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  A Confluence Of Events Has Driven Crude Oil Below $100 Per Barrel
Posted Under: Sectors

 

View from the Observation Deck 

  1. Today’s blog post offers a brief analysis for why oil prices have come under pressure in the second half of 2014. The chart highlights one of the negative influences: a strengthening U.S. dollar.
  2. The price of crude oil reached its 2014 closing high of $107.26 per barrel on 6/20/14. Investors have grown accustomed to $100-a-barrel oil. Crude oil averaged $97.17 per barrel for the 3-year period ended 10/28/14.
  3. From 6/20/14-10/28/14, the price of crude oil plunged from $107.26 per barrel to $81.42, or a decline of 24.1%. The S&P 500 Energy Index posted a total return of -13.7% over the same period.
  4. The U.S. dollar, however, appreciated 6.35% against a basket of major currencies, as measured by the U.S. Dollar Index. Since the U.S. dollar is the world’s reserve currency, most commodities, including oil, are priced in dollars. 
  5. The dollar’s value has likely been driven higher by a number of serious geopolitical events (see chart). Historically speaking, the U.S. dollar has been used by foreign investors as a safe haven in tumultuous climates.  
  6. In addition to a stronger U.S. dollar and a number of challenging geopolitical situations, an imbalance between the supply of oil and the demand for oil has surfaced.
  7. There is concern in the marketplace that a slowdown in global economic growth in Europe and China will ease demand for oil at a time when production is ramping up, especially in the U.S.
  8. In the most recent four-week period measured, crude oil inventories increased by 23.11 million barrels, the fifth largest four-week increase since 1983, and the largest since Q1’09, according to Bespoke Investment Group.
  9. Of all the geopolitical events, we believe a resolution to the Russia/Ukraine conflict could ease concerns over softening global growth, provided that the U.S., Europe and Russia drop their respective sanctions.
  10. With respect to oil production, the Organization of the Petroleum Exporting Countries are scheduled to meet on 11/27 to discuss whether to adjust their output target of 30 million barrels per day for early 2015.

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 Energy Sector Index is capitalization-weighted and comprised of S&P 500 constituents representing the energy sector. 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 Thursday, October 30, 2014 @ 2:24 PM • Post Link Share: 
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  Equity Investors Still Have The Fundamentals On Their Side
Posted Under: Broader Stock Market

 

View from the Observation Deck 

  1. Equity investors endured another pullback in the stock market recently and it was accompanied by the usual dose of scary headlines and dire predictions.
  2. From 9/18/14 (all-time high) through 10/15/14, the S&P 500 Index posted a total return of -7.28%, according to Bloomberg. From 10/15/14 through 10/27/14, however, the index was up 5.34%.
  3. In our opinion, the reason why the S&P 500 hasn’t experienced a 10% or greater correction since Q3’11 is because investors have continuously bought the dips.
  4. Today, thanks to the Internet, investors have access to an abundance of information about the economy and the markets, both domestically and globally. Sifting through it all can be a daunting task.
  5. Focusing on the fundamentals is always a good place to start, in our opinion. The chart above features two key indicators that are fundamental in nature: corporate earnings and P/E ratios.  
  6. When comparing 2007 (pre-financial crisis) results with those from 2013, the thing that stands out is that the year-end P/E ratios are nearly the same (17.36 vs. 17.30), yet index earnings were considerably higher in 2013 ($84.59 vs. $106.82).
  7. As of 10/28/14, the consensus 2014 and 2015 earnings estimates for the S&P 500 from analysts tracked by Bloomberg were $120.03 and $131.47, respectively.
  8. As of 10/28/14, the consensus 2014 and 2015 P/E estimates from analysts tracked by Bloomberg were 16.42 and 14.99, respectively. The index’s average P/E over the past 50 years was 16.50 (as of 10/28/14).
  9. Fundamentally speaking, investors are currently paying close to a normal market multiple for record-level earnings.

