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  Comparing Two Major Recoveries: Technology vs. Financials
Posted Under: Conceptual Investing

 
View from the Observation Deck  

  1. The S&P 500 Index has never failed to fully recover the losses sustained from a bear market (price decline of 20% or more). We know this because it reached an all-time high on 9/20/18. 
  2. On a sector level, Financials and Information Technology have both endured crushing bear markets in the new millennium, and they were similar in scope. 
  3. On a price-only basis (does not include dividends), the S&P 500 Information Technology Index declined by 82.51% from 3/27/00 through 10/9/02 (peak-to-trough), according to Bloomberg. The S&P 500 Financials Index declined by 83.96% (peak-to-trough) from 2/20/07 through 3/6/09, according to Bloomberg.  
  4. As indicated in the chart, the losses sustained from the bear market in tech stocks took 6,323 days to fully recover, as measured by the S&P 500 Information Technology Index. Since then (7/19/17-2/15/19), the index posted an aggregate price-only return of 22.93%, according to Bloomberg. 
  5. The rebound in Financials is still a work in progress. As of 2/15/19, the recovery effort from the 2008-2009 financial crisis had lasted 4,378 days, as measured by the S&P 500 Financials Index. As of 2/15/19, the index stood 14.09% below its all-time high set on 2/20/07. 
  6. We know that the banks, particularly the largest institutions, were at the epicenter of the financial crisis. Here is a link to our latest take on the banks (click here).
  7. The U.S. stock market has demonstrated its ability to heal itself. The X-Factor is time. So far, Financials appear to be healing at a much faster clip than Technology did. 
   
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 Information Technology Index and the S&P 500 Financials Index are capitalization-weighted and comprised of S&P 500 constituents representing those specific sectors.

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Posted on Thursday, February 21, 2019 @ 11:05 AM • Post Link Share: 
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  One Of The Original Asset Allocation Models
Posted Under: Conceptual Investing

 
View from the Observation Deck  

  1. An ongoing request we get from investors is to see our latest asset allocation ideas. As one might imagine, the possibilities seem almost endless.
  2. The explosion of new investment products in recent years, particularly in the ETF space, allows investors to diversify over a much broader spectrum of opportunities, in our opinion.
  3. Today, we would like to take investors back to a simpler time when the focus tended to be on just four major asset classes: stocks, government bonds, real estate and gold.
  4. One of the primary goals in employing asset allocation is that it can potentially help investors manage risk more effectively.
  5. Many investors may still be apprehensive about assuming market risk considering we have endured two punishing bear markets in stocks since 2000.
  6. The simple takeaway from the chart is that, with the exception of 2018, at least one of the four major asset classes featured managed to post a positive return in 31 of the past 32 years.
  7. From 1987 through 2018, on annual basis, the price of gold bullion was down 14 times, while Long-Term Government Bonds, Equity REITs and the S&P 500 Index were down 8 times, 7 times and 6 times, respectively.

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 (currently 505) used to measure large-cap U.S. stock market performance.  The FTSE NAREIT Equity REITs Index is a free float adjusted market capitalization-weighted index that includes all tax qualified REITs listed on the major U.S. exchanges. Gold bullion price obtained from COMEX (Commodity Exchange) gold futures. The Ibbotson Associates SBBI U.S. Long-Term Government Bond Index is an unmanaged index representing the U.S. long-term government bond market.

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Posted on Tuesday, February 19, 2019 @ 1:57 PM • Post Link Share: 
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  US Stock Markets Ended February 15, 2019
Posted Under: Weekly Market Commentary

 
Equities pushed higher by over 2.5% to close out higher for the third consecutive week, measured by the S&P 500. Small cap stocks returned 4.38% and mid cap stocks posted a 3.38% return as measured by the S&P 600 and S&P 400, respectively. Consumer outlook coupled with positive developments in the China trade talks suppressed fears about global growth. On Friday, President Trump announced he will declare a national emergency to secure federal funding for a border wall. The move to circumvent the five to eight-billion-dollar addition to the federal spending bill will keep the government open and avoid another shutdown. The President is expected to sign the bill over the weekend. Amazon has decided to scrap its plans for a New York headquarters. The deal was championed by state officials, but local lawmakers opposed the $790 billion-dollar company's plan to transform their communities. Domestic economic growth was upheld in the energy markets as oil moved to over $55 a barrel to close out the week. The move in crude pushed energy stocks in the S&P 500 higher and the group lead the index for the week. Devon Energy, Marathon Oil, and Apache were some of the top performing energy stocks in the index. Coty Inc., a beauty product manufacturer, was one of the top performers in the S&P 500 after JAB Investments announced it will acquire control of the company. Uncertainty still exists on the global front, but domestic affairs are keeping stocks pushing higher. Looking ahead to next week, housing demand will be evidenced by the mortgage applications number. The minutes from the last FOMC meeting in January will be released on Wednesday and give insight into where the committee sees the US economy.
Posted on Tuesday, February 19, 2019 @ 7:58 AM • Post Link Share: 
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  US Economy and Credit Markets Ended February 15, 2019
Posted Under: Weekly Market Commentary

