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Bob Carey
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  Stronger U.S. Economic Growth in 2015 Could Help Boost Interest in Small- and Mid-Cap Stocks
Posted Under: Conceptual Investing

 

View from the Observation Deck 

  1. Investors may have noticed that small- and mid-capitalization stocks have lagged their larger counterparts in 2014.
  2. From 12/31/13-10/22/14, the S&P 500 Index posted a total return of 5.97%, compared to 1.86% and -4.78%, respectively, for the S&P MidCap 400 Index and the Russell 2000 Index.
  3. As of 10/7/14, the International Monetary Fund (IMF) was forecasting a real U.S. GDP growth rate of 3.1% for 2015, according to its own release. The U.S. economy has grown at a rate closer 2.0% since the recovery began in Q3’09. 
  4. While there is no assurance that the IMF’s 3.1% estimate will prove accurate, we thought it would be interesting to see how a 50/50 split between small- and mid-cap stocks has performed in years in which real U.S. GDP growth exceeded 3.0%.
  5. As indicated in the chart, of the eight years that real GDP growth exceeded 3.0% since 1994, only one of them (1994) was accompanied by a negative total return (-3.38%) for the 50/50 split.
  6. What is unique about 1994?  The Federal Reserve raised the federal funds target rate from 3.00% to 5.50% in 1994, and then on to 6.00% in February 1995.
  7. That was a fairly aggressive pace of tightening, in our opinion. We do not expect the Fed to adopt such a strategy in 2015 at this point in time.
  8. As of 10/23/14, Bloomberg’s 2015 consensus earnings growth rate estimates for the S&P MidCap 400 Index and the Russell 2000 Index were 14.39% and 35.01%, respectively.

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 or other expenses incurred when investing. Investors cannot invest directly in an index. The S&P MidCap 400 Index is a capitalization-weighted index comprised of 400 stocks used to measure the performance of the mid-range sector of the U.S. stock market, while the Russell 2000 Index is comprised of the smallest 2000 companies in the Russell 3000 Index. It represents approximately 8% of the Russell 3000 total market capitalization.


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Posted on Thursday, October 23, 2014 @ 2:44 PM • Post Link Share: 
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  U.S. Equities’ Share Of Total Global Market Capitalization Is Growing
Posted Under: Conceptual Investing

 

View from the Observation Deck 

  1. Today’s blog post is an update of one we did on 2/28/13. The chart provides investors with a snapshot of where capital is invested in equities around the globe.  
  2. Total capitalization of all equities markets worldwide was $61.9 trillion (USD) on 10/21/14, up from $54.4 trillion (USD) on 2/27/13. The all-time high was $66.5 trillion (USD) on 9/3/14.
  3. Total U.S. stock market capitalization was $22.5 trillion on 10/21/14, up from $18.0 trillion on 2/27/13. Its all-time high was $23.9 trillion on 9/23/07.
  4. U.S. equities accounted for 36.3% of the total market capitalization of all equities markets worldwide on 10/21/14, up from 33.0% on 2/27/13. 
  5. The next closest countries by market capitalization are Japan at $4.4 trillion (USD), or a 7.0% share, and China at $4.1 trillion (USD), or a 6.6% share.

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

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Posted on Tuesday, October 21, 2014 @ 2:24 PM • Post Link Share: 
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  Back to Our Regularly Scheduled Bull Market
Posted Under: Weekly Market Commentary Video
Bob Carey, Chief Market Strategist at First Trust Advisors L.P., discusses the latest developments and why the market has solidly rebounded this week. He continues to provide a positive perspective on the 4th quarter.
Posted on Tuesday, October 21, 2014 @ 12:44 PM • Post Link Share: 
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  US Stocks Week Ended Oct. 17, 2014
Posted Under: Weekly Market Commentary

