stocks.Earnings growth has been the most consistent actor driving the marketsin recent years, but growth has now slowed to the low-single digits orS&P 500 companies.
 
Valuations
– The price-to-earnings ratio o the S&P 500, at around 15 onthe past our quarters’ earnings, is well below the 17 18 seen at the endo all prior bull markets since WWII.
 
WEEKLY MARKET COMMENTARY
LPL Financial Member FINRA/SIPC Page 3 o 4
 
Credit
– Demand or credit has improved and credit spreads havenarrowed; both trends are key supports to growth.
 
Corporate Cash
– Strong cash balances provide a cheap source ocapital to invest and incentive to buy back shares to boost earnings pershare growth.
Market Dynamics
 
Momentum
– Stocks have been on a strong winning streak thatcould continue.
 
Volume
– Trading volume in the markets has been light this year,10 15% below last year, traditionally seen as a sign that a trend hasbecome vulnerable.
 
Volatility
– Investors have once again become net sellers o U.S. stockmutual unds in the past two weeks, according to data rom the InvestmentCompany Institute (ICI), despite strong and steady gains. A return to morevolatile markets may urther undermine individual investor support.
 
Interest Rates
– Interest rates are on the rise, potentially acting as a dragon everything rom housing to the U.S. budget, but rom very low levels.There are quite a ew listed here, but these certainly are not all the actorsthat are inuencing the markets.The key message or investors in considering these actors is: don’t be tooconfdent in any particular outcome. Respect the complexity o the situation.This is a time or caution and taking some profts, not or indiscriminateselling. It is a time to nibble at opportunities as they emerge; it is not a timeto jump in with both eet.Investing is not a game, but it is important also to remember thatorecasting is not an exact science, and many actors can aect outcomesthat are hard to predict. Two years ago, the Japanese earthquake had a bigimpact on markets and natural disasters despite tremendous advancesin technology — are very hard to predict with any degree o accuracy.Geopolitical outcomes can also be hard to oresee as we look to thestresses in the Middle East. For example, the outcome o the Arab Springuprisings and the changes they have led to in countries including Syria andEgypt were hard to oresee. The markets rarely oer perect clarity on theirdirection because they are driven by these actors as well as many others.Even this week’s NCAA March Madness can be seen as a reminder o howit can be notoriously hard to predict winners. Historically, a team’s rankinghas meant nothing ater getting down to the elite eight.These actors will play out in the markets over the course o the year, not justin the coming weeks. This means there will likely be some upsets that resultin volatility and pullbacks as these actors ace o against each other. In theend, we expect a positive year with many opportunities or investors.

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