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  How Some Major Equity Indices Have Fared In The Recent Correction And Recovery
Posted Under: Conceptual Investing

 

 
View from the Observation Deck  
  1. The top chart above shows the corrections registered by the Dow Jones Industrial Average Index, S&P 500 Index and the MSCI World (ex U.S.) Index at the end of 2018 (9/20/18-12/24/19). 
  2. A correction is defined as a price decline of 10.00% to 19.99% from the most recent peak. We use total returns for our performance measure, which include reinvested dividends. 
  3. The MSCI Emerging Markets Index merely suffered a pullback. A pullback is defined as a price decline of 5.00% to 9.99% from the most recent peak. 
  4. The S&P MidCap 400 and S&P SmallCap 600 Indices, however, slid far enough to reach bear territory. A bear market is defined as a price decline of 20.00% or more from the most recent peak.  
  5. Perhaps the main reason why the two foreign stock indices declined less than the domestic indices is because they were already dramatically underperforming leading up to the peak in the market on 9/20/18, in our opinion. 
  6. From 12/29/17-9/20/18 (not shown in chart), the MSCI Daily TR Net World (Ex U.S.) and MSCI Emerging Net TR Indices posted total returns of -1.21% (USD) and -8.72% (USD), respectively, in USD, according to Bloomberg. For comparative purposes, the S&P 500 Index posted a total return 11.16% over the same period. 
  7. The U.S. Dollar Index, which indicates the general international value of the dollar relative to a basket of major world currencies, was up 5.26% from 12/29/17 through 4/12/19, according to Bloomberg. The stronger U.S. dollar provided a bit of a drag on the total returns of the two foreign indices. 
  8. The bottom chart above captures the rebound that commenced after the close on 12/24/18. The rebound is still in progress. In addition to a decent Q1'19 earnings season, we contend that the biggest potential catalyst for fueling this rally moving forward is a new trade agreement with China. Stay tuned. 
  9. Click here to see how the S&P 500 Index sectors performed during these same periods. 
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 MidCap 400 Index is a capitalization-weighted index that tracks the mid-range sector of the U.S. stock market. The S&P Small Cap 600 Index is a capitalization-weighted index that tracks U.S. stocks with a small market capitalization. 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 Thursday, April 18, 2019 @ 2:05 PM • Post Link Share: 
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  The Losses Sustained In The Recent Correction Nearly Fully Recouped
Posted Under: Conceptual Investing

 

 
View from the Observation Deck  
  1. The two charts in today's blog post are a tale of two markets. The first chart captures the recent correction in the S&P 500 Index, while the second chart shows the rally in progress.
  2. A correction is defined as a price decline of 10.00% to 19.99%. The -19.4% total return posted by the S&P 500 Index came very close to bear market territory, which is defined as a price decline of 20.00% or more. On a price-only basis (dividends not included), the S&P 500 Index declined by 19.8% in the period, according to Bloomberg. 
  3. As of the close on 4/12/19, the S&P 500 Index stood just 0.8% below its all-time closing high on 9/20/18 (2,930.75), according to Bloomberg. 
  4. In the first chart, the sectors that sold-off the most were clearly more cyclical in nature. The sectors that declined the least were more defensive in nature. In the second chart showing the rebound, the cyclicals are the one's outperforming.
  5. Our take all along has been that investors should not be spooked by corrections in the market, particularly when the issues/headwinds of the day can be remedied. The Federal Reserve, for example, has indicated that it does not intend at this time to initiate any additional rate hikes in 2019.
  6. A Bloomberg survey of 25 equity strategists found that their average 2019 year-end price target for the S&P 500 Index was 2,897 as of 4/2/19, according to its own release. The highest estimate was 3,250, while the lowest was 2,390.
  7. We believe these strategists will likely adjust their year-end targets higher for the S&P 500 Index if the Q1'19 earnings reporting season delivers better-than-expected results. 
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 (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. As of 9/28/18, the Global Industry Classification Standard (GICS) was reconstituted and the Telecommunications Services sector was renamed Communication Services. GICS sector information for periods prior to 9/28/18 may not necessarily be comparable to the reconstituted sectors. 

