Advisor Investment Playbook - 3rd Quarter : simplebooklet.com

LPL Weekly Market Commentary (5/17/21) - The economy continues tostrengthen and, so far, this year is off to a better start than even themost bullish economist could have expected. There are always risksthough, including COVID-19 spread outside the U.S., deficit spending,geopolitics, inflation, tax increases, and a potential policy mistake. Notto mention after a record 89% rally for the S&P 500, a well-deservedbreak or consolidation during a historically weak time seasonally wouldbe perfectly normal. But, amid a backdrop of an improving economy,massive levels of fiscal and monetary stimulus, and rising vaccinationrates, we don’t expect any pullbacks to last very long, and we’d use anythat appear as a buying opportunity. We upgraded our forecast for theglobal economy and U.S. corporate earnings in April, and last weekupgraded our 2021 year-end S&P 500 fair-value target range to 4,400-4,450. We continue to recommend an overweight to equities andunderweight to fixed-income position relative to investors’ targets, asappropriate. Economy: RecoveryIVNPAGThis is for Internal Use Only. Distribution to the public is strictly prohibited.

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Inflation is currently the most hotly debated topic in the investment world. While excessive inflation remains arisk, our view (and LPL’s view) is that inflation will remain under control for the foreseeable future. We have nothad significant inflation in 40 years. Need to see more evidence of it to believe it. Economy: InflationIVNPAGThis is for Internal Use Only. Distribution to the public is strictly prohibited.LPL Weekly Market Commentary (5/17/21)Here are some reasons we expect inflation to be transitory:• The root cause. The reopening is happening, supply chain issues are making it harder to get goods, some jobs are hard to fill, andmassive stimulus has created high savings levels, all of which have caused price pressures to build. But once the reopening has taken placeand these bottlenecks have cleared, we would expect inflation readings to come back down. The Fed agrees, having said for months thatany higher inflation numbers will be transitory, which means things should go back to normal once we get past the shock of reopening. 3Member FINRA/SIPC • Easy comparisons. In the midst of the pandemic last spring, CPI was negative three consecutive months in a row and April saw one of thelargest drops ever. Now with the economy improving, comparisons from those dark days are extremely easy, likely distorting the yearlyinflation numbers. • Recovery plays accounted for most of the jump. Used car and truck prices jumped a record 10%, lodging climbed 7.6%, airfare 10.2%, carrentals 16.2%, and sporting events 10.1%. All of these are heavily impacted by the reopening process and accounted for nearly all of thejump. As these prices get back to normal, we expect inflation to calm down. How many more cars can people buy? And, of course sportingevents were cheaper a year ago when no one was going to them. Meanwhile, other major components of CPI, like rents (0.2%), showedmuch more modest increases. • Bigger forces still in play. Yes, near-term inflation has spiked, but in the longer-term a 1970s-style scare is extremely unlikely.Technology, globalization, the Amazon effect, increased productivity and efficiency, automation, and high debt (which puts downwardpressure on inflation) are among the major structural forces that have put a lid on inflation the past decade plus—and will likely continue todo so.

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Equity Markets: Valuation vs. GrowthInternational vs. DomesticIVValue stocks have not beenthis cheap relative to growthstocks in 20 years (left).Likewise, international stockshave not been this inexpensivecompared to US stocks inrecent history (right). In ableak investmentenvironment, these are hugeopportunities. Our models areshifting toward internationalvalue stocks to takeadvantage of these trends. NPAGThis is for Internal Use Only. Distribution to the public is strictly prohibited.Quote from LPL Research (6/15/21): We expect the macroeconomic factors that have driven the market’s shift toward value stocks in recent months topersist, justifying a neutral rather than positive view for tech.

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The shape of the yield curve is one of the bettereconomic predictive tools available. When longer-term yields become less than short-term yields(inverted yield curve), a recession often results.Since August 2020, however, the yield curve hassteepened, indicating an improving economy. Whileits possible that the bond market has priced in toomuch inflation fear in the near-term, the potentialfor still higher rates causes bonds to lack broadinvestment appeal.LPL Research (Weekly Market Commentary -6/1/21) has this to say: After one of the worst startsto a year for fixed income, returns may not getmuch better from here. Long-term interest rateshave traded sideways recently but we expect ratesto potentially rise further, which would putdownward pressure on bond prices. We’re notgiving up on high-quality fixed income though, asTreasury securities have shown to be the bestdiversifier during times of equity market stresses. Fixed Income MarketsIVNPAGThis is for Internal Use Only. Distribution to the public is strictly prohibited.

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Model ChangesIVNPAGThis is for Internal Use Only. Distribution to the public is strictly prohibited.Core Modelsa.Transamerica International Equity Fund (TSWIX)– We are adding this new fund to fill a vacancy in the international developed space. This low-turnover, value strategy focuses on companies with strong, attractively priced cash flows that are exhibiting short-term momentum in the form ofearnings surprises or relative strength. Manager has been in place for 15 years generating very consistent performance. Rated 5-stars byMorningstar and ranks in the top decile for 10-year performance. We are funding the purchase of this fund with the sale of large US growth stockfunds.b.Adding Fidelity Real Estate Income Fund (FRIRX) – This fund is unusual in that it has a much lower risk profile than its real estate peer group,without sacrificing return. It accomplishes this by investing in all areas of the capital structure - equities, preferred stock, commercial mortgaged-backed bonds, and corporate bonds. Morningstar states, “This isn't a typical real estate fund and shouldn't be looked at like one. The managersaim to generate a better yield than ordinary REIT funds and most bond funds but with less volatility and interest-rate sensitivity. They have done afine job of achieving those goals over time.”c.Victory Market Neutral Fund (CBHIX) – This fund simply delivers bond like returns, 3-4% recently, in any environment – including when interestrates are going up. It does this purchasing high-dividend paying stocks and shorting out the broad stock market exposure – thus leaving investorswith nothing but the dividend stream. The fund performs very consistently, including during periods of rising interest rates or declining stockprices.The Fidelity RE Income fund and the Victory Market Neutral fund will create a 10% Alternative sleave in all Core Models. This sleeve isdesigned to provide a steady and attractive income stream that is not highly correlated with the stock or bond market and is being fundedlargely by the sale of low duration bond funds. If you have any questions, want more detailed information, or want to discuss any of these strategies, please contact Steve Hoffman atextension 106. ETF Models In the near future, we will be also shifting from Large Growth to International Developed. There is an active ETF (symbol PXF) that tracks theTransamerica Fund above quite closely. First, we will discuss consolidating the number of ETF models. Stay tuned.

Advisor Investment Playbook - 3rd Quarter

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