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YOUR FINANCIAL FUTURE
Your Guide to Life Planning
January 2015
In This Issue
Bond Market Perspectives | Week of January 5, 2015
For just the second time in the last 30 calendar years, short-term 2-year Treasury yields
increased while longer-term 10- and 30-year Treasury yields fell.
Four Common Mistakes of Asset Allocation
Paul Dixon
Sovereign Investment Group
LLC
SVP - Investment ServicesBranch Office Mgr.
3120 Southwest Frwy. Ste.
500
Houston, TX 77098
713-627-2200
Fax: 713-627-2227
[email protected]
www.sovereigngrp.com
Allocating and managing portfolios successfully in today's marketplace is difficult. There are
many pitfalls along the way to complicate matters. As a result, investors and financial
professionals need to be aware of the common mistakes that can be made when employing asset
allocation so that they can avoid them.
Weekly Market Commentary | Week of January 5, 2015
The fourth quarter of 2014 will be a tale of two earnings seasons: the best of times and the worst
of times. Despite a substantial drag from the energy sector, we expect another good earnings
season overall.
In Volatile Markets, Investors May Find Comfort in
Dividends
Dividend-paying stocks offer an attractive mix of features and can help cushion the effects of
market volatility.
Outlook 2015: In Transit
To help you prepare for this market in transition, LPL Financial Research has boxed up timely
advice into our Outlook 2015: In Transit for an on-time delivery of what could likely be another
year marked with positive advances by stocks, flat returns for bonds, heightened volatility, and
strong U.S. economic growth.
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Your Guide to Life Planning
Bond Market Perspectives | Week of January 5, 2015
Key Takeaways
For just the second time in the last 30 calendar years, short-term 2-year Treasury yields increased
while longer-term 10- and 30-year Treasury yields fell.
One factor from 2014 that remains in place at the start of 2015 is the lure of Treasury yields on a global
basis.
Although bonds may continue to be supported by lower oil prices and European growth fears, we
believe U.S. economic growth and the start of Fed rate hikes will translate to a lower-return
environment than investors experienced in 2014.
Curve Ball
The notable decline in 10- and 30-year Treasury yields was one of the main stories of 2014, but lost in that
focus was the rise in short-term Treasury yields. While it is not uncommon for the yield differential between
short- and long-term bonds to change over time, the way yields changed was extremely rare and threw
investors a curve ball.
For just the second time in the last 30 calendar years, short-term 2-year Treasury yields increased while
longer-term 10- and 30-year Treasury yields fell. The yield on the 2-year nearly doubled, moving from 0.39%
to 0.67%, in contrast to 10- and 30-year rates falling sharply from 3.04% to 2.17% and 3.96% to 2.75%,
respectively [Figure 1].
Prior to 2014, the only other occurrence of such a yield curve shift over the past 30 calendar years took place in
2004. In 2004, short-term rates moved in anticipation of, and later in response to, Federal Reserve (Fed) rate
hikes, which began in June 2004 [Figure 1]. Note that this shift did not portend a recession in 2005 and we
similarly do not expect a recession in 2015. In 2014, short-term yields rose in anticipation of short-term rate
hikes expected in 2015. Although timing was slightly different, the cause of both moves was forthcoming Fed
rate hikes. The extraordinarily low level of short-term rates in recent years caused the bond market in 2014 to
push up short-term yields earlier than prior history.
The yield curve does typically "flatten" (represented by a flatter line when plotting yields across the maturity
spectrum on a chart) ahead of expected Fed interest rate increases, but this has usually translated into higher
short-term and higher long-term bond yields. In this case, the yield curve flattens in response to short-term
yields rising more than long-term yields, as short-term yields are more directly impacted by Fed rate hikes.
This is known as a bearish flattener, as it usually translates to weaker total returns for bond investors. A bullish
flattener, a situation where long-term rates fall more than short-term yields, represents expectations of slower
economic growth from the bond market and is typically a positive for bond investors.
