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LP L FINANCIAL R E S E AR C H

Weekly Economic Commentary March 26, 2012

The Long Road Home John Canally, CFA Economist LPL Financial

Highlights Looking ahead to the remainder of 2012, we see only a modest contribution to Gross Domestic Product (GDP) growth from housing, as the positives slightly outweigh the negatives. We take the pulse of the health of the housing market, by reviewing a range of indicators, in this report.

Economic Calendar Monday, March 26 Pending Home Sales Feb Dallas Fed Mfg. Index Mar Tuesday, March 27 Consumer Confidence Mar Wednesday, March 28 Durable Goods Orders and Shipments Feb Thursday, March 29 Real GDP Q4 Initial Claims wk 3/21

GDP Price Index Q4 Fed's Bernanke Gives Lecture at George Washington University Friday, March 30 Personal Consumption Expenditures Feb Personal Income Feb Chicago Purchasing Managers Index Mar U of M Consumer Sentiment Mar

This week brings a mix of policy and data, but the Supreme Court's consideration of the Affordable Care Act will likely draw most of the media's attention. This week's U.S. economic data is a mix of data on: 1) manufacturing in February (durable goods orders) and March (Richmond, Kansas City and Dallas Fed manufacturing indices along with the Chicago area Purchasing Managers Index-PMI); 2) housing (pending home sales in February); 3) and consumer sentiment for March. Markets will be looking for signs of slowdown in the United States after seeing the weaker data in Europe, the U.K. and China last week. The release of the German IFO index for March and the March PMI in China are the data highlights overseas. The real action, however, may be on the policy front this week, at home and abroad. The U.S. Supreme Court will hear arguments this week on the Affordable Care Act. The hearings will get a lot of media attention, though a decision by the Supreme Court is not due until the end of June. While the Federal Reserve’s (Fed) next Federal Open Market Committee (FOMC) meeting is still five weeks away, the debate over whether or not the Fed will conduct another round of quantitative easing (QE3) will be in the news this week, as no fewer than 10 Fed officials make public appearances. There are more policy hawks (those favoring the low inflation side of the Fed’s dual mandate) than doves (those who favor the full employment side) on the docket, and so by the end of the week, the market may doubt that QE3 is still on the table. Our view remains that unless the economy accelerates noticeably in the next several months, the Fed is more likely than not to do another round of quantitative easing in the second half of the year. In addition to the Fed speakers, there are several key finance ministers’ meetings (and debt auctions) in Europe this week, and leaders of the BRIC nations (Brazil, Russia, India, China) will meet in India amid slowing growth in many emerging market economies.

Still on the Road to Recovery Housing was in the news last week, and there are several housingrelated reports due out this week as well. As we have noted in recent commentaries, the U.S. housing market is still in the process of recovering from the 2006 – 09 bust that followed the housing boom that began to show severe cracks in 2007 and collapsed in 2008. The collapse in housing, in turn, was a major contributor to the financial crisis and Great Recession of 2007 – 09. The housing market, along with many financial markets, and many economies around the globe are still feeling the after-effects of the housing collapse.

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As the old saying goes, the real estate market is all about “location, location, location.” When we discuss the housing market, we do so from a national perspective: what is happening to the housing market on your street or in your neighborhood, town, city or state may be completely different (better or worse) than what is happening nationwide.

1 Housing Affordability Is at an All-Time High, but Difficulty Qualifying for a Mortgage Remains a Key Roadblock Composite Housing Affordability Index Median Inc = Qualifying Inc = 100 200 175 150

With that important caveat in mind, we can say that the housing market (sales, prices, construction, etc.) hit bottom in early 2009 and has been moving sideways to slightly higher since then. Housing construction (which is the most direct way housing impacts gross domestic product–GDP) has not been a significant, sustained contributor to economic growth (as measured by GDP) since 2005. The lack of participation from housing has been one of the main reasons (along with the severe cutbacks in state and local governments) behind the so far sluggish economy recovery. Looking ahead to the remainder of 2012, we see only a modest contribution to GDP growth from housing, as the positives slightly outweigh the negatives. There are a number of direct (housing starts, housing sales, construction spending, home prices) and indirect (homebuilder sentiment, mortgage applications, foreclosures, inventories of unsold homes, mortgage rates, housing vacancies, lumber prices, prices of publicly traded homebuilders) ways to measure the health of the housing market. These data are collected and disseminated by both the U.S. government and by private sources. A quick recap of these various indicators is below.

