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  How Bonds Have Fared Since 8/4/20
Posted Under: Bond Market

 

View from the Observation Deck  

  1. The yield on the 10-year Treasury note (T-note) closed at an all-time low of 0.51% on 8/4/20, according to Bloomberg.  
  2. From 8/4/20 through 8/9/22, its yield rose from 0.51% to 2.78%, or an increase of 227 basis points, based on the close of trading. It reached as high as 3.48% on 6/14/22 during the period.    
  3. As indicated in the chart above, the only two debt categories in positive territory for the period were leveraged loans (senior loans) and high yield corporate bonds, both of which are speculative-grade securities.  
  4. Emerging market bonds and intermediate-term global government bonds were deep into negative territory for the period captured in the chart. The strength in the U.S. dollar definitely had a negative impact on the performance of foreign bonds, in our opinion. The U.S. Dollar Index (DXY) rose by 13.91% over the same period, according to Bloomberg.   
  5. Inflation remains elevated. The trailing 12-month CPI (Consumer Price Index) stood at 8.5% in July 2022, up from 1.3% from August 2020. The CPI is at a level not seen since 1982, according to data from the Bureau of Labor Statistics.
  6. As of 8/9/22, the federal funds target rate (upper bound) stood at 2.50%, up from 0.25% this past March. The Fed has signaled that it is prepared to take rates higher if the data warrants it. The Fed’s next meeting is scheduled for September 20-21. 
  7. For comparative purposes, the federal funds target rate (upper bound) averaged 2.46% for the 30-year period ended 8/9/22. Stay Tuned! 

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 BofA 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 BofA 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 BofA 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 BofA 1-3 Year U.S. Corporate Index is a subset of the ICE BofA U.S. Corporate Index including all securities with a remaining term to maturity of less than 3 years. The ICE BofA 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 BofA 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 BofA 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 BofA 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 BofA 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 BofA Freddie Mac Mortgage Backed Securities Index is a subset of the ICE BofA U.S. Mortgage Backed Securities Index including all generics representing pools issued by Freddie Mac.

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Posted on Thursday, August 11, 2022 @ 11:40 AM • Post Link Share: 
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  A Snapshot Of Gold, Silver And The Miners
Posted Under: Sectors

 

View from the Observation Deck  

  1. Today's blog post illustrates the wide disparities that often exist between the annual price performance of an ounce of gold bullion, silver and the equity returns posted by the mining companies.  
  2. Since precious metals tend to be priced in U.S. dollars, investors should also be aware of the relative strength of the U.S. dollar against other major global currencies, in our opinion. 
  3. Precious metals have historically been considered potential inflation hedges by investors, although that has not been the case so far in 2022 (see Point 7). From 1926-2021, the CPI rate averaged 3.0%, according to data from the Bureau of Labor Statistics. It stood at 9.1% on a trailing 12-month basis in June 2022.  
  4. As of 8/5/22, the price of gold closed trading at $1,775.50 per ounce, according to Bloomberg. The all-time closing high for the spot price is $2,060.59 per ounce, set on 8/6/20.
  5. From 2007 through 2021, the Philadelphia Stock Exchange Gold & Silver Index only posted a positive total return in seven of the 15 calendar years, but four of them occurred from 2016 through 2020. It is in negative territory YTD. 
  6. As of 8/8/22, Bloomberg's earnings per share figures (in dollars) for 2019, 2020 and 2021 (actual earnings) and consensus estimated earnings per share for 2022 and 2023 for the Philadelphia Stock Exchange Gold & Silver Index were as follows: $1.00 (2019); $4.62 (2020); $5.63 (2021); $6.42 (2022 Est.); and $7.27 (2023 Est.).   
  7. The price of gold and gold mining stocks succumbed to the simultaneous rise in Treasury bond yields and the strengthening of the U.S. dollar between mid-April through mid-July, according to Barron’s. The selloff in the stock market over that period more than likely put additional downward pressure on gold mining stocks, in our opinion. Bond yields and the U.S. dollar have fallen in recent weeks and stocks have rebounded. Stay tuned.    

The chart and performance data referenced are for illustrative purposes only and not indicative of any actual investment. The index performance data excludes the effects of taxes and brokerage commissions or other expenses incurred when investing. Investors cannot invest directly in an index. There can be no assurance that any of the projections cited will occur. The Philadelphia Stock Exchange Gold & Silver Index is a capitalization-weighted index comprised of the leading companies involved in the mining of gold and silver. The U.S. Dollar Index (DXY) indicates the general international value of the dollar relative to a basket of major world currencies. The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.