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 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, October 28, 2014 @ 2:44 PM • Post Link Share: 
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  Stay Calm and Focus on the Fundamentals
Posted Under: Weekly Market Commentary
Bob Carey, Chief Market Strategist at First Trust Advisors L.P., reminds investors of the importance of business fundamentals and how they continue to drive positive results in the 4th quarter.
Posted on Monday, October 27, 2014 @ 4:02 PM • Post Link Share: 
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  US Stocks Week Ended Oct. 24, 2014
Posted Under: Weekly Market Commentary

 
Last week the S&P 500 Index closed in positive territory with a 4.14% return, the best week of 2014. This came after four straight weeks of losses which included the -3.09% performance for the worst week of 2014 (Oct. 6-10). Over 120 companies in the S&P 500 Index reported earnings last week with earnings season picking up. The index closed up 0.92% on Monday with all sectors trading up and consumer staples leading the charge. Tuesday continued up and showed the best performing day of the year with a 1.96% return. All but four of the 25 companies in the index that reported earnings either Monday or Tuesday before the open beat their earning’s estimate. Energy and healthcare led for the day as all sectors were in positive territory. Stocks climbed early on Wednesday, but turned the other direction to give the index its first loss in five days with a -0.72% return. Thursday returned 1.23% as US initial jobless claims of 283K marked the sixth straight week with claims below 300K and the first time since early 2006 with more than two consecutive weeks below 300K. The jobless claims number came close to the consensus estimate of 281K, though it was an increase from the previous week’s 266K. September new home sales of 467K came in close to the 470K expected on Friday, but August’s 504K was revised down to 466K. Friday closed up with a 0.71% return. All ten economic sectors had positive performance for the week. The health care sector was the best performing sector with a 6.57% return. The information technology and industrials sectors followed with 4.68% and 4.29% returns, respectively. The telecommunication services sector’s 0.66% return was the worst performance of all the sectors and was followed by consumer staples and materials which returned 2.84% and 3.47%, respectively. Tractror Supply Co., a retail farm store chain, turned in the best performance in the S&P 500 Index with a 21.83% gain. The stock jumped 15.82% on Thursday after it reported earnings that beat expectations. The next two best performers were Edwards Lifesciences Corp. and Celgene Corp. with returns of 17.94% and 17.16%, respectively. This week will bring earnings news from Exxon Mobil Corp., Berkshire Hathaway Inc., Chevron Corp., Facebook Inc., Pfizer Inc., Merck & Co. Inc., Visa Inc., Altria Group Inc., MetLife Inc., Starbucks Corp. and many others as over 150 companies from the S&P 500 Index are expected to announce earnings.
Posted on Monday, October 27, 2014 @ 8:04 AM • Post Link Share: 
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  US Economy and Credit Markets Week Ended Oct. 24, 2014
Posted Under: Weekly Market Commentary

 
Treasury prices dropped moderately over the course of the week as investors moved back into risker equity assets. On Monday, prices for Treasuries rose slightly as investors still worried about the previous week’s volatility. However, Treasuries dropped on Tuesday as reports suggested that the European Central Bank is considering plans to entice growth by adding corporate bond purchases to its stimulus measures. The goal would be to fight deflation and a decision could come as soon as December. On Thursday, prices dropped significantly as equity markets soared on several positive economic reports. Initial Jobless Claims were slightly lower than expected and the Leading Index was slightly higher than expected. Lackluster demand for the 30-year inflation protected securities sold by the Treasury department on Thursday suggested deflation fears are still present. Treasuries rebounded slightly on Friday on news of a positive Ebola test in New York, but still ultimately ended the week much lower. Oil continued its fall, dropping another 2%. Major economic reports (and related consensus forecasts) for the upcoming week include: Monday: September Pending Home Sales (0.8% MoM, 2.5% YoY), October Dallas Fed Manf. Activity (11.0); Tuesday: September Durable Goods Orders (0.5%), October Consumer Confidence Index (87.0); Thursday: October 25 Initial Jobless Claims (281,000), 3rd Quarter Annualized GDP (3.0% QoQ), 3rd Quarter Annualized Personal Consumption (1.9%); Friday: September Personal Income (0.3%),September Personal Spending (0.1%), October F Univ. of Michigan Confidence (86.4).
Posted on Monday, October 27, 2014 @ 7:58 AM • Post Link Share: 
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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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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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The Fallout From The Recent Sell-Off In The Stock Market
Retail Investors Still Leery Of U.S. Stocks
Volatility. The price you pay for better returns.
US Stocks Week Ended Oct. 10, 2014
US Economy and Credit Markets Week Ended Oct. 10, 2014
Companies Are Returning Cash To Shareholders Via Stock Dividends
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