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Portfolio Compass | October 16, 2019 – James Hendries Financial Advisor

COMPASS CHANGES

  • Downgrading energy resources from neutral to negative / neutral

INVESTMENT EXPECTATIONS

  • We maintained our 3,000 year-end fair value target for the S & P 500 Index, even though the index is close to this level following recent advances in US-China trade discussions. *
  • We recommend a balanced exposure. Relative valuations and the recent rate hike favor value stocks, but several potential Federal Reserve (Fed) rate cuts and a slowdown in economic growth are driving growth.
  • Attractive valuations, demographics, and relatively strong economic growth favor emerging markets over developed foreign markets, although we still consider the risk of a continuing conflict between the US and China to be high.
  • It is difficult to imagine a new short-term positive catalyst for oil prices, after the massive disruption of Saudi supply had only a limited lasting impact.
  • Slower but still solid economic growth and modest inflation can put pressure on yields, but trade uncertainty and the global appetite for US government bonds increase the likelihood that they will remain tied to bandwidth.
  • We value a mix of high-quality inter-bonds, with investment-grade and mortgage-backed securities (MBS) in preference to Treasuries. MBS provides a diversified investment-grade return, while economic growth supports investment-grade companies. High-yield companies could become an alternative to equities on a risk-adjusted basis.
  • The technicals data for US equities suggest a bullish bias as trends remain favorable and positioning is subdued. While technicals continue to favor large caps over small caps, the Russell 2000 index is again close to strong support.

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IMPORTANT SPECIFICATIONS

All stated services are historical and do not guarantee future results.

There can be no assurance that the techniques and strategies discussed will be suitable for all investors or will yield positive results. The purchase of certain securities may be required to implement some of the strategies.

All indexes are not managed and can not be created directly. Unmanaged index returns do not take into account fees, expenses or sales charges. The index performance gives no indication of the performance of an investment.

Equity and pool investment risks

The payment of dividends is not guaranteed. Companies can cut or cancel the distribution of dividends at any time.

Value investments may differ from the overall market. They can remain undervalued by the market over long periods of time.

Investment in equities involves a number of specific risks, including: dividend volatility, capital loss and potential illiquidity of the investment in a declining market.

Investments in securities of foreign and emerging market countries involve particular additional risks. These risks include currency risk, geopolitical risk and the risk associated with different accounting standards. Investing in emerging markets can increase these risks.

The prices of small and mid-cap stocks are generally more volatile than those of large-cap stocks.

Borrowing and borrowing risks

Government bonds and Treasury bills are guaranteed by the US Government to pay principal and interest in a timely manner and, if held to maturity, offer a fixed rate of return and a fixed net present value. The value of the fund shares is not guaranteed and fluctuates.

Alternative risks

Event-driven strategies, such as merger arbitrage, consist of the purchase of shares of the offeree company in the event of a planned merger and the full or partial hedging of the exposure to the acquirer by short-selling the shares of the acquiring company or otherwise. This strategy poses a significant risk, as events may not occur as planned and disruptions to a proposed merger could result in a significant loss of a hedged position.

Managed futures strategies use systematic quantitative programs to identify and invest in positive and negative trends on futures markets for financials and commodities. Futures and futures are speculative, involve a high risk that the expected market outcome will not occur, and may not be suitable for all investors.

INDEX DEFINITIONS

The S & P 500 Index is a 500-weighted, capitalization-weighted index used to measure the performance of the general domestic economy through changes in the total market value of 500 stocks across all major industries.

The Bloomberg Barclays US Municipal Bond Index covers the USD-denominated long-term tax-free bond market. The index has four main sectors: government and local sovereigns, revenue bonds, insured bonds and pre-funded bonds.

The Russell 1000 Growth Index measures the performance of Russell 1000 companies with higher value for money and higher forecast growth. The Russell 1000 Value Index measures the performance of Russell 1000 companies with lower value for money and lower projected growth.

DEFINITIONS

A cyclical share is an equity value whose price is influenced by the ups and downs of the economy as a whole. Cyclical stocks typically refer to companies that sell discretionary products that consumers can afford more in a booming economy and that will decline in a recession.

Duration is a measure of the sensitivity of the price (principal value) of a fixed income investment to a change in interest rates. It is expressed in years. Rising interest rates mean falling bond prices, while falling interest rates mean rising bond prices. The higher the duration, the higher the interest rate risk or the yield on bond prices.

Ratings are published rankings that are based on detailed financial analysis by a credit bureau and are specific to the ability of the bond to meet debt obligations. The highest rating is AAA and the lowest is D. Securities rated BBB and above are rated investment grade.

Gross domestic product (GDP) is the monetary value of all finished goods and services produced within the country within a given period, with GDP usually calculated on an annualized basis. It covers all private and public consumption, public expenditure, investment and exports less imports that occur in a given area.

The simple moving average is an arithmetic moving average calculated by adding the closing price of the security over a number of time periods and dividing that sum by the number of time periods. Short-term averages quickly react to changes in the price of the underlying, while long-term averages are slow to respond.

The Beige Book is a common term used in the Federal Reserve (Fed) report, which is a summary of the commentary on the current economic situation in the Federal Reserve District. It will be released just prior to the Federal Open Market Committee (FOMC) meeting on interest rates and will inform members about changes in the economy since the last meeting.
Technical analysis is a method of valuing securities on the basis of statistics generated by market activity, such as: Eg past prices, volume and momentum. It is not intended to be the sole mechanism for trading decisions. Technical analysts do not try to measure the intrinsic value of a security but use charts and other tools to identify patterns and trends. The technical analysis carries an inherent risk, including that past performance is not an indicator of future performance. The technical analysis should be used in conjunction with the fundamental analysis in the decision-making process, including considerations such as: investment theory, eligibility, expected time horizon and operational factors such as trading costs are examples.

The P / E (price-earnings ratio) is a measure of the price paid for a stock relative to the company's net income or gain per share. It is a financial measure used for valuation: Higher P / E means that investors pay more for each unit of net income, so the stock is more expensive than a stock with lower P / E.

Alpha measures the difference between the actual returns of a portfolio and its expected performance as measured by beta risk. A positive (negative) alpha indicates that the portfolio has performed better (worse) than the beta would predict.

Beta measures the volatility of a portfolio relative to the benchmark. A beta of more than 1 indicates that the portfolio has historically been more volatile than its benchmark. A beta of less than 1 indicates that the portfolio was less volatile in the past than its benchmark.

An idiosyncratic risk can be considered to be the factors that influence an asset such as a stock and the underlying business on a microeconomic level. Idiosyncratic risk hardly correlates with market risk and can therefore be significantly reduced or eliminated from a portfolio through appropriate diversification.

This research material was prepared by LPL Financial, LLC.

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