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  S&P 500 Index Earnings & Revenue Growth Rate Estimates
Posted Under: Broader Stock Market
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View from the Observation Deck

As we near the end of the fourth quarter earnings season, we thought it would be timely to provide an update regarding estimated 2024 and 2025 earnings and revenue growth rates for the companies comprising the S&P 500 Index (“Index”). On February 23, 2024, the Index closed at a record-high of 5,088.80, representing an increase of 19.51% on a price-only basis from when it stood at 4,258.19 on October 5, 2023 (the last time we posted on this topic), according to data from Bloomberg. For comparison, from 1928-2023 (96 years) the Index posted an average annual total return of 9.56%. When we wrote about earnings estimates in October (click here to view that post), we wrote that increased revenues could boost earnings and provide the catalyst for higher equity valuations going forward. We believe that the Index’s notable surge over the past months is reflective, in part, of that scenario playing out.

Current estimates generally reveal favorable earnings growth over the next several years.

As today’s table shows, the earnings for the companies that comprise the S&P 500 Index are expected to increase by a combined 9.5% and 13.9%, respectively, on a year-over-year (y-o-y) basis in 2024 and 2025. Keep in mind that estimates for 2024 reflect favorable comparisons to 2023’s earnings. As of February 23, 2024, Bloomberg data shows that full-year 2023 earnings are expected to decline by 2.8% (not in table). In 2024, earnings are estimated to decline in just two of the eleven sectors that comprise the Index (Energy and Materials). While negative earnings are never favorable, the Energy and Materials sectors’ 2024 earnings estimates show substantial improvement from 2023, when they are estimated to have contracted by 30.6% and 22.7%, respectively, on a y-o-y basis.

Notably, revenue growth rate estimates continue to reveal a similar pattern.

Echoing our last post on this topic, the increase in earnings estimates for the 2024 and 2025 calendar years are paired with rising revenue growth rate expectations. As of February 23, 2024, the estimated revenue growth rate for companies in the Index stood at 4.7% and 5.9%, respectively, in 2024 and 2025. Nine of the eleven sectors that comprise the Index reflect positive y-o-y revenue growth rate estimates for 2024 with five of them estimated to surpass 5.0%.

Takeaway: As many investors may be aware, most traditional equity markets are forward-looking discounting mechanisms. Practically speaking, the price of an efficient market should reflect the sum-effect of present and future (expected) events. We think the recent surge in the S&P 500 Index, which rose by 19.51% on a price-only basis between October 5, 2023 (our last post on this topic) and February 23, 2024, can be explained, in part, by the expected earnings and revenue growth rates revealed in today’s table. Additionally, expectations that the Federal Reserve (“Fed”) could cut interest rates early this year also played a large part in the Index’s growth, in our opinion. That said, information flows quickly, and estimates are subject to constant revision. Recent economic data and Fed commentary lend support to the idea that interest rates may not come down as quickly as expected. Time will ultimately reveal the accuracy of these forecasts, but we maintain that higher revenues in the coming year could be the best catalyst for growing earnings, and in turn, increasing equity valuations.

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 Thursday, February 29, 2024 @ 1:41 PM • Post Link Print this post Printer Friendly
  Growth Vs. Value Investing (Small-Caps)
Posted Under: Themes
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View from the Observation Deck
 
We update this post on small-capitalization (cap) stocks every now and then so that investors can see which of the two styles (growth or value) are delivering the better results. Click Here to view our last post on this topic.

  • As today’s chart reveals, the S&P SmallCap 600 Pure Growth Index (Pure Growth Index) outperformed the S&P SmallCap 600 Pure Value Index (Pure Value Index) by a significant margin over both the 1-Year and year-to-date (YTD) time frames. 

  • In our last post on this topic, we noted that the Information Technology Sector comprised 19.8% and 6.4% of the Pure Growth and Pure Value Indices, respectively.

On a trailing 12-month basis thru February 23, 2024, the S&P SmallCap 600 Information Technology Index posted a total return of 5.94%. For comparative purposes, the S&P SmallCap 600 Index was up 4.94% on a total return basis over the same period.

