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Bob Carey
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  Tracking The Retail Investor’s Appetite For High Yield Corporate Bonds
Posted Under: Bond Market

 
View from the Observation Deck  
  1. High yield corporate bonds are speculative-grade securities (a much higher level of credit risk) that tend to pay a higher rate of interest than their investment-grade counterparts. 
  2. One of the primary indicators used for assessing risk levels in the high yield corporate bond market is the industry default rate. A bond default occurs when the issuer fails to make an interest or principal payment within the specified period.
  3. The long-term global speculative-grade default rate, as tracked by Moody's, has averaged approximately 4.3%, according to its own release. In July 2017, the default rate stood at 3.1%. 
  4. Moody's believes that the default rate will be lower a year from now. It is forecasting a default rate of 2.2% by July 2018. 
  5. As indicated in the chart, asset levels in high yield corporate bond funds relative to total taxable bond fund assets dropped dramatically during the 2008-2009 financial crisis. With the exception of 2013, these asset levels have remained below the average from 2000-2016 (see chart). 
  6. What makes 2013 interesting is that interest rates rose markedly that year. The yield on the benchmark 10-year Treasury note increased 127 basis points, from 1.76% to 3.03%, according to Bloomberg.  
  7. From 2000-2016, total high yield corporate bond issuance as a percentage of total corporate bond issuance averaged 17.00% (not shown in chart), according to data from SIFMA. 
  8. From 12/31/99-12/30/16, a period that included a number of challenges and shocks to the economy, the BofA Merrill Lynch U.S. High Yield Constrained Index posted an average annual total return of 7.20%, according to Bloomberg. For comparative purposes, the S&P 500 Index posted an average annual total return of 4.51% over the same period. 

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. There can be no assurance that any of the projections cited will occur. The BofA Merrill Lynch U.S. High Yield Constrained Index tracks the performance of U.S. dollar denominated below investment grade corporate debt publicly issued in the U.S. domestic market. The S&P 500 Index is a capitalization-weighted index comprised of 500 stocks used to measure large-cap U.S. stock market performance.  

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Posted on Tuesday, August 22, 2017 @ 2:44 PM • Post Link Share: 
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  US Stocks Ended August 18, 2017
Posted Under: Weekly Market Commentary

 
The S&P 500 Index had another down week returning -0.58% following the previous week's decline, the second worst week of 2017. The first seven months of the year all finished in positive territory, but August has shown negative performance with less than two weeks of trading remaining in the month. The week started out positive with North Korean tensions declining, but reversed by Thursday as more attention was drawn to the rhetoric of the President of the United States in the aftermath of the Charlottesville tragedy. The S&P 500 Index declined 1.54% on Thursday as investors questioned the probability of the President achieving his policy agenda and economic growth ambitions. In economic news, retail sales advanced higher than expected in July and the University of Michigan Consumer Sentiment Index also beat expectations reporting its highest level since January. US initial jobless claims of 232K were lower than the consensus estimate of 240K and the previous week's 244K. Crude oil declined 0.63% for the week, dropping $0.31and closing at $48.51 per barrel. Micron Technology Inc., a manufacturer of memory chips, flash memory and semiconductor components, showed the best performance for the week in the S&P 500 Index with a 8.46% return. The stock had positive momentum as memory prices for VGA graphics cards jumped over 30% from July and filings showing the CFO purchasing shares of the company. Wynn Resorts Limited, a luxury hotel and casino resort operator, returned 7.38% last week. The stock jumped 6.41% on Tuesday after a large bank upgraded the company to a buy from a hold which also helped other casino resort operators outpace the market that day. Estee Lauder Companies Inc., a manufacturer of skin care, makeup, fragrance, and hair care products, climbed 7.73% after releasing strong earnings results early Friday morning.
Posted on Monday, August 21, 2017 @ 9:00 AM • Post Link Share: 
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  US Economy and Credit Markets Ended August 18, 2017
Posted Under: Weekly Market Commentary

