Mark Levy’s Economic Update – Thursday, September 21, 2017

September 26th, 2017 by Legacy Wealth Planning

In the next few months some of you (advisory clients) will be getting notifications of a change at Legacy Wealth Planning regarding our business structure. In order to adapt to this ever-changing world, we are creating our own Registered Investment Advisor (RIA) to our business model. Of course, LPL Financial will remain our broker dealer, but this change will allow us to expand our product and advice services to our clients. When we transition from LPL’s RIA to our own, there will be paperwork to address for advisory clients only and we will contact you directly if you are affected. I’m including this notice in my newsletter to simply make you aware of this event in advance – there is no current action needed from you until we contact you in the future.

When we invest in equities, I believe the smart move is to diversify our portfolios. Why? We do so because when stock markets correct, the draw down can be painful and a diversified portfolio can potentially be less impacted. There are many subsectors in equites, like large, medium and small capitalization stocks. There are also international and emerging market companies that can be invested in and there is another classification called growth and value.

In the last year, growth has been on a roll. Based on the Russell 3000 style indexes, growth’s 18% year-to-date gain is 14% ahead of value’s 4% advance. Looking further back, this growth outperformance is nothing new. Over the past 10 years, including the financial crisis period of 2008 and 2009, growth has outpaced value by 50%, representing the longest period of growth outperformance since style indexes began to gain a following about 40 years ago. For LPL Financial Research, this observation is setting off some alarm bells and LPL thinks value is possibly setting up for a rebound.

A historically favorable condition for the value style to potentially thrive is an acceleration in economic growth. Although today’s economic growth is still subpar, it has picked up a bit from 2% gross domestic product (GDP) growth to around 2.5%. GDP grew in the second quarter, but a slowdown to 2-2.5% is likely in the third, excluding the temporary effects of Hurricanes Harvey and Irma, Additionally, we have seen a pickup in earnings growth, which also tends to correlate with better value performance. The S&P 500 index had produced two consecutive quarters of double-digit year-over-year earnings gains. Yet, the value style continues to lag. So, has this relationship been broken? LPL Research doesn’t think so and here is why:

Interest rates have remained low and inflation stays contained, which had prevented the value oriented reflation trade that would normally lift the financials and natural resource stocks on the value side from working. Also, market participants are skeptical the latest GDP rate can be maintained, but if it can, the value style may have its day and diversified accounts may be glad to have that asset class in the portfolio. – Mark

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. No strategy assures success or protects against loss. Economic forecasts may not develop as predicted. Some of this research material has been prepared by LPL Financial. All indices are unmanaged and may not be invested into directly. Stock investing involves risk including loss of principal. The prices of small and mid-cap stocks are generally more volatile than large cap stocks. Value investments can perform differently from the market as a whole. They can remain undervalued by the market for long periods of time. The Russell 3000 Growth Index is an unmanaged index comprised of those Russell 3000 companies with higher price-to-book ratios and higher forecasted growth values. The Russell 3000 Value Index measures the performance of those Russell 3000 companies with lower price-to-book ratios and lower forecasted growth values. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. Referenced Material: LPL Research Weekly Market Commentary dated September 18, 2017. Approved Tracking #: 1-647038.

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