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Bob Carey
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  Passive vs. Active Fund Flows
Posted Under: Conceptual Investing

 
View from the Observation Deck  

  1. Investors directing capital into mutual funds and exchange traded funds (ETFs) continued to favor passive investing over active management on a massive scale for the 12-month period ended 9/30/18.   
  2. Passive mutual funds and ETFs reported net inflows totaling $510.1 billion, compared to net outflows totaling $58.8 billion for those actively managed.
  3. The two asset classes garnering the largest amount of net inflows for the 12-month period ended 9/30/18 were Taxable Bond at $279.2 billion and International Equity at $146.2 billion. 
  4. The two active categories garnering more interest from investors than their passive counterparts were Municipal Bond and Commodities.   
  5. We intend to monitor net flows moving forward.

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

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Posted on Thursday, November 15, 2018 @ 1:33 PM • Post Link Share: 
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  How Stocks Have Fared Since 9/20/18
Posted Under: Conceptual Investing

 
View from the Observation Deck  

  1. Today's blog post shows how some major global stock indices have performed since the S&P 500 Index posted its all-time closing high on 9/20/18. 
  2. From 9/20/18 through 11/12/18, the U.S. dollar rose by 3.87%, as measured by the U.S. Dollar Index (DXY), according to Bloomberg. 
  3. The dollar's gains are likely a result of a flight to quality due to the ongoing trade tensions between the U.S. and China, in our opinion. Some pundits are concerned a prolonged battle could negatively impact global growth. A new trade pact would likely boost the prospects for domestic and foreign equities. 
  4. While it appears that the foreign stock indices have held up better than most of the U.S. stock indices during the sell-off, consider the fact that the U.S. stock indices had significantly outperformed the foreign stock indices on a year-to-date basis. 
  5. From 12/29/17 through 9/20/18, the NASDAQ 100, S&P SmallCap 600, S&P 500 and S&P MidCap 400 Indices were up 19.25%, 16.41%, 11.16% and 8.80%, respectively, on a total return basis, according to Bloomberg.
  6. Over the same period, the Nikkei 225 Net, MSCI Daily TR Net World (ex U.S.), MSCI Europe Net, MSCI Emerging Net and MSCI EM BRIC Net posted total returns of 4.98%, -1.21%, -1.59%, -8.72% and -9.31%, respectively, according to Bloomberg.
  7. Brian Wesbury, Chief Economist at First Trust Advisors L.P., is forecasting 3%+ average growth for the U.S. economy in 2018 and 2019. With no recession on the horizon until 2020 or later, we believe that investors should consider the recent sell-off as a potential buying opportunity. 
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 EM BRIC Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of Brazil, Russia, India and China. The MSCI Europe Index is a free-float weighted index designed to measure the equity market performance of the developed market countries in Europe. The Nikkei 225 Index is a price-weighted average of 225 top-rated Japanese companies listed in the First Section of the Tokyo Stock Exchange. The MSCI World (ex U.S.) Index is a free-float weighted index designed to measure the equity market performance of developed market countries, 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 market countries.  

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Posted on Tuesday, November 13, 2018 @ 3:08 PM • Post Link Share: 
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  US Stock Markets Ended November 9, 2018
Posted Under: Weekly Market Commentary

 
Stocks, measured by the S&P 500, moved higher through the Tuesday midterm elections and trailed off Thursday and Friday to close out the week 2.2% higher. Oil fell into bear market territory after closing out the week at just over $60 a barrel after hitting $76 earlier this month. Oil production is at a record and OPEC output is at the highest level since 2016. Technology shares were the main drag on the major indexes. At the end of the week, Skyworks plunged after its results signaled a slowdown in smartphone demand echoing Apple's results in the prior week. An economic slowdown is on the mind of investors as some see the cycle peaking. China is also on investor's radar after softer economic data is helping to raise concerns about the vitality of the world's second biggest economy. Global growth anxiety could also be felt in gold after the metal fell to just over $1,200 an ounce, its lowest point in a month. Gold prices have also been keying off the Federal Reserve's decision to keep rates unchanged this month and the signs are still pointing to a December rate increase. In the S&P 500, one of the top performing stocks, Mosaic posted a third quarter profit that pointed to stronger global demand for its fertilizers. The company stated that "momentum is continuing" across its business units and a key boost to revenue were Brazil's farmers who are looking to increase yields. Looking ahead to next week, CPI and retail sales will be in investor's playbooks.
Posted on Monday, November 12, 2018 @ 8:11 AM • Post Link Share: 
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  US Economy and Credit Markets Ended November 9, 2018
Posted Under: Weekly Market Commentary