Conundrum Revisited
The last time the Fed embarked on a rate hike campaign was 2004, so the 2004-2005 experience may reveal
what 2014 could mean for investors in 2015. The relative resilience of long-term bond prices in the face of
steady interest rate hikes from mid-2004 through mid-2006 caused a puzzled former Fed Chair Alan
Greenspan to label it a "conundrum."
In 2005, the yield curve continued its flattening trend with long-term yields falling again, albeit modestly,
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while short and intermediate yields continued to rise [Figure 2]. Note that the decline in 30-year Treasury
yields in 2004 was relatively modest compared with the sharp 1.2% decline of 2014, making a repeat of 2014
unlikely. Still, the 2004 experience shows that longer-term bond yields may remain resilient despite the
potential start of Fed rate hikes later this year. We expect there may be a modest rise in longer-term rates for
2015.
Muted Returns
The more important takeaway for investors may be lower total returns. In 2005, the further flattening of the
yield curve created a year in which returns were muted across fixed income sectors [Figure 3]. The outcome of
2005 is in-line with our expectations for flat bond returns in 2015, as noted in our Outlook 2015: In Transit
publication. Additionally, the lower absolute level of yields to start 2015 also suggests bond total returns may
be lower than in 2005.
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Your Guide to Life Planning
Foreign Influences Still Strong
One factor from 2014 that remains in place at the start of 2015 is the attractiveness of Treasuries on a global
basis. The German 10-year government bond yield has fallen to 0.5% and the German 5-year to 0.0%, well
below the 1.6% of the 5-year Treasury. Treasuries continue to draw global interest, especially given ongoing
bond buying by the Bank of Japan and expectations that the European Central Bank may start buying
government bonds in coming months.
In combination with a reduced supply of high-quality government bonds, longer-term bonds have continued to
garner support. At some point, continued increases in short-term yields or ebbing of dollar strength may
change the attractiveness of longer-term debt to global investors. Although bonds may continue to be
supported by lower oil prices and European growth fears, we believe U.S. economic growth and the start of Fed
rate hikes will potentially translate to a lower-return environment than investors experienced in 2014.
IMPORTANT DISCLOSURES
The opinions voiced in this material are for general information only and are not intended to provide specific
advice or recommendations for any individual. To determine which investment(s) may be appropriate for
you, consult your financial advisor prior to investing. All performance reference is historical and is no
guarantee of future results. All indexes are unmanaged and cannot be invested into directly.
The economic forecasts set forth in the presentation may not develop as predicted and there can be no
guarantee that strategies promoted will be successful.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values and yields will
decline as interest rates rise, and bonds are subject to availability and change in price.
Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of
principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.
However, the value of fund shares is not guaranteed and will fluctuate.
Investing in foreign fixed income securities involves special additional risks. These risks include, but are not
limited to, currency risk, political risk, and risk associated with foreign market settlement. Investing in
emerging markets may accentuate these risks.
High-yield/junk bonds are not investment-grade securities, involve substantial risks, and generally should
be part of the diversified portfolio of sophisticated investors.
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Your Guide to Life Planning
INDEX DESCRIPTIONS
The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure
performance of the broad domestic economy through changes in the aggregate market value of 500 stocks
representing all major industries.
The Barclays U.S. Aggregate Bond Index is a broad-based flagship benchmark that measures the
investment-grade, U.S. dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries,
government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM pass-throughs), ABS,
and CMBS (agency and non-agency).
This research material has been prepared by LPL Financial.
To the extent you are receiving investment advice from a separately registered independent investment
advisor, please note that LPL Financial is not an affiliate of and makes no representation with respect to
such entity.
Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not
Guaranteed by Any Government Agency | Not a Bank/Credit Union Deposit
Tracking #1-341555 (Exp. 01/16)
6
Your Guide to Life Planning
Four Common Mistakes of Asset Allocation
Regardless of your
risk tolerance, you
should want to earn a
return that outpaces
inflation and taxes
over time.
