YOUR FINANCIAL FUTURE

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1 YOUR FINANCIAL FUTURE August 2014 In This Issue Bond Market Perspectives Week of August 4, 2014 Last weeks batch of top-tier economic data failed to act as a catalyst for additional bond gains. Weekly Market Commentary Week of August 4, 2014 Michael Majhanovich & Doran James Wyoming Wealth Management 2620 Commercial Way Suite 100 Rock Springs, WY Fax: becky.moeller@lpl.com wyomingwealthmanagement. org Losing almost 3% in a week seems a minor concern given historical market ups and downs; nevertheless, investors may begin to wonder if stock market valuations are signaling a decline. What Rising Interest Rates May Mean to You With higher rates on the horizon, you might be wondering how your investment portfolio could be affected.

2 2 Bond Market Perspectives Week of August 4, 2014 Highlights Last week's batch of top-tier economic data failed to act as a catalyst for additional bond gains. June and July bond performance may be representative of what investors can expect after a strong start to the year. Bonds Take a Breather After a strong start to 2014, bonds took a breather in July with the broad Barclays Aggregate Bond Index posting a modest loss. The decline follows a meager 0.05% return in June. As we have commented in this publication previously, the pace of bond performance was unsustainable, and June and July performance may signal exhaustion. Last week witnessed bond price declines despite some support from weaker stock markets. Unlike March 2014, the last time the broad index declined, price declines were more broadly distributed in July, even if modest in most cases [Figure 1]. From high-quality Treasuries to high-yield bonds, total returns were negative, but year-to-date returns remain firmly positive. Among taxable bonds emerging market debt managed slightly positive returns as interest income marginally offset softer prices, while Treasury Inflation Protected Securities and investment-grade corporate bonds were flat. Foreign bonds hedged for currency movements led performance for the month as they continued to benefit from European bond strength. In general, July performance should be viewed in the context of what has been, and still is, a good year for bond investors.

3 3 Aside from sectors, long-term bonds were one of the few segments of the market to manage gains in July Short and intermediate bond prices, on average, declined in anticipation of a Federal Reserve (Fed) rate hike in late Long-term bonds managed a modest gain of 0.25%, according to Barclays index data, benefiting from geopolitical concerns and lingering doubts over how high the Fed may ultimately raise interest rates. Municipal bonds also managed gains for the month of July, reversing late June/early July underperformance. Continued low issuance, fading Puerto Rico concerns, and heavy reinvestment needs helped fuel modest price gains. Another Catalyst Needed We believe June and July are broadly representative of what bond investors can expect going forward. Year-to-date strength has led to lower yields and higher valuations across the bond market. In last week's commentary ( Bond Market Perspectives: Calling the Fed's Bluff), we discussed how high-quality bonds would need another catalyst to push bond prices higher and yields lower. Last week's batch of top-tier economic data failed to produce that missing catalyst for additional price gains. The July employment report showed payrolls increased by more than 200,000, registering the sixth consecutive monthly gain in excess of 200,000. Also, both the July Institute for Supply Management manufacturing survey and second quarter economic growth (as measured by gross domestic product) were stronger than expected. A benign statement from the Fed and stock market volatility lent support to bonds, but neither economic data nor the Fed provided the catalyst for another round of bond gains. High-Yield Pullback The better economic data should provide support to high-yield bonds, a sector in the midst of its biggest sell-off since spring An illiquid trading environment has exacerbated price declines that first began in June on profit taking and then continued through July as equity markets remained volatile on a host of concerns from geopolitics to earnings to the economy. High-yield spreads have increased by over 1%, the sharpest move since 2013 [Figure 2]. High-yield bonds may remain volatile near term, but if the average yield (which is now 5.9%) increases, it should help bring out demand given still-low yields across high-quality bond markets.

