This month I’m featuring an important research White Paper written by Burt White, LPL Financial’s Chief Investment Officer. I call it a “Coffee Cup” read, because you’ll want to settle in with a cup of joe and contemplate his foresight. Below are excerpts, and I recommend downloading the full PDF report for your convenience. -Rose

The Phase After the Road to Recovery

Burt White
Chief Investment Officer
LPL Financial

In late 2008, when the recession was at its peak, LPL Financial Research rolled out the Road to Recovery, our roadmap of how we thought the market and economy would find its bottom and begin to recover. That journey unfolded almost exactly as we outlined from 2008 through the beginning of 2010. However, the economy does not stay in a recovery phase forever. Eventually, a recovering economy and revived market needs to evolve to one that shifts from healing to growing, recovery to prosperity, and survivability to sustainability. In a sense, the economy has already shifted from recession to recovery; now it gives way to the next series of mile markers, which will guide it from recovery to growth. The Road to Recovery is behind us now and the market’s next phase marks a new part of the journey: the Transition to Sustainable Growth.

The Next Step: The Transition to Sustainable Growth

In the next stage of the journey from recession to recovery to growth, the market enters a period where the catalyst for growth will shift from stimulus-led to business- and consumer-led expansion. The three stages of the Transition to Sustainable Growth are below:


  • Transition Stage 1: Committing to the Recovery(stage we have just entered)
    The market is unsure if this recovery is really sustainable. As this idea becomes accepted as reality, consumers and businesses become committed to the recovery and begin to spend to fuel future growth.
  • Transition Stage 2: Preparing for Life Without Help
    With consumers and businesses having committed to growth, the central banks of major countries start to hint at undertaking and even begin the tightening cycle. Markets and the economy must come to grips with the notion of growth without being propped up by stimulus and accommodative policies.
  • Transition Stage 3: The Market On Its Own Two Feet
    With the tightening cycle across the globe in full force, growth shifts entirely onto the backs of consumers and businesses.



Summary of Three Phases of the Transition

Click on the image for a larger view



Investing During Transitions
Before diving into more details on the three stages of the Transition to Sustainable Growth, let’s focus on some key rules for investing during periods like this. There are nine rules for navigating a market in transition:

1) Take Bigger Bets in a Fewer Number of High Conviction Ideas: In a trendless market, there are fewer great ideas which will mean investors will have to concentrate on a smaller number of high conviction bets.

2) Establish Trading Ranges: A shifting market will experience multiple pullbacks, but be largely range bound. Therefore, the most successful strategy is to buy the dips and trim the rips meaning a more active re-balancing strategy is a way to success.

3) Benefit from Increased Volatility: When volatility spikes, so may opportunity.

4) Don’t Give it Away in Fixed Income: Don’t forget about the fixed income side of portfolios as the potential for rising rates could make risk-controlling bonds actually risky.

5) Don’t Forget the Simple Rules: Don’t fight the Fed. Listen to the market. Beware when the crowd gets too optimistic or pessimistic.

6) Use Alternative Strategies, Not Just Bonds, to Help Manage Risk: Once central banks begin to raise rates and bonds do not provide risk control anymore, investors should consider alternative strategies to help cushion the downside.

7) Invest in What You Know: 2010 is not the year to be a hero or to guess have a plan and follow it.

8) Manage Expectations: After last year, expectations are sky high. As the market transitions to fueling sustainable growth, market returns will likely be volatile and modest. Remember the famous quote by Oleg Vishnepolsky: when you are expected to exceed expectations, expect the unexpected.

For the full report, download the PDF:



The Transition to Sustainable Growth

theWhitepaper February 2010



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Jeffrey Kleintop, CFA
Chief Market Strategist
LPL Financial


Groundhog Day came late in February for the stock market. Last Thursday’s
worsening weekly unemployment claims data spooked stock market
investors worried about job growth as February winter storms negatively
impacted the data. 

Groundhog Day Comes Late

In that labor report, the stock market saw its shadow
and it appears that investors are in for six more weeks of winter weather
affected reports contributing to stock market volatility. Everything from retail
sales to manufacturing to the job market is likely to have been affected
by the unusually bad winter weather in February. The most signifi cant of
these may be the Employment report for February, due this week on Friday
morning, which is likely to show another month of job losses that were
exaggerated by the winter storms.

Some Highlights:

  • Last week, the stock market saw its shadow
    and we are in for six more weeks of winter
    weather affected reports contributing to stock
    market volatility.
  • One way to invest in a low-return, volatile market
    is to focus on yield rather than solely on price
    appreciation.
  • The added advantage of incorporating a focus on
    dividends now is that March and April tend to be
    the time of year when most companies increase
    their dividend payment.
  • We expect dividend payments to rebound
    in 2010, including those from the Financial
    sector as dividends are reinstated, since some
    companies now have both the ability and
    incentive to pay dividends.

Click on the PDF below to download the full report:

Groundhog Day Comes Late
Groundhog Day Comes Late
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“Watch Your Step”


John Canally, CFA
Economist
LPL Financial


  • Monetary policy took center stage last week, as the Federal Reserve (Fed) took another step toward normalizing monetary policy by raising the discount rate.