125

Taking the Pulse

100 75

(Shaded areas indicate a recession)

ƒƒ Near-record housing affordability. Housing affordability, the ability of a household with the median income to afford the payments on a median priced house at prevailing mortgage rates, is at an all-time high. Rising incomes, record-low mortgage rates, and the aftermath of the 20 – 30% drop in home prices nationwide account for the record level of affordability.

2 The Visible Inventory of Unsold New and Existing Homes Is Close to Normal, but a Shadow Inventory of up to 2 Million Homes Remains a Concern

ƒƒ Homebuilder sentiment. At 28 (on a scale of 0 to 100, where zero is the worst and 100 is the best) the index of homebuilder sentiment has surged over the past nine months and now sits at a four-and-a-half-year high albeit still at a very low level. The homebuilder sentiment data is compiled by the private sector’s National Association of Home Builders.

50

75

80

85

90

95

00

05

10

Source: National Association of Realtors, Haver Analytics 03/26/12

Millions of Units

Single Family Homes for Sale (New and Existing) 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0 Jun Jun Jun Jun Jun Jun Jun Jun Jun Jun 82 85 88 91 94 97 00 03 06 09

ƒƒ Inventories of unsold homes are low. Despite a “shadow inventory”, homes in or close to foreclosures and homes still sitting on bank balance sheets, inventories of unsold existing homes are the lowest they have been since 2006 – 07. The official count of the inventory of unsold single family existing homes (from the National Association of Realtors) tells us that 2.1 million existing homes are for sale. Depending on the data source (there is no “official” number for shadow inventory) cited, the shadow inventory is in the range of 1.5 – 2.0 million. While still well above average, the shadow inventory has come down over the past few years as well. It may rise later this year as foreclosures ramp up again after the moratorium was lifted earlier this year.

Source: National Association of Realtors, Haver Analytics 03/26/12

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3 Lumber Prices Are a Good Market-Based Indicator of the Housing Market, and They Have Moved Up Sharply in the Recent Months Commodity Prices: Random Lengths’ Framing Lumber Composite, Avg, $/1000 Bd Ft 525 450 375 300 225 150

01

02

03

04

05

06

07

Source: FIBER, Haver Analytics 03/26/12 (Shaded areas indicate a recession)

08

09

10

11

ƒƒ Housing starts and building permits. Responding to less demand for housing, difficult credit conditions and a glut of unsold inventory, homebuilders drastically cut the number of new housing starts in recent years. Housing starts peaked at 2.4 million units in early 2006 and by early 2009 had dropped to under 500,000 units, an 80% drop. Since then, as inventories of unsold new and existing homes shrunk and the economy and financing conditions improved, starts have moved 50% higher. Despite the 50% move off the bottom, housing starts remain 70% below their all-time high. Both housing starts and building permits (a key leading indicator of starts) are collected by the U.S. Commerce Department. ƒƒ Homebuilder stocks. Although they are not a perfect leading indicator of the health of the housing market, the S&P 500 Homebuilders Index has rallied by nearly 80% since October 2011. Despite that dramatic rally, homebuilding stocks are still 75% below the peak hit in mid-2005. ƒƒ Lumber prices. Lumber is a key input to the homebuilding process. Lumber prices peaked in mid-2004 — a year or so before the housing market peaked — and declined by nearly 70% by early 2009. Since early 2009, lumber prices have increased (in fits and starts) by 75%, but remain more than 40% below their 2004 peak. Lumber prices are set in the open market, trading on several global commodity exchanges. ƒƒ Supply and demand for housing credit, bank lending to consumers for mortgages. From the mid-1990s through late 2006, bank lending standards (down payment required, credit scores, work history, etc.) for residential mortgages were relatively easy. Coupled with low rates and rapid innovation in financial products backing residential mortgages, this easy credit helped to fuel the housing boom. The banking industry began tightening lending standards in early 2007, and continued to tighten for more than two years. Lending standards eased in 2009 and 2010, and have only recently returned to where they were in 2003. On the demand side of the equation, consumer demand for mortgages remains muted, as consumers are uncertain about prospects for home price appreciation and their own financial and labor market status in the years ahead. This data is compiled by the Federal Reserve in the Senior Loan Officer Survey, which is released quarterly. ƒƒ Mortgage applications. Measured by the private sector’s Mortgage Bankers Association, the volume of mortgage applications has increased fourfold since late 2008, but remains well below its mid-2000s peak. Weekly mortgage applications are a key gauge of consumer demand for housing, and as we enter the key spring selling season — 40% of home sales occur between April and July — weekly mortgage applications will be a key metric to watch. Mortgage applications are a component of our weekly Current Conditions Index. ƒƒ Foreclosure activity. After a de facto moratorium on new foreclosures was put into place in late 2010 as the United States and individual state governments sued mortgage processors and banks, the pace of new foreclosures slowed down. By early 2012, new foreclosures were at the lowest level since mid-2007. Now that the legal action has been settled,