Smart people make dumb mistakes all the time. Allocating and managing portfolios successfully in today's
marketplace is difficult. There are many pitfalls along the way to complicate matters. When investors and
portfolio managers fail to avoid mistakes, they place portfolios at risk. At stake are not only the growth and
safety of investors' portfolios but also their future financial independence, control, and security. As a result,
investors and financial professionals need to be aware of the common mistakes that can be made when
employing asset allocation so that they can avoid them.1
Mistake 1: Excluding Desirable Asset Classes
Research studies have concluded that how you allocate a portfolio, rather than which investments you select or
when you buy or sell them, is the leading determinant of investment performance over time. As a result, make
every effort to allocate a portfolio among all appropriate asset classes. Each asset class and asset subclass
provides return-enhancing and risk-reducing benefits. By not incorporating appropriate classes, a portfolio
may not exhibit the desired risk-and-return trade-off profile.
Regardless of your risk tolerance, you should want to earn a return that outpaces inflation and taxes over time.
Some investors shy away from moderately risky assets, such as large-cap equities, fearing the market's ups and
downs will hinder long-term performance. By doing so, investors may find it very difficult, if not impossible, to
fund the style of living they desire in retirement. Even conservative investors with a long-term time horizon are
highly encouraged to consider a small allocation to equities for their portfolio, thus increasing the odds that its
performance will outpace that of inflation and taxes.
Mistake 2: Confusing Asset Allocation With Diversification
Many investors confuse asset allocation with diversification. They believe the two are the same thing. For many
investors, this confusion is not their mistake. Many money management companies, financial authors, and
investment professionals explain it this way because some of them do not fully understand the difference. This
confusion is one of the leading misconceptions of asset allocation.
Diversification impacts only the management of risk, specifically the reduction of investment-specific risk. On
the other hand, asset allocation not only maximizes risk-adjusted return but also reduces risk by combining
asset classes that have less than perfect correlations. Asset allocation addresses both the numerator and
denominator of the risk and return trade-off equation, while diversification deals only with the numerator: risk
management.
Mistake 3: Overestimating the Level of Diversification
Diversification is the key to reducing risk, namely investment-specific risk. There are two ways to overestimate
the level of diversification. First, one may believe that the quantity of securities currently in a portfolio is
sufficient to create a diversified portfolio when, in fact, it is not.
Second, but much less important, although a portfolio may hold an appropriate quantity of securities, the
majority of the securities may be too similar to provide significant diversification benefits. For example, the
stocks of General Motors and Ford will provide some diversification benefits, but due to their inherent
industry similarities, holding both in a portfolio will not provide a significant level of diversification.
Diversifying across fundamentally different sectors or industries is therefore recommended.
Mistake 4: Paying Excessive Portfolio Expenses
If you don't keep it, did you really make it? Over time, the compounding effect of portfolio management
expenses can be quite large and surprising, thus depriving a portfolio of returns. Even small annual expenses
can add up to significant expenses over the long term. Obviously, it is more or less impossible not to pay some
sort of portfolio-related expenses. Nevertheless, you should focus on minimizing portfolio management
expenses, namely trading costs, both commissions and bid-ask spreads, and investment advisory fees.
1Asset allocation does not ensure a profit or protect against a loss.
Excerpted from Understanding Asset Allocation by Scott Frush. Copyright © 2007 by The McGraw-Hill
Companies.
© 2015 Wealth Management Systems Inc. All rights reserved.
1-106894
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Your Guide to Life Planning
Weekly Market Commentary | Week of January 5, 2015
Key Takeaways
The fourth quarter of 2014 will be a tale of two earnings seasons: the best of times and the worst of
times.
Despite a substantial drag from the energy sector, we expect another good earnings season overall.
We expect more winners from cheap oil than losers, although the energy sector faces significant
challenges.