4 4 Earnings reporting season and the latest release of the Fed's Senior Loan Officer Survey bode well for a continued low default environment -- a key underpinning for high-yield bonds. Second quarter earnings are on pace to rise nearly 8% year over year with 65% of companies reporting. The Fed's lending survey showed a growing number of institutions easing lending standards. Easier lending standards reduce the probability of default, which is one reason why this survey has been such a good leading indicator of defaults [Figure 3]. While high-yield volatility has startled some, we view it as a natural market correction. Bank loans, a similar category, also declined in July but much less so in keeping with the sector's lower historical volatility compared with high-yield bonds. Our main takeaway from last week's bond market activity is that top-tier economic data did not provide the fuel for additional gains. Conversely, the not-too-hot, not-too-cold nature of the jobs report may keep the Fed at bay and leave bond prices and yields range bound near current levels until the next set of top-level economic data. IMPORTANT DISCLOSURES

5 5 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. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. Index performance is not indicative of the performance of any investment. The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values and yields will decline as interest rates rise, and bonds are subject to availability and change in price. This research material has been prepared by LPL Financial. To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is not an affiliate of and makes no representation with respect to such entity. Not FDIC or NCUA/NCUSIF Insured No Bank or Credit Union Guarantee May Lose Value Not Guaranteed by any Government Agency Not a Bank/Credit Union Deposit Tracking # (Exp. 08/15)

6 6 Weekly Market Commentary Week of August 4, 2014 Highlights Losing almost 3% in a week seems a minor concern given historical market ups and downs; nevertheless, investors may begin to wonder if stock market valuations are signaling a decline. Since the end of the last significant sell-off for stocks, the market has been in a consistent upward trend. Valuation is a poor market-timing indicator; while valuation should always be considered, it is a blunt tool that should be taken into broader context. Stock Market Valuations Suggest Bull Market Still Has Teeth After hitting another all-time high on July 24, the S&P 500 Index fell for six consecutive trading days, leading to a 2.7% drop for stocks for the week ending August 1, Losing almost 3% in a week seems a minor concern given historical market ups and downs, especially in the face of a strong bull market that has seen a 220% gain since the market's low point in Nonetheless, investors may begin to wonder if stock market valuations are signaling a larger impending market decline and possibly the end of this bull market cycle. Part of the fear over last week's sell-off is that investors have not been accustomed to drops in stock prices over the past two years. After all, it has been a long while since we have seen a significant pullback. In fact, this week marks the third anniversary of the last 10% or greater correction in the S&P 500, which happened in the late summer of 2011 (July 22, 2011-August 8, 2011). The catalyst at the time was the debt ceiling debacle in Congress and the resulting downgrade of the United States' credit rating by Standard & Poor's alongside the increased risk of a break-up of the Eurozone. The stock market fell 17% during this two-and-a-half week period (and dropped 19% peak to trough from the April 2011 high through the October 2011 low). Three years seems like a very long time without a 10% correction and frankly, it is. But it is not without precedent. Economic expansions periodically offer long stretches of remarkably low volatility and a preponderance of up days for stocks. Since the end of the last significant sell-off for stocks (October 3, 2011), the market has been in a consistent upward trend. The result is that it has been 1033 days since the end of a period culminating in a double-digit drop for the S&P 500. Since 1980, three periods have gone longer without a double-digit decline [Figure 1]. Keep in mind we came very close to that 10% mark in 2012, with a loss of just under 10% in April through June of that year, and during that time a number of market segments did lose more than 10%. In a typical year, the S&P 500 endures an average of four 5% pullbacks. Against this backdrop, we see this latest bout of volatility (roughly a 3% drop in the S&P 500 since July 24) as normal, overdue, and frankly, healthy. While we do not necessarily believe this latest bout of volatility is the start of a 10% market correction -- though it is possible -- it is worth noting that we have had only one 5% pullback so far this year (January 22 - February 5, 2014). As we move later in the business cycle, an increase in volatility is to be expected. But at this point, based on our economic and market outlook, we would view this slight sell-off and any more pronounced weakness as a potential buying opportunity. Valuations Not Overly Stretched The current pullback has led to slightly more attractive valuations. With the bull market having produced a total cumulative return of over 220% since it began on March 9, 2009, it is no surprise that many investors and stock market pundits have begun expressing concerns about stock valuations. We highlighted the

