Navigating the Equity, Fixed Income And Alternatives Markets by LPL Financial

The Portfolio Compass provides a snapshot of LPL Financial Research’s views on equity and alternative asset classes, the equity sectors, and fixed income. This biweekly publication illustrates our current views and will change as needed over a 3- to 12-month time horizon.

Reading the Portfolio Compass

  • Fundamental, technical, and valuation characteristics for each category are shown by colored squares.
  • Negative, neutral, or positive views are illustrated by a solid black bar positioned over the color scale, while an outlined black bar with an arrow indicates change and shows the previous view.
  • Rationales for our views are provided beneath each category.

Navigating the Markets

Compass Changes

  • Upgraded energy commodities view to neutral/positive from neutral/negative.
  • Upgraded energy sector to neutral from negative/neutral.

Investment Takeaways

  • Our 2014 stock market return forecast remains for gains of 10 – 15% despite the recent increase in volatility, supported by continued near double-digit earnings gains in the second half.*
  • Our recent downgrade to our foreign equities view reflected lackluster growth and structural impediments in Europe, despite bold actions from the European Central Bank (ECB).
  • Our upgraded energy commodities view follows oil’s bear market decline to the low $80s, providing what we view as attractive valuations for the energy sector.
  • A lower than benchmark weighting to bonds may be appropriate, as the yield does not compensate investors for the interest rate risk.
  • A growth scare is driving strong demand for high-quality bonds, but a return to focus on fundamental data will likely reveal an economy that remains quite healthy and may reverse the recent surge.
  • From a technical perspective, the S&P 500 is testing key support at the 200-day simple moving average; if support holds, there may be an opportunity to buy in on a dip at these levels.

Equity, Fixed Income, Alternatives Markets

Equity & Alternative Asset Classes

Looking for a Bounce in Stocks and Oil

  • Our 2014 stock market forecast remains for gains of 10 – 15%, despite the recent increase in volatility, supported by continued near-double-digit earnings gains in the second half.*
  • ??Midterm election year fourth quarters have historically been good for stock market returns, suggesting the potential remains for a late-year rally.
  • Small cap underperformance may be overdone, though technical weakness and the aging of the business cycle suggest it is prudent to temper enthusiasm some. ??We maintain a preference for growth over value, based on cyclical sector exposure and relative valuations.
  • We favor U.S. over large foreign, primarily due to our cautious view of Europe. Europe is on the verge of another recession and structural impediments to faster growth remain, despite ECB actions.
  • Improving fundamentals and supportive valuations are supportive of emerging markets (EM) equities, even as the Federal Reserve (Fed) tapers quantitative easing (QE). We are waiting for technical weakness to subside before potentially becoming more positive.
  • The bear market in crude oil provides a more attractive technical opportunity for crude oil exposure, in our view, despite fundamental challenges.
  • Our recently upgraded alternatives view reflects our interest in alternative sources of bond-like returns with less interest rate sensitivity.

Equity, Fixed Income, Alternatives Markets

Equity Sectors

Bear Market in Oil Provides More Attractive Energy Sector Opportunity

  • We continue to favor the cyclical sectors for their potential to capture further stock market gains as economic growth improves. As we enter the back half of the business cycle, we have tempered our positive view of consumer discretionary.
  • Our positive U.S. business spending view and forecast for improved global growth support industrials (including transports) and technology, where valuations and technicals support our positive view.
  • We are big believers in the U.S. energy boom and see the bear market in oil as providing a more attractive opportunity for energy sector exposure.
  • Our financials view is neutral, as strong loan demand offsets the tough interest rate and regulatory environment. The U.S. focus and potential for steeper yield curve favor regional banks.
  • Our neutral healthcare view reflects our focus on cyclical sectors, though robust product innovation trends, a likely uptick in demand from the Affordable Care Act (ACA), and strong earnings solidify healthcare’s place as our favorite defensive sector.
  • Cost pressures are easing for consumer staples companies, and valuations have become more reasonable, but we continue to favor the more cyclical sectors.
  • We remain cautious on telecom and utilities due to their interest rate sensitivity, though telecom valuations have become attractive and the recent drop in interest rates has helped both sectors during the past month.

Equity, Fixed Income, Alternatives Markets

Fixed Income

Growth Scare

  • A growth scare is driving strong demand for high-quality bonds at the start of the fourth quarter. While fears may persist over the near term, a return to focus on fundamental data will reveal an economy that remains quite healthy and may reverse the recent surge in prices.
  • A lower than benchmark weighting to bonds may be appropriate, as low yields and higher valuations suggest very low future returns.
  • Municipal bond performance may continue to be driven by Treasury price movements. Valuations have cheapened to start the fourth quarter but overall yields remain very low to compensate for potential longer-term interest rate risks.

Equity, Fixed Income, Alternatives Markets

  • For fixed income allocations, we emphasize a blend of high-quality intermediate bonds coupled with less interest rate–sensitive sectors such as high-yield bonds and bank loans.
  • High-yield bonds have remained somewhat volatile, but good credit quality, low defaults, and now more attractive valuations should help support the sector.
  • Among high-quality bonds, we favor investment-grade corporate bonds due to their economic sensitivity and good fundamentals.
  • Yields are higher on dollar-denominated EM debt compared to several fixed income sectors; and valuations have not cheapened, but have yet to reach a level we find attractive enough.

Equity, Fixed Income, Alternatives Markets