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  A Snapshot of Bond Valuations
Posted Under: Bond Market

 
View from the Observation Deck  
 
  1. Today's blog post is one we do ongoing so that investors can monitor fluctuations in bond prices relative to changes in interest rates.
  2. The yield on the benchmark 10-year Treasury note (T-note) rose from 2.37% at the close of 12/4/17 to 2.91% on 12/4/18, or an increase of 54 basis points (bps), according to Bloomberg. The closing low for the period was 2.34% (12/6/17), while the closing high was 3.24% (11/8/18). The all-time closing low for the yield on the 10-year T-note was 1.36% on 7/8/16, according to Bloomberg. 
  3. Since 12/4/17, the Federal Reserve ("Fed") has increased the federal funds target rate (upper bound) 100 bps, from 1.25% to 2.25%. We believe the Fed will likely raise the rate another 25 bps in December 2018. 
  4. For the 30-year period ended 12/4/18, the federal funds target rate (upper bound) averaged 3.19%, according to Bloomberg. On a historical basis, the Fed's current monetary policy is not tight. 
  5. All bond indices in the chart reflect a downward adjustment in pricing year-over-year.
  6. The combination of rising interest rates and trade tariffs have some pundits concerned that global economic growth could slow, and this outlook is likely already impacting bond prices, in our opinion. We intend to monitor these events closely.  
 
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 ICE BofAML 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 with a remaining term to maturity greater than or equal to 22 years. The ICE BofAML 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 S&P/LSTA U.S. Leveraged Loan 100 Index is a market value-weighted index designed to measure the performance of the largest segment of the U.S. syndicated leveraged loan market. The ICE BofAML 7-10 Year U.S. Treasury Index tracks the performance of U.S. dollar denominated sovereign debt publicly issued by the U.S. government with a remaining term to maturity between 7 to 10 years. The ICE BofAML 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 ICE BofAML 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 ICE BofAML 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 Thursday, December 6, 2018 @ 3:34 PM • Post Link Share: 
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  Checking in on the 10-Largest Stocks in the S&P 500 Index
Posted Under: Conceptual Investing

 
View from the Observation Deck  
  1. We continue to receive questions about the degree to which the largest 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 were participating in the upside of the market, while the blue shaded years indicate that the top 10 stocks garnered more favor from investors. 
  3. While the top 10 companies by market cap significantly outperformed the broader market over the past three years (2015-2017), the S&P 500 index has delivered the best results through the first 11 months of 2018.    
  4. Another way to size up the bull market with respect to market breadth is to compare the S&P 500 Index, which is cap-weighted, to the S&P 500 Equal Weight Index (not depicted in table). 
  5. From 12/31/11-11/30/18 (period featured in table), the S&P 500 Index posted a cumulative total return of 153.78% (14.40% on an average annualized basis), compared to 150.22% (14.17% on an average annualized basis) for the S&P 500 Equal Weight Index, according to Bloomberg. A slight edge for the S&P 500 Index.  
  6. The bull market, as measured by the S&P 500 Index, commenced in March 2009. From 3/9/09-11/30/18, the S&P 500 Index posted a cumulative total return of 400.34% (17.99% on an average annualized basis), compared to 490.62% (20.02% on an average annualized basis) for the S&P 500 Equal Weighted Index, according to Bloomberg. A huge win for the S&P 500 Equal Weight Index. 
  7. 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 (currently 505) used to measure large-cap U.S. stock market performance. The S&P 500 Equal Weight 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 Tuesday, December 4, 2018 @ 1:46 PM • Post Link Share: 
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  US Stock Markets Ended November 30, 2018
Posted Under: Weekly Market Commentary

