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  Interest Rates Spiked In November And Investment Grade Bond Prices Fell
Posted Under: Bond Market

 

View from the Observation Deck 

  1. Intermediate-term interest rates moved markedly higher following the presidential election. In general, as interest rates rise, fixed-rate bond prices tend to fall, particularly those of the highest credit quality. 
  2. From 11/8/16 through 11/30/16, the yield on the benchmark 10-year Treasury note (T-note) surged 52 basis points, from 1.86% to 2.38%, according to Bloomberg. Its yield stood at 1.60% on 9/30/16.
  3. The 2.38% yield registered on 11/30/16, however, was still below the 2.44% average yield posted in the current U.S. economic recovery. The recovery commenced in July 2009, according to the National Bureau of Economic Research.
  4. Investors should know that interest rates are still sitting at extremely low levels on a historical basis. For the 50-year period ended 11/30/16, the average yield on the 10-year T-note was 6.51%, according to Bloomberg.
  5. If interest rates continue to rise moving forward, investors should expect further downward pricing pressure on fixed-rate bonds. We intend to keep a close eye on the direction of interest rates moving forward.

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 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. The BofA Merrill Lynch 22+ Year U.S. Municipal Securities Index tracks the performance of U.S. dollar denominated investment grade tax-exempt debt publicly issued by U.S. states and territories, and their political subdivisions, in the U.S. domestic market. The BofA Merrill Lynch Fixed Rate Preferred Securities Index tracks the performance of investment grade fixed rate U.S. dollar denominated preferred securities issued in the U.S. domestic market. The BofA Merrill Lynch U.S. Corporate Index tracks the performance of U.S. dollar denominated investment grade corporate debt publicly issued in the U.S. domestic market. The BofA Merrill Lynch Global Corporate Index tracks the performance of investment grade corporate debt publicly issued in the major domestic and Eurobond markets. 

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Posted on Tuesday, December 06, 2016 @ 2:24 PM • Post Link Share: 
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  2017 and a Look at Profitability
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 Tuesday, December 06, 2016 @ 1:32 PM • Post Link Share: 
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  US Stocks Ended Dec. 2, 2016
Posted Under: Weekly Market Commentary

 
U.S. stocks retreated this week after the post-election rally ended last Friday. The S&P 500 returned -0.91% for the week and 9.45% YTD. Small cap stocks pulled back after a three week rally as the Russell 2000 traded down -2.4%. Energy stocks could not boost the rest of the index declines, most notably technology and consumer stocks. Wednesday, OPEC announced a production cut with crude jumping over $4 and continued to rise though the end of the week. Markets were keyed into Friday's employment report which came in at consensus expectations and should provide enough information for the Federal Reserve's December meeting to keep the Fed on its projected path for a rate increase. Transocean Ltd., an offshore driller, turned in the best performance in the S&P 500 Index with a 14.49% gain. The company moved higher after OPEC announced a production cut. The next two best performers were Helmeric & Payne and Marathon Oil Corp with returns of 14.15% and 11.79%, respectively.
Posted on Monday, December 05, 2016 @ 7:49 AM • Post Link Share: 
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  US Economy and Credit Markets Ended Dec. 2, 2016
Posted Under: Weekly Market Commentary

 
Thursday of last week marked a 17 month high for 10 year Treasury yields before they slumped on Friday amid a mixed jobs report. The December 14th Federal Reserve meeting is expected to result in the Fed raising the benchmark Federal Funds rate and since the election bonds have been under substantial pressure resulting from increased expectations of a higher interest rate environment. Brent oil rose sharply last week as OPEC reached an accord to cut oil production among member countries. The deal represents the group's first supply cut in 8 years as they agreed to cut production by 1.2 million barrels a day in aggregate. Last Tuesday the Real GDP for Q3 was revised up to a 3.2% annualized growth rate primarily from strong personal consumption from US consumers. Wednesday's personal income report registered a .6% increase for October which was ahead of expectations led by private-sector wage growth. On Thursday the ISM Manufacturing Index rose to 53.2 for November which is indicative of continued expansion within the sector. Lastly, on Friday, the jobs report registered an increase in nonfarm payrolls for November but wages unexpectedly slipped .1%. Major economic reports (and related consensus forecasts) for the upcoming week include: Tuesday: October US Trade Balance (-$41.7B, -$5.3B), October Factory Orders (2.5%, +2.2%) and October Durable Goods Orders (4.8%, unch.); Wednesday: Prior week MBA Mortgage Applications; Thursday: Prior week Initial Jobless Claims (255,000, -13,000); Friday: October Wholesale Inventories (-.4%, unch.) and December's preliminary University of Michigan Sentiment reading (94.2, +.4).
Posted on Monday, December 05, 2016 @ 7:47 AM • Post Link Share: 
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  A Snapshot Of The Two Longest U.S. Equity Bull Markets At The 94-Month Mark
Posted Under: Broader Stock Market

