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Market Commentary - 6.20.12

Second-Half Market Perspectives

With the first half of 2012 winding down, the pattern of a strong first part of the year followed by market weakness continues. At the beginning of each of the past three years, there were signs economic activity was picking up. Each time it seemed the economy might be stepping onto a higher growth path, breaking out of the sluggishness that has characterized the current recovery. Within a few months, however, leading economic indicators - especially payroll growth - began showing unmistakable signs of faltering growth, and the stock market, which had risen in anticipation of a pickup in activity, retreated from its gains. While markets showed some fortitude in the late parts of the past few years, what's in store for the rest of this year?

Let's first focus on today. In Europe, there is a recession, government bond yields are still high, Spain has missed its budget targets and needed a bailout for its banks, and voters across Europe have signaled they are reluctant to accept austerity. Here in the United States, it is not rosy either. The consensus among economists is that real GDP in the United States will grow by 2.2% this year, which is below its average of 2.8% since 1970. With a presidential election in November, and the United States facing a "fiscal cliff" in January, it is natural to suspect that political uncertainty is playing a role in dampening economic activity. The "fiscal cliff" is the triple whammy of the expiration of the Bush tax cuts, extended unemployment benefits and automatic government spending cuts agreed to as part of the debt ceiling extension last year. This combination of concerns in Europe and a stagnant U.S. economy has led to uneasiness and increased volatility in global markets.

Looking forward, the softening of the global economy, policy uncertainties in an election year and Europe's ongoing travails clearly suggest that the markets still face strong headwinds. Despite these headwinds, our outlook is not much changed from the beginning of the year - we continue to expect modest market returns coupled with sharp bouts of volatility.

Given these themes, we do not believe there is enough to induce us to change our overall asset allocation views. These are to favor an allocation to equities in line with investment objectives, with a preference to dividend paying stocks and to growth over value. Within equities, we would underweight developed-country international stocks, especially European equities, relative to U.S. stocks. Although valuations have become inexpensive in Europe, we believe it makes sense to wait until the region has made more progress in solving its crisis. In addition, U.S. stocks may get a boost from any fallback in the dollar and rise in commodity prices as the European crisis abates. In fixed income, those sectors of the bond market that provide a cushion in the form of a spread over U.S. Treasuries (such as corporate bonds) are still attractive, in our view, especially relative to long-term U.S. Treasuries, where yields are too low relative to the risks of an eventual rise in inflation and interest rates. Finally, now more than ever we believe diversification is important, across stocks and bonds and especially into alternative investments, where fund managers have the ability to react quickly to a variety of market conditions.

This information compiled by Cetera Financial Group is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The information has been selected to objectively convey the key drivers and catalysts standing behind current market direction and sentiment. No independent analysis has been performed and the material should not be construed as investment advice. Investment decisions should not be based on this material since the information contained here is a singular news update, and prudent investment decisions require the analysis of a much broader collection of facts and context. All economic and performance information is historical and not indicative of future results. Investors cannot invest directly in indices. This is not an offer, recommendation or solicitation of an offer to buy or sell any security and investment in any security covered in this material may not be advisable or suitable. Please consult your financial professional for more information.

While diversification may help reduce volatility and risk, it does not guarantee future performance. Additional risks are associated with international investing, such as currency fluctuations, political and economic instability, and differences in accounting standards.

Multi-Financial Securities Corporation, its affiliates and subsidiaries and/or their officers and employees may from time to time acquire, hold or sell a position in the securities mentioned herein.