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  The Rebound in Homebuilder Sentiment has Outpaced the Rebound in Homebuilder Stocks
Posted Under: Sectors

 

View from the Observation Deck 

  1. Today's post shows that the homebuilding industry has essentially recovered from its downturn with respect to homebuilder sentiment, but valuation levels of homebuilder stocks still reflect a deep discount to their peak in 2005.
  2. The National Association of Home Builders Market Index (SA) measures builder sentiment. An index reading above 50 indicates that sentiment is positive.
  3. As of 3/31/17, the index level stood at 71. It has been above 50 for 33 consecutive months. Since 3/31/03, the highest reading has been 72, which was posted in June 2005.
  4. The S&P Homebuilding Select Industry Index, which includes builders and companies that sell building and other home-related products, stood 32.31% below its all-time high (7/20/05) at the close of March 2017.
  5. In Q1'17, the S&P Homebuilding Select Industry Index posted a total return of 10.26%, a nice start to the year when you compare it to 2016's full-year total return of 0.12%, according to Bloomberg.
  6. Bloomberg's 2017 and 2018 estimated price-to-earnings (P/E) ratios on the S&P Homebuilding Select Industry Index were 14.85 and 13.31, respectively, as of 4/26/17. Both are well below the index's three-year average P/E of 17.64 as of 4/26/17.

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 Homebuilding Select Industry Index provides investors with an equity benchmark for U.S. traded Homebuilding-related securities. The National Association of Home Builders Market Index (SA) tracks sentiment among participants in the housing industry. A reading above 50 indicates that builders are positive on the climate.

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Posted on Thursday, April 27, 2017 @ 10:36 AM • Post Link Share: 
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  Gold, Silver and the Miners Still In Rally Mode
Posted Under: Commodities

 

View from the Observation Deck 

  1. Today's blog post illustrates the wide disparities that often exist between the annual price performance of an ounce of gold bullion and silver and the equity returns posted by the mining companies.
  2. Since precious metals are priced in U.S. dollars, investors should also be aware of the relative strength of the U.S. dollar against other major global currencies, in our opinion. For this reason, we have included the U.S. Dollar Index (DXY) in the table.
  3. From 2007 through 2016, the Philadelphia Stock Exchange Gold & Silver Index only posted a positive total return in four of the 10 years, but 2016 was a big rebound year following five consecutive down years (2011-2015).
  4. From 12/29/06-12/30/16, the cumulative total return on the Philadelphia Stock Exchange Gold & Silver Index was -37.63%, compared to cumulative price increases of 80.51% and 23.87% for gold bullion and silver, respectively, according to Bloomberg. If gold and silver prices were to rise over the next few years, the miners could represent more of a value play potentially than the metals themselves, in our opinion.  
  5. Precious metals have historically been considered potential inflation hedges by investors. The Consumer Price Index stood at 2.4% in March 2017, up from 0.9% in March 2016, according to the Bureau of Labor Statistics.
  6. Bloomberg's earnings (in dollars) for 2015 and 2016 and estimated earnings for 2017 and 2018 for the Philadelphia Stock Exchange Gold & Silver Index were -$1.72 (2015), $1.92 (2016), $2.65 (2017 Est.) and $3.82 (2018 Est.), as of 4/25/17.

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 Philadelphia Stock Exchange Gold & Silver Index is a capitalization-weighted index comprised of the leading companies involved in the mining of gold and silver. 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, April 25, 2017 @ 2:17 PM • Post Link Share: 
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  US Stocks Ended April 21, 2017
Posted Under: Weekly Market Commentary