The total returns in today’s chart, thru February 23, 2024, were as follows (Pure Growth vs. Pure Value):

  • 15-year average annualized (14.37% vs. 16.73%)
  • 10-year average annualized (7.04% vs. 6.82%)
  • 5-year average annualized (4.38% vs. 9.16%)
  • 3-year average annualized (-3.23 % vs. 9.83%)
  • 1-year (14.86% vs. 3.80%)
  • YTD (2.51% vs. -4.19%)

Takeaway: As today’s chart illustrates, the Pure Growth Index has enjoyed substantially higher total returns than the Pure Value Index over the trailing 12-month and YTD time frames (thru 2/23/24). The last time we posted about this topic, we presented the idea that sector allocations could offer insight into the divergent performance between these two benchmarks. From our perspective, that estimation still holds. While sector weightings can change, they may provide unique insight into recent performance trends, in our view.

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 SmallCap 600 Index is an unmanaged index of 600 companies used to measure small-cap U.S. stock market performance. The S&P SmallCap 600 Pure Growth Index is a style-concentrated index designed to track the performance of stocks that exhibit the strongest growth characteristics based on three factors: sales growth, the ratio of earnings-change to price, and momentum. It includes only those components of the parent index that exhibit strong growth characteristics, and weights them by growth score. Constituents are drawn from the S&P SmallCap 600 Index. The S&P SmallCap 600 Pure Value Index is a style-concentrated index designed to track the performance of stocks that exhibit the strongest value characteristics based on three factors: the ratios of book value, earnings, and sales to price. It includes only those components of the parent index that exhibit strong value characteristics, and weights them by value score. The respective S&P SmallCap 600 Sector Indices are capitalization-weighted and comprised of S&P SmallCap 600 constituents representing a specific sector.  

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Posted on Tuesday, February 27, 2024 @ 2:24 PM • Post Link Print this post Printer Friendly
  Consumer Delinquency Rates
Posted Under: Sectors
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View from the Observation Deck

For today’s post, we thought it would be informative to compare the delinquency rate on consumer loans issued by all U.S. commercial banks to the prices of the S&P 500 Consumer Discretionary Index, over time. We use data from the Board of Governors of the Federal Reserve System, retrieved from FRED, for the former set of observations.

At 42.30%, the S&P 500 Consumer Discretionary Index boasted the third-highest total return of the 11 major sectors that comprise the S&P 500 Index in 2023. The Index has not fared as well in 2024, posting a year-to-date (YTD) total return of 0.03% thru February 13.

In a recent blog post (click here for “Consumer Checkup: Aisle 7”) we wrote about the various factors that could be impacting the performance of the consumer discretionary sector. It is worth restating several of our observations. First, consumer spending appears to have been bolstered by surging U.S. household net worth, which rose to $142.4 trillion at the end of Q3’23, up from $110.1 trillion at the end of Q4’19 (pre-COVID).  We also shared insight regarding the “health” of the U.S. consumer as viewed through the lens of their debt burden, noting that a healthy consumer may play an integral role in the U.S. avoiding a protracted recession. As indicated in today’s chart, one measure of consumer health (delinquency rates) shows signs of weakening. 

As revealed in today’s chart, after falling to an all-time low of 1.53% in Q3’21, the consumer loan delinquency rate surged to 2.53% in Q3’23. Loan delinquency rates among credit cards and auto loans have risen as well. 

One important aspect of overall consumer health is the rate at which they are defaulting on their debt obligations. To be sure, not all delinquencies will become defaults, but a spike in the number of payments that are past-due could be an indication that the U.S. consumer is under increasing financial duress. The loan delinquency rate for credit cards issued by all insured commercial banks stood at 2.98% at the end of Q3’23 (most recent data), its highest level since the close of Q1’12. In addition, the Federal Reserve Bank of New York reported that the percentage of auto loans that moved into serious delinquency (90 days or more delinquent) rose to 2.66% in Q4’23 up from 2.22% over the same period in 2022.