7 7 importance of valuations, looking specifically at price-to-earnings ratios (PE), in our Mid-Year Outlook 2014: Investor's Almanac Field Notes publication, where it is included as one of our five "forecasters." These five key indicators, which include valuations, have consistently and reliably signaled the increasing fragility of the economy. Furthermore, they have marked the transition to the late stage of the business cycle and have foreshadowed the likelihood of a recession. PEs are the most commonly cited metric when measuring stock market valuations. PEs measure the price of a stock market index, or single stock, relative to corporate profits, or earnings. Observing the PE ratio of a broad index such as the S&P 500 can measure how expensive the broad market may be. The lower the PE, the more attractive stocks are and vice versa. However, there are three very different versions: Trailing PE, the price divided by the past four quarters' earnings per share for companies in the S&P currently at about 16.9 (and our preferred measure); Forward PE, the price divided by the Wall Street analyst consensus estimate for the next four quarters' earnings per share -- currently at 15.2; Cyclically adjusted PE, or CAPE, the price divided by the average of 10 years of earnings, adjusted for inflation -- currently about 26. As a note, we rarely use the CAPE, which has been saying for five years now that stocks are overvalued even as one of the most powerful bull markets ever seen has taken place. It is our opinion that the CAPE fails as an investing tool for several reasons, among them the arbitrary 10-year adjustment period, which is longer than most actual cycles and therefore distorts the "cycle" average for earnings. In addition, huge changes to the index constituents over the past 10 years almost render the CAPE useless. So many big companies were not even in the S&P 500 Index 10 years ago, like Google (added in 2006) and Amazon (2005), while AIG was one of the largest constituents and Lehman Brothers was in there as well (and obviously is not now). Valuation Is a Useful but Blunt Tool While of paramount importance to investment returns over the long term, there is no relationship over the short term between the level of the PE and stock market performance over the following year. As a result, valuation is a poor market-timing indicator. In other words, valuation is like brushing your teeth -- you know it is important over the long term, but its significance and impact is at some time in the uncertain future. Like regular brushing, monitoring valuation can help you take care of the health of your portfolio in the long term, but it won't tell you what's going to happen in the next year. Thus, while valuation should always be considered, it is a blunt tool -- like a toothbrush -- that should be taken into broader context. The current trailing PE of 16.9 is above the long-term average (since 1927) of about 15, but it is far from the peak of 2000, and it remains in line with the average since Nevertheless, it is approaching an important range. Since WWII, every bull market has ended with a PE between 17and 18, with the exception of the bull market that ended in 2000, which peaked much higher. This is not to suggest the PE could not go higher than it is today. In past cycles, PEs did reach higher levels before ending up between 17 and 18 as the stock market peaked. We also note that earnings are on pace for the high single-digit gains that we forecast for this year, and as a result, very little, if any, PE multiple expansion is required for the S&P 500 to reach our targeted return range for 2014 of 10-15%.

8 8 Weeks like last week drive investors to search for a reason to justify the modest sell-off. Although there are many potential culprits, valuation is likely not one of them. Stock valuations remain slightly elevated but not at levels to spark selling pressure or concern. That said, valuations at current levels do suggest the bar for growth has been raised and stocks are likely more vulnerable to any economic deterioration if growth does not materialize in the second half. However, amid the equity market losses of last week, economic data continued to validate a strengthening economic backdrop, including a healthy July jobs report, above-consensus second quarter gross domestic product (GDP) results, and a better-than-expected ISM report for July (please see this week's Weekly Economic Commentary for details). These strong results are important since solid growth, not valuations, remains the most important catalyst for fueling stock market gains for the remainder of the year. So keep brushing those teeth and looking out for market "cavities," but, for now, we would not be too afraid of the dentist. IMPORTANT DISCLOSURES 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. All performance reference is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. The economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful. INDEX DESCRIPTIONS The Standard & Poor's 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stock representing all major industries. This research material has been prepared by LPL Financial. To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial is not an affiliate of and makes no representation with respect to such entity. Not FDIC or NCUA/NCUSIF Insured No Bank or Credit Union Guarantee May Lose Value Not

