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  The Recovery In Financials Could Include Rising Dividend Payouts
Posted Under: Equity Income

 

View from the Observation Deck 

  1. As indicated in the chart, from 2004-2007, the financial companies in the S&P 500 Index accounted for nearly 30% of the S&P 500 Index's dividend payout. In that period, no other sector even reached 15%.
  2. The chart shows a steep plunge in the contribution from financial companies in 2009 and 2010. This was an unfortunate byproduct of the 2008-2009 financial crisis.
  3. The fallout from the financial crisis was hard on many financial companies, particularly the banks, in our opinion. In some cases, dividends were suspended altogether.
  4. In past posts, we noted that the contribution from financial companies to the S&P 500 Index's dividend payout had once again ascended to a level that exceeded the other nine sectors.
  5. As noted in the chart, for now, that is no longer the case due to S&P's decision to create an 11th sector: Real Estate. Real Estate contributed 4.69% as of 9/20/16. The biggest contributor was Information Technology at 15.23% (not shown).
  6. The recovery in the financial sector should continue, in our opinion. Those banks that cleared the Fed's annual stress tests in June 2016 were approved to return capital to their shareholders in the form of stock dividends and share buybacks. In September, Goldman Sachs estimated that banks should return capital equal to an average of 83% of their estimated earnings over the next year, up from 69% following last year's stress tests, according to Market Realist. 

This chart is for illustrative purposes only and not indicative of any actual investment. The illustration excludes the effects of taxes and brokerage commissions and other expenses incurred when investing. Investors cannot invest directly in an index. The S&P 500 Index is a capitalization-weighted index comprised of 500 stocks used to measure large-cap U.S. stock market performance, while the S&P 500 Financials Index is capitalization-weighted and comprised of S&P 500 Index constituents representing the financial sector.

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Posted on Tuesday, September 27, 2016 @ 1:44 PM • Post Link Share: 
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  Stocks Ended Sept. 23, 2016
Posted Under: Weekly Market Commentary

 
Equity markets traded up this week as positive economic news, including another delay by the Fed in raising rates, fueled markets. The S&P 500 Index was up 1.2% but was outpaced by the S&P 400 Midcap Index (up 2.0%) and the S&P 600 Smallcap Index (up 2.6%). Year-to-date the S&P 600 Smallcap Index (up 15.0%) and the S&P 500 Midcap Index (up 13.1%) are far outpacing the S&P 500 Index (up 8.2%). So far 2016 has been a reversal of recent trends as 2013 was the last time the S&P 1000 Smidcap Index outpaced the S&P 500 Index. This week European stocks rallied as the U.K. FTSE 100 Index was up 3.0% in GBP, the French CAC 40 was up 3.6% in EUR and the German DAX rallied 3.4%. The U.S. Federal Reserve and the Bank of Japan continuing their monetary policies helped to lift many European equities higher. Crude oil had a volatile week. Crude opened the week close to $43 a barrel and rose to $46.32 Thursday, only to tumble down to $44.48 to close Friday. OPEC appeared to have a deal figured out on Thursday where the Saudi's offered to cut oil production as long as Iran froze production growth. However, on Friday it was announced that no OPEC deal was immanent, causing the crude price to fall. FedEx Corp. rallied nearly 10% this week as they announced strong earnings and guidance. FedEx management stated that they expect to see record holiday shipping this year and that they will add 50,000 seasonal workers as a result. Adobe Systems Inc. also rallied over 8.6% after they announced strong earnings and guidance primarily from higher than expected digital media spending. Looking forward to next week, markets should have a more up-to-date view on consumer spending as Carnival Corp., NIKE Inc., PepsiCo Inc. and Costco Wholesale Corp. are expected to release quarterly results.
Posted on Monday, September 26, 2016 @ 8:33 AM • Post Link Share: 
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  US Economy and Credit Markets Ended Sept. 23, 2016
Posted Under: Weekly Market Commentary