A Tale of Two Earnings Seasons
The fourth quarter of 2014 will be a tale of two earnings seasons: the best of times and the worst of times.
Companies that benefit from lower energy prices should generally report positive results and have mostly
optimistic comments about their business outlooks. Conversely, companies within or connected to the energy
sector will likely have a difficult time due to the sharp, swift decline in oil prices. Overall, we expect the winners
from cheap oil to outnumber the losers, with another good performance by corporate America. Alcoa
unofficially kicks off earnings season on January 12, 2015.
Q4 Earnings Likely to Be Good, Despite Energy Drag
Despite a substantial drag from the energy sector, we expect another good earnings season overall for the just
completed fourth quarter. Consensus estimates from Thomson Reuters are calling for a 4% year-over-year
increase in S&P 500 earnings per share for the quarter, even while absorbing an expected 20% decline in
energy sector earnings. We see some potential upside from cheaper energy and other commodity input costs
for consumer companies and manufacturers (those without close ties to the energy sector), which may help
earnings achieve their average historical upside surprise of about 3%. The biggest cost component for S&P 500
companies, wages, has not yet exerted enough upward pressure on corporate cost structures to raise concerns
about profit margins, which continued to expand throughout 2014 and currently remain at record highs.
Our favorite earnings indicator, the Institute for Supply Management (ISM) Manufacturing Index, has
continued to signal mid- to high-single-digit earnings gains for late 2014 and early 2015. Although the index
pulled back in December 2014, due partly to reduced energy sector spending plans, it remains solidly in
expansion territory at over 55 (50 is the breakpoint between growth and contraction). The three-month
average is near the highest levels since the end of the Great Recession.
The pace of economic growth in the United States also bodes well for earnings. After the weather-depressed
contraction during the first quarter of 2014, gross domestic product (GDP) growth exceeded 4% annualized
during the second and third quarters and is on track for near 3% growth for the fourth quarter, based on
available data as of year-end 2014. This pace of growth should support the low- to mid-single-digit revenue
gains necessary to drive forecasted earnings gains, even when factoring in energy sector impacts.
The "Ex-Energy" Quarter
Earnings and other financial statistics are often expressed excluding a particular sector due to one-off
irregularities. "Ex-financials" is one example in recent years due to the fall, then rise, of the financial sector in
the aftermath of the 2008 financial crisis.
This earnings season, earnings "ex-energy" will likely become a commonly heard phrase because of the sector's
expected divergence. Analysts and strategists will likely strip out energy and assess how earnings for the S&P
500 would look if that sector is excluded. The divergent path that the sector's earnings have taken [Figure 1]
will likely be the top story during this earnings period (overtaking Europe, which was last quarter's top story,
and the strength of the U.S. dollar). Over just the past three months, energy sector earnings estimates for the
next four quarters have tumbled 29%, compared with the S&P 500 overall which--despite including
energy--has seen estimates fall just 2% during this period.
Click here for Figure 1, S&P 500 Earnings Estimates Have Held Up Well As Energy Estimates
Have Plummeted
S&P 500 earnings have many drivers. But the sharp drop in oil prices (more than 50% from last year's peak in
June 2014) will bring energy to the forefront this earnings season. The energy sector is expected see a 20%
year-over-year earnings decline in the fourth quarter, based on Thomson Reuters consensus estimates. The
only other sector expected to see a decline is materials, also commodity based, and that sector's expected
earnings decline is less than 2% [Figure 2]. In fact, energy is such an outlier that removing it lifts S&P 500
earnings by about two percentage points (boosting consensus from 4% to 6%). The industrials sector provides
an additional energy-related drag by being the destination for substantial capital investment by energy
companies, indicating that removing energy could lead to more than a two-point boost to S&P 500 earnings.