 
Treasuries sold off early in the week as geopolitical concerns abated and retail sales came in better than expected. Specifically, retail sales grew 0.6% in July and 4.2% versus a year ago. The selloff reversed on Wednesday when the Federal Open Market Committee released the minutes from its July meeting. The minutes showed that the Committee is split over the timing of the next rate increase. Some members argued against a rate increase until the recent softness in inflation proves temporary, while others cautioned that a delay "could result in an overshooting of the Committee's inflation objective that would likely be costly to reverse." Fed Chairwoman Janet Yellen told the Senate Banking Committee in July "It probably remains prudent to continue on a gradual path of rate increases." Members agreed that the Fed should begin to reduce the size of its balance sheet "relatively soon." On Thursday, declines in major U.S. stock indexes increased demand for haven assets like U.S. government bonds, sending yields lower. The market also questioned the Trump administration's ability to pass through its fiscal agenda after two CEO councils were disbanded on Wednesday, putting further pressure on yields. This week, top policy makers, including Fed Chair Janet Yellen and European Central Bank President Mario Draghi, will meet in Jackson Hole, Wyoming for an annual economic symposium. Major economic reports (related consensus forecasts; prior data) for the upcoming week include: Wednesday: August 18 MBA Mortgage Applications and August preliminary Markit US Manufacturing PMI (53.4, 53.3); Thursday: August 19 Initial Jobless Claims (236K, 232K) and July Existing Home Sales (5.56M, 5.52M); Friday: July preliminary Durable Goods Orders (-6.0%, 6.4%).
Posted on Monday, August 21, 2017 @ 8:58 AM • Post Link Share: 
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  A Snapshot of Market Breadth
Posted Under: Broader Stock Market

 
View from the Observation Deck  

  1. We continue to receive questions about the degree to which the top 10, 25 and 50 companies in the S&P 500 Index, by market capitalization (cap), are influencing the performance of the index in the current bull market.
  2. The price-only returns featured in the table are shaded in either gray or blue. The gray shaded years indicate that a broad number of stocks in the S&P 500 Index are participating in the bull market, while the blue shaded years indicate that the top 10, 25 and 50 stocks have garnered more favor from investors. 
  3. We included 1998 and 1999 to remind investors of what top-heavy performance can look like at the extreme. If you recall, the climate in the equity bull market back in the latter half of the 1990s was characterized by former Federal Reserve Chairman Alan Greenspan as "irrational exuberance."
  4. The bull market, as measured by the S&P 500 Index, actually began the day after the close of trading on 3/9/09.
  5. From 3/9/09-7/31/17 (not shown in chart), the S&P 500 Index posted a cumulative total return of 336.02% (19.16% on an average annualized basis), compared to 442.87% (22.31% on an average annualized basis) for the S&P 500 Equal Weighted Index, according to Bloomberg.
  6. Those returns suggest that this bull market has been inclusive, rather than one dominated by the biggest companies, in our opinion.
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. The S&P 500 Equal Weighted Index is comprised of the same companies as the capitalization weighted S&P 500 Index, but each company is allocated a fixed weight, or 0.2% of the index total at each quarterly rebalance.

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Posted on Thursday, August 17, 2017 @ 12:06 PM • Post Link Share: 
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  A Snapshot of Growth vs. Value Investing
Posted Under: Themes

 
View from the Observation Deck  

  1. Today's blog post is an update of one we do on an ongoing basis. Investors can compare today's snapshot to the one we did on 6/13/17 (click here to view). 
  2. Growth style investing tends to outpace value style investing when the earnings growth rates of companies accelerate faster than the broader market, such as right after the economy exits a recession.
  3. In today's chart, the S&P 500 Pure Growth Index outperformed its value counterpart in four of the six periods. Growth investing topped value investing for the 15-year, 10-year, 3-year and year-to-date periods through 8/11/17.
  4. The returns were as follows (Pure Value vs. Pure Growth): 15-yr. average annualized (11.72% vs. 12.75%); 10-yr. average annualized (8.51% vs. 10.99%); 5-yr. average annualized (16.67% vs. 16.10%); 3-yr. average annualized (6.55% vs. 8.77%); 1-yr. (14.24% vs. 13.27%) and Y-T-D (4.62% vs. 15.02%). 
  5. As indicated in the chart, investors have clearly favored large-capitalization (cap) growth stocks over large-cap value stocks year-to-date through 8/11/17. S&P 500 Index earnings and revenue growth were both strong in Q2'17, in our opinion.
  6. In Q2'17, with 459 companies having reported results, 78.2% have beat their consensus earnings estimates, according to Bloomberg. S&P 500 Index earnings were up 9.74% on a year-over-year (y-o-y) basis. Revenue growth was up 5.48% (y-o-y). The two sectors with the best showing were Information Technology and Energy. 
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 Pure Growth Index is a style-concentrated index designed to track the performance of stocks that exhibit the strongest growth characteristics based on three factors: sales growth, the ratio of earnings change to price, and momentum. It includes only those components of the parent index that exhibit strong growth characteristics, and weights them by growth score. Constituents are drawn from the S&P 500 Index. The S&P 500 Pure Value Index is a style-concentrated index designed to track the performance of stocks that exhibit the strongest value characteristics based on three factors: the ratios of book value, earnings, and sales to price. It includes only those components of the parent index that exhibit strong value characteristics, and weights them by value score. Constituents are drawn from the S&P 500 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.

