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  Information Technology + Consumer Discretionary = E-commerce
Posted Under: Sectors

 
View from the Observation Deck  
  1. The time period featured in today's blog chart (3/9/09-11/12/19) represents the current bull market in U.S. stocks. 
  2. Merriam-Webster defines e-commerce as commerce conducted via the Internet. Sounds simple enough. 
  3. The majority of retail-oriented companies in the S&P 500 Index are categorized as Consumer Discretionary. 
  4. The majority of the companies in the index that help provide the backbone to the internet are categorized as Information Technology. 
  5. Conceptually speaking, if you were to combine these two sectors you might get something akin to the Dow Jones Internet Composite Index (see definition below). 
  6. As indicated in the chart, these two sectors have posted nearly identical average annualized total returns at this point in the bull market, but lag the results generated by the Dow Jones Internet Composite Index.  
  7. The Dow Jones Internet Composite Index may be gaining an edge from less diversification. It is comprised of 41 constituents, compared to 68 for the S&P 500 Information Technology Index and 64 for the S&P 500 Consumer Discretionary Index.
  8. That edge can be meaningful over time. The cumulative total returns for the period depicted in the chart are as follows: 1006.15% (Dow Jones Internet Composite Index); 789.36% (S&P 500 Consumer Discretionary Index) and 781.30% (S&P 500 Information Technology Index), 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. The S&P 500 Index is an unmanaged index of 500 stocks used to measure large-cap U.S. stock market performance. The S&P 500 Consumer Discretionary and S&P 500 Information Technology are capitalization-weighted and comprised of S&P 500 Index constituents representing a specific sector. The Dow Jones Internet Composite Index is a modified capitalization-weighted index that tracks companies involved in Internet-related activities. 

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Posted on Thursday, November 14, 2019 @ 11:56 AM • Post Link Share: 
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  Equity Investors Opting For Blended Portfolios Over Growth And Value
Posted Under: Conceptual Investing

 
View from the Observation Deck  

  1. Today's blog post is intended to be an FYI of sorts in that we simply want to show how investors have been positioning their capital with respect to equity style and market capitalization (cap).
  2. We are featuring the 12-month period ended 9/30/19 over year-to-date because it captures the tumultuous climate in the equities markets back in Q4'18.
  3. Notice that, with the exception of small-cap stocks, the blended mutual funds and exchange-traded funds (ETFs) tracked by Morningstar garnered by far the most capital inflows from investors, particularly the Large Blend and Foreign Large Blend categories. 
  4. We should note that some investors may be shying away from small-caps due to concerns over slowing economic growth in the U.S. and abroad.   
  5. In addition to net fund flows, total net assets per category (as of 9/30/19) suggests that investors have favored blend funds over their growth and value counterparts over time. 
  6. Our takeaway is that, for many investors, the ongoing debate over whether to emphasize growth or value stocks in one's investment portfolio isn't worth sweating. Just own both.     
  7. For those that are interested in this debate, (click here) to see our most recent post on the performance of growth and value stocks. 

This chart is for illustrative purposes only and not indicative of any actual investment. 

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Posted on Tuesday, November 12, 2019 @ 1:42 PM • Post Link Share: 
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  US Stock Markets Ended Nov. 8, 2019
Posted Under: Weekly Market Commentary

 
Stocks closed at record highs last week with the S&P 500 up over 25% for the year. The index has closed in positive territory for the fifth straight week. Consumer sentiment improved again for the third straight month showing that Americans are confident in their financial position as markets move higher. Ralph Lauren Corp showcased that sentiment after the company reported same-store sales growth across the US and the rest of the world. A drop in foreign shoppers in North America had been a problem for the company, but a resurgence of domestic spending pushed their sales past Wall Street estimates. The trade war with China continues to keep its thumb on the equity markets. Contradictory headlines about rolling back tariffs from officials from both countries were met by President Trump comments disputing the pledge. Travel company Expedia sat at the bottom of the S&P 500 as the worst performing stock last week. The company reported quarterly sales in line with expectations, but their short-term rental unit VRBO came up short of analyst estimates. The disappointing growth of the division resulted in the company lowering the full-year outlook. As stocks push higher towards the end of the year, investors look to the higher beta sectors in market. Defensive sectors were the poorest group in the S&P 500 with Real Estate, Utilities, and Consumer Staples comprising the bottom three performers. Looking ahead, more of the same future headlines will be in play. Trade, the 2020 election, impeachment, and the economic impact of climate change will remain on the minds of investors and move the markets.
Posted on Monday, November 11, 2019 @ 8:58 AM • Post Link Share: 
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  US Economy and Credit Markets Ended Nov. 8, 2019
Posted Under: Weekly Market Commentary