Takeaway: The delinquency rate on consumer loans issued by all U.S. commercial banks stood at 2.53% at the end of Q3’23. While it is true that loan delinquency rates have risen from recent lows, they are not alarmingly high, in our opinion. At current readings, the index reflects delinquency rates that are well below their historical average of 3.07% and even further below their all-time high of 4.85%. That said, the recent surge in delinquencies is notable. We will continue to monitor the delinquency rate among consumers and report back as needed.

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 Consumer Discretionary Index is an unmanaged index which includes the stocks in the consumer discretionary sector of the S&P 500 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. Consumer delinquency data is seasonally adjusted.

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Blog posts will resume on 2/27.

Posted on Thursday, February 15, 2024 @ 1:09 PM • Post Link Print this post Printer Friendly
  A Snapshot of Bond Valuations
Posted Under: Bond Market
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View from the Observation Deck

Today’s blog post is intended to provide insight into the movement of bond prices relative to changes in interest rates. For comparative purposes, the dates in the chart are from prior posts we’ve written on this topic.

Valuations for each of the eight bond indices in today’s chart have improved significantly since our last post.

When we last posted on this topic at the beginning of November, the Federal Reserve (“Fed”) had recently announced that interest rates were likely to remain “higher for longer” amidst persistently high inflation. As we see it, the drawdown in bond valuations between our posts in July and November (see chart) reflected the Fed’s sentiment. Up until then, the Fed had announced a total of 11 increases to the federal funds target rate (upper bound) over the previous 19 months, raising the rate from 0.25% where it stood on 3/15/22, to 5.50% as of 11/1/23. That said, the Fed’s outlook changed dramatically since then. In December, just a few short months after its “higher for longer” announcement, the Fed revealed that it anticipated as many as three rate cuts totaling 75 bps in 2024. Bond valuations (which generally move inversely to bond yields) rallied on the news, with the yield on the 10-year Treasury Note plummeting by 82 basis points (bps) between October 19, 2023 (most recent high) and February 9, 2024.

The trailing 12-month rate of change in the Consumer Price Index (CPI) stood at 3.1% as of 1/31/24, down significantly from its most recent peak of 9.1% on 6/30/22, but up from its most recent low of 3.0% on 6/30/23.

While the decrease in the CPI is a welcome relief to bond investors and consumers alike, inflation remains above the Fed’s stated goal of 2.0% as well as its 30-year average of 2.5% (through 1/31/24). Following their policy meeting on January 31, 2024, the Fed voted to keep the federal funds target rate unchanged, marking the fourth consecutive meeting with no changes. Inflation’s re-acceleration, combined with continued strength in the U.S. economy has made predicting the timing of the Fed’s cuts incredibly difficult. At the close of 2023, the federal funds rate futures market was pricing in an 84.3% chance that the Fed would cut rates at its policy meeting in March 2024. As of February 9, 2024, that same metric had plummeted by 65 percentage points to just 19.3%.

Takeaway: Bond valuations have improved dramatically over the past few months. In our view, the recent surge in prices can be attributed to changing expectations regarding the path of the federal funds target rate. In September, the Fed commented that it could keep rates higher for longer to quell persistently high inflation. Then, just a few short months later, the Fed’s sentiment shifted dramatically. In December, the Fed announced that it expected 75 bps of cuts over three meetings in 2024. The fixed income markets surged on the news, with the Bloomberg U.S. Aggregate and Bloomberg Global Aggregate Bond Indices rising by 6.93% and 6.38%, respectively, on a total return basis between October 31, 2023, and February 9, 2024. That said, timing the Fed can prove to be a fruitless endeavor. On December 31, 2023, the federal funds futures market was pricing in an 84.3% change that the Fed would cut rates at its March policy meeting. Stronger than expected economic data and a re-acceleration in the pace of inflation from November to December appear to have stifled these predictions. Expectations of a rate cut in March plummeted to just 19.3% on February 9, 2024, representing a decline of 65 percentage points from where they stood on December 31, 2023.

