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Market Commentary - 11.10.11

Looking Beyond Europe for Answers

Over the last few months, every move in the stock market seemed to correspond with headlines emanating from Europe. Whether to buy or sell, investors took their cues from developments in Greece and Italy. Given the up and down swings in the stock market over the past few days, it's easy to assume that Europe is the only issue that matters. However, let's take a step back and focus on the fundamental backdrop of equities, namely economic data and corporate earnings.

Just a few weeks ago, despite the fact that only twice in the last 80 years had one occurred, market pundits were screaming that a double-dip recession was looming. A double-dip recession refers to a recession that is followed by a short-lived recovery, followed by a second recession. Now, unless the events in Europe significantly worsen, the odds of another U.S. recession remain quite low. Over the last couple of weeks, there has been significant improvement in U.S. economic data. For example, initial jobless claims are now at seven-month lows, the National Federation of Independent Business index remarkably improved in October, business productivity jumped in the third quarter, mortgage applications for new purchases continued to rise, and retail sales trended higher. All of these suggest a solid footing exists in the U.S. economy. The chart below shows the Citigroup Economic Surprise Index. This index trends higher when economic data beats consensus estimates and lower when it does not. We have seen significant improvement over the past couple months. This upswing has helped to reduce expectations of a double-dip recession and suggests the economy offers an improving fundamental backdrop.

The Citigroup Economic Surprise Indices are objective and quantitative measures of economic news. They are defined as weighted historical standard deviations of data surprises (actual releases vs Bloomberg survey median). A positive reading of the Economic Surprise Index suggests that economic releases have been on balance beating consensus estimates. The indices are calculated daily in a rolling three-month window. The weights of economic indicators are derived from relative high-frequency spot FX impacts of 1 standard deviation data surprises. The indices also employ a time decay function to replicate the limited memory of markets.

While the U.S. economy shows signs of stabilizing, albeit at a low growth rate, corporate profits continue to be strong. According to Thomson Reuters, as of November 4, 2011, S&P 500 third quarter profits rose an impressive 16.8% year-over-year. Furthermore, of the 433 S&P 500 companies that have reported earnings, 70% have beaten consensus earnings estimates and 61% have beaten consensus revenues estimates. These are impressive results that offer a positive backdrop for stock prices (historically speaking, stock prices track earnings). Not surprisingly, the month of October was equally impressive for equities.

Despite the improving economic picture and solid corporate profits, investors continue to make investment decisions based upon overnight news in Europe. While we believe a positive or negative impact from Europe will affect global markets, we want to remind you that other factors at work, improving economic conditions and solid corporate profits, offer a rosier foundation. From an investment standpoint, we would not raise the all clear signal and jump whole-heartedly into risky assets. Instead, we feel there are pockets of opportunities that historically have helped to cushion portfolio volatility and offer some upside potential - dividend equities and corporate bonds to name a few.

This information is compiled by Cetera Financial Group from source material obtained or provided by US federal and state departmental websites, equity index sponsors Standard & Poor's, Dow Jones, and NASDAQ, credit ratings agencies Standard & Poor's, Moody's Ratings, & Fitch Ratings, domestic and foreign corporate issued newswires and press statements, and from referenced compilations and index readings by Bloomberg Professional. The information 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.

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