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Weekly Market Commentary 4/1/2013

Weekly Market Commentary 4/1/2013

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Weekly Market Commentary 4/1/2013
Weekly Market Commentary 4/1/2013

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Published by: monarchadvisorygroup on Apr 02, 2013
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Member FINRA/SIPCPage 1 o 3
Jeffrey Kleintop, CFA
Chief Market StrategistLPL Financial
Weekly Market Commentary
April 1, 2013
Message From the Markets
Does the perormance o stocks, bonds, andcommodities in the rst quarter orecast thatbooming economic growth lies just ahead?Or might these market gains risk makingApril ools o those expecting a sharpeconomic acceleration?Examining the relationships betweenmarkets and the economy, it appears that themessage rom the markets is that modesteconomic growth is likely to continue ratherthan accelerate.
Stocks posted a strong rst quarter. While shy o last year’s 12% rstquarter gain, the S&P 500 Index’s 10% gain seen this year refects verystrong perormance. Consistent with the powerul gains or stocks, bondyields and oil prices also rose in the quarter.We devote careul study to the economic data to help us assess the outlookor the markets. What about the other way around? Given the average-at-best economic readings during the rst quarter, the perormance o thestock, bond, and commodity markets begs the question: what are themarkets saying about where the economy is headed?Does the perormance o stocks, bonds, and commodities in the rstquarter orecast that booming economic growth lies just ahead? Or mightthese market gains risk making April ools o those expecting a sharpeconomic acceleration?
Message From Stocks
Historically, the stock market has been a very good leading indicator outure job growth with a lead o about six months, as you can see inFigure1. Since most o last year’s gain came in the rst quarter, ater the strong
Stocks Predicting Slower Job Growth
Source: Bloomberg data, LPL Financial 04/01/13The S&P 500 is an unmanaged index, which cannot be invested into directly. Past perormance is no guarantee outure results.
9699020508116%4%2%0%-2%-4%-6%Payroll Growth
Year Over Year
(Left Scale) 
S&P 500
Year Over Year, Adv. 6 Months
(Right Scale) 
The 11% gain suggests only about a1 – 2% year-over-year growth rate or jobsor a pace o about 180,000 per month.
LPL Financial Member FINRA/SIPC Page 2 o 3
rst quarter o this year, the S&P 500 Index is up about 11% rom a yearago. This does not suggest booming job growth in the coming months. Inact, the 11% gain suggests only about a 1 – 2% year-over-year growth rateor jobs or a pace o about 180,000 per month. This would mark a modestslowdown rather than a sharp re-acceleration o job growth.
Message From Bonds
Traditionally, in the bond market a rise in long-term yields relative to short-term yields is indicative o a stronger outlook or economic growth. Thebigger the dierence in these yields, in technical terms known as the slope othe yield curve, the stronger the expected pace o growth or the economy.This relationship can be seen inFigure 2, where the dierence in yields helpsto predict gross domestic product (GDP) over the coming two years.While short-term yields did not change in the rst quarter, remaining pinneddown by the Federal Reserve (Fed) at just under 0.1%, the yield on thelonger term 10-year Treasury note rose rom an average o 1.69% in theourth quarter o last year to 1.92% in the rst quarter o this year. While onthe surace an increase in the slope o the yield curve may suggest a bettergrowth outlook, when viewed in the historical context seen inFigure 2, themodest uptick in yield predicts merely a continuation o the roughly 2%GDP growth seen, on average, over the past couple o years.
Message From Commodities
Ater spending much o the ourth quarter o 2012 below $90, oil pricessurged to near $100 in the rst quarter, ending at $97. Since oil prices andeconomic activity tend to move in the same direction, is this $10 surge inoil prices a sign that demand is rising with increasing economic activity?Unortunately, the answer is no. We can see inFigure 3that this level o oilprices is consistent with the current modest pace o manuacturing activityrepresented by the widely-watched Purchasing Managers’ Index rom theInstitute or Supply Management in the low 50s.Despite the strong perormance in the rst quarter, it appears that themessage rom the markets on the economy is that modest growth is likelyto continue rather than accelerate. Just like last year, the strong rst quarterled to more o the same in the economy, averaging 2% GDP growth andmodest job gains.
Bonds Predicting Same Sluggish GDP Growth
Source: Bloomberg data, LPL Financial 04/01/13Yield curve is a line that plots the interest rates, at a set point in time,o bonds having equal credit quality, but diering maturity dates.The most requently reported yield curve compares the three-month,two-year, fve-year and 30-year U.S. Treasury debt. This yield curve isused as a benchmark or other debt in the market, such as mortgagerates or bank lending rates. The curve is also used to predict changesin economic output and growth.
87 90 93 96 99 02 05 08 116420-2-486420-2-4-6Slope of Yield Curve
(Left Scale) 
Lagged by Two Years
(Right Scale) 
Oil Prices Suggest Same Level oManuacturing Activity
Source: Bloomberg data, LPL Financial 04/01/13
08 09 10 11 12 13160120$80$40$0706050403020Oil Prices
(Left Scale) 
(Right Scale) 
This level o oil prices is consistentwith the current modest pace omanuacturing activity.

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