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Posted on Tuesday, August 9, 2022 @ 11:28 AM • Post Link Share: 
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  US Stock Markets Ended August 5, 2022
Posted Under: Weekly Market Commentary

 

The S&P 500 index only returned 0.11% last week despite evidence that the economy and corporate earnings remain strong. The Friday jobs report showed gains in nonfarm payrolls of 528k, more than double the estimated 250k jobs and revisions for last month were also strong. Unemployment ticked down to 3.5% and the labor force participation rate dipped to 62.1%. For the first time, total payrolls surpassed the pre-COVID rate from February 2020. There is no evidence the U.S. economy is heading for a recession from the July jobs reports. Energy was the worst performing sector last week as the price of Oil dropped from $98.62 down to $88.51 as global recessionary worries and tepid demand weighed on prices. Earnings season was in full tilt last week after 168 companies in the S&P 500 index announced quarterly results. Several mobility/delivery names announced terrific quarterly results. Uber Technologies Inc. announced that they hit a significant milestone becoming FCF positive for the first time. They credited the return of their mobility/rideshare business after pandemic lockdowns for their 107% revenue growth year over year. Their revenue and gross bookings were both all time highs for the company as their shares rallied 36.50% last week. Competitors Lyft Inc. and Doordash Inc. had similar stories as well. Lyft had record EBIDA returns and guided that next quarter they would have over $1b in revenue and stated their goal of $700m in positive free cash flow for 2024. Doordash also had strong revenue and EBIDA results that beat analyst expectations, as well as guidance for FY22 EBITDA between $200m-$500m. As a result of their terrific announcements, Lyft returned 46.32% and Doordash 15.11% last week. PayPal Holdings Inc. rallied 10.16% last week, after announcing strong quarterly results as well as a $15b stock buyback program and a $2b investment from private equity firm Elliott Management. Looking ahead to next week, earnings season is winding down as only 27 names in the S&P 500 are expected to report. Overall corporate earnings remain strong, and equities remain attractive. 

Posted on Monday, August 8, 2022 @ 8:22 AM • Post Link Share: 
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  US Economy and Credit Markets Ended August 5, 2022
Posted Under: Weekly Market Commentary

 

U.S. Treasury yields rose significantly over the course of the week, especially short-term yields, as investors weighed the pace at which the Federal Reserve would increase interest rates at coming meetings. Yields started the week with a drop in rates on Monday, before rising significantly on Tuesday as regional Fed policy makers Mary Daly and Charles Evans said that U.S. interest rates need to keep rising until inflation comes back down. Long-term yields then dropped moderately again on Wednesday as the ISM manufacturing index rose to a 3-month high of 56.7, compared to estimates of 55.3. Yields remained flat on Thursday as the Bank of England increased their target interest rate to by 50 basis points to 1.75 and U.S. Jobless claims met expectations of 260k. On Friday, yields rose significantly again across all durations as the U.S. added 528k jobs in July, which was significantly higher than expectations of 250k. This led investors to speculate that the Fed may increase the Federal Funds Target Rate more rapidly. The market implied probability of a 75-basis-point increase at the September 21st meeting rose from 32% at the beginning of the week to 76% by the end of the week. The yield curve continued to invert as the 2-year yield ended the week 40 basis points higher than the 10-year yield. Oil prices dropped 10% over the course of the week as recession fears have led investors to speculate there will be reduced demand for oil. Major economic reports (related consensus forecasts, prior data) for the upcoming week include: Wednesday: August 5 MBA Mortgage Applications (n/a, 1.2%), July CPI MoM (0.2%, 1.3%), July CPI YoY (8.7%, 9.1%); Thursday: August 6 Initial Jobless Claims (265k, 260k), July PPI Final Demand MoM (0.3%, 1.1%), July PPI Final Demand YoY (10.4%, 11.3%); August Prelim. U. of Mich. Sentiment (52.0, 51.5).

Posted on Monday, August 8, 2022 @ 8:20 AM • Post Link Share: 
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  Market Minute - August 2022
Posted Under: Broader Stock Market

Think Quality.
If anything defined the Covid-19 investing landscape from April 2020 until the end of 2021, it’s that the biggest winners were stocks or assets that defied traditional quality metrics. Instead, investors forecasted a future landscape substantially different from the past which traditionally rewarded companies on attributes such as growing cash flows, balance sheet strength, and attractive returns on capital. While the S&P 500 Index has fallen 12.6% for the year through July 31, 2022, the real damage has been done in some of those speculative assets that outperformed quality companies during the last 9 months of 2020 and in 2021. Meme Stocks, NFTs, and Crypto currencies, all declined significantly as the air came out of the areas that benefited from an environment primarily focused on outsized returns with a blatant disregard for the accompanying outsized risk that is inherent during a speculative period. In addition, those assets rely most on rosy forecasts of the future that are difficult to quantify. Bitcoin ended 2021 over $46,000 per coin and sits closer to $24,000 per coin on July 31st, down over 45%. NFTs, or non-fungible tokens, are digital images of an asset that procures unique ownership of that image. The Bitwise Blue-Chip NFT Collections Index has fallen nearly 50% this year. The Solactive Roundhill Meme Stock Index has also declined 50% this year.