 
The stock market moved higher last week by 0.87% as measured by the S&P 500. Industrial stocks, led by the railroads, were the best performers for the week. The turnaround at CSX is gaining steam after a positive earnings release, followed by analyst upgrades, helped the stock climb and close out the week with a +9.37% return. The company noted core pricing gains that also sent peer railroads prices higher (Norfolk Southern +4.3%, Union Pacific +3.3%). On Sunday, voters in France went to the polls to select two candidates for the presidential runoff. Emmanuel Macron, a pro-growth centrist, and nationalist Marine Le Pen were selected in the closely watched race. In domestic affairs, US Treasury Secretary Steven Mnuchin announced plans to reform taxes have progressed. The plan would be the biggest overhaul to the tax code since President Ronald Reagan. The progress comes as the administration struggles to repeal the Affordable Care Act and present a budget that appeases both sides of the aisle. Oil prices slid during the week from $53.18 at last week's close to $49.62 on Friday. Energy companies followed and were the worst performing sector in the S&P 500 at -2.13%. Lam Research Corp., a semiconductor equipment manufacturer, delivered the best performance in the S&P 500 during the week with an 11.83% return. On Tuesday the company reported higher than expected profits and announced an accelerated stock buyback pact with BNP Paribas and Citi. The toymaker Mattel Inc reported on Thursday that its comeback plan for Barbie was not working as expected. The company posted a greater than expected loss which sent the stock tumbling Friday and closed out the week as the worst performing stock in the S&P 500. Looking ahead, 194 companies in the S&P 500 are slated to release quarterly results.
Posted on Monday, April 24, 2017 @ 8:04 AM • Post Link Share: 
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  US Economy and Credit Markets Ended April 21, 2017
Posted Under: Weekly Market Commentary

 
Treasury yields continued to march lower last week as geopolitical concerns and lackluster economic data sent investors into safe haven assets.  On Friday, yields reversed course after President Trump promised to announce his tax reform plan this week. In Europe, the French presidential election stoked fears over the prospect of electing an anti-European Union candidate that will push to follow Britain's lead and "Frexit" the EU. On Monday, the Consumer Price Index showed a decline in March for the first time in more than a year. Core CPI, excluding food and energy, fell for the first time in seven years. The Federal Reserve's Beige Book report of local economic conditions signaled stronger job markets in all twelve districts; however, investors are still awaiting confidence to translate into higher wages and spending.  The probability of a June rate hike, implied by Fed Funds futures, has decreased as a result of diminished inflationary pressures. Investors will be watching closely for upcoming economic data to show an uptick in inflationary pressures to warrant two more rate increases by the FOMC this year. The US government will run out of money to pay its bills on April 29 if Congress fails to agree on a spending bill. President Trump increased the odds of a government shutdown by attaching border wall funding to the bill, which Democrats oppose. The last government shutdown was in 2013 in a political fight over healthcare funding. Major economic reports (related consensus forecasts; prior data) for the upcoming week include Tuesday: March New Home Sales (588k; 592k), April Conference Board Consumer Confidence (123.7, 125.6); Wednesday: April 21 MBA Mortgage Applications; Thursday: March Preliminary Wholesale Inventories (0.3%, 0.4%), March preliminary Durable Goods Orders (1.5%, 1.8%), April 22 Initial Jobless Claims (--, 244k); Friday: Q1 Annualized GDP (1.2%, 2.1%), April Chicago Purchasing Manager Index (56.9, 57.7), and April University of Michigan Sentiment (98.4, 98.0).
Posted on Monday, April 24, 2017 @ 8:01 AM • Post Link Share: 
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  U.S. Mergers & Acquisitions (M&A) Deal Volume
Posted Under: Themes

 

View from the Observation Deck 

  1. Today's blog post is just one more example of how the recovery following the 2008-2009 financial crisis has broadened, in our view.  
  2. If stock dividends are a barometer of the financial strength of a company, M&A activity is a barometer of the strength of the overall economy, in our opinion.
  3. CEOs are more likely to make acquisitions if they are optimistic about the forward-looking prospects for the economy.
  4. As indicated in the chart, the dollar volume of announced U.S. M&A deals fell below the $1.0 trillion mark from 2008 through 2013. The 10-year low was $690.3 billion in 2009.
  5. M&A volume in 2014 ($1.37 trillion), 2015 ($1.87 trillion) and 2016 ($1.49 trillion), however, eclipsed the amount posted in 2007 ($1.34 trillion), just prior to the 2008-2009 financial crisis.
  6. M&A deal making is off to a good start in 2017. In Q1, U.S. volume totaled $300.2 billion, up 19.4% from Q1'16's volume, according to Mergermarket. The average disclosed deal size was $723.8 million, up 51.8% from Q1'16's average.
  7. While multibillion dollar mergers tend to garner the most attention from the financial media, most deals involve small and mid-sized companies, which is why we included the price performance of the S&P Composite 1500 Index in the chart.  