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 Morningstar 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 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 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 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 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 U.S. Mortgage Backed Securities Index tracks the performance of U.S. dollar denominated fixed rate and hybrid residential mortgage pass-through securities publicly issued by U.S. agencies in the U.S. domestic market. 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 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 Tuesday, February 13, 2024 @ 4:47 PM • Post Link Print this post Printer Friendly
  Consumer Checkup: Aisle 7
Posted Under: Sectors
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View from the Observation Deck
 
Today’s post compares the performance of consumer stocks to the broader market, as measured by the S&P 500 Index, over an extended period. Given that consumer spending has historically accounted for roughly two-thirds of U.S. Gross Domestic Product (GDP), we think the performance of consumer stocks can offer insight into potential trends in the broader economy.

Real consumer discretionary spending rose to $10.9 trillion in 2023, an increase of $1.2 trillion from the $9.7 trillion in real discretionary spending in 2019 (pre-COVID).

The last time we posted on this topic (click here) we noted that consumer discretionary stocks had outperformed consumer staples as well as the S&P 500 Index by a significant margin on a year-to-date basis. Discretionary stocks held their lead over staples through the remainder of the year, but lagged the S&P 500 Index, which was propelled forward on exuberance surrounding developments in AI (see table). We think the 1-year performance margin between the S&P 500 Consumer Discretionary and Consumer Staples Indices can be explained, in part, by improving net worth among U.S. households. Data from the Federal Reserve Bank of St. Louis revealed that U.S. household net worth stood at $142.4 trillion at the close of Q3’23, up from $110.1 trillion at the end of Q4’19 (pre-COVID). Consumer sentiment has also improved. In December 2023 and January 2024, the University of Michigan’s Index of Consumer Sentiment surged by 14% and 13% on a month-over-month basis, respectively.

Just how healthy is the U.S. consumer?

While discretionary spending and consumer sentiment have risen substantially, so has U.S. household debt. The Federal Reserve Bank of New York reported that aggregate household debt balances increased by $212 billion in Q4’23, to a record $17.50 trillion. Credit card debt and auto loans rose by $50 billion and $12 billion in the fourth quarter alone, to a record $1.13 trillion, and $1.61 trillion, respectively. Higher loan balances combined with surging interest rates have pressured borrowers. During the quarter, 6.3% of credit card loans were categorized as seriously delinquent (at least 90 days past due). The second quarter of 2011 was the last time serious delinquency rates were higher than present values. Additionally, consumers appear to be saving less. The personal savings rate stood at 3.7% in December, down from 4.1% in February 2022, the month before the Federal Reserve began raising interest rates.

Takeaway: From our perspective, the S&P 500 Consumer Discretionary Index has benefitted from a surge in U.S. household net worth and lower inflationary pressures, the combination of which has led to a spike in consumer sentiment. The trailing 12-month rate on the consumer price index stood at 3.4% on December 31, 2023, marking a stunning retreat from when it stood at 9.1% on June 30, 2022. This slowdown in the pace of rising prices has been a welcome relief to many Americans who, stretched thin by rising interest rates, plummeting savings, and record levels of credit card debt, are a significant driver of economic growth. Should the consumer remain healthy, the possibility of the U.S. experiencing a notable recession could be diminished. Stay tuned!

This table 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 Index is a capitalization-weighted index comprised of companies spanning 19 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, February 8, 2024 @ 2:28 PM • Post Link Print this post Printer Friendly
  Defensive Sectors and Elevated Inflation
Posted Under: Sectors
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View from the Observation Deck

For today’s post, we looked back to 1990 and selected calendar years where inflation, as measured by the Consumer Price Index (CPI), rose by 3.0% or more on a trailing 12-month basis. We chose 3.0% as our baseline because the rate of change in the CPI averaged 3.0% from 1926-2023, according to data from the Bureau of Labor Statistics. We then selected three defensive sectors (Health Care, Consumer Staples, and Utilities) and compared their total returns to those of the S&P 500 Index over those periods.

  • Of the eleven years in today’s table, there were only two (2021 and 2023) where the S&P 500 Index outperformed each of the Health Care, Consumer Staples, and Utilities sectors.

  • From 12/29/89 – 12/29/23 (period captured in the table above), the average annualized total returns posted by the four equity indices presented were as follows (best to worst): 11.54% (S&P 500 Health Care); 10.35% (S&P 500 Consumer Staples); 10.19% (S&P 500); and 7.88% (S&P 500 Utilities); according to data from Bloomberg.

