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Bob Carey
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  Technology Stocks Continue to Deliver Srong Returns for Investors
Posted Under: Sectors

 

View from the Observation Deck 

  1. From 3/9/09-7/17/18 (current bull market), all four of the technology-related indices featured in the chart outperformed the S&P 500 Index.
  2. As of 7/18/18, Information Technology accounted for 26.30% of the S&P 500 Index, up from 17.84% on 3/9/09, according to Bloomberg and Bespoke Investment Group. It is the most heavily weighted sector in the index, followed by Health Care at 14.21%.
  3. The average annualized total returns shown in the chart are as follows: ISE Cloud Computing Index (+30.59%); Dow Jones Internet Composite Index (+30.44%); Philadelphia Semiconductor Index (+25.47%); S&P 500 Information Technology Index (+23.67%); and S&P 500 Index (+18.90%), according to Bloomberg.
  4. Year-to-date through 7/18/18, the S&P 500 Information Technology Index posted a total return of 16.51%, compared to 6.41% for the S&P 500 Index, according to Bloomberg. It was the top-performing sector index, followed by the S&P 500 Consumer Discretionary Index, up 15.19%.
  5. As of 7/13/18, Bloomberg's Q2'18 consensus earnings growth rate estimate for the S&P 500 Information Technology Index was 30.9%, compared to 20.3% for the S&P 500 Index.

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 S&P 500 Index is a capitalization-weighted index comprised of 500 stocks used to measure large-cap U.S. stock market performance. The ISE Cloud Computing Index is a modified equal-dollar weighted index designed to track the performance of companies actively involved in the cloud computing industry. The Dow Jones Internet Composite Index is a modified capitalization-weighted index designed to track companies involved in Internet-related activities. The Philadelphia Semiconductor Index is a modified capitalization-weighted index comprised of companies that are involved in the design, distribution, manufacturing, and sale of semiconductors. The S&P 500 Information Technology Index is capitalization-weighted and comprised of S&P 500 constituents representing the technology sector.

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Posted on Thursday, July 19, 2018 @ 1:34 PM • Post Link Share: 
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  The Real Rate of Return on the 10-Year Treasury Note is back to Zero
Posted Under: Bond Market

 
View from the Observation Deck  
  1. The real rate of return on a bond is calculated by subtracting the most recent inflation rate, such as the Consumer Price Index (CPI), from the bond's current yield. The higher the real rate the better. 
  2. As of the close of 6/29/18, the yield on the benchmark 10-year T-note was 2.86% (2.9% rounded), which matched the 2.9% year-over-year (YoY) rate on the CPI in June 2018. That equates to a real rate of 0.0%. 
  3. The CPI YoY rate rose significantly, from 2.1% to 2.9%, in the first half of 2018. For comparative purposes, from 1926 through June 2018, the CPI YoY rate averaged 3.0%, according to Bloomberg.  
  4. Including the initial rate hike on 12/16/15, the Federal Reserve has raised its federal funds target rate (upper bound) seven times, from 0.25% to 2.00%, or an increase of 175 basis points (bps). Over that same period, the yield on the 10-year T-note rose just 56 bps, according to Bloomberg. 
  5. With inflation on the rise, we believe bond investors are likely going to have make a judgement call relatively soon as to whether, or not, they believe that U.S. economic growth will accelerate in the coming months. After all, that was one of the primary goals behind the drafting of the Tax Cuts and Jobs Act (December 2017).  
  6. The chart and performance data referenced are for illustrative purposes only and not indicative of any actual investment. 