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Your Guide to Life Planning
Click here for Figure 2, Energy Earnings Expected to Contract Substantially
The Upside to Oil's Decline
The flip side of lower energy prices hurting energy sector earnings comes from the sectors that have benefitted
from lower oil and other commodity prices. The most obvious is the consumer discretionary sector, as lower
prices at the gas pump and cheaper home heating bills help boost discretionary income. Manufacturers also
benefit from cheaper fuel and raw materials. Airlines and automakers are big beneficiaries as well, although
commodity-hedging activities do partially dampen the positive impact.
Oil Is Not the Only Challenge
Europe may continue to be a drag for S&P 500 company profits, given the Eurozone is on the brink of another
recession (based on latest GDP data) and has very low inflation, which gives businesses operating there less
pricing power. S&P 500 companies generate roughly 15% of earnings from the Eurozone. Much less
concerning, but still a risk, is exposure to the big oil-producing emerging market (EM) countries, Russia in
particular. We estimate exposure to these EM countries, some of which are in or near recession, at only about
1-2% of overall S&P 500 profits. The strength in the U.S. dollar may also be a drag on overall earnings again, as
foreign-sourced profits (particularly in Europe) are translated into fewer dollars.
Conclusion
The fourth quarter will be a tale of two earnings seasons. For the energy sector, it will no doubt be a very
difficult earnings season due to the sharp drop in oil prices. Conversely, companies that benefit from lower
energy prices may report solid results and have positive comments about their outlooks amid the favorable
economic backdrop in the United States. Overall, we expect more winners from cheap oil than losers, with
another good performance by corporate America.
IMPORTANT DISCLOSURES
Commodity-linked investments may be more volatile and less liquid than the underlying instruments or
measures, and their value may be affected by the performance of the overall commodities baskets, as well as
weather, geopolitical events, and regulatory developments.
Because of its narrow focus, investing in a single sector, such as energy or manufacturing, will be subject to
greater volatility than investing more broadly across many sectors and companies.
Currency risk arises from the change in price of one currency against another. Whenever investors or
companies have assets or business operations across national borders, they face currency risk if their
positions are not hedged.
The opinions voiced in this material are for general information only and are not intended to provide specific
advice or recommendations for any individual. To determine which investment(s) may be appropriate for
you, consult your financial advisor prior to investing. All performance reference is historical and is no
guarantee of future results.
The economic forecasts set forth in the presentation may not develop as predicted and there can be no
guarantee that strategies promoted will be successful.
Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal,
and potential liquidity of the investment in a falling market.
All investing involves risk including loss of principal.
INDEX DESCRIPTIONS
The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure
performance of the broad domestic economy through changes in the aggregate market value of 500 stocks
representing all major industries.
The Institute for Supply Management (ISM) Index is based on surveys of more than 300 manufacturing
firms by the Institute of Supply Management. The ISM Manufacturing Index monitors employment,
production inventories, new orders, and supplier deliveries. A composite diffusion index is created that
monitors conditions in national manufacturing based on the data from these surveys.
This research material has been prepared by LPL Financial.
To the extent you are receiving investment advice from a separately registered independent investment
advisor, please note that LPL Financial is not an affiliate of and makes no representation with respect to
such entity.
Not FDIC or NCUA/NCUSIF Insured | No Bank or Credit Union Guarantee | May Lose Value | Not
9
Your Guide to Life Planning
Guaranteed by Any Government Agency | Not a Bank/Credit Union Deposit
Tracking #1-341003 (Exp. 01/16)
10
Your Guide to Life Planning
In Volatile Markets, Investors May Find Comfort in Dividends
As uncertainty at home and abroad roils the financial markets, income-minded investors seeking protection
from the bumpy road ahead may find dividend-paying stocks offer an attractive mix of features and warrant a
place in their equity portfolios.
Dividend payouts are
often seen as a sign
of a company's
financial health and
management's
confidence in future
cash flow.
The appeal is simple: Dividend-paying stocks can provide investors with tangible returns on a regular basis
regardless of market conditions.
The Benefits of Dividend-Paying Stocks
If you own stock in a company that has announced it will be issuing a dividend, or if you are proactively
considering adding an allocation to dividend-paying stocks, history provides compelling evidence of the
long-term benefits of dividends and their reinvestment.