 

View from the Observation Deck 

  1. A "bull market" is generally defined as a sustained period of rising stock prices.
  2. The current bull market, as measured by the S&P 500 Index, just hit 2,824 days as of 11/30/16, which equates to roughly 94 months. It ranks as the second-longest U.S. equity bull market in history, according to Bespoke Investment Group.
  3. The longest U.S. equity bull market lasted 4,494 days (12/4/87-3/24/00), according to Bespoke.
  4. Keep in mind when looking 2,824 days into the longest bull market, that year (1995) was near the beginning of the "internet revolution," which ran until March 2000. In other words, a unique economic event.
  5. Perhaps the statistic that sticks out the most is the size of the Federal Reserve's balance sheet in November 2016 relative to where it stood in August 1995. The Fed's quantitative easing initiatives in response to the 2008-2009 financial crisis helped drive its balance sheet to its current nosebleed level.
  6. By buying more than $2 trillion dollars of bonds (Treasuries and mortgages) and dropping the federal funds rate to nearly zero, the Fed was successful in keeping short-term and longer-term interest rates artificially low for many years, in our opinion.
  7. For equity investors, the low-rate climate is still a potential tailwind moving forward. President-Elect Donald Trump's pro-growth economic policies, such as infrastructure spending, pruning back government regulations and reducing corporate tax rates, could add to that tailwind if enacted, 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.

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Posted on Thursday, December 01, 2016 @ 2:45 PM • Post Link Share: 
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  U.S. Crude Oil & Natural Gas Rig Counts Are Trending Higher
Posted Under: Sectors

 

 
View from the Observation Deck 
  1. Today's blog post illustrates the dramatic reduction in the number of active U.S. crude oil and natural gas rigs since energy prices peaked in 2014, as well as a bit of a rebound in the counts in the second half of 2016.
  2. Rig count cuts are generally done in an effort to curb production in response to declining energy prices. Rig counts tend to rise when energy producers sense that higher prices are not only coming, but are sustainable.   
  3. Since the beginning of 2014, the peak (6/20/14) in the price of crude oil was $107.26 per barrel, while the peak (2/19/14) in the price of natural gas was $6.15 per million British thermal units (BTUs), according to Bloomberg.
  4. As of 11/25/16, the price of a barrel of crude oil stood at $46.06 per barrel, down 57.06% from its peak in 2014, while the price of natural gas stood at $3.09 per million BTUs, down 49.76% from its peak in 2014. From 5/31/16 through 11/25/16, however, the price of natural gas rose by 34.93%.  
  5. With respect to the period depicted in the charts, the 118 active natural gas rigs registered on 11/25/16 was notably higher than the period low of 81, which was posted on 8/5/16. The 474 active crude oil rigs registered on 11/25/16 was up from the period low of 316, posted on 5/27/16.
  6. Rig counts are just one barometer investors can use to assess both the crude oil and natural gas markets. U.S. investors should keep in mind that the crude oil market is more global in scope (foreign competition), while the natural gas market tends to be more domestic in scope, in our opinion.

The charts and performance data referenced are for illustrative purposes only and not indicative of any actual investment.

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Posted on Tuesday, November 29, 2016 @ 2:07 PM • Post Link Share: 
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  2017 and The Priority of Allocation
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, November 28, 2016 @ 1:06 PM • Post Link Share: 
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  US Stocks Ended Nov. 25, 2016
Posted Under: Weekly Market Commentary