 
Treasury yields rose last week on signs of progress in trade negations between the U.S. and China, with the yield on the U.S. 10-year Treasury reaching its highest level since July. Safe havens such as gold and government bonds fell globally on Thursday after China's Ministry of Commerce announced that the U.S. and China have agreed to roll back tariffs as part of a "phase one" deal between the two countries. However, President Donald Trump disputed the report on Friday, saying the U.S. hasn't agreed to roll back tariffs on China. U.S. government bond prices rose following the President's comments, reversing some of the selling from the day before. In economic data, the ISM Non-Manufacturing Index rose to 54.7 in October, coming in above expectations. The report eased concerns that a recent slowdown in manufacturing would affect other areas of the economy such as the service sector. The preliminary November reading of the University of Michigan Consumer Sentiment Index showed a slight gain over the prior month. It was the third consecutive month of improvement and further indication that the U.S. consumer is on solid footing. Major economic reports (related consensus forecasts, prior data) for the upcoming week include: Wednesday: October CPI MoM (0.3%, 0.0%), November 8 MBA Mortgage Applications (N/A, -0.1%); Thursday: November 9 Initial Jobless Claims (215k, 211k), October PPI Final Demand MoM (0.3%, -0.3%); Friday: October Retail Sales Advance MoM (0.2%, -0.3%), October Industrial Production MoM (-0.4%, -0.4%), November Empire Manufacturing (5.9, 4.0).
Posted on Monday, November 11, 2019 @ 8:55 AM • Post Link Share: 
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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) fell from 3.20% at the close of 11/5/18 to 1.86% on 11/5/19, or a decline of 134 basis points (bps), according to Bloomberg. The closing low for the period was 1.46% (9/3/19), 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 11/5/18, the Federal Reserve ("Fed") has decreased the federal funds target rate (upper bound) 50 bps, from 2.25% to 1.75%.  
  4. For the 30-year period ended 11/5/19, the federal funds target rate (upper bound) averaged 2.98%, according to Bloomberg. On a historical basis, the Fed's current monetary policy is not tight. 
  5. The only bond index featured in the chart that does not reflect an upward adjustment in pricing year-over-year is the S&P/LSTA U.S. Leveraged Loan 100 Index. Leveraged loan payouts are typically indexed to short-term rates, which we noted have declined year-over-year.   
  6. Investors funneled an estimated net $222.21 billion and $68.18 billion, respectively, into Taxable Bond and Municipal Bond mutual funds and exchange-traded funds for the 12-month period ended 9/30/19, according to Morningstar. 
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, November 7, 2019 @ 12:34 PM • Post Link Share: 
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  This Covered Call Index Tends To Outperform The S&P 500 When Stock Returns Are Modest Or Negative
Posted Under: Conceptual Investing

 
View from the Observation Deck  
  1. From 2003-2018, the CBOE S&P 500 BuyWrite Index (an index designed to measure a covered call strategy) outperformed the S&P 500 Index in four of the 16 calendar years. 
  2. Though it is performing well year-to-date, it has lagged the return on the S&P 500 Index by roughly 10 percentage points (see table).
  3. While covered call options can generate an attractive level of current income, they can also cap the potential for capital appreciation.
  4. The use of a covered call portfolio tends to be most beneficial to investors when the stock market posts down years (2008) and when returns range from 0% to 10% (2007, 2011 and 2015), though the BuyWrite Index did not outperform the S&P 500 Index in 2005 or in 2018.
  5. Covered call writing tends to be less beneficial when stock market returns are above 10%, such as in 2010, 2012, 2013, 2014, 2016, 2017 and thus far in 2019 (see table). 
  6. As of 10/31/19, the S&P 500 Index stood 0.30% below its all-time high of 3,046.77 set on 10/30/19, according to Bloomberg. 
  7. We believe that corporate earnings growth determines the direction of stock prices over time. 
  8. Bloomberg's 2020 and 2021 consensus earnings growth rate estimates for the S&P 500 Index were 9.26% and 10.36% as of 11/1/19. Those earnings growth projections fit the range that has historically been a favorable climate for covered calls.  
  9. From 1926-2018 (93 years), the S&P 500 posted an average annual total return of 9.99%, according to Morningstar/Ibbotson Associates.
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 an unmanaged index of 500 stocks used to measure large-cap U.S. stock market performance. The CBOE S&P 500 BuyWrite Index (BXM) is designed to track a hypothetical buy-write strategy on the S&P 500. It is a passive total return index based on (1) buying an S&P 500 stock index portfolio, and (2) "writing" (or selling) the near-term S&P 500 Index (SPXSM) "covered" call option. 