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there is a concern that the foreclosure pipeline will fill back up again. While we may see some spike higher in foreclosures and sales of foreclosedon bank-owned properties in the coming months, it is important to note that the pipeline of new defaults and overall mortgage delinquencies are falling, aided by a better economy and job market. There are various public and private sources for foreclosure and delinquency data. On the private sector side, firms like RealtyTrak, Lender Processing Services and the Mortgage Bankers Association provide data. Freddie Mac, Fannie Mae, and the Federal Housing Finance Administration (FHFA) are among the government agencies that compile data on delinquencies and foreclosures. ƒƒ Construction employment. As measured by the U.S. Department of Labor, construction employment increased by more than one million between the early 2000s and 2006 to nearly 3.5 million workers. Since then, workers employed in the construction of new homes has dropped by nearly 50%, bottoming out at just under 2 million in late 2010. Since then, construction employment has held steady, but has yet to make a decisive turn higher. ƒƒ Construction already put into place. The value of new residential construction put into place peaked at $535 billion in early 2006. Since then, construction of new homes has plummeted, and by mid-2009, just $122 billion in new home construction was underway. This data series moved sideways for about 18 months, hitting another low ($120 billion) in late 2010. Since then, there has been a modest uptick in construction of new homes, but new home construction is still running 75% below its peak. This data is collected by the U.S. Commerce Department.

4 The Gap Between New Household Formation and New Housing Starts Has Never Been Wider Total Number of Households, 5 Year Annualized Change Housing Starts, 5 Year Annualized Change 30 20 10 0 -10 -20 -30

65

70

75

80

85

90

95

Source: Census Bureau, Haver Analytics 03/26/12 (Shaded areas indicate a recession)

00

05

ƒƒ Home prices. There are a variety of sources for home prices from both the private sector — Case Shiller Home Price Index, CoreLogic, Zillow, RadarLogic, National Association of Realtors — and the U.S. Government — Freddie Mac, Fannie Mae, Federal Housing Finance Agency, etc. In general, these indices all suggest that home prices fell by between 20% and 30% between mid-2005 and early 2009, and are at best unchanged since then. Price changes before, during and after the bubble vary widely by region, price of home and type of property (single family versus condo, distressed and non-distressed, etc.). ƒƒ Demand for housing. New household formation is running just under 1% per year. Contrast that against the 80% drop in new housing starts over the past five years. The gap between new household formation and new housing starts had never been wider, leading some analysts to suggest that we are quickly running out of houses. But, with so many vacant homes (18 million or so), and young people (and older relatives) living with other relatives, it is difficult to say just how quickly we will run out of housing. The U.S. Census Bureau collects the data on household formation and the housing vacancy data. On balance, the housing market continues to struggle three years after hitting rock bottom, and in some cases seven years after it peaked. How quickly housing can recover from here will help to determine the pace of the overall economic recovery. Warmer and drier than usual weather

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this winter may help to explain some of the better housing data of late. Warmer weather generally means better housing data (sales, construction, showroom traffic, etc.), so it may be that the better tone to the housing market is purely a function of the weather. We need to see some more normal weather and get past the traditional spring selling season to be sure. Our best bet is that the slow recovery in housing will pick up some steam in 2012, but that it will still take several more years before the national housing market is back to normal.  n

LPL Financial Research 2012 Forecasts „„

GDP 2%*

„„

Federal Funds Rate 0%^

„„

Private Payrolls +200K/mo.†

Please see our 2012 Outlook for more details on LPL Financial Research forecasts.