 
The Federal Open Market Committee left rates unchanged last week, as expected, saying in its statement "that the labor market has continued to strengthen and that economic activity has been rising at a strong rate." Household spending increases have also been strong recently, according to the Fed, while business fixed investment has slowed from its robust pace in the first half of 2018. The yield on the U.S. 10-year Treasury hit a 7-year high on Thursday following the statement, while the Fed is still widely expected to raise rates for the fourth time this year at its December meeting. U.S. government bond prices were little changed after a volatile session on Wednesday following the midterm elections that went as expected. Meanwhile, demand for the Treasury's auction of 30-year bonds on Wednesday was the weakest for a 30-year bond auction since February 2009, measured by the number of bids relative to the amount debt sold, or the bid-to-cover ratio. The weak demand was partially attributed to the increasing supply of debt brought on by the expanding budget deficit and the Fed's reduction of its balance sheet, as it allows $30 billion in Treasurys to mature each month without being reinvested. The Producer Price Index rose 0.6% in October over the prior month, easily topping the 0.2% expected increase. The month-over-month increase was the largest since September 2012. Major economic reports (related consensus forecasts, prior data) for the upcoming week include: Wednesday: October CPI MoM (0.3%, 0.1%), November 9 MBA Mortgage Applications (N/A, -4.0%); Thursday: November 10 Initial Jobless Claims (214k, 214k), October Retail Sales Advance MoM (0.5%, 0.1%), November Empire Manufacturing (20.0, 21.1); Friday: October Industrial Production MoM (0.2%, 0.3%).
Posted on Monday, November 12, 2018 @ 8:08 AM • Post Link Share: 
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  A Global Snapshot of Government Bond Yields
Posted Under: Bond Market

 
View from the Observation Deck  

  1. Today's blog post shows the yields on a couple of benchmark government bond maturities from key countries/economies around the globe.
  2. We highlight where yields have trended since the U.S. 10-year Treasury note (T-note) hit its all-time closing low of 1.36% on 7/8/16, according to data from Bloomberg.
  3. The 188-basis point (bps) increase in the yield on the 10-year T-note from 7/8/16 through 11/7/18 negatively impacted the performance of intermediate-term government bonds. 
  4. The ICE BofAML 7-10 Year U.S. Treasury Index posted a total return of -7.82% (-12.95% price return vs. 5.13% income return) over that period, according to Bloomberg. For comparative purposes, the ICE BofAML 1-3 Year U.S. Treasury Index posted a total return of 0.28% (-3.88% price return vs. 4.15% income return) over the period. 
  5. As indicated in the table, with one exception (Mexico), U.S. government bond yields have risen the most since the 10-year T-note bottomed on 7/8/16. 
  6. Investors need to be cognizant of the fact that interest rates are still at low levels relative to their historical averages. Even though the yield on the 10-year T-note is up 188 bps from its all-time low, at 3.24% (11/7/18), it is still 150 bps below its average yield of 4.74% over the past 30 years, according to Bloomberg.
  7. Bond investors have not had to cope with rising inflation for many years, in our opinion. The International Monetary Fund (IMF), however, sees inflation in "Advanced Economies" advancing at a rate of 1.8% in 2018 and 2019, up from 1.4% in 2017. It sees inflation in "Emerging Market and Developing Economies" rising from 4.3% in 2017 to 5.0% in 2018 and 5.2% in 2019. 

This chart is for illustrative purposes only and not indicative of any actual investment. Investors cannot invest directly in an index. There can be no assurance that any of the projections cited will occur. The ICE BofAML 7-10 Year U.S. Treasury Index and the ICE BofAML 1-3 Year U.S. Treasury Index track the performance of U.S. dollar denominated sovereign debt publicly issued by the U.S. government in its domestic market.  

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Posted on Thursday, November 8, 2018 @ 1:23 PM • Post Link Share: 
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  A Snapshot Of U.S. Equity Valuation Levels
Posted Under: Broader Stock Market

 
View from the Observation Deck  
  1. An argument can made that the stock market had become a bit extended through the first three-quarters of this year and was due for a pullback (decline of 5.00% to 9.99%) or correction (decline of 10.00% to 19.99%). 
  2. That is exactly what we experienced in October 2018. The S&P 500, S&P MidCap 400 and S&P SmallCap 600 Indices posted total returns of -6.84%, -9.55% and -10.48%, respectively, for the month, according to Bloomberg. 
  3. While sell-offs in the stock market are never a pleasant experience, they are a normal part of any bull market and can provide investors, particularly those with ready cash, a more favorable entry point into the market. 
  4. As indicated in the table, trailing 12-month P/E ratios as of 11/5/18 are mostly lower than where they stood at the close of 2017. 
  5. The estimated P/Es for year-end 2018 and 2019 also look more favorable due to October's sell-off and strong corporate earnings.
  6. To lend some further perspective to valuation levels, we find the S&P 500 Index's 2018 year-end estimated P/E of 16.77 relatively enticing considering it matched the index's 50-year average P/E of 16.77 as of 11/5/18, according to data from 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 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. 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 SmallCap 600 Index is a capitalization-weighted index that tracks U.S. stocks with a small market capitalization. 