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Posted on Tuesday, November 5, 2019 @ 12:14 PM • Post Link Share: 
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  US Stock Markets Ended Nov. 1, 2019
Posted Under: Weekly Market Commentary

 
U.S. stocks moved higher for the week amid solid economic data, improving trade sentiment and upbeat earnings reports. Positive macro releases include a strong jobs report that added 128,000 jobs in October and 3Q GDP growth of 1.9%, above the 1.6% estimate by economists. By contrast, the ISM manufacturing index came in below expectations at 48.3. Readings above 50 signal an expansion in manufacturing activity, while readings below 50 signal contraction. This was the third consecutive month with a reading below 50, increasing concern of an economic slowdown in manufacturing. Turning to earnings, Apple Inc. climbed to new highs after reporting strong iPhone revenues, robust growth for AirPods and 18% growth in service revenue. Shares of Facebook Inc. jumped after announcing a beat on the top-line, lower expenses and robust active user growth. Royal Caribbean Cruises Ltd. missed estimates on a worse-than-expected impact from Hurricane Dorian, although booking trends and onboard spending remain positive. Grubhub Inc. shares tumbled after missing on both the top and bottom lines due to intensifying competition in mature markets and less accretive agreements with chain restaurants. With many large-cap stocks reporting results, earnings season has provided a catalyst for stocks as expectations were dire coming into the quarter. Looking ahead, investors will remain focused on changes in economic activity, geopolitical risk, Fed moves and trade negotiations. If corporate fundamentals continue to show signs of strength, equity markets could continue to climb the wall of worry and post new highs.
Posted on Monday, November 4, 2019 @ 8:04 AM • Post Link Share: 
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  US Economy and Credit Markets Ended Nov. 1, 2019
Posted Under: Weekly Market Commentary

 
United States Treasury yields dropped across the curve as investors took in a plethora of economic data throughout the week. On Wednesday, third quarter real GDP came in at an annual growth rate of 1.9%, beating the consensus expected rate of 1.6%. Consumer spending was the largest positive contributor to growth for the quarter, indicating the continued confidence and purchasing power of the U.S. consumer. Also, on Wednesday, the Federal Reserve cut short-term interest rates by 25 basis points, moving the fed funds rate to the range of 1.50%-1.75%, which was largely expected. More importantly, Federal Reserve Chairman Powell signaled a pause in further rate cuts unless there are material changes in the economic outlook. The week wrapped up with manufacturing and jobs data on Friday. The ISM Manufacturing Index, which is a survey, rose to 48.3 in October, though 0.6 lower than expectations. The data indicated manufacturing activity continued to slow in October, as levels above 50 signals expansion while levels below 50 indicate contraction. October manufacturing data was largely impacted by the GM strike. The strike resulted in 46,000 employees out of work for the month. Friday's jobs report reaffirmed the strength of the U.S. labor market. Nonfarm payrolls rose 128,000 in October, well above the consensus expectation of 85,000. With August and September revisions, nonfarm payrolls were up 223,000. The Unemployment rate rose to 3.6% in October, 0.1% higher than September levels. Labor force participation rose to 63.3%, the highest level since 2013. Average hourly earnings rose 0.2% in the month and are up 3.0% year-over-year. Major economic reports (related consensus forecasts, prior data) for the upcoming week include: Monday: September Final Durable Goods Orders (-1.1%, -1.1%), September Factory Orders (-0.5%, -0.1%); Tuesday: September Trade Balance (-$52.5b, -$54.9b), October Final Markit US Services PMI (51.1, 51.0), October Final Market US Composite PMI (n/a, 51.2), October ISM Non-Manufacturing Index (53.4, 52.6); Wednesday: November 1 MBA Mortgage Applications (n/a, 0.6%); Thursday: November 2 Initial Jobless Claims (215k, 218k), October 26 Continuing Claims (1660k, 1690k); Friday: September Final Wholesale Inventories MoM ( -0.3%, -0.3%), November Preliminary University of Michigan Sentiment ( 95.5, 95.5).
Posted on Monday, November 4, 2019 @ 8:00 AM • Post Link Share: 
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  This Data Does Not Portend A Bear Market In Stocks
Posted Under: Conceptual Investing