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 indices are unmanaged and cannot be invested into directly. * Gross Domestic Product (GDP) is the monetary value of all the finished goods and services produced within a country's borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory. ^ Federal Funds Rate is the interest rate at which depository institutions actively trade balances held at the Federal Reserve, called federal funds, with each other, usually overnight, on an uncollateralized basis. † Private Sector – the total nonfarm payroll accounts for approximately 80% of the workers who produce the entire gross domestic product of the United States. The nonfarm payroll statistic is reported monthly, on the first Friday of the month, and is used to assist government policy makers and economists determine the current state of the economy and predict future levels of economic activity. It doesn’t include: - general government employees - private household employees - employees of nonprofit organizations that provide assistance to individuals - farm employees 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. Stock investing involves risk including loss of principal. International investing involves special risks, such as currency fluctuation and political instability, and may not be suitable for all investors. Quantitative Easing is a government monetary policy occasionally used to increase the money supply by buying government securities or other securities from the market. Quantitative easing increases the money supply by flooding financial institutions with capital in an effort to promote increased lending and liquidity. The Federal Open Market Committee action known as Operation Twist began in 1961. The intent was to flatten the yield curve in order to promote capital inflows and strengthen the dollar. The Fed utilized open market operations to shorten the maturity of public debt in the open market. The action has subsequently been reexamined in isolation and found to have been more effective than originally thought. As a result of this reappraisal, similar action has been suggested as an alternative to quantitative easing by central banks.

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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 United States Treasure securities). The Chicago Area Purchasing Manager Index that is read on a monthly basis to gauge how manufacturing activity is performing. This index is a true snapshot of how manufacturing and corresponding businesses are performing for a given month. A reading of 50 or above is considered a positive reading. Anything below 50 is considered to indicate a decline in activity. Readings of the index have the ability to shift the day's trading session one way or another based on the results.

This research material has been prepared by LPL Financial. The LPL Financial family of affiliated companies includes LPL Financial and UVEST Financial Services Group, Inc., each of which is a member of FINRA/SIPC. 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

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LP L FINANCIAL R E S E AR C H

Weekly Market Commentary March 26, 2012

10 Indicators to Watch for Another Spring Slide Jeffrey Kleintop, CFA Chief Market Strategist LPL Financial

Highlights In each of the past two years the stock market began a slide in the spring that lasted well into the summer months. We have identified 10 indicators to watch closely in the coming weeks that may warn of an impending slide. So far, about half of the 10 indicators point to a repeat of the spring slide this year, while the other half do not.

In each of the past two years the stock market began a slide in the spring, a phenomenon often referred to by the old adage “sell in May and go away,” which lasted well into the summer months. Are stocks poised to repeat the pattern this year? We have identified 10 indicators to watch closely in the coming weeks that may warn of an impending slide.

What to Watch In both 2010 and 2011 an early run-up in the stock market, similar to this year, pushed stocks up about 10% for the year by mid-April. On April 23, 2010 and April 29, 2011, the S&P 500 made peaks that were followed by 16 – 19% losses that were not recouped for more than five months. While late April is still four weeks away, judging by what indicators seemed to precede the declines in 2010 and 2011, we have identified 10 indicators to watch over the next four weeks. The 10 indicators include: 1. Fed stimulus – In each of the past two years, Federal Reserve (Fed) stimulus programs known as QE1 and QE2 came to an end in the 1 Another Fed Stimulus Program Ending Soon S&P 500 Index Fed Stimulus Programs 1500

QE 1

1400

QE 2

Operation Twist

1300 1200 1100 1000 900 800 700 600 2008

2009

2010

2011

2012

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spring or summer and stocks began to slide until the next program was announced. The current program known as Operation Twist was announced on September 12, 2011 and is scheduled to conclude at the end of June. The stock market may again begin to slide until another program such as QE3, the scope of which was recently hinted at by the Fed, is announced.