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Posted on Thursday, August 4, 2022 @ 11:50 AM • Post Link Share: 
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  One Way To View Consumer Stocks
Posted Under: Sectors

 

View from the Observation Deck  

  1. Today's blog post compares the performance of consumer stocks to the broader market, as measured by the S&P 500 Index, over an extended period. 
  2. Why target consumer stocks? Historically, consumer spending has been credited with generating as much as 67% to 70% of U.S. gross domestic product (GDP). That stat is derived from U.S. personal consumption expenditures, which stood at 68.4% at the end of June 2022, according to Haver Analytics.
  3. Consumer Discretionary outperformed Consumer Staples in six of the eight periods in the table above, but not the two most recent periods. 
  4. It outperformed the S&P 500 Index in five of the eight periods, but not the three most recent periods.   
  5. The 50/50 split between Consumer Discretionary and Consumer Staples outperformed the S&P 500 Index in five of the eight periods, including the two most recent periods.  
  6. For the 25-year period ended 7/29/22, the cumulative total return on the S&P 500 Consumer Discretionary Index was 975.61%, compared to 588.50% for the S&P 500 Index and 584.63% for the S&P 500 Consumer Staples 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 companies used to measure large-cap U.S. stock market performance. The S&P 500 Consumer Discretionary Index is a capitalization-weighted index comprised of companies spanning 21 subsectors in the consumer discretionary sector. The S&P 500 Consumer Staples Index is a capitalization-weighted index comprised of companies spanning 12 subsectors in the consumer staples sector. 

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Posted on Thursday, August 4, 2022 @ 11:38 AM • Post Link Share: 
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  S&P 500 Index Earnings & Revenue Growth Rates
Posted Under: Stock Dividends

 
View from the Observation Deck  
 
  1. On 7/29/22, the S&P 500 Index closed the trading session at 4,130.29, which was 13.89% below its all-time closing high of 4,796.56 on 1/3/22, 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 1926-2021 (96 years), the S&P 500 Index posted an average annual total return of 10.5%, according to Morningstar/Ibbotson & Associates. 
  4. Earnings estimates were revised markedly lower in July. As indicated in the table, Bloomberg's 2022 and 2023 consensus year-over-year (y-o-y) earnings growth rate estimates for the index were 9.3% and 6.4%, respectively, as of 7/29/22. Those same estimates stood at 10.7% (2022) and 9.3% (2023), respectively, a month ago. Click here to see that post.   
  5. Six of the 11 major sectors that comprise the index reflect a positive double-digit or higher y-o-y earnings growth rate estimate for 2022, compared to four for 2023. 
  6. Bloomberg's 2022 and 2023 consensus y-o-y revenue growth rate estimates for the S&P 500 Index were 11.2% and 4.1%, respectively, as of 7/29/22.
  7. Eight of the 11 major sectors reflect y-o-y revenue growth rate estimates of 5.0% or more for 2022, compared to five for 2023. For comparative purposes, from 2012-2021, that 10-year average was 4.5%, according to S&P.  
  8. The following is a breakdown of the quarterly earnings growth rate estimates for the S&P 500 Index from Q2'22 through Q3'23 as of 7/29/22 (not in table): 6.6% (Q2'22); 6.3% (Q3'22); 7.1% (Q4'22); 7.5% (Q1'23); 6.1% (Q2'23); and 8.3% (Q3'22), according to Bloomberg. 
 
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 an unmanaged index of 500 companies 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 Tuesday, August 2, 2022 @ 11:32 AM • Post Link Share: 
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  US Stock Markets Ended July 29, 2022
Posted Under: Weekly Market Commentary

 

Equity markets rallied higher as positive economic news and strong corporate earnings fueled a relief rally for stocks. The S&P 500 finished up 4.28% last week and up 9.22% for the month of July. Despite real GDP growth being -0.9% in 2Q22, the second consecutive negative quarter which is a common measure for recessions, there was other strong economic data. Last week personal spending, personal incomes and durable goods orders all beat expectations and helped to quell recession fears. Corporate earnings were also strong as 173 names in the S&P 500 announced their quarterly results last week. Microsoft Corp. rallied 7.83% last week after announcing quarterly results in-line with expectations but raised their forecasts as management was positive on digital trends. Amazon.com Inc. announced 2Q revenues above expectations as they had less retail inventory issues than big box stores given their third-party seller model. Further they had 33% growth in their AWS segment topping analyst estimates. AMZN shares rose 10.24% last week. Exxon Mobil Corp. earned more than $4 per share last quarter, the highest quarterly earnings per share since at least 1989. They pledged to hold their capital expenditures flat quelling any worries of overinvesting in production growth, as a result their shares rallied 11.31% last week. Chevron Corp. also announced fantastic quarterly results. They too earned massive profits while keeping capital expenditures in check and hiked their share buyback facility by 50%. As a result, their shares rallied 13.59% last week. Looking ahead to next week earnings season continues as 165 names in the S&P 500 index are expected to report quarterly results. Notable names expected to report include Berkshire Hathaway Inc., Eli Lilly & Co., Advanced Micro Devices Inc., ConocoPhillips, Caterpillar Inc., Starbucks Corp. and Marriott International Inc.

