Issues Impacting Markets and the Economy

I’d like to share some insights into the issues impacting the current market and economic landscape.

We all know the big changes and events the markets face in the second half of 2013: a potential reduction of the Federal Reserve’s (Fed) bond-buying program, the need for Congress to craft a deal to avert the debt ceiling, and the question of whether Europe will emerge from recession are a few examples. But LPL Financial Research is also closely watching smaller changes and events taking shape that, through a rippling chain of events, may have just as great an effect on the world’s markets. To name a couple:

• U.S. farmland prices have soared recently. However, trends such as falling grain prices and surging global output, as well as rising borrowing rates, could potentially lead to a reversal in land prices. This reversal could be felt well beyond the farm and impact the broader economy.

• Rising wages in China and the boom in U.S. energy production, along with other factors, could herald a renaissance for U.S. manufacturing.

In the bond markets, LPL Financial Research views the current bond sell-off as being overdone, as the Fed’s timing around a possible first interest rate increase has not materially changed.

Additionally, very poor liquidity, which is not often discussed, has played a role in recent bond weakness and exacerbated weakness across the board. While poor liquidity may persist, the magnitude of the recent sell-off in the bond market shows much of this impact has already occurred and sets up an attractive entry point for bond investors around the upcoming June 19 Federal Open Market Committee (FOMC) meeting. Additional clarity from the Fed at this meeting may arrest tapering fears, and provide some solace and opportunity for bond investors.

Turning to the economy, the latest edition of the Federal Reserve’s (Fed) Beige Book, released on June 5, underscores the impact of the weather and the lack of impact from the sequester on the U.S. economy. The Beige Book data provide a window into the economic activity on Main Street around the nation using plain, everyday language. LPL Financial Research’s read of the latest Beige Book indicates that health care continues to be a big part of the conversation; business and banking contacts have generally become more confident in the recovery, especially in housing; and Main Street may be getting used to the European sovereign debt crisis, now in its fourth year.

One tool I use and find helpful when thinking about Main Street is LPL Financial Research’s Beige Book Barometer (BBB), which provides one snapshot of the book’s entire collage of data. Although the BBB dipped in June, the BBB remains close to its highest level in eight years. The latest Beige Book notes that the economy continued to expand at a “modest to moderate pace” from mid-April through late May 2013.

While the news media may focus on high-profile economic news, we can’t forget about smaller trends and events that also have a large impact on the markets. Keeping an eye on factors like liquidity in the bond market or trends on Main Street can provide useful insights about the economic landscape that inform smart investment decisions. As always, please contact me at bill.pollak@lpl.com or (925) 301-4086 with any questions.

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 me 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.

Stock investing involves risk, including the risk of loss.

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.
The Federal Open Market Committee (FOMC), a committee within the Federal Reserve System, is charged under the United States law with overseeing the nation’s open market operations (i.e., the Fed’s buying and selling of U.S. Treasury securities).

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.

This research material has been prepared by LPL Financial.Not FDIC/NCUA Insured | Not Bank/Credit Union Guaranteed | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit

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