 
Treasuries fell for the first three days of last week before rising on Thursday as retail sales data showed significant weakness compared to expectations. The US 2 year and 10 year Treasury Note spread is only up marginally from December's lows, even amid a strong start to the year for equity markets, and fell sharply last week. This may be partly due to mixed economic data. While wage growth and job growth are both strong, last week saw retail sales register a 1.2% decline in December, The Producer Price Index (PPI) declined 0.1% in January and Industrial Production fell 0.6% in January. The mixed data seems to support the Federal Reserve's current pause on its rate path as it seeks to determine what the current market conditions warrant. On Wednesday of last week, the Consumer Price Index (CPI) remained unchanged even with historically strong labor markets. Partly driving this may be energy prices which have fallen for the last three months of 2018. Crude prices did rise last week, though, and are nearing three-month highs. Many Energy and Production companies have announced reduced CAPEX budgets in the first quarter earnings season and market sentiment anticipates this may help crude oil pricing later this year.Major economic reports (related consensus forecasts, prior data) for the upcoming holiday-shortened week include: Wednesday: February 15 MBA Mortgage Applications (N/A, -3.7%); Thursday: February 16 Initial Jobless Claims (229k, 238k), December preliminary Durable Goods Orders (1.7%, 0.7%), February preliminary Markit US Manufacturing PMI (54.9, 54.9), January Leading Index (0.2%, -0.1%) and January Existing Home Sales (5M, 4.99M).
Posted on Tuesday, February 19, 2019 @ 7:57 AM • Post Link Share: 
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  Many Investors Could Be Underweight Mid- & Small-Cap Stocks
Posted Under: Conceptual Investing

 
View from the Observation Deck  

  1. Today's blog post focuses on equity asset allocation via market capitalization (cap). In other words, how much capital do investors commit to U.S. large-, mid- and small-cap stocks. We use mutual fund and exchange-traded fund (ETF) asset levels as a barometer.
  2. As indicated in the chart, as of 12/31/18, investors had positioned a combined $5.766 trillion in the three large-cap categories, while allocating just $0.906 trillion and $0.686 trillion, respectively, to the mid- and small-cap categories.
  3. Overall, of the $7.358 trillion allocated to these nine categories as of 12/31/18, 78.4% is in large-cap stock portfolios.
  4. In all three of the market caps featured in the chart, investors have favored the blended portfolios, which have exposure to both growth and value stocks.
  5. The following four style/market caps featured in the chart were the only groups that had positive estimated net flows in 2018: $144.554 billion (Large Blend); $11.682 billion (Small Blend); $10.734 billion (Mid-Cap Blend); and $5.302 billion (Small Growth), according to Morningstar. 
  6. While risk tolerance is always an important factor in determining where to allocate investment capital, the fact that mutual fund and ETF investors have just 21.6% of their capital earmarked for U.S. stocks in mid- and small-caps is a bit surprising, in our opinion. Some investors may even fall short of that mark. 
  7. From 12/31/99 through 12/31/18, a period that included two severe bear markets, the S&P 500 Index posted an average annualized total return of 4.86%, compared to 8.67% and 9.15%, respectively, for the S&P MidCap 400 and S&P SmallCap 600 Indices, according to Bloomberg. In addition to outperforming their larger-cap counterparts in the new millennium, small-caps have outperformed in the current decade.
  8. From 12/31/09 through 12/31/18, the S&P SmallCap 600 Index posted an average annual total return of 12.34%, compared to 11.31% and 11.72%, respectively, for the S&P MidCap 400 and S&P 500 Indices, according to Bloomberg.
  9. Bloomberg's 2019 consensus earnings growth rate estimates for the S&P 500, S&P MidCap 400 and S&P SmallCap 600 Indices were 11.31%, 12.68% and 21.54%, respectively, as of 2/13/19.