9 9 Guaranteed by any Government Agency Not a Bank/Credit Union Deposit Tracking # (Exp. 08/15)

10 10 What Rising Interest Rates May Mean to You Rising interest rates can provide investors the chance to reinvest in bonds offering higher yields. Speculation is ongoing about when the Federal Reserve will begin hiking short-term interest rates. While the central bank has kept short-term rates near zero since December 2008, at the most recent policy meeting, Fed Chairwoman Janet Yellen indicated that with continued signs of economic improvement, higher rates could come in With higher rates on the horizon, you might be wondering how your investment portfolio could be affected. Individual Bonds 1 Generally speaking, rising interest rates lower the value of bonds that investors currently hold. This is because investors can now buy similar bonds with the same maturity by paying a higher rate, which lowers the value of existing bonds. But for investors who hold their bonds until maturity, rising rates are not necessarily cause for worry. Price fluctuations do not affect a bond's coupon payment and should not affect the ability to pay back principal at maturity. Some investors may choose short-term bonds to limit their exposure to price fluctuations. Rising interest rates can also provide investors the chance to reinvest in bonds offering higher yields. If you seek a balance between low price fluctuations and higher yields, consider choosing a mix of short-, intermediate-, and long-term bonds. Bond Mutual Funds 2 A bond fund's value also fluctuates as the prices of its individual holdings change. And because, unlike individual bonds, bond funds do not have a specific maturity date, principal risk cannot be minimized by holding to maturity. In other words, if interest rates rise, there is a chance that the bond fund's total return will be lower. Yet because they continuously buy and sell holdings, bond funds have the potential to offer instant diversification. 3 Stocks and Stock Mutual Funds 4,2 Prices of individual stocks and stock funds may decline as interest rates rise, as higher rates make bond investments more appealing. Higher interest rates can also negatively affect corporate earnings in some industries, such as utilities and financial services, potentially causing those stocks to decline. But some stocks may be less sensitive to interest rates because of other factors, including new technologies, currency exchange rates, and corporate management changes. Since stocks and bonds generally do not tend to move in lockstep, the best way to insulate your investments against interest rate risk may be to diversify between both types of investments. Diversifying may also help to stabilize your portfolio during times of market volatility. 3 1 Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and are subject to availability and change in price. 2 Investing in mutual funds involves risk, including loss of principal. Mutual funds are offered and sold by prospectus only. You should carefully consider the investment objectives, risks, expenses and charges of the investment company before you invest. For more complete information about any mutual fund, including risks, charges and expenses, please contact your financial professional to obtain a prospectus. The prospectus contains this and other information. Read it carefully before you invest. 3 There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not ensure against market risk. 4 Investing in stocks involves risks, including loss of principal Wealth Management Systems Inc. All rights reserved

11 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. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. Michael Majhanovich & Doran James is a Registered Representative with and Securities are offered through LPL Financial, member FINRA/SIPC. Insurance products offered through LPL Financial or its licensed affiliates. Wyoming Wealth Management is not a registered Broker/Dealer and is not affiliated with LPL Financial Not Bank/Credit Union Not FDIC/NCUA Insured Guaranteed Not Insured by any Federal Government Agency May Lose Value Not a Bank Deposit This newsletter was created using Newsletter OnDemand, powered by Wealth Management Systems Inc.