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  Individual Investors Are Not Very Bullish On Stocks Now And That Isn’t Necessarily Bad
Posted Under: Conceptual Investing

 
View from the Observation Deck  

  1. In July 1987, the American Association of Individual Investors (AAII) began polling its own members in an effort to gain insight into the moods of individual investors. 
  2. Each week they ask their members if they are bullish, neutral or bearish on the stock market looking out six months. We have chosen to focus on their level of bullishness. 
  3. When sentiment readings notably fall below or rise above their respective historical norms, some investors may interpret the moves as signals to either buy or sell stocks. 
  4. On 6/6/19, the index reading stood at 22.53%. From inception of the index to date (7/23/87-6/13/19), the average level of bullish sentiment has been 38.18%. The high and low readings have been 75.00% (1/6/00) and 12.00% (11/15/90), respectively, according to AAII data provided by Bloomberg.
  5. Prior to the 22.53% reading on 6/6/19, we identified 10 weekly readings (there were actually 11 but two were back-to-back weeks) that ranged from 22.00-23.00% dating back around 25 years or so. Those dates and readings are referenced in the table above. 
  6. With the exception of the 7/10/08 reading, which coincided with the 2008-2009 financial crisis, the performance of the S&P 500 Index over the following 3-, 6- and 12-month periods has been largely positive.   

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 an unmanaged index of 500 stocks used to measure large-cap U.S. stock market performance.

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Posted on Thursday, June 13, 2019 @ 2:40 PM • Post Link Share: 
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  How Bonds Have Fared Since 10/9/07
Posted Under: Bond Market

 
View from the Observation Deck  
  1. We chose 10/9/07 as our start date because it marked the last day of the prior bull market in stocks (10/9/02-10/9/07), as measured by the S&P 500 Index. 
  2. The backstory to the period featured in the chart (10/9/07-6/7/19) involves a seismic shift in retail investor sentiment in favor of fixed-income opportunities over equities, as measured by mutual fund flows. 
  3. From 12/31/07-4/30/19, retail investors funneled a net $1.49 trillion into bond mutual funds, while liquidating a net $1.16 trillion from equity mutual funds, according to data from the Investment Company Institute. 
  4. In addition to posting the performance figures for some of the major bond index categories, we also show what each index yielded at the start of the period (see chart).
  5. While the primary objective for most fixed-income investors is current income, preservation of capital tends to be a close second. Achieving a total return on an investment that matches or exceeds its yield is optimal, in our opinion. 
  6. For the period featured in the chart, the yield on the benchmark 10-year Treasury note declined from 4.65% to 2.08%, or 257 basis points, according to data from Bloomberg. A good climate for bonds. 
  7. With respect to the returns posted by the two foreign categories, investors need to factor in that the U.S. dollar appreciated 22.93% in the period, as measured by the U.S. Dollar Index (DXY), according to Bloomberg.  
  8. Lastly, as good as the returns are for all of the bond categories in the chart, none of them exceeded the 7.62% average annualized total return for the S&P 500 Index.  
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 7-10 Year Global Government (ex U.S.) tracks the performance of publicly issued investment grade sovereign debt denominated in the issuer's own domestic currency with a remaining term to final maturity greater than or equal to 7 years and less than 10 years, and excluding those denominated in US dollars. 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. 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 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 500 Index is an unmanaged index of 500 stocks used to measure large-cap U.S. stock market performance.

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Posted on Tuesday, June 11, 2019 @ 2:48 PM • Post Link Share: 
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  US Stock Market Ended June 7, 2019
Posted Under: Weekly Market Commentary

 
Last week, the S&P 500 returned just under 4.5% for its best week this year. Materials led the index with over a 9% return. The sector moved higher with precious metals gold and silver coming off levels not seen since last winter. DuPont de Nemours, Sherwin-Williams, and International Flavors & Fragrances were the top performing stocks in the Materials sector. Investors have been battling with how to take the good and bad news. On Friday, the U.S. labor market report showed job creation trailed estimates in May. The negative jobs news caused stocks to rally due to the possible increased willingness of the Federal Reserve to cut interest rates later this year. Optimism over a looser monetary policy coupled with concern over trade will keep investor sentiment more balanced and cautions. The positive sentiment in stocks is offset by a more pessimistic view in bonds. On the trade front, President Trump is still going after both China and Mexico. The Mexico deal looked to unraveling earlier in the week, but his tweet stream provided contradicting updates ending with the President seeing a "good chance" of a deal with our southern neighbors. The implications of the Mexico deal are still cloudy after some companies looked to the country as a safe haven from the impending tariffs with China. On the calendar next week, PPI, CPI, and mortgage applications will give investors new data points to structure their outlook.
Posted on Monday, June 10, 2019 @ 8:04 AM • Post Link Share: 
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  US Economy and Credit Markets Ended June 7, 2019
Posted Under: Weekly Market Commentary