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 Composite 1500 Index is a broad-based, capitalization-weighted index comprised of 1,500 stocks from the S&P MidCap 400 Index, S&P 500 Index and the S&P SmallCap 600 Index.

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Posted on Thursday, April 20, 2017 @ 2:24 PM • Post Link Share: 
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  Sell in May and Go Away! What is so Scary?
Posted Under: Conceptual Investing

 

View from the Observation Deck 

  1. The old axiom in the stock market about selling your stocks at the close of April and then buying back in at the start of November once made some sense from a seasonality standpoint.
  2. When the U.S. was more of an industrialized economy it was not uncommon for plants and factories to close for a month or longer in the summer to retool and allow employees to vacation.
  3. The theory was that companies would conduct less commerce in that six-month span, which would likely translate into lower earnings.
  4. Today, due in large part to globalization, the world is far more interconnected and competitive, and there is less room for downtime, in our opinion.
  5. From 2003 through 2016, there have been just two instances (2008 & 2011) where the S&P 500 Index posted a negative total return from May through October, and the 2008 occurrence was during the financial crisis.
  6. The average total return for the S&P 500 Index for the May through October periods in the chart was 3.30%, which is nothing to run from, 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, while the 11 major S&P 500 Sector Indices are capitalization-weighted and comprised of S&P 500 constituents representing a specific sector.

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Posted on Tuesday, April 18, 2017 @ 12:23 PM • Post Link Share: 
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  US Stocks Ended April 13, 2017
Posted Under: Weekly Market Commentary

 
Equities lost ground during the Good Friday holiday-shortened week as investors evaluated geopolitical developments and weighed the start to corporate-earnings season. Markets are digesting increased tensions in North Korea, Syria, and Russia after a recent missile test by North Korea and the bombing of a Syrian government airbase by the United States. In economic news, wholesale prices slid in March for the first time since August 2016 as oil and gasoline prices fell.; A number of the largest banks kicked-off earnings season on Thursday with the Wall Street centric banks posting better results than their Main Street counterparts. JP Morgan Chase and Citigroup's investment banks benefited from strong trading results in fixed-income amid higher rates and security issuance. Wells Fargo & Co. reported disappointing results as new consumer accounts fell for the seventh consecutive month due in part to the firm scandal over opening unauthorized accounts for clients. The nation's largest home lender also saw a 23% decline in mortgage banking revenue as higher interest rates are limiting demand for refinancing. Shares of Whole Foods Market gained after an activist investor amassed a large position in the upmarket organic grocer. Janna Partners, the activist investor, is encouraging the management team to restructure operations and to potentially consider a sale. Looking ahead to next week, a number of bellwethers are set to report results including Johnson & Johnson, United Health Care Inc., Morgan Stanley and General Electric Co. While investors have pushed out the timing on pro-growth reform from the Trump administration, a strong corporate-earnings season could power the market to new all-time highs as fundamentals will likely be the key cog for stocks.
Posted on Monday, April 17, 2017 @ 8:24 AM • Post Link Share: 
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  US Economy and Credit Markets Ended April 13, 2017
Posted Under: Weekly Market Commentary

