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  Commodities & The U.S. Dollar
Posted Under: Commodities

 

View from the Observation Deck 

  1. Commodity prices declined in six of the 10 calendar years (full-year) featured in the table, as measured by the Thomson Reuters/CoreCommodity CRB Commodity Index. Prices are up markedly so far in 2019.
  2. From 12/31/08-12/31/18, commodity prices fell 23.12%, according to Bloomberg. For comparative purposes, commodity prices rose 152.84% the previous decade (12/31/98-12/31/08).
  3. The U.S. Dollar Index (DXY) posted gains in six of the 10 calendar years (full-year) in the table. From 12/31/08-12/31/18, the index rose 18.28%, according to Bloomberg. For comparative purposes, the index declined 13.66% the previous decade (12/31/98-12/31/08). 
  4. Commodity prices tend to have an inverse relationship with the U.S. dollar over time. A strengthening U.S. dollar can put downward pressure on commodity prices, while weakness in the dollar can help boost prices.
  5. The low rate of inflation over the past decade may have contributed to the downward pressure on commodity prices. From 2009-2018, the Consumer Price Index (CPI) headline rate never closed a calendar year higher than 3.0% (2011) on a year-over-year basis, according to the Bureau of Labor Statistics. From 1999-2008, the CPI reached as high as 4.1% (2007) and was 3.0% or higher a total of four times. From 1926-2018, the CPI averaged 3.0% per year, according to Bloomberg. It stood at 1.5% in February 2019, below the Federal Reserve's ("Fed") 2.0% target level. 
  6. The Fed has acknowledged that it is factoring in the slowdown in global economic growth into U.S. monetary policy. As of 3/20/19, it is projecting zero federal funds rate hikes for the rest of 2019 and just one in 2020. In addition, it will soon end the process of reducing the size of its bloated balance sheet.
  7. Investors funneled an estimated net $151 million into Commodities (Broad Basket) mutual funds and exchange-traded funds in the first two months of 2019, and an estimated net $625 million for the 12-month period ended 2/28/19, 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 Thomson Reuters/CoreCommodity CRB Commodity Index is an average of commodity futures prices with monthly rebalancing, while the U.S. Dollar Index (DXY) indicates the general international value of the U.S. dollar relative to a basket of major world currencies.

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Posted on Thursday, March 21, 2019 @ 2:29 PM • Post Link Share: 
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  Technology Stocks Continue to Deliver Strong Returns for Investors
Posted Under: Sectors

 
View from the Observation Deck

  1. From 3/9/09-3/18/19 (current bull market), all four of the technology-related indices featured in the chart outperformed the S&P 500 Index.
  2. As of 3/18/19, Information Technology accounted for approximately 21.00% 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 approximately 14.70%. For comparative purposes, Information Technology held a weighting of 29.18% at the close of 1999, just prior to the bursting of the tech bubble in March 2000.
  3. The average annualized total returns shown in the chart are as follows: ISE Cloud Computing Index (28.79%); Dow Jones Internet Composite Index (27.54%); Philadelphia Semiconductor Index (24.02%); S&P 500 Information Technology Index (22.11%); and S&P 500 Index (17.79%), according to Bloomberg.
  4. Year-to-date through 3/18/19, the S&P 500 Information Technology Index posted a total return of 18.69%, compared to 13.53% for the S&P 500 Index, according to Bloomberg. It was the top-performing sector index, followed by the S&P 500 Energy Index, up 16.93%.
  5. While cloud computing has performed exceptionally well in the current decade-long bull market, Gartner believes we are in the early stages of the second decade of cloud computing, according to Dataquest. Cloud is being adopted for such benefits as instantaneous availability of compute resources, scalability, and pay-as-you-go.
  6. International Data Corporation's (IDC) Worldwide Quarterly Cloud IT Infrastructure Tracker reported that vendor revenue from sales of infrastructure products (server, storage and Ethernet switch) for cloud IT grew 47.2% year-over-year to $16.8 billion in Q3'18, according to its own release. IDC notes that Q3'18 marked the first time that vendor revenues from infrastructure product sales into cloud environments topped revenues from sales into traditional IT environments.