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Posted on Tuesday, April 16, 2019 @ 2:50 PM • Post Link Share: 
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  US Stock Markets Ended April 12, 2019
Posted Under: Weekly Market Commentary

 
Equity markets finished higher last week after the Federal Reserve moved more dovish and several banks reported strong quarterly results. Equities fell on Monday and Tuesday as U.S./China trade talks continue to drag along and the IMF (International Monetary Fund) downgraded their 2019 global growth forecast from 3.5% announced in January, to 3.3%. Equities rallied to close last week after the Federal Open Market Committee released their March meeting notes that revealed while they see continued U.S. economic expansion, they also believe that risks to the outlook justify keeping interest rates "unchanged for the balance of the year." Equity markets took this as welcomed news, S&P 500 was up 0.8% to close the week, as late last year some had begun to fear the Fed had put their head out over their ski's when it came to interest rate hikes. Walt Disney Co. saw their shares jump over 11% Friday after they announced a new streaming service that will be priced at $6.99/mo. Predictably, Netflix Inc. fell over 4.5% on news of an additional competitor with significant content entered the streaming video space. JPMorgan Chase & Co. was up over 4.5% Friday after the bank announced their 1Q19 financial results. Earnings per share were $2.60, nearly 10% above consensus estimates, on revenue of $29.8b which was 5% higher than estimates. CEO Jamie Dimon credited strong U.S. consumer spending for the banks very positive results. Wells Fargo & Co. fell 2.3% after their earnings came in below estimates but their revenues were higher than what the street expected. Both banks credited their positive 1Q19 results to the strength of U.S. economy. If the U.S. economic backdrop continues to be strong while inflation remains muted and the Fed accommodative, stock market returns are likely to continue.
Posted on Monday, April 15, 2019 @ 8:09 AM • Post Link Share: 
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  US Economy and Credit Markets Ended April 12, 2019
Posted Under: Weekly Market Commentary

 
Yields were up last week on signs of continued growth in the U.S. economy. Initial jobless claims beat expectations after falling by 8,000 over the prior week to 196,000 for the week ended April 6, the lowest level since 1969. Meanwhile, the Producer Price Index rose 0.6% in March, coming in well above expectations. Prior to the data releases, minutes of the Fed's March meeting released on Wednesday showed most Fed officials expected to leave interest rates unchanged for the remainder of the year. However, some Fed officials noted that their interest rate views could go either way based on incoming data and new developments. In Europe, ECB President Mario Draghi said Europe's economic slowdown would continue this year but said the bank could step in to boost the economy with monetary easing if needed. His comments came after the IMF cut its economic growth forecasts for the eurozone on Tuesday for both 2019 and 2020. Major economic reports (related consensus forecasts, prior data) for the upcoming week include: Monday: April Empire Manufacturing (8.0, 3.7); Tuesday: March Industrial Production MoM (0.2%, 0.1%); Wednesday: April 12 MBA Mortgage Applications (N/A, -5.6%), February Trade Balance (-$53.5b, $-51.1b), February Wholesale Inventories MoM (0.5%, 1.2%); Thursday: April 13 Initial Jobless Claims (206k, 196k), March Retail Sales Advance MoM (1.0%, -0.2%), April Preliminary Markit US Manufacturing PMI (52.7, 52.4), March Leading Index (0.4%, 0.2%); Friday: March Housing Starts (1,230k, 1,162k).
Posted on Monday, April 15, 2019 @ 8:07 AM • Post Link Share: 
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  A Snapshot of Growth vs. Value Investing
Posted Under: Themes

 
View from the Observation Deck  
  1. As indicated in the chart, stocks are off to a strong start in 2019. We update this post every few months so that investors can see which of the two styles (growth or value) are delivering the best results.    
  2. The S&P 500 Index closed at 2,878.20 on 4/9/19. It stood 1.79% below its all-time closing high of 2,930.75 on 9/20/18, according to Bloomberg.  
  3. The S&P 500 Pure Growth Index outperformed its value counterpart in five of the six periods featured in the chart. Growth investing topped value investing for the 15-year, 5-year, 3-year, 1-year and year-to-date periods ended 4/9/19. 
  4. The returns through 4/9/19 were as follows (Pure Growth vs. Pure Value): 15-year average annualized (10.71% vs. 10.01%); 10-year average annualized (18.42% vs. 19.17%); 5-year average annualized (11.03% vs. 7.12%); 3-year average annualized (14.86% vs. 12.04%); 1-year (9.79% vs. 2.99%) and year-to-date (18.01% vs. 14.23%).
  5. As of 3/29/19, the two largest sector weightings in the S&P 500 Pure Growth Index were Information Technology (23.1%) and Health Care (15.5%), compared to Financials (33.6%) and Consumer Discretionary (16.0%) for the S&P 500 Pure Value Index, according to S&P Dow Jones Indices.
  6. The International Monetary Fund (IMF) lowered its global growth estimate from the 3.5% target it set in January 2019 to 3.3% in April 2019, according to Bloomberg. The IMF also lowered its estimate for U.S. growth, from 2.5% in January to 2.3%. 
  7. Despite the tempered growth projections, growth stocks have outperformed value stocks year-to-date through 4/9/19.  
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.  