A sign of corporate financial health. Dividend payouts are often seen as a sign of a company's
financial health and management's confidence in future cash flow. Dividends also communicate a
positive message to investors who perceive a long-term dividend as a sign of corporate maturity and
strength.
A key driver of total return. There are several factors that may contribute to the superior total
return of dividend-paying stocks over the long term. One of them is dividend reinvestment. The longer
the period in which dividends are reinvested, the greater the spread between price return and dividend
reinvested total return.
Potentially stronger returns, lower volatility. Dividends may help to mitigate portfolio losses
when stock prices decline, and over long time horizons, stocks with a history of increasing their
dividend each year have also produced higher returns with considerably less risk than
non-dividend-paying stocks. For instance, since 1990, the S&P 500 Dividend Aristocrats -- those stocks
within the S&P 500 that have increased their dividends each year for the past 25 years -- produced
annualized returns of 12.10% vs. 9.45% for the S&P 500 overall, with less volatility (13.78% vs. 14.85%,
respectively).1
The Growth of Dividend-Paying Stocks, 1950-20132
If you are considering adding dividend-paying stocks to your investment mix, keep the following thoughts in
mind.
Dividend-paying stocks may help diversify an income-generating portfolio.
Income-oriented investors may want to diversify potential sources of income within their portfolios.
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Your Guide to Life Planning
Given current realities present in the bond market, stocks with above-average dividend yields may
compare favorably with bonds and may act as a buffer should conditions turn negative within the bond
market.
Dividends benefit from continued favorable tax treatment. The extension of the Bush-era tax
cuts helps to reinforce the current case for dividend stocks. The tax bill that passed in early 2013 made
the 15% top tax rate on qualifying dividends and other forms of investment income permanent for most
investors, though it did raise the top rate to 20% for certain high-income investors. However, this is
still lower than the 39.6% top rate on ordinary income.
Note that dividends can be increased, decreased, and/or eliminated at any time without prior notice.
1Volatility is measured by standard deviation. Past performance is no guarantee of future results.
2Source: Standard & Poor's. Stocks are represented by the S&P 500, an unmanaged index considered
representative of the broad U.S. stock market. For the period January 1, 1950, through December 31, 2013.
Past performance is not indicative of future results. Investors cannot invest directly in any index.
© 2015 Wealth Management Systems Inc. All rights reserved.
1-044954
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Your Guide to Life Planning
Outlook 2015: In Transit
Outlook 2015: In Transit
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 snow nor 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 volatile road 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.
Significant elements that are in transit in 2015 include:
The U.S. economy continues its transition from the slow gross domestic product (GDP)
growth of 2011-2013 to more sustained, broad-based growth. Ongoing progress in the labor
market, an uptick in wage growth, and continued improvement in both consumer and business
spending have propelled an uptrend in U.S. economic output. We believe inflation--which has
historically accelerated as the economy moves into the second half of the business cycle--is poised to
continue proceeding higher, but only modestly so.
Central banks around the world will also be on the move in 2015. In the United States, the
economy is likely to continue to travel toward a point where the Federal Reserve (Fed) will begin
raising interest rates, albeit gradually, for the first time in nine years. The Eurozone and Japan--the
world's second and fourth largest economies, respectively--could benefit, as central banks in those
regions embark on more aggressive policy actions aimed at restarting and reaccelerating their
long-dormant economies.
Washington shifts from a relatively quiet 2014 to take a bigger role in 2015. The
Republican takeover in the Senate and approaching debt ceiling limit might provide the opportunity for
some movement out of the gridlock that has plagued Washington in recent years.
Against this backdrop, we forecast the following:
We expect the U.S. economy will expand at a rate of 3% or slightly higher in 2015. This
forecast matches the average growth rate over the past 50 years, and 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.