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 (currently 505) 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 Tuesday, March 19, 2019 @ 1:30 PM • Post Link Share: 
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  US Stock Market Ended March 15, 2019
Posted Under: Weekly Market Commentary

 
The S&P 500 posted its best week since November as investors applauded China's renewed pledge to stimulate their economy.  In addition, muted inflation for consumer and industrial products led to optimism that the Federal Reserve will remain accommodative. In other economic news, the consumer remains strong as retail sales and new housing starts came in above estimates. Markets were paced by gains in technology for the week as the sector rose by nearly 5%. Shares of Broadcom Inc. jumped by 7% on Friday after the chipmaker maintained their current guidance, despite several headwinds faced by the semiconductor market. Nvidia Corp.'s shares gained after agreeing to purchase Mellanox Technologies Ltd. for around $6.9 billion. The deal should strengthen Nividia's offering within datacenter components. Adobe Inc. moved lower following disappointing guidance for next quarter and noise within the current quarter due to an accounting rule change. Boeing Co. fell by over 10% for the week after a second crash of its new plane, the 737 Max, led to the grounding of its aircraft in numerous countries around the world, including the U.S. Looking ahead to next week, the Fed's March meeting will be key on investors' minds, especially with few earnings announcements and key economic data points scheduled for next week. Investors expect continued patience from the Fed, especially with economic data points slowing over the last quarter. Looking further ahead, next quarter's earnings season will be pivotal as earnings are currently projected to contract by 3% as weakness in some mega-caps, the chip cycle and energy is likely to weigh on corporate profits.
Posted on Monday, March 18, 2019 @ 8:08 AM • Post Link Share: 
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  US Economy and Credit Markets Ended March 15, 2019
Posted Under: Weekly Market Commentary

 
U.S. government bond prices were up slightly last week, and the 10-year Treasury yield moved below 2.60% from nearly 3.25% in November 2018 as weaker-than-expected economic and inflation data increased expectations that the Fed will forgo raising rates this year. The Consumer Price Index, excluding food and energy, increased 0.1% in February and 2.1% over the last 12 months. The increase in February came in below expectations, which gave the appearance of cooling inflation and helped push U.S. government bond prices higher. New-home sales fell 6.9% in January over the prior month, which was below expectations, while new-home sales in December were revised up from 621,00 annually to 652,000. Soft manufacturing data released on Friday also helped push bond prices higher. According to the Fed, manufacturing fell 0.4% in February after falling 0.5% in January. This week, the Federal Open Market Committee meets on Tuesday and Wednesday and is widely expected to hold interest rates steady. Major economic reports (related consensus forecasts, prior data) for the upcoming week include: Tuesday: January Final Durable Goods Orders (0.4%, 0.4%), January Factory Orders (0.2%, 0.1%); Wednesday: March 20 FOMC Rate Decision – Upper Bound (2.50%, 2.50%), March 15 MBA Mortgage Applications (N/A, 2.3%); Thursday: March 16 Initial Jobless Claims (225k, 229k), February Leading Index (0.1%, -0.1%); Friday: March Preliminary Markit US Manufacturing PMI (53.6, 53.0), February Existing Home Sales (5.10m, 4.94m), January Wholesale Inventories MoM (0.0%, 1.1%).
Posted on Monday, March 18, 2019 @ 8:04 AM • Post Link Share: 
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  Passive Investment Vehicles Have Posted The Strongest Asset Growth Since The End Of 2007
Posted Under: Conceptual Investing

