Mark Levy’s Economic Update – Tuesday, May 06, 2014 The last few months have seen a rotation in U.S. equity markets. Some stocks have dropped in price as Wall Street and retail investors have questioned the valuation levels of these companies. At the same time, The Dow 30 Industrial Average, only a few days ago, closed at a new high of 16,580. Today it is trading at 16,454, very near that high level. The Dow Index is comprised of companies that have histories of revenue and profits, unlike the high flyers above that have high growth, but in some cases, very little profits or earnings yet in evidence. It is difficult to anticipate when market rotations like this one will occur, so it should be obvious that the diversified portfolio is the right approach to ensure participation in what is “working” and not too much exposure to “what isn’t”. Four times a year, investors focus on the most fundamental driver of investment performance; earnings. For U.S. stocks, the earnings reporting season has produced nearly all the gains in the stock market over the past four years. The earnings season in the United States is now nearly over with 374 of the S&P 500 companies – representing 80% of the market value of the index – having reported. While the earnings season will only reach the halfway point this week in Europe and Japan, the difference so far between their earnings results and guidance and U.S. markets is striking. High hopes of an overseas earnings rebound are being disappointed, which may be creating a performance headwind. While we are optimistic about certain European equity positions, it looks more and more like U. S. stocks will likely outperform most developed foreign stocks in 2014. Tomorrow, Wednesday, May 7, Federal Reserve (Fed) chair Janet Yellen will testify before the Joint Economic Committee (JEC) of Congress. The Q & A portion of the testimony will be closely watched, as then Fed Chair Ben Bernanke’s comments during the Q & A portion of his testimony of his appearance at the JEC in mid-May sparked the “taper tantrum” in the U.S. Treasury bond market that drove the yield on the 10 – year Treasury from 1.75% to 3.00% between early May and early September of 2013. Although the labor market is clearly improving, most market participants expect Yellen to maintain her dovish tone on the labor market and economy at this week’s testimony, as there is still plenty of evidence that the labor market is not “back to normal”. So, as usual in this investment game, we watch and wait. LPL Research believes equity market performance will occur in the second half of this year, but it is possible in addition to the equity rotation we have been seeing, a general correction can occur, especially after the strong equity performance we have experienced in the last few years. Please contact us if you have any investment questions. – 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. Past performance is no guarantee of future results.  Referenced material, LPL Financial Weekly Economic Commentary and LPL Financial Weekly Market Commentary, both dated 5/5/2014. Of course, 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. International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.