 
Treasury prices rose over the course of the week as the Federal Reserve decided to keep interest rates at 0.25 during the September meeting. Treasury prices stayed steady the first two days of the week as home-builder confidence reached its highest reading in a decade on Monday and investors awaited the Fed decision. When the Fed announced on Wednesday that rates would remain the same, Treasuries rose modestly. However, 3- and 6-month Treasuries rose significantly as investors believed that the Fed's policy statement signaled that an interest rate hike was likely before the end of the year. This caused a flattening of the yield curve, which is usually a sign that investors believe that interest rates are about to rise. The Fed's dot-plot implied one rate hike in 2016 and two in 2017. This drop in yields occurred despite the Bank of Japan announcing earlier in the day a 10-year interest rate target to fight deflation. Treasuries continued to climb on Thursday despite lower than expected Initial Jobless Claims due to poor existing home sales and slower factory activity. Friday's manufacturing data was also weak and Treasuries remained steady despite the Boston Fed President saying he and two other dissenters wanted to raise rates. Major economic reports (and related consensus forecasts) for the upcoming week include: Monday: August New Home Sales (600,000), September Dallas Fed Manf. Activity (-3.0); Tuesday: September Prelim. Markit US Services PMI (51.2), September Consumer Confidence Index (98.7); Wednesday: September 23 MBA Mortgage Applications, August Prelim. Durable Goods Orders (-1.4%); Thursday: August Premlim. Wholesale Inventories (0.0% MoM), 2Q GDP Annualized (2.3% QoQ), 2Q Personal Consumption (4.4%), September 24 Initial Jobless Claims (260,000), August Pending Home Sales (0.0% MoM); Friday: August Personal Income (0.2%), August Personal Spending (0.1%), September Chicago Purchasing Manager (52.0), September Final U. Of Michigan Sentiment (90.0).
Posted on Monday, September 26, 2016 @ 8:29 AM • Post Link Share: 
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  What The Slowdown In Global Growth Looks Like
Posted Under: Conceptual Investing

 

View from the Observation Deck 

  1. On 9/21/16, the Federal Reserve announced that it chose to leave its benchmark lending rate unchanged, though it indicated an increase is still likely by year-end, followed by two more hikes in 2017, according to Bloomberg.
  2. There are two more Federal Open Market Committee (FOMC) meetings scheduled for 2016 (November 1-2 & December 13-14). 
  3. Since the next meeting in November is only six days before the presidential election, it is more likely that the Fed would opt to raise the federal funds rate in December, one-year after its 25 basis point hike on 12/16/15, in our opinion.
  4. While Fed monetary policy tends to garner a great deal of attention at home and abroad, the Fed has noted after previous FOMC meetings this year that it is concerned about slowing global economic growth.
  5. As indicated in the chart, 2010 marked a turning point in global economic growth, right after a bit of a snapback following the U.S. recession from 12/07 through 6/09 (National Bureau of Economic Research).
  6. China's decision in 2012 to slow its pace of growth from double-digits to around the 7.5% level had a big influence on global growth, in our opinion. China supplanted Japan as the second-largest economy in the world in 2010, according to The New York Times.
  7. While global growth has in fact slowed since 2010, the IMF's growth rate estimates stay above the 3.0% level through 2017 (see chart).

This chart is for illustrative purposes only and not indicative of any actual investment.

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Posted on Thursday, September 22, 2016 @ 12:52 PM • Post Link Share: 
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  Technology Stocks Have Delivered Strong Returns In The Current Bull Market
Posted Under: Sectors

 

View from the Observation Deck 

  1. From 3/9/09-9/19/16 (current bull), all four of the technology-related indices featured in the chart outperformed the S&P 500 TR Index.
  2. The average annualized total returns for the period were as follows: ISE Cloud Computing TR Index (+29.99%); Dow Jones Internet Composite TR Index (+28.05%); Philadelphia Semiconductor Index (+23.12%); S&P 500 Information Technology TR Index (+21.70%); and S&P 500 TR Index (+19.00%), according to Bloomberg.
  3. The so-called "new tech" (cloud computing) subsector posted the best showing since the bull began, followed by the Internet subsector, which happened to be the last major "new tech" wave back in the mid-1990s.
  4. As of 8/31/16, technology stocks accounted for 21.0% of the S&P 500 Index, the largest weighting of the major sectors that comprise the index, according to  S&P Dow Jones Indices.
  5. Year-to-date through 9/19/16, the S&P 500 Information Technology TR Index posted a total return of 10.88%, compared to 6.34% for the S&P 500 TR Index, according to Bloomberg. Despite technology stocks outperforming the broader market to date, investors have shied away from them, in our opinion.
  6. Year-to-date through 8/31/16, investors liquidated an estimated net $7.3 billion from Technology mutual funds and exchange-traded funds, according to Morningstar.

The chart and performance data referenced are for illustrative purposes only and not indicative of any actual investment. The index performance data excludes the effects of taxes and brokerage commissions or other expenses incurred when investing. Investors cannot invest directly in an index. There can be no assurance that any of the projections cited will occur. The S&P 500 TR Index is a capitalization-weighted index comprised of 500 stocks used to measure large-cap U.S. stock market performance. The ISE Cloud Computing TR Index is a modified equal-dollar weighted index designed to track the performance of companies actively involved in the cloud computing industry. The Dow Jones Internet Composite TR Index is a modified capitalization-weighted index designed to track companies involved in Internet-related activities. The Philadelphia Semiconductor Index is a modified capitalization-weighted index comprised of companies that are involved in the design, distribution, manufacturing, and sale of semiconductors. The S&P 500 Information Technology Index is capitalization-weighted and comprised of S&P 500 constituents representing the technology sector.