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Posted on Tuesday, August 15, 2017 @ 12:08 PM • Post Link Share: 
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  US Stocks Ended August 11, 2017
Posted Under: Weekly Market Commentary

 
Increased geopolitical tensions rattled stocks around the globe, sending the S&P 500 to its worst weekly performance since March. The Dow Jones Industrial Average lost 234 points for the week after President Donald Trump said the U.S. would respond to any further threats from North Korea "with fire and fury like the world has never seen." In addition to a decrease in risk tolerance by investors, there were a number of disappointing earnings results that added to this week's sell-off. Shares of Walt Disney Co. lost over 5% for the week after cable networks continued to disappoint the street as subscriber loss was greater-than-expected. In a defensive move, the entertainment company also announced the end of their partnership with Netflix Inc. as it looks for new ways to distribute its content outside of traditional paid television. Despite beating earnings by a wide margin, Priceline Group Inc. fell on disappointing guidance due to increased marketing spend to attract customers and below consensus room night growth. Both Macy's Inc., and Kohl's Corp. reported declining sales in the second quarter as fundamentals continue to deteriorate for traditional department stores. While this week's earnings were less than stellar, S&P 500 earnings are on pace to increase by over 10% for the second quarter with 91% of companies reporting. Looking ahead, tensions with North Korea will remain in the forefront of investors' minds. However, fundamentals are likely to drive returns long term.
Posted on Monday, August 14, 2017 @ 8:05 AM • Post Link Share: 
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  US Economy and Credit Markets Ended August 11, 2017
Posted Under: Weekly Market Commentary

 
Treasury prices rose as geopolitical concerns increased overall demand for safe haven assets. Friday's July Consumer Price Index information came in under expectations as energy prices were low and the weak CPI data further contributed to weakness in longer-dated yields. The geopolitical concerns and weak CPI data combined to flatten the yield curve and, in spite of last week being one of the busiest weeks of earnings reports for major American corporations, the tense words between the US and North Korea disrupted what had been a very calm summer in equity markets. Oil was unable to get above $50/bbl for the first time since May of 2017 and has traded in a range between $40-$56 per bbl since August of 2016. Weakness in oil prices was attributed to compliance among OPEC members falling to 75% in July and persistently high inventory levels. Although the International Energy Agency is estimating inventories falling in the forthcoming fourth quarter, last week they revised their estimated draw to be less than previously expected. Last week's economic news was light in the extreme but major economic reports (related consensus forecasts; prior data) for the upcoming week include: Tuesday: August Empire Manufacturing and July Retail Sales (.4%, +.6%); Wednesday: Prior week MBA Mortgage Applications and July Housing Starts (1,225K, +10K); Thursday: prior week Initial Jobless Claims, July Industrial Production (.3%, +.1% and the July Leading Index (.3%, -.3%); Friday: August preliminary University of Michigan Sentiment (94, +.6).
Posted on Monday, August 14, 2017 @ 8:01 AM • Post Link Share: 
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  The Great Rotation From Bonds To Stocks Has Yet To Happen
Posted Under: Conceptual Investing

 

