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Weekly Market Commentary 3-12-2012

Weekly Market Commentary 3-12-2012

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Categories:Business/Law, Finance
Published by: monarchadvisorygroup on Mar 15, 2012
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Member FINRA/SIPCPage 1 o 4
Jeffrey Kleintop, CFA
Chief Market StrategistLPL Financial
Weekly Market Commentary
March 12, 2012
Best Bull Market Ever…Now What?
The three-year anniversary o the bull markettook place on Friday, March 9. This has beenthe strongest bull market since WWII.The average return in year our o prior bullmarkets was 12.9%, close to our 8 – 12%*return expectation or 2012.While the stock market aces signicantchallenges ahead, we expect another yearo gains or stocks. But that gain may beaccompanied by the return o volatility.
The three-year anniversary o the bull market took place on Friday, March 9.In the three years since March 9, 2009, the S&P 500 index is up 103% (witha 116% total return including dividends). This has been the strongest bullmarket since WWII[Chart 1].
6/13/19495/26/197010/11/19902 Years1 Year0 3 Years120%100%80%60%40%20%0%10/22/195710/3/197410/9/20026/27/19628/12/19823/9/200910/7/196612/4/1987S&P 500 Index Performance During Bull Markets
S&P 500 Bull Markets Since WWII
Source: LPL Financial, Bloomberg data 03/09/12The S&P 500 is an unmanaged index, which cannot be invested into directly. Past perormance is no guaranteeo uture results.
So, ater doubling in three years what is next or the bull? More gains, whenusing history as a guide. The average return in year our o bull marketswas 12.7% (six o the 10 post-WWII bull markets lasted that long). While aslightly dierent time period, this historical average or year our (March 9,2012 – March 9, 2013) is very close to our 8 – 12%* return expectation orstocks in calendar year 2012. Interestingly, only one bull market ended inyear our. That was in February 1966, and the S&P 500 renewed its advanceeight months later, recouping the losses ater about a year. The average bullmarket lasted 58 months, just short o ve years.While corporate earnings have been a key driver o stocks, the return oeconomic growth and the condence in the durability o that growth havealso been important. The bull market has been rising as recession ears have
*LPL Financial Research provided this range based on our earningsper share growth estimate or 2012, and a modest expansion in theprice-to-earnings ratio.
LPL Financial Member FINRA/SIPC Page 2 o 4
aded. In act, the path o the S&P 500 and the Google search trends or theword recession are a nearly perect mirror image o each other, as you cansee inChart 2.While the stock market aces signicant challenges ahead, we expectanother year o gains or stocks. But that gain may be accompanied by thereturn o volatility. Already stocks have surged 9% this year (through Friday,March 9, 2012), within the range o our 8 – 12%* return orecast. In the nearterm, we believe a modest pullback may be in store or the stock marketdriven by a combination o actors:
The Worst Earnings Season in Years
– Earnings have mattered a lot orthe stock market. Since the end o 2008, S&P 500 companies’ earningsare up about 50%, and the S&P 500 is up about 50%. That one-to-onerelationship is no coincidence. With such a heavy reliance on earningsgrowth, stocks are vulnerable to declines with earnings growth nowappearing to stall. Earnings growth in the rst quarter o 2012 will likely befat on a year-over-year basis, the worst showing in a year.
High Economic Expectations
– The economic surprise index is nearprior peaks, suggesting the bar o expectations is high and economicdata is much less likely to surprise to the upside and risks disappointingthe market. Rising gasoline prices and relatively fat incomes, along withslowing global growth, raise the risks.
Central Banks Stimulus Ending
– The Federal Reserve (Fed) and theEuropean Central Bank (ECB) policy actions are coming to an end. The ECBhas completed their renancing operations and the Fed’s Operation Twistis set to end in June o this year the end o the Fed’s ormer programsQE1 and QE2 prompted market sell-os in the past two years.
“Recession” Fades and Stocks Surge
Jan11Jul11Jul10Jul09Jan09Jul08Jan10Jan111600140012001000800600400S&P 500Frequency of Google Searches for “Recession”
    I   n    d   e   x    L   e   v   e    l    S   e   a   r   c    h    F   r   e   q   u   e   n   c   y
Source: LPL Financial, Google Trends, Bloomberg data 03/09/12*LPL Financial Research provided this range based on our earningsper share growth estimate or 2012, and a modest expansion in theprice-to-earnings ratio.
S&P 500 Bull Markets
BeginEndAfter 1 YearAfter 2 YearsAfter 3 YearsAfter 4 YearsAfter 5 YearsDuration (Months)
Source: LPL Financial, Bloomberg data 03/09/12The S&P 500 is an unmanaged index, which cannot be invested into directly. Past perormance is no guarantee o uture results.
LPL Financial Member FINRA/SIPC Page 3 o 4
The Budget Bombshell
– The prospects or divided government in 2013have increased given the latest Senate race polling data. This is criticalto the economic outlook. The 2013 budget is already going to have thebiggest impact o any budget in decades even i no action is taken inWashington. The scal headwind comprised o both tax increases andspending cuts under current policy totals over $500 billion, or 3.5% oGDP. The 2013 budget changes, primarily consisting o tax increases, arealready in the law and would need to be changed to mitigate or restructurethem to be less o an economic drag; i not a return to recession may belooming in 2013.
The Greece Fire
The risk o a grease re is that it is hard to put outand spreads easily. The market welcomed this week’s news o an orderlydeault or Greece’s private debt holders (nding it much more attractivethan the alternative). However, Greece is still eeling the heat with newbonds trading at 20%, and Portugal stands next in line or a second bailoutand a debt restructuring. Portuguese 10-year bonds are trading at about50 cents on the dollar, refecting the signicant likelihood o deault riskhaving spread beyond Greece. A deepening recession in Europe alsoraises the risks to investors beyond Europe’s borders as demand weakens,aecting both U.S. and emerging market suppliers.This week kicks o year our o the bull market. Year our will challenge theS&P 500 to take the crown once again as the best perorming bull marketgiven the strong perormance o the bull market o the mid-1980s, yet thereare potential positives that could drive such strong gains. Most notably, stockmarket valuations are below average. Each point that the price-to-earningsratio rises (or alls) is about a 7% gain (or loss) or the market. A rise in thisratio in 2012 as the above challenges are overcome could result in powerulgains and sustain the best bull market in history or yet another year.

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