This chart is for illustrative purposes only and not indicative of any actual investment. The illustration excludes the effects of taxes and brokerage commissions and other expenses incurred when investing. There can be no assurance that any of the projections cited will occur. Past performance is no guarantee of future results. 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.

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Posted on Thursday, February 14, 2019 @ 2:44 PM • Post Link Share: 
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  For Those Equity Investors Concerned About Valuation Levels
Posted Under: Broader Stock Market

 
View from the Observation Deck  

  1. In the table above, the line shaded in yellow shows the S&P 500 Index's average price-to-earnings (P/E) ratio and average annual total return from 1960 through 2018. It offers a long-term perspective on the stock market.
  2. One of our key takeaways from the table is the 9.79% average annual total return from 1960 through 2018, because it is essentially in line with the index's average annual total return of 9.99% from 1926-2018 (not shown in table), according to Ibbotson & Associates/Morningstar. 
  3. While the average P/E on the S&P 500 Index from 2010 through 2018 was 17.70, the trailing 12-month P/E stood at 16.64 as of 12/31/18 (not shown in table), below the 16.93 average P/E since 1960, according to Bloomberg.  
  4. As of 2/11/19, Bloomberg's consensus estimated P/E ratios for year-end 2019 and 2020 were 16.15 and 14.55, respectively.
  5. The S&P 500 Index is currently at its cheapest levels relative to forward-looking earnings since 2013, according to Money

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.

Download a PDF of this post, please click here.
Posted on Tuesday, February 12, 2019 @ 2:34 PM • Post Link Share: 
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  US Stock Markets Ended February 9, 2019
Posted Under: Weekly Market Commentary

 
The S&P 500 Index returned 11 basis points for the first full week in February. The index rallied in the month of January with an 8.01% return, following the painful fourth quarter of 2018. Information technology and industrials led the way up on Monday as the index showed its best performance of the week. Earnings releases and expectations appeared to be the catalyst as companies like Alexion Pharmaceuticals Inc, The Clorox Company, Seagate Technology PLC, and Alphabet Inc. all beat earnings estimates. Global demand concerns and trade resolution uncertainty between China and the United States had energy, information technology, and material stocks leading the S&P 500 Index down following the European market decline on Thursday. Crude oil prices closed the week at $52.72 per barrel, decreasing 4.60% for the week. In economic news, US initial jobless claims of 234K were higher than the consensus estimate of 221K, but lower than the previous week's 253K. Mattel Inc., a designer and manufacturer of children's toys, was the week's best performing stock in the S&P 500 Index climbing 24.63%. The stock opened higher on Friday after the company announced better than expected earnings for the fourth quarter due to Barbie doll sales. Coty Inc., a manufacturer and distributor of beauty products, returned 23.74% last week. The stock opened higher on Friday after announcing earnings and increasing profit expectations for the future. The stock has struggled in the recent past posting a -64.50% return for 2018. Anadarko Petroleum Corp, an oil and gas exploration company, was the week's worst performing stock in the S&P 500 Index declining 13.64%. The stock opened lower on Wednesday and continued to decline through Friday after releasing disappointing earnings. Next week will bring more earnings news from companies such as Cisco Systems Inc., The Coca-Cola Company, PepsiCo Inc., NVIDIA Corp, CME Group Inc., and many more.
Posted on Monday, February 11, 2019 @ 8:27 AM • Post Link Share: 
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  US Economy and Credit Markets Ended February 8, 2019
Posted Under: Weekly Market Commentary