As many investors likely know, because defensive sectors tend to be less cyclical, they may offer better performance than their counterparts during periods of heightened volatility. Today’s table reveals that defensive sectors generally offer better performance relative to their peers during periods of higher inflation as well. That said, despite elevated inflation, the S&P 500 Index surged by 26.26% in 2023, outperforming the Health Care Index by 24.2 percentage points. In our view, several factors contributed to the S&P 500 Index’s relative outperformance during the year. First, developments in AI led to decidedly narrow participation in the equity markets. In 2023, the S&P 500 Technology, Communication Services, and Consumer Discretionary Indices accounted for nearly 87% of the total return of the broader S&P 500 Index. Second, expectations that the Federal Reserve could cut interest rates in 2024 led to higher equity valuations, particularly among those companies that may see significant benefits from AI.

Takeaway: The S&P 500 Index outperformed each of the Health Care, Consumer Staples, and Utilities sectors in just two of the eleven time frames presented in today’s table (2021 and 2023). Given these results, the obvious question is this: why did defensive stocks underperform in 2023? As we see it, investors’ risk appetite may offer one explanation. The American Association of Individual Investors reported that just 19.3% of respondents to its Investor Sentiment survey were bearish as of 12/14/23, a nearly six year low for the metric. Additionally, developments in AI led to narrow sector participation in 2023, with just three sectors accounting for nearly 87% of the S&P 500’s total return. That said, investors will often use defensive sectors as a safe haven during times of increased volatility, as well as during periods of heightened inflation. We would expect to see more interest in defensive sectors should volatility rise or the U.S. economic outlook sour in the coming months.

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 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, February 6, 2024 @ 11:45 AM • Post Link Print this post Printer Friendly
  S&P 500 Index Dividend Payout Profile
Posted Under: Stock Dividends
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View from the Observation Deck

Companies often return capital to their shareholders through dividend distributions. The practice is so common that as of 1/23/24, 403 of the 503 constituents in the S&P 500 Index (“the Index”) distributed a cash dividend to their equity owners. In addition to acting as a conduit for return of capital, dividend distributions account for a significant portion of the Index’s total return. According to data from Bloomberg, dividends contributed to over 37% of the total return of the Index over the 96-year period between December 30, 1927, and December 29, 2023.

  • Data from Bloomberg indicates that the dividend payments from S&P500 Index constituents totaled $70.91 per share (record high) in 2023, up from $67.57 (previous record high) in 2022. As of 1/31/24, dividend payments are estimated to total $74.54 and $79.66 per share in 2024 and 2025, respectively. 

  • Of the 11 major sectors that comprise the S&P 500 Index, eight of them had yields above the 1.46% generated by the Index over the period captured in the table. Financials, Information Technology, and Health Care contributed the most to the Index's dividend payout at 15.75%, 15.22% and 14.68%, respectively. 

  • The payout ratio for the S&P 500 Index stood at 36.89% on 12/29/23. A dividend payout ratio between 30% and 60% is typically a good sign that a dividend distribution is sustainable, according to Nasdaq.

  • Many investors view changes in dividend distributions as an indication of strength and or weakness in the underlying company. For that reason, companies will often avoid decreasing or suspending their dividend payout. There were a total of 25 dividend cuts and four suspensions in the Index in 2023. For comparative purposes, not a single dividend was suspended in 2022, and only five dividend reductions were recorded over the period.

Takeaway: Dividend distributions continue to be one of the most efficient methods by which companies can return capital to their shareholders. In 2023, the companies that comprise the S&P 500 Index distributed a record $70.91 per share to their equity owners and are forecast to return even higher amounts over the next several years. Additionally, dividend distributions have contributed meaningfully to the performance of the S&P 500 Index, over time. In the 96-year period between December 30, 1927, and December 29, 2023, more than 37% of the total return of the Index came from dividend distributions, according to data from Bloomberg. That said, investors may want to keep a close eye on dividend sustainability. There were a total of 25 dividend cuts in 2023, the fourth-highest total for dividend reductions over the past 20 years. For comparison, the Index suffered 68, 40, and 27 dividend cuts, respectively, in 2008, 2007, and 2020.