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Posted on Tuesday, July 17, 2018 @ 2:46 PM • Post Link Share: 
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  US Stock Markets Ended July 13, 2018
Posted Under: Weekly Market Commentary

 
Equities traded up last week, despite continued tariff risks. The S&P 500 index returned over 1.5% led by the technology sector. The largest contributors to the technology sector last week were Microsoft Corp., Apple Inc., Alphabet Inc. (Google) and Facebook Inc. On top of the best contributors, CA Inc. agreed to be acquired by Broadcom Inc. for all cash. Shares of CA soared over 18%, the best in the sector; while Broadcom fell by over 18%, the worst in the sector, showing how little equity markets enjoyed this news from Broadcom. Growth stocks continued to outpace value stocks last week, the S&P 500 Growth index returned 1.9% and the S&P 500 Value index returned 0.9%. Year-to-date growth has returned 11.4% while value has returned -0.3%. The large growth performance continues to be led by blue chip technology names. Mega-cap banks, JPMorgan Chase & Co., Wells Fargo & Co. and Citigroup Inc., announced quarterly results Friday morning. The banks all reported results that were roughly in line with expectations and ended the day down slightly, but their quarterly performance continues to bolster the overall strength of the U.S. economy. Last week, nonfarm payrolls were very strong and hourly earnings robust. The unemployment rate ticked up from 3.8% to 4% bucking recent trends. However, the rise in unemployment was likely driven by the labor force participation rate growing rather than people losing their jobs. This trend underscores the strength of the current job market as more previously discouraged workers are back searching for jobs. Looking ahead to next week, earnings season gets into full swing as 61 companies in the S&P 500 are expected to report, including: Microsoft Corp., Johnson & Johnson, UnitedHealth Group Inc., Netflix Inc. and General Electric Co.
Posted on Monday, July 16, 2018 @ 7:58 AM • Post Link Share: 
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  US Economy and Credit Markets Ended July 13, 2018
Posted Under: Weekly Market Commentary

 
United States Treasury bond prices slid early in the week, pushing Treasury yields higher. Auctions for short-dated Treasury notes were weak on Tuesday. With the Federal Reserve gradually raising rates, investors have been wary of buying short-dated government paper which tracks the benchmark rate. Treasury yields dropped in the middle of the week while investors purchased U.S. government notes as the market reacted to the White House planning to place a 10% tariff on an additional $200 billion of Chinese goods. Thursday, the two-year Treasury note yield touched its highest level since July of 2008, because of consumer inflation hitting a six-year high, indicating rising price pressures. However, yields were contained due to inflation-adjusted hourly earnings having shown little movement over recent periods. The lack of a large sell-off indicates that investors discounted price pressures accelerating throughout the economy. The week ended with Treasury yields falling on Friday as the yield curve continues to flatten as the gap between the two-year note and 10-year note narrowed by roughly 5 bps. The yield curve continues to flatten as senior Fed officials remain hawkish and the demand for U.S. government paper increases. Major economic reports (related consensus forecasts, prior data) for the upcoming week include: Monday: July Empire Manufacturing (21.0, 25.0), June Retail Sales Advance MoM (0.5%, 0.8%); Tuesday: June Industrial Production MoM (0.5%, -0.1%); Wednesday: July 13 MBA Mortgage Applications (N/A, 2.5%), June Housing Starts (1320k, 1350k); Thursday: July 14 Initial Jobless Claims (221k, 214k), June Leading Index (0.5%, 0.2%).
Posted on Monday, July 16, 2018 @ 7:57 AM • Post Link Share: 
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  A Snapshot of Market Breadth via Performance
Posted Under: Broader Stock Market