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Posted on Tuesday, September 20, 2016 @ 1:24 PM • Post Link Share: 
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  18 ... 16 ... Better Earnings Ahead!?
Posted Under: Weekly Market Commentary Video
Bob Carey, Chief Market Strategist at First Trust Advisors L.P., discusses the latest developments in the market and takes a look ahead.
 
Posted on Monday, September 19, 2016 @ 3:20 PM • Post Link Share: 
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  Stocks Ended Sept. 16, 2016
Posted Under: Weekly Market Commentary

 
Last week the S&P 500 Index moved up 59 basis points, reversing the trajectory of the prior week's performance, the third worst week of 2016. After dropping 2.45% on Friday of the prior week, the S&P 500 Index bounced back on Monday showing the largest gain of the week with a 1.47% return as investors added exposure to equities following the prior weeks' pullback. The index gave back the day's gain on Tuesday with a -1.45% return as energy, materials and telecommunication services led the way down. The International Energy Agency released their oil market report for September claiming that growth in global oil demand is slowing more quickly than previously expected. The S&P 500 Index was mixed on Wednesday losing 5 basis points as oil prices dropped for the second straight day putting pressure on energy which once again led the decline while information technology led the advancers. Economic data releases were mixed on Thursday, with retail sales and Empire State manufacturing lower than expected. US initial jobless claims of 260K were lower than the consensus estimate of 265K, but higher than the previous week's 259K. The index returned 1.03% as investors' expectations of a Federal Reserve rate hike by the end of the year appeared to be declining. Stocks opened down on Friday as the S&P 500 Index bounced in a range most of the day. Equities came up short at their attempt to recover late in the trading day closing with a -0.38% return. Utilities and health care were the only positive sectors for the day. Crude oil closed the week at $43.03 a barrel, declining 6.21% from the previous week's close. Six of the ten economic sectors had positive performance for the week. The information technology sector was the best performing sector with a 3.05% return. The utilities and health care sectors followed with 2.50% and 1.29% returns, respectively. The energy sector's -2.90% return was the worst performance of all the sectors and was followed by financials and materials which returned -1.19% and -0.95%, respectively. Skyworks Solutions Inc., a wireless semiconductor company that designs and manufactures system solutions for mobile communications, turned in the best performance in the S&P 500 Index with a 13.95% gain. The company is a supplier for Apple and is believed to have greater exposure to the iPhone than any other chipmaker. The newly released Apple iPhone 7 and iPhone 7 Plus are expected to have high demand. The next two best performers were Apple Inc. and Wynn Resorts Ltd. with returns of 11.43% and 10.32%, respectively.
Posted on Monday, September 19, 2016 @ 8:31 AM • Post Link Share: 
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  US Economy and Credit Markets Ended Sept. 16, 2016
Posted Under: Weekly Market Commentary

 
U.S. Treasury yields rose last week amid lofty valuations and growing questions over major central banks' policy outlooks. Yields rose on Tuesday after showing signs of stability on Monday and early Tuesday, as a $12 billion sale of 30-year Treasury bonds added to the market's slide. Industrial production in August fell more than anticipated on Thursday after posting its largest gain in a year in July. Retail sales in August declined unexpectedly for the first time in five months. The decline in sales was led by autos, building materials and gas stations. Producer Price Index was unchanged in August, as a decline in demand goods was offset by an increase in demand services. Long-term notes strengthened on Friday, recovering from Thursday's losses as investors continued to react to economic data over central bank policies. The Consumer Price Index increased in August, coming in slightly above expectations. Real average hourly earnings declined 0.1% in August but still remain up 1.3% for the year and should continue to rise with employment growth. Major economic reports (and related consensus forecasts) for the upcoming week include: Tuesday: August Housing Starts (1191k); Wednesday: September 16th MBA Mortgage Applications, September 21st FOMC Rate Decision (Upper Bound) (0.50%); Thursday: September 17th Initial Jobless Claims (260k), August Existing Home Sales (5.45M), August Leading Index (0.0%); September Markit US Manufacturing PMI (52.0).
Posted on Monday, September 19, 2016 @ 8:25 AM • Post Link Share: 
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  This Covered Call Index Tends To Beat The Broader Market In Low Return And Negative Return Climates
Posted Under: Broader Stock Market

 

