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Will Shoppers Bring Holiday Cheer?

We think the holiday shopping season may bring some holiday cheer for the

markets this year. The U.S. consumer is in good shape, the season got off

to a strong start, and the stock market has performed well. Even after last

week’s 3.6% loss, led down by the energy sector as oil’s slide continued,

the S&P 500 has returned 10.5% year to date. We expect holiday shoppers,

bolstered by lower energy prices, to help support potential stock

market gains. The U.S. consumer is in good shape. As we noted in our Outlook 2015:

In Transit publication, the consumer is a key factor supporting our 3%-plus

U.S. gross domestic product (GDP) forecast for 2015.* Job growth has

picked up in recent months, with an average of nearly 300,000 jobs added

per month over the three months ending in November 2014.

Will Shoppers Bring Holiday Cheer for Markets?

Beige Book: Window on Main Street

The latest Beige Book reflected a picture of the U.S. economy that has been largely unaffected by the increasing market concern over falling oil prices, the end of QE in the

United States, and the rising U.S. dollar. The report suggested that U.S. economic activity has “continued to expand,” and in general, optimism regarding the economic

outlook far outweighed pessimism, as it has for the past 18 months or so. For the first time in this business cycle, the latest Beige Book contained more than one mention of

employers having difficulty finding low-skilled workers, and retaining and compensating key workers. Over the past 3 Beige Books, the BBB has averaged +93, in-line with the

highest readings over any 3 consecutive Beige Books since at least 2005, suggesting recent market concerns have not been a threat to the U.S. economic expansion as of late November 2014….

Beige Book: Window on Main Street

 

U.S. Economic Growth Picks Up

Overseas, policies already in place — and those that we expect to be enacted over the course of 2015 — are likely to be big drivers of global growth. We expect the U.S. economy will expand at a rate of 3% or slightly

higher in 2015, which matches the average growth rate over the past 50 years. This forecast is based on contributions from consumer spending, business capital spending, and housing, which are poised to advance at

historically average or better growth rates in 2015. Net exports and the government sector should trail behind. As the economy continues to grow at a moderate pace in 2015, we expect this expansion to potentially take us

into 2016, where we could likely find tightening labor market conditions and a rising fed funds rate. The United States is in the middle stage of the economic expansion, presenting investment opportunities and risks for investors. While the

U.S. economy has grown over time, the growth has not been in a straight line. The variations in the pace of growth around the long-term trend are called economic cycles. Economic cycles have four distinct stages: recession,

early (recovery), middle (mature), and late (aging). By historical standards, the economic recovery that began in mid-2009 has been by far the most tepid recovery on record, with GDP through

third quarter 2014 just 11% above its 2009 trough. In all recoveries since the end of World War II (WWII), the economy expanded 24% on average in the first five years of recovery. The current recovery even lags the last

three (beginning in 1982, 1991, and 2001), which we believe are the most comparable. Five years into those recoveries, the economy stood 16%…

U.S. Economic Growth Picks Up

 

LPL 2015 Outlook

Since the wind-down of the Great Recession in early 2009, the latest economic expansion has certainly delivered the goods and rewarded investors’ mailboxes with six consecutive calendar years of positive gains for stocks. “Neither snownor rain nor heat nor gloom of night” has kept a lid on the continuation of one of history’s greatest bull market advances for stocks, and LPL Financial Research believes this trend of rising equity prices may continue in 2015.But unlike the last two years, when the global economy produced improved growth on the back of a stabilizing economic backdrop, 2015 will be a year marked by transitions. Likely changes in monetary policy around the world, the return of volatility, and the recent shift in the political balance of Congress could mean 2015 is a year that will have the global economy, markets, and central banks all on the move. To help prepare for rerouting to this more volatilroad ahead, our Outlook 2015: In Transit expedites the delivery of the investment insights needed to navigate an economic backdrop shifting to the latter stages of the business cycle…..