 
U.S. Treasury prices continued to rise last week as tariffs and weak headline economic data raised concerns about the economy. Treasury bond yields fell on Monday as fears of an economic slowdown ratcheted up after President Donald Trump launched a second tariff front, this time on Mexico. On Tuesday, Treasury bond yields attempted a comeback as Federal Reserve Chairman Jerome Powell and other Fed officials cooled concerns over the United States slowing economy. Fed Chairman Powell asserted that the Fed will "act as appropriate to sustain the expansion." Treasury bond prices finished the week higher with Treasury bond yields dropping on Friday as investors reacted to the U.S. jobs report. Nonfarm payrolls rose 75,000 in May, missing the consensus expected 175,000.  Underlying data consisted of the unemployment rate remaining unchanged, productivity up 2.4% this year, and average hourly earnings up 0.2% in May and 3.1% versus a year ago. The weak headline jobs data coupled with the Federal Reserve's comments earlier in the week elevated expectations for rate cuts this year.  Major economic reports (related consensus forecasts, prior data) for the upcoming week include: Tuesday: May PPI Final Demand MoM (0.1%, 0.2%), May PPI Final Demand YoY (1.9%, 2.2%); Wednesday: June 7 MBA Mortgage Applications (n/a, 1.5%), May CPI MoM (0.1%, 0.3%), May CPI YoY (1.9%, 2.0%), May Monthly Budget Statement (n/a, $160.3b), Thursday: May Import Price Index MoM ( -0.3%, 0.2%), June 8 Initial Jobless Claims (215k, 218k); Friday: May Retail Sales Advance MoM (0.7%, -0.2%), May Industrial Production MoM (0.2%, -0.5%), June Preliminary University of Michigan Sentiment (98.0, 100.0).
Posted on Monday, June 10, 2019 @ 8:02 AM • Post Link Share: 
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  The Only Constant Is Change
Posted Under: Sectors

 
View from the Observation Deck  
  1. One of the most common questions we field on an ongoing basis is the following: What are your favorite sectors?
  2. Sometimes the answer is more evident than at other times, in our opinion. 
  3. You didn't need much of a crystal ball to tout Information Technology in 1998 and 1999 (top-performing S&P 500 sector both years by a wide margin), as was the case with Energy in 2004 & 2005, according to performance data from Bloomberg.  
  4. From 2006-2018, however, no sector in the S&P 500 Index was able to repeat as the top-performer on a calendar year basis.
  5. As indicated in the chart above, forecasting which of the 11 major sectors in the S&P 500 Index is likely to outperform the pack on a quarterly basis is even trickier, 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. Past performance is no guarantee of future results. The S&P 500 Index is an unmanaged index of 500 stocks used to measure large-cap U.S. stock market performance. The respective 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, June 6, 2019 @ 2:23 PM • Post Link Share: 
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  Sector Performance Via Market Capitalization (Since Steel/Aluminum Tariffs Enacted)
Posted Under: Sectors

 
View from the Observation Deck  

  1. On 3/8/18, President Trump signed orders imposing tariffs on imported steel (25%) and aluminum (10%). Since then, trade tensions with China have escalated and we believe such tensions are weighing on global growth projections and the stock market.  
  2. As of 5/31/19, the S&P 500, S&P MidCap 400 and S&P SmallCap 600 Indices stood 6.58%, 11.69% and 19.09% below their respective all-time closing highs (down 20% or more from recent peak is bear market territory), according to Bloomberg.  
  3. These three indices together comprise the S&P Composite 1500 Index, which represents approximately 90% of total U.S. equity market capitalization (cap), according to S&P Dow Jones Indices. 
  4. Sector performance can vary widely by market cap. Some of the sectors reflect a significant disparity in performance (see table). The more defensive/income-oriented sectors (Utilities & Real Estate) performed the best for investors. 
  5. Large-cap stocks, as measured by the S&P 500 Index, have significantly outperformed their mid- and small-cap counterparts since the tariffs began (3/8/18). 
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 an unmanaged index of 500 stocks used to measure large-cap U.S. stock market performance, while the 11 major S&P 500 Sector Indices (Real Estate was added as the 11th major sector in 2016 but data is not available for this chart) are capitalization-weighted and comprised of S&P 500 constituents representing a specific sector. The S&P MidCap 400 Index is a capitalization-weighted index that tracks the mid-range sector of the U.S. stock market. The S&P SmallCap 600 Index is a capitalization-weighted index that tracks U.S. stocks with a small market capitalization. 

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Posted on Tuesday, June 4, 2019 @ 2:50 PM • Post Link Share: 
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  Same Old Song and Dance
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 Monday, June 3, 2019 @ 12:18 PM • Post Link Share: 
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  US Stock Markets Ended May 31, 2019
Posted Under: Weekly Market Commentary