 
A holiday-shortened week marked by heightened geopolitical concerns saw continued demand for government bonds, which is a reversal of their post-election sell-off. After the election, Treasuries declined on higher expectations for economic growth and inflation, but recent geopolitical headlines have caused investors to reevaluate their expectations and renewed demand for safe assets like government bonds. Notably, the yield on the U.S. 10-year Treasury note has fallen from has high of 2.6% in March to below 2.3%, currently. Of primary concern was escalating tensions between the U.S. and Russia and the U.S and North Korea. Meanwhile, on Wednesday, President Trump said in an interview that he supports a "low-interest rate policy," which sent Treasuries higher. The Labor Department also said on Wednesday that import prices fell 0.2% in March, helping to stem inflation expectations and keep yields lower. Treasuries sold off to begin Thursday but rallied to end the holiday-shorted week after the U.S. used its largest nonnuclear bomb against ISIS, exacerbating investors' geopolitical concerns and increasing demand for government bonds. Elsewhere, the upcoming French presidential election has also contributed to investors' concerns, causing the spread between French government bond yields and German government bond yields to widen. Major economic reports (and related consensus forecasts and prior data) for the upcoming week include Monday: April Empire Manufacturing (15); Tuesday: March Industrial Production (0.5% MoM); Wednesday: April 14 MBA Mortgage Applications; Thursday: April 15 Initial Jobless Claims, March Leading Index (0.2%), April Philadelphia Fed Business Outlook (25).
Posted on Monday, April 17, 2017 @ 8:20 AM • 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 2/7/17 (click here).
  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 4/11/17.
  4. The returns were as follows (Pure Value vs. Pure Growth): 15-yr. average annualized (9.75% vs. 9.87%); 10-yr. average annualized (7.92% vs. 10.23%); 5-yr. average annualized (16.58% vs. 14.51%); 3-yr. average annualized (7.89% vs. 9.84%); 1-yr. (21.68% vs. 14.28%) and Y-T-D (2.71% vs. 7.20%).
  5. For the 12-month period ended February 2017, estimated net inflows to Large Blend mutual funds and exchange-traded funds totaled $89.48 billion ($154.32 billion "Passive" vs. -$64.84 billion "Active"), according to Morningstar. It was the second-highest total behind the estimated net $122.99 billion taken in by Intermediate-Term Bond funds and ETFs. This is an indication that many investors may not currently favor one style over the other, in our opinion.
  6. Earnings reporting season is about to commence for Q1'17 results. If earnings reflect improvement, growth stocks could maintain their leadership role on a year-to-date basis, 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 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 Thursday, April 13, 2017 @ 1:36 PM • Post Link Share: 
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  A Snapshot Of What Investors Are Paying For Stocks
Posted Under: International-Global

 

View from the Observation Deck 

  1. Today's blog post features a table showing the price-to-earnings (P/E) ratios of a few major stock indices. Our goal is to provide investors with a global perspective on where valuations have been and where they are projected to go.
  2. We believe that a 10-year perspective is appropriate because it captures where valuations stood prior to the 2008-2009 financial crisis.
  3. As indicated in the last column in the table, P/E estimates for 2017 show that foreign equities, on a relative basis, are expected to be less expensive than U.S. stocks, as measured by the S&P 500 Index.
  4. While the earnings expectations for all four of these stock indices look encouraging for 2017, the estimates on foreign stocks stick out. As of 4/10/17, Bloomberg's consensus earnings growth rate estimates for 2017 were as follows (not in chart): 19.09% (S&P 500 Index); 67.70% (MSCI Europe Index); 41.97% (MSCI World ex U.S.); and 24.88% (MSCI Emerging Markets).
  5. From 3/30/07 through 3/31/17, the cumulative total returns on these four indices were as follows: 106.27% (S&P 500); 7.27% (MSCI Europe Net Total Return USD Index); 11.89% (MSCI Daily Total Return Net World ex U.S. USD); and 30.78% MSCI Emerging Net Total Return USD), according to Bloomberg.
  6. The S&P 500 Index significantly outperformed the major foreign stock indices over the past decade, but foreign stocks look like they are on the mend, in our opinion. We intend to monitor this relationship moving forward.

This chart is for illustrative purposes only and not indicative of any actual investment. There can be no assurance that any of the projections cited will occur. 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 MSCI Europe Index is a free-float weighted index designed to measure the equity market performance of the developed markets in Europe. The MSCI World (ex-U.S.) Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets excluding the U.S. The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets.

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Posted on Tuesday, April 11, 2017 @ 2:04 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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