2015 LPL Outlook

 

Japan Check-In: Will the Weak Q3 GDP

Japan reported a 1.6% annualized decline in real gross domestic product (GDP) in the third quarter of 2014 over the weekend of November 14 – 16,2014. Policymakers in Japanese Prime Minister Shinzo Abe’s government

and at the Bank of Japan (BOJ), as well as most market participants, expected a solid gain in GDP in Q3, not a decline. The consensus of economists polled by Bloomberg News was looking for a 2.2% gain in GDP

in Q3, after the Japanese economy contracted more than 7% in Q2 2014 in response to a big value-added tax (VAT) increase imposed in April 2014. (We’ll discuss the VAT in more detail below.) As a result of the unexpected

decline in GDP in Q3, Japan’s economy has met the unofficial definition of recession (i.e., two consecutive quarters of negative GDP) and has entered its fourth recession since 2007. How long Japan’s economy remains in recession — and more

importantly, the policy response to the latest recession — may help to determine the trajectory of global growth in 2015 and beyond….

Japan Check-In

Solid Earnings Season Spelled Out

The market’s focus was clearly on the midterm elections last week (November 3 – 7) with the Republicans taking control of the Senate — as expected — and adding to their majority in the House. While the certainty

provided by an election outcome has been positive for the stock market over time (as we wrote in our September 2, 2014, Weekly Market Commentary: Midterms May Mean More Gains for Stocks”), our still positive stock

market outlook is based much more on fundamentals. It does not get more fundamental than earnings, so this week we provide a wrap-up of third quarter earnings season….

Solid Earnings Season Spelled Out

 

S&P Is Not GDP

U.S. economic growth has been subpar — right around 2% — during much of the ongoing economic expansion. Yet, the S&P 500 has returned nearly 230% cumulatively since the bear market low on March 9, 2009. How didthat happen and is it justified? Before trying to answer to those questions, it is worth pointing out that this situation is not all that unusual. In fact, since 1950, the S&P 500 median return is 13% (average is 12%) when real gross domestic product (GDP) grows less than 3%, with the S&P generating a positive return 68% of the time. However, a good portion of those returns come during recessions — historically, the best time to buy stocks is at recession troughs. But even if we take those periods in and around recessions out of the equation and look at annual returns when GDP growth is between 1–3%, the median (and average) S&P 500 return is a respectable 7–8%. Stocks tend to like average (or slightly below average) growth, which is not strong enough to generate worrisome inflation. Now back to the question of what has driven this stock market to far outperform economic growth….

S&P Is Not GDP

Corporate Calm

The stock market’s recent gains have gone a long way toward restoring calm in the marketplace. The rebound — 5% off the S&P 500 low on October 15, 2014 — has been driven by a combination of factors, including some better economic data, prospects for more support from central banks, old fashioned bargain hunting, and perhaps most importantly, generally solid earnings results. The market’s concerns have not fully been alleviated, but progress has been made. We would argue that the market’s biggest concern right now is slower global growth, particularly in Europe where the Eurozone is potentially on the verge of another recession. Slowing growth in China also remains a concern, though less so…..

Corporate Calm

 

 

Oil Hits the Skids

The S&P 500 fell 1% last week (October 13 – 17, 2014) in volatile trading, leading market participants and media pundits to speculate on how far the stock market slide—now just over 6% from the September 18, 2014, closing high — might go. In last week’s Weekly Market Commentary, “Pullback Perspective,” we cited the economic backdrop, central bank support, and valuations as reasons the pullback was unlikely to turn into a bear market (a 20% decline). This week we turn to an area that has already entered bear market territory and discuss our outlook for oil and the energy sector.

Why Does Oil Matter?

Oil has a significant impact on several key sectors of the economy….

Oil Hits the Skids

 

Current Conditions Index October 15, 2014

Over the past week, the LPL Financial Current Conditions Index (CCI) fell 13 points to 249. While the CCI has shown some downward movement since its June 2014 multiyear high, it still sits at the peak levels established

between the Great Recession and the end of 2014’s unusually cold and snowy weather. It remains consistent with the U.S. economy emerging from the modest, but steady, economic growth of recent years…

Current Conditions Index