 
Equities surged following comments by Federal Reserve chairman Jerome Powell that the current benchmark rate was "just below" neutral, implying the central bank could be close to leaving interest rates steady. As recently as last month, Mr. Powell had said rates were "a long way" from neutral. Along with tariffs, fears of higher interest rates, which could lead to slower growth, remains another key concern for most investors. During the week, trade headlines continued to add volatility to the market in the lead up to Presidents Donald Trump and Xi Jinping meeting this weekend.  In economic news, housing numbers remained disappointing as new home sales came in under expectations for October and continued to soften. Rising costs due to material and labor shortages coupled with higher interest rates have driven down home affordability. In stock news, General Motors Co. made headlines and felt the ire of President Trump's Twitter account after announcing a 15% reduction in its North American salaried workforce and the closure of three plants. Shares of Salesforce.com, Inc. jumped following a strong quarterly announcement that resulted in 27% growth in billings as clients are integrating and signing up for additional solutions.; Workday Inc. also posted impressive results and raised guidance for the full-year on broad-based strength across regions, product line and size of client. Looking ahead, all focus will be on this weekend's dinner at the Group of 20 where Presidents Donald Trump and Xi Jinping will be in attendance. If no resolution is reached soon, 25% levies are set to be placed on Chinese goods starting January 1st. Takeaways from the meeting this weekend are likely to drive sentiment for the week ahead.
Posted on Monday, December 3, 2018 @ 8:27 AM • Post Link Share: 
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  US Economy and Credit Markets Ended November 30, 2018
Posted Under: Weekly Market Commentary

 
U.S. Treasury note yields were up at the start of the week as investors favored risk assets. On Monday, the 10-year Treasury note yield had its largest one-day gain in nearly a year. Federal Reserve Chairman Jerome Powell's speech on Wednesday received mixed interpretations by investors and economists. Some viewed Chairman Powell's comments as dovish, while others believe he did not add much more new information and was merely restating the current monetary policy stance of the Federal Open Market Committee. U.S. Treasury note yields finished down on Friday with the 10-year Treasury note yield declining the most in one month since August of last year. Investors are anxiously waiting for news out of Buenos Aires as President Donald Trump and Chinese President Xi Jinping plan to meet at the G-20 summit. Last week saw a slew of economic data. Real GDP grew at a 3.5% annual growth rate in the third quarter, matching the initial estimate as well as consensus expectations. Pre-tax corporate profits grew by 3.4% in the third quarter, the fastest quarterly growth rate since the second quarter of 2014, and are up 10.3% in the past year, the largest four-quarter increase since mid-2012. New single-family home sales declined 8.9% in October to an annual rate of 544,000, missing consensus estimates. Personal income increased 0.5% and personal consumption increased 0.6% in October, both beating consensus estimates. Major economic reports (related consensus forecasts, prior data) for the upcoming week include: Monday: November Final Markit US Manufacturing PMI (55.4, 55.4), October Construction Spending MoM (0.4%, 0.0%), November ISM Manufacturing (57.5, 57.7); Wednesday: November 30 MBA Mortgage Applications (n/a, 5.5%), October ADP Employment Change (195k, 227k); Thursday: October Trade Balance (-$55b, -$54.0b), October Factory Orders (-2.0%, 0.7%), December 1 Initial Jobless Claims (225k, 234k), October Final Durable Goods (-2.4%, -4.4%); Friday: November Change in Nonfarm Payrolls (198k, 250k).
Posted on Monday, December 3, 2018 @ 8:24 AM • Post Link Share: 
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  A Snapshot of Growth vs. Value Investing

