FEBRUARY 11, 2015 Is It Safe? By Mark Luschini, Chief Investment Strategist In the 1976 movie “Marathon Man”, Dustin Hoffman portrayed a student and avid runner suspected of holding secretive information. In one famous scene, actor Sir Lawrence Olivier tortures Hoffman using a dental utensil and repeatedly asks “Is it safe?” Olivier’s character was a fugitive Nazi war criminal dodging capture while trying to recover stolen diamonds, knowledge about which he believed Hoffman possessed. Investors may be wondering if it’s safe to invest in the stock market today. After all, stocks have risen more than 200% since the nadir in March 2009 and consecutively for six years. While corporate profits have grown and the economy has expanded, what’s left to support further gains in the stock market from here? Or, put another way, what could derail the bull market? We have written extensively about our forecast for greater volatility this year. There are plenty of cross currents that could disrupt the market, including shifting central bank policy, an oil-related geopolitical skirmish, a currency war, and an erupting conflict in Europe, the Middle East or elsewhere. However, we view these possibilities as a likely source of a short-term setback. The fundamental economic underpinnings point to enough strength for the market to regain its footing and overcome a temporary pull back. What could leave a longer-lasting scar on the market is a threat of recession. The prospect of declining economic activity would cause investors to sell stocks in anticipation of slipping profits. The subsequent de-rating of stocks could be material and lengthy, mostly predicated upon the circumstances under which recessionary conditions were induced. So what are the probabilities of a recession in our view? Remote. Historically, the yield curve – simply the sequential maturities of fixed income securities traded in the bond market with terms from 1-day to 30 years – has a very high predictive value concerning the direction of the economy. If the yield curve is inverting, where short-term yields are higher than long-term yields, what follows have usually been slow to recessionary economic conditions. When the yield curve is steep, its natural state since the economy expands more often that it contracts, it generally portends positive economic growth. This, in turn, usually bodes well for stock prices since that is typically a fertile climate for companies to grow profits. It can be seen in the table, the yield curve (plotted in blue) when inverting (dropping below zero) has forecast recessions in advance. Note that ahead of each shaded area marking recessions since the late 1970’s, the blue line dipped into negative territory. So where are we today? The yield curve is in its natural state and has actually steepened of recent. Therefore, if past is prologue the prospects of a recession, as signaled by the predictive powers of the yield curve, are dim. Page 1 of 2 Investable Themes JANNEY MONTGOMERY SCOTT LLC Member NYSE • FINRA • SIPC If that weren’t enough, the following lays out a compilation of economic data that supports our forecast for continued, positive economic growth.           IMF and World Bank GDP forecasts raised to 3.6% and 3.2%, respectively. Job gains in the last three months occurred at the fastest pace since the 1990’s Wage growth increased to 2.2% annualized and is expected to climb higher Inflation running below 2% is tame and well-anchored Purchasing Managers’ report manufacturing and service industries expanding Small business optimism is at pre-recession highs and hiring plans are increasing Consumer confidence levels are the highest in 14 years The gasoline “tax cut” is a $150 billion boon to the consumer’s pocketbook Dysfunctional politics and fiscal headwinds have receded Corporations are flush with cash and are reporting rising profits It is because we believe the U.S. economy is poised to grow, that stocks should follow suit. Clearly, it may not be in a straight line, but hosting a fear of a decline in the stock market which dislodges a sound choice to own stocks in proportion with one’s risk budget, can be costly. Is it safe? We believe stocks are likely to deliver attractive results, and certainly have a distinct advantage over idle cash. We find dividend-paying stocks to be particularly appealing for income investors or those seeking to reduce the risk-profile of their equity portfolio. Disclaimer: Past performance is no guarantee of future performance and future returns are not guaranteed. There are risks associated with investing in stocks such as a loss of original capital or a decrease in the value of your investment. This report is provided for informational purposes only and shall in no event be construed as an offer to sell or a solicitation of an offer to buy any securities. The information described herein is taken from sources which we believe to be reliable, but the accuracy and completeness of such information is not guaranteed by us. The opinions expressed herein may be given only such weight as opinions warrant. This Firm, its officers, directors, employees, or members of their families may have positions in the securities mentioned and may make purchases or sales of such securities from time to time in the open market or otherwise and may sell to or buy from customers such securities on a principal basis. Page 2 of 2 Investable Themes JANNEY MONTGOMERY SCOTT LLC Member NYSE • FINRA • SIPC