  • Aside from another disappointing reading on jobless claims, the week’s economic data on the housing and manufacturing sectors came in better than expected. In addition, the market digested Fed deliberations on the economy, inflation, and monetary policy “exit” strategies.

  • This week’s U.S. economic data focuses on the manufacturing sector, housing, and the consumer. Both fiscal and monetary policy will be on the front burner this week, with key testimonies from both Federal Reserve Chairman Ben Bernanke and U.S. Treasury Secretary Tim Geithner.


Key Reports This Week:

Economic Calendar for This Week
This week’s U.S. economic data focuses on the manufacturing sector (January durable goods orders and the February reading on the Chicago area purchasing managers index), housing, (new and existing home sales for January), and the consumer (consumer confidence and consumer sentiment for February). The market will also be keenly interested in Federal Reserve Chairman Bernanke’s Monetary Policy testimony to Congress. In addition to Bernanke, several other Fed officials, as well as Treasury Secretary Tim Geithner have public appearances scheduled. Thus, the Fed’s exit strategy, along with all matters fiscal (debt ceiling, budget deficits, the TARP, etc) are likely to be in the news.

 

Download the full report here:

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LPL Financial Weekly Market Commentary for February 22, 2010

February 24, 2010

“Volatility Ahead”
 
 
Jeffrey Kleintop, CFA
Chief Market Strategist
LPL Financial
 

The volatility and classic 5-10% pullback we have seen so far this year is perfectly normal and very likely to be a recurring pattern throughout 2010 as the economy transitions from recovery to sustainable growth.
A key contributor to the volatility that accompanied the transition to sustainable growth in 1994 [...]

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LPL Financial Weekly Market Commentary for February 16, 2010

Thumbnail image for LPL Financial Weekly Market Commentary for February 16, 2010 February 19, 2010

By Jeffrey Kleintop, CFA
Chief market Strategist
LPL Financial

Events and data in recent weeks have prompted market participants to view the tailwinds that caused the markets to go sailing higher for much of 2009 as beginning to fade. They now view them as having become more balanced with the rising headwinds associated with increasing global frictions.
We [...]

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Protecting Yourself from Scams

February 11, 2010

Beware of the financial schemes aimed at mature Americans.
Provided by Los Angeles Financial Planner, Rose Greene, CFP ®
Retirement lasts longer and longer, and the retired population is growing. So the conditions are right for a “perfect storm” of financial swindles aimed at baby boomers and elders. Just an alert … here are some common scams [...]

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FINANCIAL ISSUES SAME-SEX COUPLES NEED TO ADDRESS

February 10, 2010

Be cognizant of these unique challenges.
provided by Los Angeles Financial Planner, Rose Greene, CFP ®
Many states have passed laws barring housing, credit and employment discrimination against LGBT (lesbian, gay, bisexual, and transgender) couples and individuals. Yet these civil rights moves have not removed the financial penalties that gay, lesbian, bisexual and transgender couples face directly [...]

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MONEY & HAPPINESS | Do they Go Hand in Hand?

February 10, 2010

Do they go hand in hand?
Provided by Los Angeles Financial Planner, Rose Greene, CFP ®
Does money actually buy a degree of happiness?
It is worth thinking about the effect money has on our lives. What role does money play in our happiness? Is that role overrated?
Most psychologists and sociologists will tell you that our happiness comes [...]

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The Decade in Review | A Look at Stocks, Commodities, and Memories (Good and Bad)

January 25, 2010

A look at stocks, commodities and memories (good and bad)
Provided by Los Angeles Financial Planner, Rose Greene, CFP®

A turbulent ten years. The 2000s gave us remarkable opportunity and remarkable volatility. They tested our patience, and many investment strategies. They taught us to hold on, hang in there and diversify.
Stocks. Was it really a “lost decade”? [...]

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Weekly Economic Update for February 1, 2010

February 1, 2010

Quote of the week.
Reputation is what other people know about you. Honor is what you know about yourself.”
– Lois McMaster Bujold
4Q GDP: 5.7%: That is the preliminary reading from the Commerce Department, and that is the best reading since 3Q 2003. Economists
pointed out that much of the increase reflected companies rebuilding their inventories rather than [...]

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A Look at How Fast the Markets Recover Through the Years

February 9, 2010

Provided by Los Angeles Financial Planner, Rose Greene, CFP 

The stock market is amazingly resilient.

You might be surprised at how fast the stock market can change … for the better. Let’s look at how the market has recovered remarkably – and quickly – from some notable downturns.
2008-2009: The collapse of the subprime mortgage [...]

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Do You Need A Financial Planner?

March 3, 2010

What do they do? And should you have one?
What does a financial planner do? Well, that depends. Many individuals refer to themselves as “financial planners”, but not all perform true multidisciplinary financial planning. Investment, insurance and tax professionals sometimes specialize in certain areas of financial planning (such as retirement planning, estate planning, tax planning, or [...]

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(RE)CONSIDERING CDs

February 10, 2010

In a challenging market, getting back to basics may be good.
provided by Rose Greene, CFP ®
Respect for the humble CD. When the stock market turns bearish, people take a second look at fixed-rate investments, including certificates of deposit. In a bull market, the CD may seem like just about the most unattractive investment choice out [...]

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