 
View from the Observation Deck  
 
  1. The recent correction (decline of 10.00% to 19.99%) in the stock market (S&P 500 Index) that transpired between the close of 9/20/18 through 11/23/18 impacted the performance of growth stocks more than value stocks. 
  2. From 9/20/18-11/23/18, the S&P 500 Pure Growth Index posted a total return of -13.40%, compared to -9.85% for the S&P 500 Pure Value Index, according to Bloomberg. 
  3. The S&P 500 Pure Growth Index outperformed its value counterpart in two of the six periods featured in the chart. Growth investing topped value investing for the 5-year and year-to-date (YTD) periods ended 11/27/18. This is vastly different than in our last post on 10/9/18 (click here).
  4. The returns through 11/27/18 were as follows (Pure Growth vs. Pure Value): 15-year average annualized (10.63% vs. 10.95%); 10-year average annualized (18.09% vs. 18.18%); 5-year average annualized (10.16% vs. 8.11%); 3-year average annualized (9.42% vs. 10.02%); 1-year (1.56% vs. 4.27%) and year-to-date (1.78% vs. -1.04%).
  5. As of 10/31/18, the largest sector weighting in the S&P 500 Pure Growth Index was Information Technology at 36.8%, while the most heavily weighted sector in the S&P 500 Pure Value Index was Financials at 26.2%, according to S&P Dow Jones Indices.
  6. YTD through 11/27/18, the S&P 500 Information Technology Index posted a total return of 5.19%, compared to -3.60% for the S&P 500 Financials Index, according to Bloomberg.
  7. Due to the potential escalation of the use of trade tariffs, particularly between the U.S. and China, the world's two largest economies, one of the concerns is that global growth could slow moving forward if a new trade agreement isn't forged between them. Slower growth would have more of a negative impact on growth stocks, whereas a new trade agreement could favor growth stocks, in our opinion. We will continue to monitor these events closely.  
 
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 Index is a capitalization-weighted index comprised of 500 stocks (currently 505) used to measure large-cap U.S. stock market performance. 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 Information Technology Index is a capitalization-weighted index comprised of S&P 500 constituents in the information technology sector.  The S&P 500 Financials Index is a capitalization-weighted index comprised of S&P 500 constituents in the financials sector.

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Posted on Thursday, November 29, 2018 @ 1:55 PM • Post Link Share: 
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  How Bonds Have Fared Since 7/8/16
Posted Under: Bond Market

 
View from the Observation Deck  
  1. The yield on the benchmark 10-year Treasury note (T-note) closed at an all-time low of 1.36% on 7/8/16, according to data from Bloomberg.
  2. For comparative purposes, its all-time closing high was set on 9/30/81 at 15.84%, while its average yield has been 6.18% from 1/5/62 to 11/26/18. 
  3. From 7/8/16-11/23/18, the yield on the 10-year T-note rose from 1.36% to 3.04%, or an increase of 168 basis points (bps). It closed as high as 3.24% (11/8/18) in the period. 
  4. Since the Federal Reserve ("Fed") began raising rates on 12/16/15, the federal funds target rate (upper bound) has increased from 0.25% to 2.25%, or an increase of 200 bps, according to Bloomberg. 
  5. The cumulative total returns in the chart indicate that corporate bonds have outperformed the other major categories since the yield on the 10-year-T-note began its upward climb from its all-time low on 7/8/16, followed by shorter-maturity bonds.
  6. The strength of the U.S. economy supports further rate hikes by the Fed, in our opinion. We are expecting another hike in December 2018, with the Fed currently signaling three more hikes in 2019.
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 ICE BofAML 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/LSTA U.S. Leveraged Loan Index is a market value-weighted index designed to measure the performance of the U.S. leveraged loan market. The ICE BofAML Emerging Markets Corporate Plus Index tracks the performance of U.S. dollar and euro denominated emerging markets non-sovereign debt publicly issued in the major domestic and eurobond markets. The ICE BofAML 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 ICE BofAML 1-3 Year U.S. Corporate Index is a subset of the ICE BofAML U.S. Corporate Index including all securities with a remaining term to maturity of less than 3 years. The ICE BofAML 1-3 Year U.S. Treasury Index tracks the performance of U.S. dollar denominated sovereign debt publicly issued by the U.S. government with a remaining term to maturity of less than 3 years. The ICE BofAML 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 with a remaining term to maturity greater than or equal to 22 years. The ICE BofAML 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 ICE BofAML 7-10 Year Global Government (ex U.S.) Index tracks the performance of publicly issued investment grade sovereign debt denominated in the issuer's own domestic currency with a remaining term to maturity between 7 to 10 years, excluding those denominated in U.S. dollars. The ICE BofAML 7-10 Year U.S. Treasury Index tracks the performance of U.S. dollar denominated sovereign debt publicly issued by the U.S. government with a remaining term to maturity between 7 to 10 years.  