View from the Observation Deck 

  1. Today's blog post features a snapshot of some key bond market statistics that can be used to support the theory that some of the capital currently invested in bonds, particularly bond mutual funds, could potentially shift to equities if interest rates were to rise moving forward.
  2. The rise in interest rates would likely be driven by stronger economic activity, higher inflation and the gradual unwinding of the Federal Reserve's balance sheet over a number of years, in our opinion.
  3. With respect to fixed-rate bonds, interest rates and bond prices tend to be inversely related. When interest rates rise, bond prices fall, and vice versa. 
  4. From 12/31/06 through 6/30/17, the BofA Merrill Lynch 7-10 Year U.S. Treasury Index posted an average annualized total return of 5.31%, which exceeded the 4.70% yield on the 10-Year Treasury note as of 12/31/06 (see chart).
  5. The dilemma facing fixed-rate bondholders today is the yield on the 10-Year Treasury note closed at 2.31% on 6/30/17, less than half of where it stood on 12/31/06.  
  6. The aforementioned shift has been referred to as the "Great Rotation," due in part to the significant rise in total bond mutual fund assets since the end of 2006 (see chart). From 12/31/06-6/30/17, bond mutual funds reported net inflows totaling $1.36 trillion (not shown in chart), according to the ICI.  
  7. To be fair, this theory has been discussed for a number of years. While short-term interest rates have risen since the end of 2015 due to Federal Reserve rate hikes, intermediate and longer-term bond yields have not.
  8. With most major U.S. stock indices trading near their respective all-time highs more than eight years into the second-longest bull market in history, some investors might be wondering where the capital could potentially come from to drive stock prices higher.
  9. We believe that the bond market could be one possible source of capital moving forward. Here is an overview of the level of liquid assets held by equity mutual funds (click here to view). 

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 BofA Merrill Lynch 7-10 Year U.S. Treasury Index tracks the performance of U.S. dollar denominated sovereign debt publicly issued by the U.S. government in its domestic market.


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Posted on Thursday, August 10, 2017 @ 1:43 PM • Post Link Share: 
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  Equity Mutual Fund Managers Have Plenty Of Dry Powder
Posted Under: Conceptual Investing

 

View from the Observation Deck 

  1. Dry powder is a slang term referring to marketable securities that are highly liquid and considered cash-like, according to Investopedia.
  2. As of 6/30/17, the value of liquid assets held by all U.S. equity mutual funds totaled $310.9 billion.
  3. As indicated in the chart (year-end values), for the 15-year period ended 2016, the average value of liquid assets held by U.S. equity mutual funds was $211.0 billion.  
  4. If you were to calculate an average including all of the monthly totals tracked by the ICI over that same 15-year period (not shown in chart), the average was $212.9 billion, essentially in line with the $211.0 billion average using year-end totals.
  5. Since January 2001, the highest value of liquid assets held by U.S. equity mutual funds was $314.6 billion (2/28/15), while the lowest was $107.6 billion (2/28/03).

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

To Download a PDF of this post, please click here.

Posted on Tuesday, August 8, 2017 @ 12:22 PM • Post Link Share: 
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  US Stocks Ended August 4, 2017
Posted Under: Weekly Market Commentary

 
Last week equity markets, measured by the S&P 500, traded higher with a 0.23% return. Investor confidence in the US economy was bolstered by a strong July payroll report and an upward revision to May and June's job number. Average hourly earnings also rose month over month at a 0.3% rate. The Fed will look to these numbers as it contemplates a rate increase during the second half of the year. With inflation low and a despite tight labor market, the Fed may hold off on an increase until 2018. From a global perspective, the second quarter didn't slow down after a strong first quarter. With more than two thirds of US and European companies reporting quarterly results, earnings growth has clocked in just above 10%. One of the largest global companies, Apple, reported earnings on Tuesday that beat analyst expectations. The company, along with the other 29 members, lifted the Dow Jones Industrial Average to an all-time high of over 22,000. Large Caps continue to move the markets as the S&P 500 outperformed the Mid and Small cap indices last week. The top performer in the S&P last week was Illumnia Inc, a life sciences company specializing in gene analysis tools. The company reported higher profits and sales versus analyst estimates and raised 2017 sales guidance. The Materials sector was one of the worst performers in the S&P 500 last week, however two companies CF Industries and FMC Corp went against the grain. Both companies reported better than expected quarterly results and were rewarded with over a 10% return for the week. Looking ahead to next week, inflation will be on the investor's minds when the CPI number is released on Friday.
Posted on Monday, August 7, 2017 @ 8:36 AM • 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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