 
The Dow Jones Industrial Average and the S&P 500 closed at record highs on Friday amid expectations for less regulation, reduced corporate taxation and higher infrastructure spend. Stocks rose for the third consecutive week with the largest gains coming from small-cap stocks as the Russell 2000 closed higher for the 15th consecutive trading day on Friday. In economic news, existing home sales unexpectedly climbed in October to their highest level since February 2007 as higher incomes, steady hiring and stronger consumer balance sheets drove demand for homes. However, new home sales for October slightly missed expectations. In stock news, Deere & Co. shares surged after doubling analyst expectations for fiscal fourth quarter earnings on cost cuts as revenue declined for the third consecutive year. Shares of Eli Lilly fell nearly 10% for the week after announcing disappointing Phase 3 results for its Alzheimer's drug Solanuzemab. Dollar Tree Inc. rose after better-than-expected same store sales as increased traffic and purchases per costumer drove better comparable sales. Despite beating earnings for the current quarter, Palo Alto Networks Inc. declined after reporting disappointing revenue guidance as the cybersecurity company transitions to a cloud-based subscription model. Looking ahead, investors will be focused on November's employment report and the Fed meeting on December 14th, which is now pricing in a 100% chance of a rate hike, according to the futures market.
Posted on Monday, November 28, 2016 @ 8:03 AM • Post Link Share: 
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  US Economy and Credit Markets Ended Nov. 25, 2016
Posted Under: Weekly Market Commentary

 
Treasury prices mostly fell, with the exception of the 10- year and 30-year Treasuries, over the course of the week on expectations from the new administration and strong economic reports. The Federal Reserve is widely expected to raise rates at the December 14th meeting as the market implied probability of a rake hike is 100%. Short-term Treasuries started out the week mostly stable on Monday and Tuesday, while long-term Treasuries rose slightly as investors have struggled to value bonds in the uncertainty of the policies of the new Trump administration. Expectations of a tax cut along with increased infrastructure spending have led investors to believe higher deficits will lead to increased supply in Treasury bonds and higher inflation. On Wednesday, Treasury prices fell sharply as durable goods orders and consumer sentiment were both much higher than anticipated, overshadowing weak new-home sales and poor jobless claims numbers. Treasury prices remained stable in Friday's abbreviated session as investors weighed new uncertainty coming from France's election along with the future of the European Central Bank's bond-buying program. Major economic reports (and related consensus forecasts) for the upcoming week include: Tuesday: 3Q Second Annualized GDP (3.0%), 3Q Second Personal Consumption (2.3%), November Consumer Confidence Index (101.3); Wednesday: November 25 MBA Mortgage Applications, November ADP Employment Change (160,000), October Persona Income (0.4%), October Personal Spending (0.5%), November Chicago Purchasing Manager (52.0), October Pending Home Sales (0.1% MoM); Thursday: November 26 Initial Jobless Claims (253,000), November Final Markit US Manuf. PMI (53.9), October Construction Spending (0.6% MoM), November ISM Manufacturing (52.2); Friday: November Change in Nonfarm Payrolls (175,000), November Unemployment Rate (4.9%).
Posted on Monday, November 28, 2016 @ 8:01 AM • Post Link Share: 
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  The U.S. Dollar Is Once Again Testing The Upper Limits Of Its Recent Range
Posted Under: Conceptual Investing

 

View from the Observation Deck 

  1. Today's chart is an update of a previous post we did back in August showing the fluctuations in the U.S. Dollar Index (DXY) since mid-2014. 
  2. From 6/30/14 through 11/18/16, the U.S. Dollar Index rose from a reading of 79.78 to 101.21, or a gain of 26.86%, according to Bloomberg. 
  3. From 3/13/15 (high in 2015) through 11/18/16, the U.S. Dollar Index went from a reading of 100.33 to 101.21, or a gain of just 0.88%. The index, however, traded in a broader range, from a low of 92.62 (5/2/16) to a high of 101.21 (11/18/16). The index averaged a reading of 96.50 for the period.
  4. A strong dollar can make U.S. goods and services less competitive, with respect to price, in the global marketplace. It can also negatively impact the returns that U.S. investors receive from owning foreign securities. A weak U.S. dollar would have the opposite effect. 
  5. Ironically, the most recent spike in the index followed Donald Trump's victory on 11/8/16. Analysts initially expected a Trump win would weaken the U.S. dollar due to his protectionist trade policy proposals, according to The Wall Street Journal. That quickly changed to the theory that President-elect Trump's plans for large fiscal spending could potentially boost inflation to the extent that the Federal Reserve might need to raise short-term interests rates beyond current projections.
  6. Higher U.S. interest rates can potentially boost the dollar's value by making dollar assets more attractive to investors, including foreign investors, in our opinion.
  7. We intend to monitor the U.S. dollar closely in the months ahead. 

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 U.S. Dollar Index (DXY) indicates the general international value of the dollar relative to a basket of major world currencies.

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Posted on Tuesday, November 22, 2016 @ 1:55 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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