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 companies 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, February 1, 2024 @ 2:20 PM • Post Link Print this post Printer Friendly
  Passive vs. Active Fund Flows
Posted Under: Conceptual Investing
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View from the Observation Deck

Investors directing capital into mutual funds and exchange traded funds (ETFs) continued to favor passive investing over active management for the 12-month period ended 12/31/23.
Passive mutual funds and ETFs reported estimated net inflows totaling $529.12 billion for the 12-month period ended 12/31/23 while active funds reported estimated net outflows totaling $450.19 billion over the same period. The only active categories over the past 12 months with net inflows were Nontraditional Equity and Miscellaneous with inflows of $20.03 billion and $1.09 billion, respectively (see table above). For comparison, the top three passive categories were U.S. Equity, Taxable Bond, and International Equity with inflows of $243.67 billion, $224.67 billion, and $72.78 billion, respectively.

Despite improving total returns throughout much of 2023, equity funds have seen significant outflows over the trailing 12-month period.

Combined, the active and passive equity categories experienced net outflows of $117.93 billion for the 12-month period ended 12/31/23. For comparison, the Taxable and Municipal Bond categories reported net inflows totaling $214.58 billion over the same time frame. The S&P 500, S&P MidCap 400, and S&P SmallCap 600 Indices posted total returns of 26.26%, 16.39% and 15.94% respectively, for the 12-month period ended 12/29/23, according to Bloomberg. With respect to foreign equities, the MSCI Daily TR Net World (ex U.S.) and MSCI Emerging Net TR Indices posted total returns of 17.94% and 9.83%, respectively, over the same period. The U.S. Dollar Index (DXY), which reflects the general international value of the U.S. dollar relative to a basket of major world currencies, fell by 2.11% during the time frame. The weaker dollar accelerated the performance of unhedged foreign securities held by U.S. investors, in our opinion.

Takeaway: Passive mutual funds and ETFs saw inflows of $529.12 billion compared to outflows of $450.19 billion for active funds over the trailing 12-month period ended 12/31/23. In the table above, we observe the largest disparity occurred in the U.S. Equity category, with active shedding $257.61 billion compared to inflows of $243.67 billion for passive funds. Notably, even though global equities surged over the period, net outflows from equity funds stood at $117.93 billion. For comparison, combined fixed income saw inflows of $214.58 billion during the time frame. Nontraditional Equity and Miscellaneous were the only two categories to see inflows among the active management styles. To view the last time we updated this post, please click here.

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 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. companies with a small market capitalization. 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 MSCI World (ex U.S.) Index is a free-float weighted index designed to measure the equity market performance of developed 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, January 30, 2024 @ 4:33 PM • Post Link Print this post Printer Friendly
  Global Government Bond Yields
Posted Under: Bond Market
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View from the Observation Deck

We update today’s table on a regular basis to show the impact monetary policy could be having on government bond yields. As many investors are likely aware, after more than a year of increasingly tighter monetary policy, numerous global central banks have held off on raising policy rates further, effectively “pausing” to allow the impact of previous rate hikes to take full effect. In the U.S., for example, the Federal Reserve (“Fed”) increased the federal funds target rate (upper bound) eleven times, from 0.25%, where it stood on 3/15/22, to 5.50% on 7/26/23. The Fed has met three additional times since July, voting to leave their policy rate unchanged in each of those meetings.

Despite tighter monetary policy, headline inflation rates are still above target levels in seven of the ten countries listed in today’s table (China, Italy, and Switzerland being the only exceptions), but have come down dramatically.

While it is not presented in today’s table, the pace of inflation, which was the impetus for elevated policy rates, remains stubbornly high across the globe. The resilience of rising prices sits at the forefront of the continued debate regarding the Fed’s path moving forward. While the Fed did announce that it was likely to cut the U.S. policy rate in 2024, the timing and depth of those cuts remains unknown, and could depend largely on near-term economic data. That said, U.S. inflation, as measured by the trailing 12-month change in the consumer price index, stood at 3.4% on 12/29/23, representing a decline of 5.7 percentage points from when it stood at 9.1% on 6/30/22.