 
View from the Observation Deck  

  1. This marks the eighth calendar year in which we have tracked the asset growth of the four major types of packaged products since the close of 2007 (prior to financial crisis in 2008-2009).
  2. The percentage change in the total assets invested in packaged products from 2008 to 2018 were as follows (see chart): Exchange-Traded Funds (ETFs) (+454%); UITs (+32%); Mutual Funds (+48%); and Closed-End Funds (-20%).
  3. With respect to mutual funds, Morningstar data indicates that assets held in passive funds rose six-fold from 2008 through 2018, while active assets roughly doubled, according to InvestmentNews.  
  4. From 2017 to 2018, total assets in each of the four major types featured in the chart fluctuated as follows: ETFs ($3.40 trillion vs. $3.37 trillion); UITs ($85 billion vs. $70 billion); Mutual Funds ($18.75 trillion vs. $17.71 trillion); and Closed-End Funds ($275 billion vs. $250 billion).
  5. In 2018, investors favored passive investing over active management. Data from Morningstar shows that estimated net flows to all "Active" long term mutual funds and ETFs totaled -$300.7 billion, while estimated net flows to all "Passive" funds and ETFs totaled $457.7 billion.
  6. We have noted in previous blog posts that some industry pundits have predicted that ETFs, in time, will supplant mutual funds as the most popular packaged product. While ETF assets have grown substantially over the past decade, thus far it has not come at the expense of mutual funds.  

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

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Posted on Thursday, March 14, 2019 @ 1:00 PM • 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. As indicated in the chart, the upper bound of the federal funds target rate is currently 2.50%. While up from 0.25% in late 2015, it is still well below its 30-year average of 3.14%, according to Bloomberg.  
  5. Wesbury believes that even if the Fed raises rates a couple of times in 2019, it would simply make its policy less loose, not tight. The lack of any serious inflationary pressure (see CPI column in table) in the current climate could allow the Fed to delay its next increase for some time, in our opinion. 
  6. A March 22, 2012, 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 2/28/19, the 10-Year T-Note yielded just 2.72%, or 128 basis points below that 4.00% mark. 

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 Tuesday, March 12, 2019 @ 2:20 PM • Post Link Share: 
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  US Stock Markets Ended March 8, 2019
Posted Under: Weekly Market Commentary

 
Equity markets were lower last week as fears of weaker global GDP weighed on returns. The European Central Bank sent ripples through markets after they slashed their 2019 real GDP growth target from 1.7% last December to 1.1%. Additionally, they made smaller cuts to their 2020 and 2021 estimates. The U.S. Change in Nonfarm Payrolls where 25k compared to an expected 180k last month, uncharacteristically low. There have only been 2 months since 2011 where the number has come in lower. Despite the disappointing jobs number, wage growth remains strong at 3.4% year-over-year and the unemployment rate of 3.8% remains historically low. The tough economic backdrop didn't slow the announcement of Biogen Inc. to acquire Nightstar Therapeutics for a 74% premium and nearly $750m all cash, in a deal that is expected to close by the end of the quarter. Last week, retail had a string of weak earnings announcements. Kroger Co. announced disappointing 4Q earnings as margin compression continues, primarily from pricing and product mix changes, as well as additional investments into their supply chain. Despite their efforts to soften the blow last quarter, Ross Stores announced lower 2019 guidance, despite earnings and revenue that were in-line with expectations. Burlington Stores fell over 11% after reporting that revenue missed and margins were lower last quarter. Putting the current equity market in perspective, March 9, 2009 marked the low of the 'Great Recession'. One would have gained 400% had they invested in the S&P 500 10 years ago, which computes to a 17.4% average annual return. Had one invested at the previous high, October 9, 2007, they would have had a 124% return, or a 7.3% average annual return. Lesson? Invest high or invest low, equities remain a tremendous vehicle for buy-and-hold capital appreciation.
Posted on Monday, March 11, 2019 @ 8:49 AM • Post Link Share: 
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  US Economy and Credit Markets Ended March 8, 2019
Posted Under: Weekly Market Commentary