 
View from the Observation Deck  

  1. We continue to receive questions about the degree to which the top 10, 25 and 50 companies in the S&P 500 Index, by market capitalization (cap), are influencing the performance of the index in the current bull market.
  2. The price-only returns featured in the table are shaded in either gray or blue. The gray shaded years indicate that a broad number of stocks in the S&P 500 Index were participating in the bull market, while the blue shaded years indicate that the top 10, 25 and 50 stocks garnered more favor from investors. 
  3. After three consecutive years (2015-2017) in which the top 10, 25 and 50 companies with the largest market caps significantly outperformed the broader S&P 500 Index, the index has outperformed the top 10 and 25 constituents year-to-date through June 2018.   
  4. We included 1998 and 1999 to remind investors of what top-heavy performance can look like at the extreme. If you recall, the climate in the equity bull market back in the latter half of the 1990s was characterized by former Federal Reserve Chairman Alan Greenspan as "irrational exuberance."
  5. The bull market, as measured by the S&P 500 Index, commenced in March 2009. From 3/9/09-12/31/09 (not shown in table), the S&P 500 Index posted a total return of 67.80%, compared to 97.20% for the S&P 500 Equal Weighted Index, according to Bloomberg. 
  6. From 3/9/09-6/29/18 (current bull market), the S&P 500 Index posted a cumulative total return of 388.64% (18.57% on an average annualized basis), compared to 498.33% (21.18% on an average annualized basis) for the S&P 500 Equal Weighted Index, according to Bloomberg. 
  7. Those returns suggest that this bull market has been inclusive, rather than one dominated by the biggest companies, 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 used to measure large-cap U.S. stock market performance. The S&P 500 Equal Weighted Index is comprised of the same companies as the capitalization weighted S&P 500 Index, but each company is allocated a fixed weight, or 0.2% of the index total at each quarterly rebalance.

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Posted on Thursday, July 12, 2018 @ 1:58 PM • Post Link Share: 
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  How The S&P 500 Index Has Performed Since The Federal Reserve Began Hiking Interest Rates On 12/16/15
Posted Under: Broader Stock Market

 
View from the Observation Deck  

  1. The Federal Reserve (the "Fed") has increased the federal funds target rate a total of seven times since 12/16/15. Each one of the rate hikes was for 0.25%, or 25 basis points. The target rate (upper bound) currently stands at 2.00%.
  2. As indicated in the chart, the S&P 500 Index posted a cumulative total return of 40.3% from 12/16/15 through 7/6/18. Only three sector indices returned more than the broader index over that period. 
  3. Since 12/16/15, S&P 500 Index quarterly earnings (EPS in $) have risen from $24.82 in Q1'16 to $35.45 in Q1'18, or an increase of 42.8%, in line with its cumulative total return of 40.3%, according to data from Bloomberg.
  4. While nobody knows how long the current bull market in stocks will run, we believe that the direction of stock prices is driven by corporate earnings over time.
  5. On 7/6/18, the S&P 500 Index closed the trading session at 2,759.82, 3.94% below its all-time high of 2,872.87 set on 1/26/18, according to Bloomberg. 
  6. Earnings reporting season for Q2'18 is currently underway and expectations are high. Stay tuned. 

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 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, July 10, 2018 @ 1:05 PM • Post Link Share: 
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  18 out of 20 ... So Far!
Posted Under: Weekly Market Commentary Video
Bob Carey, Chief Market Strategist at First Trust Advisors L.P., discusses the latest developments in the market and takes a look ahead.
 
Posted on Monday, July 9, 2018 @ 3:35 PM • Post Link Share: 
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  US Stock Markets Ended July 6, 2018
Posted Under: Weekly Market Commentary

 
Domestic equities regained some ground after two weeks of downward pressure. The S&P 500 index returned just over 1.5% last week, bolstered by strong performance in the largest sector, Technology. Advanced Micro Devices and Twitter Inc. were the big winners in the sector. Large and mega-cap stocks lagged their smaller peers as the S&P MidCap 400 index and SmallCap 600 index returned about 2% and 3%, respectively. The S&P 500 has now returned 4.3% for the year, lagging the S&P MidCap 400 with 5.5% and the S&P Small Cap 600 at 12.9%. Some of the outperformance from mid and small-caps can be attributed to the idea smaller names tend to have more domestic sales and could be more protected from escalating trade risks than large multi-national names. The US trade war continues to draw interest from the global and domestic perspective. Last week, tariffs on the initial $34b of Chinese imports, which President Donald Trump announced back in April, went into effect. Toward the end of last week, President Trump threatened to expand tariffs on every Chinese import. Biogen Inc. was the best performing stock in the index after soaring 23% for the week. The company announced a positive Alzheimer's drug trial which sent the stock surging on Friday. Energy holdings in the S&P were the laggards last week with Chevron Corp. and Valero Energy Corp. rounding out the bottom performers in the index. The June unemployment number rose from an 18-year low, but wage gains unexpectedly slowed indicating the market continues to absorb excess capacity. Looking ahead to next week, CPI and PPI will be on investor's radar. Earnings reports from some of the largest banks will also be in focus, with JPMorgan Chase & Co., Wells Fargo & Co. and Citigroup Inc. reporting at the end of next week.
Posted on Monday, July 9, 2018 @ 8:03 AM • Post Link Share: 
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  US Economy and Credit Markets Ended July 6, 2018
Posted Under: Weekly Market Commentary