Posted on Monday, August 1, 2022 @ 8:26 AM • Post Link Share: 
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  US Economy and Credit Markets Ended July 29, 2022
Posted Under: Weekly Market Commentary

 

U.S. Treasury bonds yields finished the week down across a majority of the yield curve. Treasury bond prices continued to rally for a majority of the week as investors digested a slew of economic data and commentary, while the spread between the two-year and ten-year Treasury yields remained negative, a perceived recession indicator. On Wednesday, the Federal Reserve announced a 75 basis points increase to the fed-funds rate to a range between 2.25% and 2.50%. During the post meeting press conference, Federal Reserve Chairman Jerome Powell told reporters he doesn’t think the United States is in a recession and that the Fed is determined to get inflation down toward 2% but alluded to remaining data dependent in the process. On Thursday, Q2 Real GDP dropped 0.9%, well below the consensus expected gain of 0.4%, as stagflation rips through the economy.  The week wrapped up with the Fed’s preferred inflation metric, the personal consumption index or PCE, rising 6.8% year-over-year. The 6.8% increase in June was higher than May, and the highest rate since 1982. The PCE data indicates the Fed will need to continue their aggressive rate hikes in order tamp down inflation. Major economic reports (related consensus forecasts, prior data) for the upcoming week include: Monday: July Final S&P Global Manufacturing PMI (52.3, 52.3), July ISM Manufacturing (52.0, 53.0), June Construction Spending MoM (0.3%, -0.1%); Tuesday: June JOLTS Job Openings (10994k, 11254k); Wednesday: July 29 MBA Mortgage Applications (n/a, -1.8%), June Final Durable Goods Orders (n/a, 1.9%), June Factory Orders (1.1%, 1.6%), July ISM Services Index (53.9, 55.3); Thursday: July 30 Initial Jobless Claims (260k, 256k), June Trade Balance (-$80.1b, -$85.5b), July 23 Continuing Claims (n/a, 1359k); Friday: July Change in Nonfarm Payrolls (250k, 372k), July Change in Manufacturing Payrolls (18k, 29k), July Unemployment Rate (3.6%, 3.6%).

Posted on Monday, August 1, 2022 @ 8:23 AM • Post Link Share: 
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  Worst-Performing S&P 500 Index Subsectors YTD (Thru 7/26)
Posted Under: Sectors

 
View from the Observation Deck  
 
  1. Today's blog post is for those investors who want to drill down below the sector level to see what is not performing well in the stock market. 
  2. Equities are off to a rough start in 2022. Nearly all of the subsectors featured in the chart are down more than 30% so far this year. 
  3. The S&P 500 Index is currently comprised of 11 sectors and 122 subsectors, according to S&P Dow Jones Indices.
  4. As indicated in the chart above, Consumer Discretionary had six subsectors on the list.   
  5. As of 7/26/22, the most heavily weighted sector in the S&P 500 Index was Information Technology at 27.76%, according to S&P Dow Jones Indices. Consumer Discretionary had the third-largest weighting at 11.09%.  
  6. The 15 worst-performing subsectors in the chart posted total returns ranging from -28.97% (Hotels, Resorts & Cruise Lines) to -50.03% (Movies & Entertainment).  
  7. With respect to the 11 sectors, only two of them posted positive total returns for the period captured in the chart. Energy and Utilities were up 34.53% and 0.35%, respectively, on a total return basis, according to Bloomberg. The third-and fourth-best performers were Consumer Staples and Health Care, with total returns of -4.06% and -6.12%, respectively. The S&P 500 Index posted a total return of -17.04% for the period. 
  8. There are a growing number of packaged products, such as exchange-traded funds, that feature S&P 500 Index subsectors.
  9. While there are no guarantees, there could be some potential deep value opportunities in this group.  
 
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 companies used to measure large-cap U.S. stock market performance, while the S&P sector and subsector indices are capitalization-weighted and comprised of S&P 500 constituents representing a specific sector or industry.
 
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Posted on Thursday, July 28, 2022 @ 10:52 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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