Tempered by increasing levels of volatility, stocks may be poised to advance 5-9%. We
believe stocks will navigate the various cycles in transit and deliver mid- to high-single-digit returns in
2015, with a focus on earnings over valuations. This forecast would be in-line with the average stock
market growth of 7-9%, since WWII. Supported by improved global economic growth and stable profit
margins in 2015, we expect earnings per share growth for S&P 500 companies of 5-10%. We believe
continued economic growth, benign global monetary policy, and a more favorable policy climate from
Washington indicate that the powerful, nearly six-year-old bull market should continue.
We expect flat returns in the bond market. With sustained improvement in economic growth,
slowly rising inflation, and the approach of the Fed's first interest-rate hike, bond prices are likely to
decline in 2015. High-yield bonds and bank loans can help investors manage this challenging bond
market.
Despite significant improvement on almost all economic and market fronts, the route we have been on over the
last six years has been undoubtedly long and winding. The package of strong economic growth ordered up
following the Great Recession of 2008-2009 has resulted in a delivery that has been at times disjointed and
behind schedule. Journeys like the one we have been on since 2009 rarely unfold in a straight line. The reality
is that point-to-point navigation often masks the many twists and turns--and ups and downs--that a voyage
undertakes, just as the 236% cumulative increase in stock returns since the current bull market began* hides
the true nature of the market's successful but volatile path.
Transition, like we forecast on the road ahead in 2015, is just another word for change. And while the backdrop
looks favorable for continued economic and market advances, we know that not all change is good, just as not
all movement is forward. The shifting economic and market landscape in 2015 offers great opportunities
alongside major challenges, and investors will need more than just a GPS to navigate them all. As we shift
toward the latter stages of the economic cycle in the years ahead, bumps and potholes in the form of rising
volatility will be more frequent. Yet it will likely not be the road conditions that throw most investment
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portfolios off track, as we forecast relatively strong economic growth unfolding over the horizon. Rather, it will
be the pull of our emotions that could derail a potentially rewarding journey. As investors, keeping our
emotions in check when confronted with a bumpy road will ultimately be the key to success in 2015. It is
human nature to weigh the market potholes substantially more than the long, smooth roads of strong market
returns between them. However, with an investment strategy in hand and a destination in mind, 2015 is poised
to be a volatile but potentially favorable year.
To help you prepare for this market in transition, LPL Financial Research has boxed up timely advice into our
Outlook 2015: In Transit for an on-time delivery of what could likely be another year marked with positive
advances by stocks, flat returns for bonds, heightened volatility, and strong U.S. economic growth.
Please see our Outlook 2015: In Transit publication for insights on the economy, stock and bond markets, and
investments for the year ahead.
*Measured by the S&P 500 Index from the market's closing low on March 9, 2009 to October 31, 2014. Past
performance is not indicative of future results. One cannot invest directly into an index.
Important Risks
Economic forecasts set forth may not develop as predicted.
High-yield bonds are subject to higher interest rates, credit, and liquidity risks than those graded BBB and
above. They generally should be part of a diversified portfolio for sophisticated investors.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as
interest rates rise and bonds are subject to availability and change in price.
All investing involves risk including loss of principal.
This research material has been prepared by LPL Financial.
To the extent you are receiving investment advice from a separately registered independent investment
advisor, please note that LPL Financial is not an affiliate of and makes no representation with respect to
such entity.
Not FDIC/NCUA Insured | Not Bank/Credit Union Guaranteed | May Lose Value Not Guaranteed by Any
Government Agency | Not a Bank/Credit Union Deposit
Member FINRA/SIPC
Tracking #1-337508 (Exp. 12/15)
The opinions voiced in this material are for general information only and are not intended to provide specific
advice or recommendations for any individual. To determine which investment(s) may be appropriate for
you, consult your financial advisor prior to investing. All performance referenced is historical and is no
guarantee of future results. All indices are unmanaged and cannot be invested into directly.
LPL Financial, Member FINRA/SIPC
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