 
America celebrated her 242nd birthday on Wednesday last week, closing all U.S. financial markets for the day. Despite the shortened week, there were still plenty of fireworks to go around. Treasury yields rose on Monday on the release of a better than expected ISM Manufacturing Index report. The index rose to 60.2 in June, beating the consensus expected estimate of 58.5. The ISM Manufacturing Index has averaged 59.2 through June, which has been the best first-half of the year for the index since 2004. Yields slipped quickly as trading resumed in the back half of the week as the Federal Reserve's minutes from the June meeting indicated the central bank's continued commitment to gradual interest rate increases throughout the rest of this year, but highlighted a number of risks to the U.S. economy like uncertainty in trade policies and weakness in emerging markets. The U.S. unemployment rate ticked up to 4.0% from 3.8% in June as nonfarm payrolls increased 213,000 versus a consensus expected 195,000; treasuries fell further on Friday as a result. The trade war between the United States and China began in earnest last week as $34 billion in U.S. tariffs on Chinese imported goods kicked in on Friday at midnight. In response, the Chinese government slapped $34 billion in retaliatory tariffs on American goods being imported to China. Both governments have indicated that additional tariffs may be levied against one another in the coming months. Although the trade war's first rounds have officially been fired, markets were largely unfazed by the news. Major economic reports (related consensus forecasts, prior data) for the upcoming week include: Wednesday: July 6 MBA Mortgage Applications (N/A, -0.5%), June PPI Final Demand MoM (0.2%, 0.5%), and May Final Wholesale Inventories MoM (0.4%, 0.5%); Thursday: June CPI MoM (0.2%, 0.2%) and July 7 Initial Jobless Claims (226k, 231k); Friday: July Preliminary University of Michigan Sentiment (98.0, 98.2).
Posted on Monday, July 9, 2018 @ 8:01 AM • Post Link Share: 
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  Corporate Earnings Estimates Reflect Strength
Posted Under: Broader Stock Market

 

 
View from the Observation Deck  

  1. Today's chart is intended to give investors some visual perspective on where equity analysts think earnings are headed. 
  2. Click here to compare these estimates to the projections from 1/9/18. You will find that they have been adjusted higher across the board. 
  3. With respect to the S&P 500 Index, as of 6/30/18, earnings were projected to rise from $29.51 in Q1'17 to an estimated $42.46 in Q4'18, or a potential increase of 43.88%.
  4. The S&P MidCap 400 Index earnings were projected to rise from $17.20 in Q1'17 to an estimated $28.98 in Q4'18, or a potential increase of 68.49%.
  5. The S&P SmallCap 600 Index earnings were projected to rise from $7.45 in Q1'17 to an estimated $14.50 in Q4'18, or a potential increase of 94.63%.
  6. At the midpoint of 2018, the S&P 500, S&P MidCap 400 and S&P SmallCap 600 Indices stood 5.38%, 2.61% and 3.33%, respectively, below their all-time highs, according to data from Bloomberg. 
  7. We believe that corporate earnings drive the direction of stock prices over time, especially when the major indices are trading at or near record highs.

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. Investors cannot invest directly in an index. The S&P 500 Index is a capitalization-weighted index comprised of 500 stocks 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, July 5, 2018 @ 1:10 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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