 
Equities continued to march downward this week, however, positive news eased some losses by the close on Friday. The S&P 500 was down for the fourth week in a row. The last time the S&P 500 was down four weeks in a row was August of 2011.  The STOXX Europe 600 index was down eight days in a row until Friday, when a rally of 2.79% erased some of the losses for the week.  The lift Friday was mainly due to talk of economic stimulus from the European Central Bank. Domestically, small cap stocks, represented by the Russell 2000, bucked the overall downward trend and posted a positive 2.7% return for the week. Year to date, the Russell 2000 still trails the S&P 500 by 9.8% however, this week was welcomed relief for most small cap investors. Earnings season continued as Morgan Stanley Inc. was up 0.8% this week as they announced trading revenues rose faster than analyst expectations. General Electric Inc. was up over 2.2% for the week as the company beat profit and revenue estimates for the quarter. Google Inc. was down over 6% for the week as the company missed profit and revenue expectations amid lower per click revenue. Teen clothing retailer Urban Outfitters Inc. saw its shares plunge over 14% Friday, as lower than expected sales continued to negatively impact profit margins. Looking forward we continue to be positive on the U.S. economy and equities as a whole. Oil dipped below $80 a barrel this week which in the long run should provide a significant tailwind to the U.S. economy. Additionally, for a net importing country, recent strength in the dollar should also help to boost the overall economy going forward. With corporate earnings continuing to be robust, record amounts of cash on company balance sheets, consumer sentiment at a high since the Great Recession and labor market gains, there are plenty of positive catalysts for patient equity investors.
Posted on Monday, October 20, 2014 @ 8:09 AM • Post Link Share: 
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  US Economy and Credit Markets Week Ended Oct. 17, 2014
Posted Under: Weekly Market Commentary

 
Yields fell to record lows for the year before rebounding on Friday. Even as the Federal Reserve winds up its asset purchasing program this month, yields continue to fall and have so far defied expectations for them rising in 2014. The volatility in the equity markets and uncertainly regarding Global and Eurozone growth has encouraged many investors to reconsider their risk preferences. Treasuries have been beneficiaries; even with record low yields. The dollar has continued strengthening, which places downward pressure on US inflation and the price of oil continued its recent slump which is beneficial to consumers. If prices do not rise as fast as the 2% inflation target set by the Federal Reserve, it is unlikely they will look to increase rates in the near future and dovish monetary policy will continue. Wednesday’s Producer Price Index report supported the narrative of falling prices as it fell .1% in September. Food and energy prices, both down 0.7% in September, led the index lower. Producer prices excluding food and energy were unchanged in September. September Retail Sales, also released Wednesday, declined .3%. Thursday and Friday’s economic reports offered better economic news and showed September Industrial Production rising 1% and September Housing Starts rising 6.3%. Major economic reports (and related consensus forecasts) for the upcoming week include: Tuesday: September Existing Home Sales (5.1M,+.05M); Wednesday: September CPI (unch.); Thursday: Prior Week Initial Jobless Claims (284K, +20K) and September’s Leading Index (.7%, +.5%); Friday: September New Home Sales (470K, -34K).
Posted on Monday, October 20, 2014 @ 8:06 AM • Post Link Share: 
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  The Fallout From The Recent Sell-Off In The Stock Market
Posted Under: Broader Stock Market

 

View from the Observation Deck 

  1. Sell-offs in the stock market may be hard to endure, but they do have the potential to create opportunities for investors once they have run their course.
  2. Sell-offs have parameters in terms of how they are labeled. Here is a basic guide: Pullback (<10% decline); Correction (10% or more decline but <20%); and Bear Market (20% or more decline).
  3. From 9/18/14 (S&P 500 all-time high) through 10/15/14, the S&P 500 posted a total return of -7.28%. On a price-only basis, the S&P 500 was down 7.40%. This indicates that the market is currently in pullback territory.
  4. Investors might be monitoring this sell-off more closely than they normally would due to the fact that the S&P 500 has gone over three years without experiencing a correction. The norm is 18 months, according to S&P.
  5. The only sector to post a positive total return in this pullback is Utilities, up 1.38%. The sector with the worst showing so far is Energy, down 13.58%.
  6. To gauge where there might be potential opportunities looking ahead, consider the earnings growth estimates referenced below. 
  7. The following 2015 consensus earnings growth estimates (highest to lowest) are from Bloomberg (10/16): Consumer Discretionary (+18.57%); Materials (+18.48%); Information Technology (+12.46%); Health Care (+11.02%); Industrials (+10.71%); S&P 500 (+10.65%); Financials (+8.49%); Consumer Staples (+8.78%); Telecommunication Services (+6.56%); Energy (+5.84%); and Utilities (+2.73%).