 
Domestic equities experienced losses last week as disappointing trade news dominated headlines. U.S. President Donald Trump returned from his trip to Japan with news that a near-term trade deal didn't seem likely, China "was not ready to make a long-term deal' and then ended last week announcing new tariffs on Mexico in an effort to stem the flow of illegal immigrants into the U.S. The new tariffs on imports from Mexico are scheduled to start on June 10th at 5% and to escalate to 25% by October 1st. Mexican President Lopez Obrador has sent his foreign minister to Washington D.C. to negotiate with U.S. officials to try and avoid the June 10th tariffs. U.S. 1Q19 annualized GDP growth was revised down to 3.1% from the previously announced 3.2%. Both measurements were well ahead of economist projections of 2.3% from April and speak to the strength of the U.S. economy. Uber Technologies Inc. announced quarterly financial results for the first time since their IPO on May 9th and saw shares up 1.5% Friday, while the general market was down. The company is focused on becoming a one-stop shop for local transportation and commerce. In 1Q19 they averaged 17m trips per day, with an annualized booking rate of $59b or 41% year-over-year growth. The company did manage to lose over $1b last quarter, mostly from promotional costs as they continue to strive for acceptance in many of their end markets. U.S. retail continues to struggle, the most recent casualty was The Gap Inc. Despite restructuring plans to spin off their Old Navy brand, the stock fell 9.3% on poor earnings and has fallen 26% for the year. Looking ahead, tariff and trade news will likely drive near-term market returns. Remembering the strong U.S. macroeconomic picture of robust job market, strong corporate earnings and sturdy GDP growth is important for long-term stock market investors. We currently remain constructive on equities long-term, making these near-term dips in equities favorable entry points.
Posted on Monday, June 3, 2019 @ 8:01 AM • Post Link Share: 
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  US Economy and Credit Markets Ended May 31, 2019
Posted Under: Weekly Market Commentary

 
Treasury Prices rose significantly over the week on increased trade war fears. On Monday, President Trump said that the U.S. was not ready to make a deal with China, following his trip to Japan and said that tariffs on China "could go up very, very substantially. China responded Tuesday with reports that they could scale back exports of rare earth materials to the U.S. and China's vice foreign minister said that instigating trade wars was "naked economic terrorism. Trade fears escalated on Friday when Trump turned his attention to Mexico with a threat of tariffs if they do not help the U.S. curb illegal immigration along the U.S. Southern border. The plan called for a 5% tariff on Mexican imports on June 10, rising incrementally to 25% by October 1st if Mexico failed to act. This has also led investors to expect the Federal Reserve to cut interest rates sooner as the market implied probably of an interest rate cut at the July meeting rose from 17% to 48% this week. Major economic reports (related consensus forecasts, prior data) for the upcoming week include: Oil dropped 9% over the course of the week. Monday: May Final Markit US Manufacturing PMI (50.6, 50.6), May ISM Manufacturing (53.0, 52.8), April Construction Spending MoM (0.4%, -0.9%); Tuesday: April Factory Orders (-0.9%, 1.9%), April Final Durable Goods Orders (n/a, -2.1%); Wednesday: May 31 MBA Mortgage Applications (n/a, -3.3%), May ADP Employment Change (185k, 275k)' Thursday: Jun 1 Initial Jobless Claims (215k, 215k), April Trade Balance (-$50.5b, $50.0b); Friday: May Change in Nonfarm Payrolls (180k, 263k), May Unemployment Rate (3.6%, 3.6%), April Final Wholesale Inventories MoM (0.7%, 0.7%).
Posted on Monday, June 3, 2019 @ 7:59 AM • Post Link Share: 
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  A Case For Investing In Two Basic Necessities
Posted Under: Sectors

 
View from the Observation Deck  
  1. Today's blog post is an FYI to individuals who invest in electric utility stocks, especially those who buy them with the intent of holding them over a long-time horizon.
  2. Historically speaking, investors have been drawn to utility stocks because their dividend yields can at times be attractive relative to other income-oriented securities, as has been the case over the past decade, in our opinion. 
  3. What most investors may not know is that electricity and water are intertwined in complex ways via infrastructure, according to the University of Wisconsin College of Engineering. It notes that there can be no water from a tap without electricity, and there is no electricity from a switch without water. 
  4. The National Environmental Education Foundation reports that 77% of the demand for fresh water in the U.S. comes from irrigation and electric power plant cooling, followed by municipal and industrial usage at 20%.
  5. As indicated in the chart, the ISE Water Index outperformed the S&P 500 Utilities Index in four of the six time periods.
  6. What the chart does not show is how the two indices performed relative to each other on a calendar year basis. From 2004-2018 (15 years), the two indices posted similar (within 2 percentage points) total returns in just three of the 15 calendar years (2005, 2007, 2008). With respect to the other 12 years, the returns often varied significantly. In 2018, the disparity was 12.7 percentage points in favor of the S&P 500 Utility Index, according to Bloomberg. 
  7. From 2004-2018, the ISE Water Index outperformed the S&P 500 Utility Index in eight of the 15 calendar years, according to Bloomberg.
  8. While these two necessities (electricity and water) may be intertwined, the ISE Water Index and S&P 500 Utility Index have demonstrated that they do not move in lockstep over time.
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 Utilities Index is a capitalization-weighted index comprised of S&P 500 constituents representing the utilities sector. The ISE Water Index includes companies engaged in water distribution, water filtration, flow technology and other water solutions. The S&P 500 Index is an unmanaged index of 500 stocks used to measure large-cap U.S. stock market performance.  

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Posted on Thursday, May 30, 2019 @ 1:24 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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