View from the Observation Deck 

  1. From 2001-2015, the CBOE S&P 500 BuyWrite Index (an index designed to measure a covered call strategy) outperformed the S&P 500 Index in six of the 15 calendar years. It is has lagged year-to-date thru 9/13/15 (see chart).
  2. Over that 15 year period (2001-2015), the S&P 500 Index posted an average annual total return of 5.00%, compared to 3.93% for the CBOE S&P 500 BuyWrite Index, according to Bloomberg.
  3. While covered call options can generate an attractive level of current income, they also can cap the potential for capital appreciation.
  4. The use of a covered call portfolio tends to be most beneficial to investors when the stock market posts down years (2001, 2002 & 2008) and when returns range from 0% to 10% (2007, 2011 and 2015), though the BuyWrite Index did not outperform the S&P 500 Index in 2005.
  5. From 1926-2015, the S&P 500 posted an average annual total return of 10.02%, according to Ibbotson & Associates/Morningstar. That average sits above the upper end of the 0% to 10% range.
  6. Covered call writing tends to be less beneficial when stock market returns are well above their normal range, such as in 2012, 2013 and 2014 (see chart).
  7. As of 9/14/16, the S&P 500 Index stood 2.94% below its all-time high of 2,190.15 set on 8/15/16. At current levels, we believe that corporate earnings growth will have the greatest influence on the direction of stock prices.
  8. Bloomberg's 2016 consensus estimated earnings growth rate for the S&P 500 Index was 10.28% as of 9/14/16. That target is just above the 0% to 10% range.

This chart is for illustrative purposes only and not indicative of any actual investment. The illustration excludes the effects of taxes and brokerage commissions or other expenses incurred when investing. Investors cannot invest directly in an index. The S&P 500 is a capitalization-weighted index comprised of 500 stocks used to measure large-cap U.S. stock market performance. The CBOE S&P 500 BuyWrite Index (BXM) is designed to track a hypothetical buy-write strategy on the S&P 500. It is a passive total return index based on (1) buying an S&P 500 stock index portfolio, and (2) "writing" (or selling) the near-term S&P 500 Index (SPXSM) "covered" call option.

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Posted on Thursday, September 15, 2016 @ 1:36 PM • Post Link Share: 
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  Leveraged Loans (Senior Loans) Could Be One Of The Beneficiaries Of Higher Interest Rates
Posted Under: Bond Market

 

View from the Observation Deck 

  1. Conventional thought says that it is prudent to shorten the duration of one's bond holdings when interest rates are on the rise. With respect to pricing, fixed-rate bonds are particularly vulnerable to rising interest rates.
  2. Today's post seeks to illustrate that investors may shift capital in and out of floating-rate corporate securities based on the rise or fall of either short-term or longer-term interest rates. 
  3. For example, the income distributed by leveraged loans, which are issued by corporations and tend to be speculative-grade in quality, floats with the direction of short-term interest rates. Loans are typically indexed to a benchmark such as the 3-month LIBOR rate. Over time, if short-term interest rates rise the amount of interest income distributed by the loans can potentially rise, making the loans potentially more attractive to investors, and vice versa. (See net flows from 2004-2006)
  4. In 2013 (shaded blue in table), however, investors funneled a net $59.58 billion into Floating-Rate High-Yield mutual funds, likely in response to the 127 basis point increase in the yield on the 10-year Treasury note between the end of 2012 and 2013 (1.76% to 3.03%), in our opinion. Short-term interest rates were down slightly in 2013. Notice the net outflows in 2014 and 2015, likely in response to the drop in the yield on the 10-year Treasury note, in our opinion.
  5. The S&P/LSTA U.S. Leveraged Loan 100 Index closed at 92.28 on 9/12/16, or a 7.72% discount to par value, according to Bloomberg. The index's yield to maturity stood at 5.20%, according to S&P Dow Jones Indices.

This chart is for illustrative purposes only and not indicative of any actual investment. The illustration excludes the effects of taxes and brokerage commissions or other expenses incurred when investing. Investors cannot invest directly in an index. The S&P/LSTA Leveraged Loan 100 Index tracks the performance of the largest facilities in the leveraged loan market. LIBOR, or ICE LIBOR, is a benchmark rate that some of the world's leading banks charge each other for short-term loans. It stands for Intercontinental Exchange London Interbank Offered Rate and serves as the first step to calculating interest rates on various loans throughout the world.

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Posted on Tuesday, September 13, 2016 @ 2:12 PM • Post Link Share: 
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These posts were prepared by First Trust Advisors L. P., and reflect the current opinion of the authors. They are based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.
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Stocks Ended Sept. 9, 2016
US Economy and Credit Markets Ended Sept. 9, 2016
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