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 the projections cited will occur. 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 10 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 Thursday, October 16, 2014 @ 2:18 PM • Post Link Share: 
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  Retail Investors Still Leery Of U.S. Stocks
Posted Under: Broader Stock Market

 

 

View from the Observation Deck 

  1. From 3/9/09-10/13/14 (current bull market), the S&P 500 posted a cumulative total return of 212.05%, or an average annualized gain of 22.53%, according to Bloomberg. 
  2. The green line in the first chart shows large blocks of capital consistently flowing into the stock market over the past five years. The vast majority of said flows was institutional money.
  3. The second chart shows money flowing out of the stock market over the same period. The vast majority of those outflows are from retail investors.
  4. While there have been brief periods over the past couple of years when retail investors did commit capital to large-cap domestic stocks, it has been choppy at best.
  5. Despite the S&P 500 being up in 2014, Domestic Equity mutual funds have reported net outflows in each of the past six months (April-September), according to the Investment Company Institute.

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. 

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Posted on Tuesday, October 14, 2014 @ 2:31 PM • Post Link Share: 
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  Volatility. The price you pay for better returns.
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 reminds investors that this year is one of the least volatile years in recent times. He continues to provide a positive perspective on the 4th quarter.
Posted on Monday, October 13, 2014 @ 12:13 PM • Post Link Share: 
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  US Stocks Week Ended Oct. 10, 2014
Posted Under: Weekly Market Commentary

 
Stocks ended a volatile week lower, the third straight week of declines, on concern that international growth is slowing. Sentiment is turning negative globally as the International Monetary Fund cut its global growth forecast and warned of “frothy” valuations in equities due to extended low interest rates in developed nations. In addition, a report by four economic institutes showed Germany’s economy is nearing a recession. In stock news, AGCO Corp., an agricultural-equipment manufacturer with most of its revenue overseas, reduced full-year guidance for the second time due to lower demand in all regions and a strong dollar. Yum! Brands Inc. posted better-than-expected profits as poultry prices remain reasonable compared to beef. However, sales declined versus last year as same-store sales fell by 14 percent in China after a second food-safety scare. Costco Wholesale Corp. fared better as net income increased by 13 percent on strong comparable store sales. Tech giants Hewlett-Packard Co. and Symantec Corp. both announced plans to split their languishing storage businesses from the rest of the company. Alcoa Inc. unofficially kicked off earnings season on Wednesday with their highest profits in three years due to strong demand from car, plane and truck manufactures. Next week will bring earnings from many bellwether names. Earnings expectations for the 3rd quarter have been falling as corporate profits will be crimped by slowing international growth and a strong dollar. In addition, energy profits will be hurt by the recent drop in oil prices. However, longer term corporate profits will benefit from lower commodity costs. Higher quality cyclical names with limited exposure to international markets could be attractive to patient investors as many of these names have sold off unfairly in the current risk-off environment.
Posted on Monday, October 13, 2014 @ 8:15 AM • Post Link Share: 
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  US Economy and Credit Markets Week Ended Oct. 10, 2014
Posted Under: Weekly Market Commentary

 
Treasury prices rose for the fourth consecutive week, with 10-year yields dropping the most in over a year. The increase in price was due to speculation that slowing global economic growth will lead to the Federal Reserve postponing interest rate increases. On Wednesday, Mortgage Applications beat expectations and rose for the first time in three weeks due to an improving job market. On Thursday, the number of people filing for unemployment benefits unexpectedly declined to its lowest level in eight-years. Rising demands caused companies to retain workers and increase headcounts. The Bloomberg Consensus Index saw its largest increase since 2007, as households grew more optimistic about the economy and buying climate. On Friday, the September Import Price Index fell for the third consecutive month. Falling oil prices have been the primary factor for each of the monthly declines, declining 5% from the prior week. Wednesday: October 10 MBA Mortgage Applications; October Empire Manufacturing (21), September Retail Sales Advance (-0.1% MoM), September PPI Final Demand (0.1% MoM); Thursday: October 11 Initial Jobless Claims (290K); September Industrial Production (0.4% MoM); Friday: September Housing Starts (1005K), October University of Michigan Confidence (84.1).
Posted on Monday, October 13, 2014 @ 8:06 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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