 
Investment grade and high yield spreads widened marginally last week amid increased issuance and mixed global economic conditions. ECB forecasts for the Eurozone economies disappointed as growth continues to be increasing at a slower rate than anticipated. Amid the lack of growth acceleration, on Thursday, the European Central Bank revealed plans to stimulate the economies by saying they would hold interest rates steady through 2019 as well as issue low-cost long-term loans for banks beginning in September. Last week's Friday nonfarm payrolls report was only shown increasing by 20,000 in February which was far below consensus expectations of 180,000. This disappointment followed a week of mixed reports and while the unemployment rate did continue to fall, and wages were shown increasing, a wider trade deficit and the disappointing European data contributed to raising Treasury prices. Gold rallied meaningfully last week as the weak jobs report and generally weak market conditions increased investor interest in this asset. Major economic reports (related consensus forecasts, prior data) for the upcoming week include: Monday: January Retail Sales Advance (0.0%, -1.2%); Tuesday: February CPI (0.2%, 0.0%); Wednesday: March 8 MBA Mortgage Applications (N/A, -2.5%), February PPI Final Demand (0.2%, -0.1%), January preliminary Durable Goods Orders (-0.5%, N/A) and January Construction Spending (0.4%, -0.6%); Thursday: March 9 Initial Jobless Claims (225k, 223k), January New Home Sales (624K, 621K); Friday: March Empire Manufacturing (10.0, 8.8), February Industrial Production (0.4%, -0.6%), March Preliminary U. Of Michigan Sentiment (95.6, 93.8).
Posted on Monday, March 11, 2019 @ 8:47 AM • Post Link Share: 
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  Sector Performance Via Market Capitalization (Current Bull Market)
Posted Under: Sectors

 
View from the Observation Deck  

  1. From 3/9/09 through 3/5/19 (current bull market), small-capitalization (cap) stocks outperformed both mid- and large-cap stocks, as measured by the S&P 500 Index, S&P MidCap 400 Index and S&P SmallCap 600 Index (see "Index" line in table).
  2. We are encouraged by the fact that small-cap stocks have outperformed mid-cap stocks, which in turn have outperformed large-cap stocks, because it indicates that the traditional risk-return dynamic  (the greater the risk taken the greater the return expected) is alive and well.
  3. Sector performance can vary widely by market cap and several of the sectors reflect a huge disparity in performance. A quick glance at the returns in the table should at the very least help the average investor appreciate the merits of asset allocation and diversification, in our opinion.
  4. The S&P 500 Index had six sectors (Communication Services, Consumer Discretionary, Energy, Financials, Information Technology and Real Estate) post the highest cumulative total returns, by market cap, for the period captured in the table. The S&P MidCap 400 Index had three (Industrials, Materials and Utilities) top-performers, while the S&P SmallCap 600 Index had just two (Consumer Staples and Health Care).
  5. Click here to see how investors have their capital allocated by market cap and style. 

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 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. The 11 major S&P 500, S&P MidCap 400 and S&P SmallCap 600 Sector Indices are capitalization-weighted and comprised of S&P 500, S&P MidCap 400, and S&P SmallCap 600 constituents, respectively, representing a specific sector. The S&P Composite 1500 Index is comprised of the S&P 500, S&P MidCap 400 and S&P SmallCap 600 Indices. 

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Posted on Thursday, March 7, 2019 @ 1:44 PM • 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. Investors need to be cognizant of the fact that interest rates are still at low levels relative to their historical averages. 
  3. Even though the yield on the 10-year Treasury-note (T-note) has doubled from its all-time closing low of 1.36% on 7/8/16, at 2.72% (2/28/19), it is still 344 bps below its historical average yield of 6.16% since 1/5/62, according to Bloomberg.
  4. Over the past 12 months, the yield on the 10-year T-note hit or surpassed the 3.00% mark three times but could never hold the level for much more than a couple of months.
  5. The absence of any inflationary pressure in the U.S., despite the acceleration in economic growth in 2018, and the exceptionally low interest rate climate in Europe and Japan has enabled the yield on the 10-year T-note to remain artificially low, in our opinion.
  6. Bond yields in Japan and parts of Europe are still in negative territory despite stimulus efforts from their respective central banks. As of mid-February 2019, Forbes estimated that 20% of all global debt sported a negative yield.
  7. We have been waiting for interest rates and bond yields to normalize in the U.S. a while now. It looks as though we won't get there without some help from abroad. 
This chart is for illustrative purposes only and not indicative of any actual investment. 

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Posted on Tuesday, March 5, 2019 @ 3:19 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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