2 Spring Slide Indicators Citigroup Economic Surprise Index* Rasmussen Daily Consumer Confidence Index* Yield on 10-Year Treasury Less Yield on 2-Year Treasury Note 150

2. Economic surprises – The Citigroup Economic Surprise index [Chart 2] measures how economic data in the United States fared compared to economists’ expectations. A rising line indicates that the data is consistently exceeding expectations. A falling line suggests expectations have become too high. The index moved to what has historically marked the peaks in optimism about a month or two before the peaks in the stock market in 2010 and 2011. This year, it appears the index may have already started to retreat from a peak since early February; if this index again leads by two months the slide may soon begin.

100 50 0 -50 -100 -150 95 90

3. Consumer confidence – In 2010 and 2011, early in the year the daily tracking of consumer confidence measured by Rasmussen [Chart 2] rose to highs last seen on September 5, 2008, just before the stock market collapse as the financial crisis erupted. The peak in optimism gave way to a sell-off as buying faded. Investor net purchases of domestic equity mutual funds began to plunge and turned sharply negative in the following months. This measure of confidence is once again close to the highs seen in early 2010 and 2011; we will be watching for a turn lower in the index that would indicate the start of an erosion of confidence.

85 80 75 70 65 60 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% Jan 10

Apr 10

Jul 10

Oct 10

Jan 11

Apr Jul 11 11

Oct 11

Jan 12

Source: LPL Financial, Bloomberg Data 03/23/12 *These indexes are unmanaged indexes, which cannot be invested into directly. Past performance is no guarantee of future results.

4. Earnings revisions – The first couple of weeks of the first quarter earnings season (April 2010 and April 2011) drove earnings estimates higher in both 2010 and 2011. Earnings estimates for S&P 500 companies over the next year rose a greater-than-average 3 – 5% over the first couple of weeks of reports. But as the second half of the earnings season got underway in May 2010 and May 2011, guidance disappointed analysts and investors as the pace of upward revisions declined sharply. This year, we will be watching to see how much earnings expectations rise as the initial reports come in and if they begin to taper off sharply. 5. Yield curve – In general, the greater the difference, or spread, between the yield on the 2-year and the 10-year U.S. Treasury notes, the more growth the market is pricing into the economy [Chart 2]. This yield spread, sometimes called the yield curve because of how steep or flat it looks when the yield for each maturity is plotted on a chart, peaked in February of both years at 2.9%. Then the curve started to flatten, suggesting a gradually increasing concern about the economy. This year the market is pricing a more modest outlook for growth, but we will be watching to see if the recent slight decline in the spread (currently about 190 basis points) begins to decline. 6. Oil prices – In 2010 and 2011, oil prices rose about $15 – 20 from around the start of February, two months before the stock market began to decline. This year oil prices have climbed back to the levels around $105 – 110 that they reached in April of last year. However, they have risen

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only about $10 since around the start of February 2012. A further surge in oil prices would make this indicator more worrisome. 7. The LPL Financial Current Conditions Index (CCI) – In 2010 and 2011, our index of 10 real-time economic and market conditions peaked around the 240 – 250 level in April and began to fall by over 50 points. This year, the CCI recently reached 249 and has started to weaken and currently stands at 232. 8. The VIX – In each of the past two years the VIX, an options-based measure of the forecast for volatility in the stock market, fell to a relatively low 15 in April. This suggested investors may have become complacent and risked being surprised by a negative event or data. This year, the VIX has recently declined once again to 15 in the past two weeks. 9. Initial jobless claims – It was evident that initial filings for unemployment benefits had halted their improvement by early April 2010, and beginning in early April 2011, they deteriorated sharply. So far, in 2012 initial jobless claims continue to improve at a solid pace, but it may yet be too early, and so we will be watching for any weakening as April gets underway. 10. Inflation expectations – The University of Michigan consumer survey reflected a rise in inflation expectations in March and April of the past two years. In fact, in 2011, the one-year inflation outlook rose to 4.6% in both March and April. This year, inflation expectations have also jumped higher so far in March, reaching 4%. While this list may seem incomplete, it is notable that many of the most widely watched indicators of economic activity such as manufacturing (the Institute for Supply Management Purchasing Managers Index known as the PMI or the ISM), job growth, and retail sales, among others, did not deteriorate ahead of the market decline, but along with it. It is not that they are not important; it is just that they did not serve as useful warnings of the slide to come, while the above indicators did. So far, about half of the 10 indicators point to a repeat of the spring slide this year, while the other half do not. We will continue to monitor these closely in the coming weeks.