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Posted on Tuesday, November 6, 2018 @ 2:20 PM • Post Link Share: 
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  US Stock Markets Ended November 2, 2018
Posted Under: Weekly Market Commentary

 
Stocks started off the third quarter down almost 7% through Halloween. The week brought stocks back from their lows as the S&P 500 returned 2.45% last week. A three-day rally, starting on Tuesday, retreated on Friday after President Trump gave mixed statements on the potential trade deal with China. Apple released quarterly earnings on Thursday that sent shockwaves through the technology indexes after a disappointing outlook for iPhone sales growth. The company said iPhone unit sales grew at a slower pace even though a new flagship device was released during the quarter. Despite the top-heavy tech sector being one of the worst performing sectors in the S&P 500, Red Hat Inc was the top performing stock in the index after IBM announced it will acquire the company for a 54% premium. The $31 billion-dollar deal is expected to close by the end of 2019. On the consumer front, Under Armour and Newell Brands were the next best-performing stocks in the S&P 500 with +30% and +21% gains, respectively. Each day leading up to next Tuesday's midterm election has been a ride for stocks. The market will pivot after the rhetoric gives way to results at the polls. The most expensive midterm election in history will have the market looking for guidance from Washington as both sides of the aisle brace for a possible split decision that would have the House going to the Democrats and the Republicans hodling on to the Senate majority. Looking past next Tuesday, initial jobless claims followed by the FOMC meeting will be waiting for investors after the dust settles from the midterm elections.
Posted on Monday, November 5, 2018 @ 8:03 AM • Post Link Share: 
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  US Economy and Credit Markets Ended November 2, 2018
Posted Under: Weekly Market Commentary

 
Treasury yields climbed throughout the week on the back of strong economic data and equities attempting to rebound after selling off throughout most of October. On Tuesday, 10-year and 30-year Treasury note yields rose 2.8 basis points and 3.0 basis points, respectively, as President Trump comments regarding striking a trade deal with China led investors away from haven investments, such as US government paper. Treasury yields climbed further on Wednesday as Automatic Data Processing reported that 227,000 jobs were added to the private-sector in October, beating consensus expectations. ADP's report also stated salaries for the private-sector grew at their fastest pace since 2008. The 30-year Treasury note yield reached its highest in four years as Treasury yields increased on Friday to close out the week. The rise in Treasury yields on Friday was a reaction, in part, to a strong October jobs report. Nonfarm payrolls rose 250,000 in October, easily beating the consensus expectation of 200,000. The gains in October were widespread, with no major sector showing a decline. Average hourly wages rose 0.2% in October pushing the 12-month pace to 3.1%, its highest 12-month pace since 2009. Major economic reports (related consensus forecasts, prior data) for the upcoming week include: Monday: October ISM Non-Manufacturing Index (59.1, 61.6); Wednesday: November 2 MBA Mortgage Applications (N/A, -2.5%); Thursday: November 3 Initial Jobless Claims (214k, 214k), November 8 FOMC Rate Decision (Upper Bound) (2.25%, 2.25%); Friday: October PPI Final Demand MoM (0.2%, 0.2%), October PPI Final Demand YoY (2.5%, 2.6%), September Final Wholesale Inventories MoM (0.3%, 0.3%), November Preliminary U. of Michigan Sentiment (97.9, 98.6).
Posted on Monday, November 5, 2018 @ 8:01 AM • Post Link Share: 
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  How The S&P 500 Index & Sector Indices Have Fared YTD And Since 9/20/18
Posted Under: Conceptual Investing

 

 
View from the Observation Deck  

  1. The S&P 500 Index is up 3.00% year-to-date (YTD) on a total return basis despite enduring one correction and one near correction based on daily closing prices. A correction is defined as a price decline of 10.00% to 19.99%. 
  2. The correction in the S&P 500 Index occurred from 1/26/18 through 2/8/18 and it produced a price-only (does not include dividends) loss of 10.16%, according to Bloomberg. The near correction occurred from 9/20/18 (all-time high) through 10/29/18 and it produced a price-only loss of 9.88%.
  3. CFRA, a Wall Street research firm, reported that there have been 22 corrections in the S&P 500 Index since World War II, with an average price decline of 13.8%, according to USA TODAY. It notes that corrections normally last around five months and not every correction leads to a bear market (price decline of 20% or more). Bear markets tend to coincide with recessions.
  4. Brian Wesbury, Chief Economist at First Trust Advisors L.P., is forecasting a 3%+ average growth rate for the U.S. economy for 2018 and 2019, which does not portend a recession anytime soon. Wesbury views the recent turmoil in the markets as another buying opportunity. 
  5. Bloomberg's 2018 and 2019 consensus estimated earnings growth rates for the S&P 500 Index were 21.90% and 9.61%, respectively, as of 10/31/18, according to Bloomberg. 
  6. The recent sell-off in the stock market has driven valuations down to more normal levels on a forward-looking basis. Bloomberg's 2018 year-end price-to-earnings (P/E) ratio estimate for the S&P 500 Index was 16.60 as of 10/31/18. That is in line with its 50-year average P/E of 16.77. 

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.


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Posted on Thursday, November 1, 2018 @ 3:16 PM • Post Link Share: 
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  Stock market on sale … will anyone show up?
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 Tuesday, October 30, 2018 @ 4:35 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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A Snapshot Of The Rally In The U.S. Dollar
US Stock Markets Ended October 26, 2018
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