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Posted on Thursday, April 11, 2019 @ 1:30 PM • Post Link Share: 
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  A Snapshot Of Dividend-Payers & Non-Payers In The S&P 500 Index
Posted Under: Stock Dividends

 
View from the Observation Deck  
  1. One of the ways in which S&P Dow Jones Indices tracks the performance of the constituents in the S&P 500 Index ("index") is by separating those that pay a dividend from those that do not. 
  2. Companies that do not pay a dividend tend to be more growth-oriented, in our opinion. As of 3/29/19, 418 of the index members distributed a cash dividend to shareholders, according to S&P Dow Jones Indices.  
  3. The number of S&P 500 companies that distribute dividends fluctuates over time. Since 2002, the numbers have ranged from a year-end low of 351 in 2002 to a year-end high of 423 in 2014.
  4. While the S&P 500 Index is capitalization-weighted, constituents are equally-weighted in this comparison. 
  5. The average market cap of the constituents in the S&P 500 Index was $49.0 billion as of 3/29/19, according to S&P Dow Jones Indices. For comparative purposes, the 50 largest companies in the index had an average market cap of $245.5 billion. 
  6. From 2002-2018, the dividend-payers outperformed the non-payers, on a total return basis, in 10 of the 17 calendar years. Payers are lagging year-to-date through Q1'19. 
  7. With respect to the non-payers, two years in the table stand out: 2003 and 2009. Both marked the first year of a new bull market, which helps explain the huge disparity in performance over the dividend-payers, 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. 

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Posted on Tuesday, April 9, 2019 @ 3:23 PM • Post Link Share: 
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  US Stock Markets Ended April 5, 2019
Posted Under: Weekly Market Commentary

 
The second quarter started off on a positive note as the S&P 500 rallied over 2% last week. The seven-day upward swing is the longest streak since 2017. Stocks are approaching the record high set back in September. Defensive sectors gave up their gains last week as investors turned risk on, leaving Consumer Staples and Utilities in negative territory. Materials had the best week in the S&P 500 led by Dow Inc, Eastman Chemical, and LyondellBasell Industries. However, on Friday JPMorgan initiated coverage on Dow with an underweight rating. The report pushed the stock down over 3.5% to close out the week. Payrolls topped estimates causing equities to rise on Friday. The release eased investor fear about a slowing domestic economy as a strong labor market coupled with low signs of inflation is a good sign for financial markets. Around the globe, central banks are staying patient on their tightening plans. The World Trade Organization cut its global trade growth projection from 3.7% to 2.6%, the lowest level in three years. Adding to the uncertainty, U.K. Prime Minister Theresa May asked the European Union to delay Brexit until the end of June. Back in the U.S., President Trump is keeping pressure on Chairman Powell by reiterating his opposing views of the Fed's decision to raise interest rates and shrink its balance sheet. Some have accused the president of damaging the central bank's independence by making comments against Fed policy and announcing his plan to nominate two close political allies in Stephen Moore and Herman Cain. Next week, the Federal Reserve and its members will continue to top headlines as the FOMC meeting minutes from March will be released on Wednesday.
Posted on Monday, April 8, 2019 @ 8:03 AM • Post Link Share: 
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  US Economy and Credit Markets Ended April 5, 2019
Posted Under: Weekly Market Commentary

