Mark Levy’s Economic Update –April 02, 2012 Well, we have put to bed the first quarter of 2012 and surprise, surprise; it was the best quarter for the equity markets since 1998. The S&P 500 Equity Index rose approximately 12% for the quarter and that represents the return expectations LPL Financial had for this index for the entire year. So, with nine months to go in 2012, what happens next? Historically, April has been one of the strongest months for equities, but it also has been the month that many rallies have ended on, like last year. Looking ahead, we certainly see a number of issues and events to be concerned with, but it is unclear if these will be catalysts for significant stock market corrections. The recent oil and gasoline price rise, investor complacency, the European and Chinese economies, an election year and the possibility of rising inflation are just a few of these concerns, but equity valuations are low. According to the Don Hays investment newsletter, the Price Earning Ratio (P/E) for all corporations, public and private is currently 14.1. In the 4th quarter of 2008, the P/E hit a high of 24.9 in the fourth quarter of that year. At 14.1, the P/E is within a range not seen since the early 1990’s. According to Don, “history says that when stocks are this cheap investors have the potential of achieving the average 4 year results of 15% a year gains in stocks. Our inclination then, is to hold. Choppiness or even a correction can be right around the corner, but with equity prices in this low range we are looking at the longer view and want to make sure we participate in a rising tide. Housing affordability, or the ability of a household with the median income to afford the payments on a median priced house at prevailing interest rates, is at an all time high. Rising incomes, record-low mortgage rates and the aftermath of the 20–30% drop in home prices nation wide account for the level of affordability. Home builder sentiment is at 28 (on a scale of 0 – 100 where zero is the worst and one hundred the best). This index has surged in the last nine months and now sits at a four and a half year high albeit still at a very low level. Very surprisingly, inventories of unsold homes are low. Despite a “shadow inventory”, homes in or close to foreclosures and homes still sitting on balance sheets, inventories of unsold existing homes are the lowest they have been since 2006-2007. The official count of the inventory of unsold single family existing loans (from the National Assoc. of Realtors) tells us that 2.1 million existing homes are for sale. Depending on the data source (there is no “official” number for the shadow inventory) cited, the shadow inventory is in the range of 1.5 – 2.0 million. While still above average, the shadow inventory has come down over the past few years as well. The housing information above came from LPL Financial Research and I thought this is a subject that affects us all and many believe a recovery needs to occur in housing for it to be a lasting one. – 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. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. * Stock investing involves risk including loss of principal. The Dow Jones Industrial Average is an unmanaged index and cannot be invested into directly. Past performance is no guarantee of future results. LPL Financial Weekly Economic Commentary, LPL Financial Weekly Market Commentary, and Don Hays Investment Newsletter dated 4/2/2012.