 
U.S. government bond prices rose last week on strong demand and weak economic data out of Europe. In the U.S., the January reading of the ISM non-manufacturing index missed expectations as the government shutdown weighed on sentiment but still signaled expansion, declining from 58.0 in December to 56.7. In Europe, German manufacturing orders and industrial production both fell unexpectedly in December and the European Union cut its forecast for economic growth in the area from 1.9% in 2019 to 1.3%, pushing U.S. government bond prices higher. Meanwhile, fears lingered that the U.S. and China will not reach a trade deal ahead of a March 1 deadline after White House economic adviser Larry Kudlow said a deal was a "pretty sizable distance" away. Following the March 1 deadline, suspensions on certain tariff increases will be lifted. At the end of last week, Fed funds futures implied nearly a nearly 0% chance that the Fed will raise rates in 2019, down from about 30% only two weeks prior. Major economic reports (related consensus forecasts, prior data) for the upcoming week include: Wednesday: January CPI MoM (0.1%, -0.1%), February 8 MBA Mortgage Applications (N/A, -2.5%); Thursday: February 9 Initial Jobless Claims (225k, 234k), December Retail Sales Advance MoM (0.1%, 0.2%), January PPI Final Demand MoM (0.1%, -0.2%); Friday: February Preliminary U. of Mich. Sentiment (93.9, 91.2), January Industrial Production MoM (0.1%, 0.3%), February Empire Manufacturing (7.5, 3.9).
Posted on Monday, February 11, 2019 @ 8:24 AM • Post Link Share: 
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  Rising Bank Dividend Payouts Are A Sign Of Strength
Posted Under: Sectors

 
View from the Observation Deck  

  1. Since the biggest banking institutions in the U.S. were at the epicenter of the 2008-2009 financial crisis, investors should not be surprised that the recovery has been a lengthy one, in our opinion. 
  2. While many indices trade closer to their respective all-time highs, as of the close of trading on 2/6/19, the S&P 500 Banks Index stood 24.88% below its all-time high set on 2/20/07, according to Bloomberg. 
  3. The recovery in bank dividend payments has now entered its 9th year. As indicated in the chart, the post-crisis bottom in annual dividend distributions for the S&P 500 Banks Index was $1.34 per share in 2010. Even if the $12.12 per share dividend estimate for 2021 proves accurate, it would still stand 16.70% below the $14.55 per share payout in 2007, just prior to the crisis. 
  4. Today, the banking sector is robust, according to Deloitte. It notes that return on equity for the industry was at a post-crisis high of 11.83% heading into 2019.
  5. Due to the passage of the Tax Cuts & Jobs Act in December 2017, 23 major U.S. banks were able to shave nearly $21 billion off their taxes in 2018, lowering their effective tax rates from around 28% in 2016 to below 19%, according to Bloomberg.
  6. The tax savings enabled the 23 lenders to increase their dividends and stock buybacks in 2018 by a combined $28 billion from 2017's outlay, according to Bloomberg. 
  7. While the recovery in the banking sector has gained a lot of ground, it remains a work in progress, and therein lies the opportunity for those investors willing to be patient, in our opinion.

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 Banks Index is capitalization-weighted and comprised of 19 constituents.

Download a PDF of this post, please click here.
Posted on Thursday, February 7, 2019 @ 1:23 PM • Post Link Share: 
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  Volatility vs. Stock Returns
Posted Under: Conceptual Investing

 
View from the Observation Deck  
  1. The Chicago Board Options Exchange (CBOE) SPX Volatility Index (VIX) uses S&P 500 Index options activity to gauge investors' expectations of volatility. It represents a 30-day measure. 
  2. The VIX Index is often referred to as the "fear index" by the financial media. Aside from 2008 (financial crisis), the VIX Index has demonstrated it can fluctuate dramatically on an intra-year basis without negatively impacting the performance of the S&P 500 Index (see 2003, 2009 & 2010 in table). 
  3. From 2003 through 2018, the average reading on the VIX Index was 18.63 (not shown in table), according to data from Bloomberg. Over that same period, the average annual total return for the S&P 500 Index was 8.96%, according to Bloomberg. 
  4. For comparative purposes, from 1926-2018 (93 years), the average annual total return posted by the S&P 500 Index was 9.99%, according to Ibbotson Associates/Morningstar. 
  5. While the average reading for the VIX Index was just 16.62 in 2018, below its 18.63 average from 2003-2018, the S&P 500 Index posted a total return of -4.38%. 
  6. Looking at the high, low and average data points in the table for 2018 would not shed light on the fact that the S&P 500 Index registered two corrections (Q1'18 & Q4'18) involving a price decline of 10.00% to 19.99%.  
  7. Volatility was uncharacteristically low in 2017. It normalized in 2018. While it is a tool that traders may take notice of, it is not something investors should sweat, 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. The S&P 500 is a capitalization-weighted index comprised of 500 stocks (currently 505) used to measure large-cap U.S. stock market performance. The VIX Index (The CBOE SPX Volatility Index®) estimates expected volatility by averaging the weighted prices of S&P 500 puts and calls over a wide range of strike prices.

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Posted on Tuesday, February 5, 2019 @ 2:09 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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