 
Prices on U.S. Treasurys fell early in the week, pushing yields higher, on the back of strong United States and Chinese economic data. Sentiment was positive on Monday as the Chinese manufacturing purchasing managers index rose above 50 (levels higher than 50 signal expansion) in March and, in United States, the ISM Manufacturing Index rose to 55.3 in March, beating the consensus expected 54.5. Growth in the manufacturing sector bounced back in March after missing estimates in February. The ISM non-manufacturing index missed consensus expectations for March, but still came in at a strong 56.1, as expansion remains on-track. Nonfarm payrolls rose 196,000 in March, comfortably beating the consensus expected by 19,000. Including revisions to January/February, nonfarm payrolls increased 210,000. Though average hourly earnings missed consensus expectations by 0.2%, total wages grew by an impressive 0.6% in March, pushing total wages up 5.2% over the past year. The strong economic data throughout the week dampened the looming recession narrative. Major economic reports (related consensus forecasts, prior data) for the upcoming week include: Monday: February Factory Orders (-0.5%, 0.1%), February Final Durable Goods Orders (N/A,-1.6%); Tuesday: March NFIB Small Business Optimism (101.2, 101.7); Wednesday: April 5 MBA Mortgage Applications (N/A, 18.6%), March CPI MoM (0.3%, 0.2%), March CPI YoY (1.8%, 1.5%), and March Monthly Budget Statement (-$212.8B, -$234.0B); Thursday: March PPI Final Demand MoM (0.3%, 0.1%), March PPI Final Demand YoY (1.9%, 1.9%), April 6 Initial Jobless Claims (210K, 202K), and March 30 Continuing Claims (N/A, 1717K); Friday: April Preliminary University of Michigan Sentiment (98.4, 98.4).
Posted on Monday, April 8, 2019 @ 8:00 AM • Post Link Share: 
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  Every Year Looks Volatile Compared To 2017
Posted Under: Broader Stock Market

 
View from the Observation Deck  

  1. In 2017, the S&P 500 Index (the "index") did not register a single down month on a total return basis, which includes reinvested dividends. That is not typically the case. 
  2. In 10 of the past 11 calendar years, which includes the 2008-2009 financial crisis, the index endured no less than two negative total return months and as many as eight (see table). 
  3. In the first three months of 2019, the index posted the following total returns: 8.01% (January); 3.21% (February); and 1.94% (March), according to Bloomberg. Only nine more positive months needed to match 2017.  
  4. From 2008 through March 2019, the S&P 500 Index endured a loss in 43 of the 135 months on a total return basis, or approximately 32% of the time. Over that same period, the index posted an average annualized total return of 8.32%, according to Bloomberg. 
  5. For comparative purposes, from 1926 through 2018, the S&P 500 Index posted a loss in 25 of the 93 calendar years on a total return basis, or approximately 27% of the time, according to data from Ibbotson Associates/Morningstar. Over that same period, the index posted an average annual total return of 9.99%, according to Bloomberg.
  6. Stock prices don't rise in a straight line. Investors are going to encounter some turbulent times along the way. The good news is that as recently as last September, the S&P 500 Index had never failed to fully recoup any losses that it had sustained.
  7. As of 4/3/19, the index stood at 2,873.40, 1.96% below its all-time closing high of 2,930.75 on 9/20/18, according to Bloomberg. 

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 any past trends will continue or that projections cited will occur. The S&P 500 Index is a capitalization-weighted index comprised of 500 stocks (currently has 505) used to measure large-cap U.S. stock market performance. 

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Posted on Thursday, April 4, 2019 @ 1:48 PM • Post Link Share: 
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  S&P 500 Index Earnings & Revenue Growth Rate Projections
Posted Under: Broader Stock Market

 
View from the Observation Deck  

  1. On 3/29/19, the S&P 500 Index closed the trading session at 2,834.40, 3.29% below its all-time high of 2,930.75 set on 9/20/18, according to Bloomberg. 
  2. For the market to trend higher, we believe that corporate earnings will need to grow, and perhaps the best catalyst for growing earnings is to increase revenues.
  3. From 1926-2018 (93 years), the S&P 500 Index posted an average annual total return of 9.99%, according to Ibbotson & Associates/Morningstar. 
  4. As indicated in the table, Bloomberg's 2019 and 2020 consensus year-over-year (y-o-y) earnings growth rate estimates for the index were 4.7% and 11.3%, respectively, as of 3/29/19. 
  5. Only one (Consumer Discretionary) of the 11 major sectors that comprise the index reflects a double-digit y-o-y earnings growth rate estimate for 2019, compared to seven in 2020. 
  6. Bloomberg's 2019 and 2020 consensus y-o-y revenue growth rate estimates for the S&P 500 Index were 4.4% and 5.4%, respectively, as of 3/29/19.
  7. Three of the 11 major sectors reflect y-o-y revenue growth rate estimates of 5.0% or more for 2019, compared to five for 2020.
  8. Click here to compare today's estimates to those from 1/11/19. 

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 (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, April 2, 2019 @ 1:31 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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