Shorter Slide? While it is possible we will experience another spring slide this year, there are factors that may mitigate the decline short of the 16 – 19% seen in the past two years. Looking back, in 2010 the negative environment that helped fuel the decline included the end of the Fed’s QE1 stimulus program, the uncertainty around the impact of the Dodd-Frank legislation, the eurozone debt problems and bailouts, central bank rate hikes, and the end of the homebuyer tax credit. In 2011, the negatives included the end of the Fed’s QE2 stimulus program, the Japan earthquake and nuclear disaster that disrupted global supply chains and pulled Japan into a recession, the Arab Spring erupted pushing up oil

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prices, the budget debacle and related downgrade of U.S. Treasuries, rising inflation, central bank rate hikes, and the eurozone debt problems coming to a head. Looking ahead, the negatives we face in 2012 already include the end of the Fed’s Operation Twist stimulus program, rising oil prices, China’s slowdown, the European recession, the election uncertainty, and anticipation of the 2013 budget bombshell of tax hikes and spending cuts. However, there are some positives this year that may help offset some of the negatives making for a potential decline that may be less steep than those of the past two years. First, central banks are now cutting rather than hiking rates, which should help to temper global recession fears evident during the past two years’ spring slides. Second, housing is showing signs of improvement as both new and existing home sales are rising at about a 10% pace. Third, while energy prices are up this year (same as last year) food prices are decelerating, which helps to explain why consumer sentiment is going up in the face of higher gasoline prices. Finally, auto production schedules are robust for the next quarter and likely to support manufacturing activity, which had fallen in May through July of the past two years and contributed to the market decline. Given this year’s double-digit gains and the possibility of another spring slide for the stock market, investors may want to watch these indicators closely for signs of a pullback despite the current upward momentum in the stock market and solid economic growth. n

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 indices 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. International and emerging markets investing involves special risks, such as currency fluctuation and political instability, and may not be suitable for all investors. The fast price swings in commodities and currencies will result in significant volatility in an investor’s holdings. 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. The fast price swings in commodities and currencies will result in significant volatility in an investor’s holdings. 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 Standard & Poor’s 500 Index is an unmanaged index, which cannot be invested into directly. Past performance is no guarantee of future results. Citigroup Economic Surprise Index (CESI) measures the variation in the gap between the expectations and the real economic data.

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The Federal Open Market Committee action known as Operation Twist began in 1961. The intent was to flatten the yield curve in order to promote capital inflows and strengthen the dollar. The Fed utilized open market operations to shorten the maturity of public debt in the open market. The action has subsequently been reexamined in isolation and found to have been more effective than originally thought. As a result of this reappraisal, similar action has been suggested as an alternative to quantitative easing by central banks. Gross Domestic Product (GDP) is the monetary value of all the finished goods and services produced within a country’s borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory. Quantitative Easing is a government monetary policy occasionally used to increase the money supply by buying government securities or other securities from the market. Quantitative easing increases the money supply by flooding financial institutions with capital in an effort to promote increased lending and liquidity. Yield Curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity dates. The most frequently reported yield curve compares the three-month, two-year, five-year and 30-year U.S. Treasury debt. This yield curve is used as a benchmark for other debt in the market, such as mortgage rates or bank lending rates. The curve is also used to predict changes in economic output and growth. The VIX is a measure of the volatility implied in the prices of options contracts for the S&P 500. It is a marketbased estimate of future volatility. When sentiment reaches one extreme or the other, the market typically reverses course. While this is not necessarily predictive it does measure the current degree of fear present in the stock market. Purchasing Managers Index (PMI) is an indicator of the economic health of the manufacturing sector. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment.

This research material has been prepared by LPL Financial. The LPL Financial family of affiliated companies includes LPL Financial and UVEST Financial Services Group, Inc., each of which is a member of FINRA/SIPC. 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

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