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Posted on Tuesday, November 27, 2018 @ 3:14 PM • Post Link Share: 
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  US Stock Markets Ended November 23, 2018
Posted Under: Weekly Market Commentary

 
Last week the S&P 500 Index continued its downward trend with a 3.77% drop. While the index returned 10.56% in the first three quarters of 2018, the decline in the fourth quarter has currently erased those gains. Equity markets started the week on a sour note after US Vice President Mike Pence and Chinese President Xi Jinping exchanged harsh rhetoric and gave differing views for the direction of future trade at the APEC summit over the previous weekend. President Trump and President Xi are expected to meet this weekend at the G20 summit in Argentina. In economic news, University of Michigan Consumer Sentiment Index remains high while US initial jobless claims of 224K were higher than expected. Information technology and energy led the decline last week with all sectors in negative territory. Crude oil prices declined 10.70% last week and closed at $50.42 per barrel, the lowest close since early October 2017. Signs of oversupply continue to weigh on crude and the energy sector. Technology giant Apple Inc., known for their iPhones and iPads, dropped 3.96% on reports that the company cut production orders of iPhones as demand appears to be declining. The stock lost 10.98% last week. Nvidia Corp, a developer of graphics processors and software, resumed being punished last Monday with a 12% decline. The stock dropped 18.76% the previous Friday after missing earnings and sales estimates and lowering fourth quarter revenue guidance. Rockwell Collins Inc., a commercial and military aviation electronics manufacturer, was the week's best performing stock in the S&P 500 Index returning 6.89%. The stock's trading volume was elevated as it jumped on Friday after reports that United Technologies Corp received their final regulatory approval from China to acquire the company. Rockwell is expected to release earnings on Tuesday. Companies reporting earnings this coming week include salesforce.com, HP Inc., Dollar Tree Inc., and a few others.
Posted on Monday, November 26, 2018 @ 8:30 AM • Post Link Share: 
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  US Economy and Credit Markets Ended November 23, 2018
Posted Under: Weekly Market Commentary

 
Treasury prices were mixed over the course of the week with long-term Treasury prices rising slightly and short-term Treasury prices dropping slightly. Investors believe the Federal Reserve is even more likely to raise rates at the December meeting as the market implied probability of a rate hike increased from 66% to 73%. However, a sell-off in the equity markets led by concerns over U.S. technology company earnings and a slowdown in global growth caused investors to seek the perceived safety of Treasuries, leading Treasury prices to remain steady. Homebuilder confidence dropped, and housing starts only met expectations. In Europe, Italy clashed with the European Commission in Brussels as Italian officials said their budget would remain intact, but they would be willing to make some changes to appease Brussels. Investors also believed that the concern that tariffs would negatively impact the economy through decreased investment spending was evident in the 4.4% drop in durable goods orders. Oil dropped 11% over the course of the week on concerns for weak demand out of China and oversupply coming from the U.S. Major economic reports (related consensus forecasts, prior data) for the upcoming week include: Tuesday: November Conf. Board Consumer Confidence (135.5, 137.9); Wednesday: November 23 MBA Mortgage Applications (n/a, -0.1%), October Prelim. Wholesale Inventories MoM (0.4%, 0.4%), 3Q Second GDP Annualized QoQ (3.5%, 3.5%), October New Home Sales (580k, 553k); Thursday: October Personal Income (0.4%, 0.2%), October Personal Spending (0.4%, 0.4%), November 24 Initial Jobless Claims (220k, 224k); Friday: November Chicago Purchasing Manager (58.8, 58.4).
Posted on Monday, November 26, 2018 @ 8:28 AM • Post Link Share: 
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  A Snapshot Of Dividend Yields
Posted Under: Sectors