 
View from the Observation Deck  
  1. Today's blog post is intended to provide some historical perspective as to where three key benchmark interest rates/yields stood prior to U.S. equities, as measured by the S&P 500 Index, succumbing to bear markets.
  2. A bear market in stocks is defined as a decline of 20% or more in the price level of a benchmark index, such as the S&P 500 Index, from its recent peak.  
  3. Brian Wesbury, Chief Economist at First Trust Advisors L.P., has noted through the years that bear markets tend to occur when the Federal Reserve ("Fed") becomes too tight with its monetary policy.  
  4. Three consecutive rate cuts have brought the federal funds target rate (upper bound) down to 1.75%. It currently stands well below its 30-year average of 2.98%, according to Bloomberg. The Fed is not tight by historical standards.  
  5. Historically, stocks have performed well following three successive interest rate cuts (1975, 1996 and 1998). Data from LPL Financial indicates that the S&P 500 Index has risen an average of 10% six months after said rate cuts and 20% a year out, according to MarketWatch.  
  6. A 3/22/12 article in Businessweek stated that data from Standard & Poor's revealed that, since 1953, U.S. stocks posted their best returns when the yield on the 10-Year Treasury Note (T-Note) rose to around 4.00%.
  7. As of 10/30/19, the 10-year Treasury-note (T-note) yielded a paltry 1.77%, or 223 basis points below that 4.00% mark. The absence of any significant inflationary pressure is one of the reasons why bond yields are so low. 
  8. The 2020 and 2021 consensus earnings growth rate estimates for the S&P 500 Index were 9.52% and 10.18%, respectively, as of 10/25/19, according to Bloomberg. Those estimates do not portend a bear market or a recession, in our opinion. 
This chart is for illustrative purposes only and not indicative of any actual investment. Past performance is not indicative of future results and there can be no assurance that any of the projections cited will occur. 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 CPI (Consumer Price Index) measures the prices paid for a market basket of consumer goods and services. 


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Posted on Thursday, October 31, 2019 @ 1:17 PM • Post Link Share: 
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  Trump Rally (11/8/16-10/28/19) vs. Trump Tariffs (3/8/18-10/28/19)
Posted Under: Conceptual Investing

 
View from the Observation Deck  
  1. A common thread running through the Trump Rally and the Trump Tariffs is President Trump's policy of "America First." 
  2. While each of the equity indices featured in the chart have posted positive cumulative total returns (green bars) since Donald Trump won the presidential election on 11/8/16, the U.S. equity indices have clearly outperformed their foreign counterparts through 10/28/19. 
  3. On 3/8/18, President Trump signed a proclamation authorizing tariffs on imported steel (25%) and aluminum (10%). Since that initial proclamation, the Trump administration has authorized additional tariffs, primarily targeting China.
  4. The U.S. dollar, which can be a safe-haven destination for foreign investors, has strengthened since the tariffs commenced, creating some headwind for U.S. investors holding foreign stocks. From 3/8/18 through 10/28/19, the U.S. dollar rose by 8.41%, as measured by the U.S. Dollar Index (DXY), according to Bloomberg. That represents a reversal from how the U.S. dollar performed after Trump's victory in the presidential election and the start of the tariffs. From 11/8/16 through 3/8/18, the U.S. Dollar Index declined by 7.85%.
  5. Take a moment to compare the returns in the chart above to those featured in a previous post on 8/6/19 (click here). Investor sentiment in the equities markets has grown more upbeat of late largely due to perceived progress in the trade negotiations with China, in our opinion. 
  6. We believe that this is a timely example of the potential rewards that can be associated with the notion of "time in the market." 
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 NASDAQ 100 Index includes 100 of the largest domestic and non-financial companies listed on The NASDAQ Stock Market based on market capitalization. The S&P SmallCap 600 Index is a capitalization-weighted index that tracks U.S. stocks with a small market capitalization. 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 MSCI World (ex U.S.) Index is a free-float weighted index designed to measure the equity market performance of developed markets. The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. The U.S. Dollar Index (DXY) indicates the general international value of the dollar relative to a basket of major world currencies.

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Posted on Tuesday, October 29, 2019 @ 12:34 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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