 
View from the Observation Deck   
  1. Today's blog post reflects the fluctuation in the dividend yields on the S&P 500 and its 11 sector indices since the close of 2016. The S&P 500 is a market-capitalization weighted index.
  2. The significant decline in the yield on the S&P 500 Communication Services Index in 2018 was a result of it being reconstituted from the S&P 500 Telecommunication Services Index on 9/28/18. The new index is comprised of 26 stocks, the majority of which were formerly members of either the S&P 500 Information Technology Index or the S&P 500 Consumer Discretionary Index.     
  3. For comparative purposes, the yields on the 10-year Treasury note for the dates cited in the table were as follows: 2.45% (12/30/16), 2.41% (12/29/17) and 3.13% (11/14/18), according to Bloomberg. The financial media often compares the yields on dividend-paying stocks to what investors could earn on Treasuries. 
  4. The dividend yield on the S&P 500 Financials Index has been trending higher of late in large part due to the Federal Reserve's ruling in 2017 that allowed banks to begin hiking their dividend payouts. We expect payouts to rise moving forward. Banks had been restricted in doing so following the 2008-2009 financial crisis. The yield on the S&P 500 Financials Index stood above the yield on the S&P 500 Index on 11/14/18. 
  5. For the 12-month period ended 6/30/18 (most recent data), the S&P 500 Index paid out a record high $435.69 billion in dividends, up 7.02% from the $407.11 billion distributed for the 12-month period ended 6/30/17, according to S&P Dow Jones Indices. 
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 (currently 505) 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, November 20, 2018 @ 1:40 PM • Post Link Share: 
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  US Stock Markets Ended November 16, 2018
Posted Under: Weekly Market Commentary

 

Equities were on a see-saw last week. The S&P 500 Index was down -2.8% thru Wednesday, only to pare losses and close last week -1.3%. The discretionary and technology sectors were laggards, while real estate and materials were the only positive returning sectors. Brick and mortar retail stocks were hammered after Nordstrom Inc. (-22% return) and Macy's Inc. (-12% return) announced disappointing earnings results. The worst performing technology stocks last week were Nvidia Corp. (-20%) and NetApp Inc. (-12%). Nvidia announced quarterly revenue and earnings below market expectations, which caused the stock to plummet on Friday. The advanced computer chip maker pointed to waning crypto-currency demand, which slowed sales and grew inventory. NetApp dropped after revenue was reported on the lower end of expectations. The supplier of flash memory appears to have strong end market demand in every category but government spending fell which management claimed was a timing issue. Oil dipped below $60 for the first time since February. After reaching $76 in early October, the commodity plummeted down to $55 on Tuesday, only to stabilize and trade slightly higher to end the week. Global growth concerns, a strong dollar and continued pumping all have contributed to the price drop. As a result, the S&P 500 Energy Index was one of the poorest performing sectors last at a -1.9% return. The worst performing stock in the S&P 500 Index last week was California utility PG&E Corp. (down -36%), which faces significant risks around the potential financial liability from fires in southern California. Edison International, another California utility, was also down -11% last week for similar reasons. Both PG&E and Edison did have large gains on Friday, after California Public Utilities Commission officials indicated that it would apply a cap when evaluating fire related expenses. Looking ahead to next week, investors will be focused on housing starts, consumer confidence and durable goods orders for confirmation of continued economic strength.

Posted on Monday, November 19, 2018 @ 8:04 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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US Economy and Credit Markets Ended November 16, 2018
Passive vs. Active Fund Flows
How Stocks Have Fared Since 9/20/18
US Stock Markets Ended November 9, 2018
US Economy and Credit Markets Ended November 9, 2018
A Global Snapshot of Government Bond Yields
A Snapshot Of U.S. Equity Valuation Levels
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