The yield curve between the U.S. 10-Year Treasury Note (T-note) and the 2-Year T-note remains inverted.

Historically, an inverted yield curve has been a fairly accurate indicator of an impending economic recession. Data from the Federal Reserve Bank of San Francisco shows that an inverted yield curve has been a precursor to each of the last 10 economic recessions in the U.S. since 1955. As of 1/24/24, the yield curve between the 2-Year and 10-Year T-notes has been inverted for nearly 19 consecutive months.

Real yields (yield minus inflation) offered by government bonds have become increasingly attractive.

As shown in the columns marked “12-Month Change (Basis Points)”, the yields on most of the government bonds in today’s table rose over the past 12-months, providing ballast to real yields. In addition, many major economies are seeing price increases slowly come down. As of 1/24/24, five of the ten countries represented in today’s table have a positive real yield on their 10-year note (up from three the last time we posted on this topic). The five countries and their respective real yields are as follows: Italy (3.29%); China (2.80%); the U.S. (0.77%); Canada (0.09%); and the U.K. (0.01%). Click here to view our post from 8/22/23, where we wrote about the real yield on the 10-year T-note in more detail.

Takeaway: Despite the tighter monetary policies enacted by central banks around the world, inflation remains stubbornly high. Just three of the countries in today’s table boast headline inflation readings that are below their stated target rate (China, Italy, and Switzerland). The impact of higher interest rates on bond yields has been notable, with most of the countries in today’s table experiencing higher yields on a year-over-year basis. That said, global inflation is growing at a slower pace, leading some central banks to pause further rate hikes, and others to cut their policy rate. The global fixed income markets surged in November and December of 2023, driven by the expectation of further cuts in the first half of 2024. The total return for the Bloomberg Global Aggregate Bond and Bloomberg U.S. Aggregate Bond Indices stood at 9.41% and 8.53%, respectively, over the two-month period. In December, the U.S. Federal Reserve gave credence to these projections, announcing that the federal funds target rate could be reduced by as much as 75 bps over three meetings in 2024. The timing and depth of these cuts remains unknown and could be largely data dependent. We will continue to monitor the situation and report back as new developments occur.

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

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Posted on Thursday, January 25, 2024 @ 3:22 PM • Post Link Print this post Printer Friendly
  Technology Stocks and Semiconductors
Posted Under: Sectors
Supporting Image for Blog Post

 

View from the Observation Deck
 
Tracking the direction of worldwide semiconductor sales can provide investors with additional insight into the potential demand for tech-oriented products and the overall climate for technology stocks, in our opinion. As evidenced by recent developments in artificial intelligence (AI) and robotics, as well as the vast market for smartphones, tablets, and wearables, we continue to find creative and innovative ways to integrate semiconductors into our everyday lives.

Semiconductor sales appear to lag fluctuations in the valuations of technology stocks.

Several of the more notable examples in today’s chart, which goes back to 12/31/1998, occurred after the 1999 Dot-com bubble, the “great recession” of 2008, and the decline from semiconductors’ peak sales in 2022. In our last post on this topic (click here to view it), we wrote that the divergent trend between global semiconductor sales and the performance of the S&P 500 Technology Index appeared to be an anomaly. Since that post, global semiconductor sales have improved but have yet to recapture their peak which was set in 2022.

November 2023 marked the first month of year-over-year (y-o-y) semiconductor sales growth since August 2022.

Amidst unprecedented demand, the Semiconductor Industry Association (SIA) reported that worldwide semiconductor sales surged by 26.2% to settle at a record $555.9 billion in 2021. In 2022, sales rose to another record of $574.1 billion, but had begun to stagnate in the second half of the year. Hobbled by declining demand, the continued chip shortage, and high inflation, semiconductor sales suffered y-o-y declines each month from August 2022 through October 2023, falling by as much as 21.6% on a y-o-y basis in April 2023. As of November 2023 (most recent data), the World Semiconductor Trade Statistics (WSTS) organization forecast that the global semiconductor market would contract by 9.4% in 2023. That said, November’s sales data showed significant promise, with semiconductor sales rising by 5.3% on a y-o-y basis.

With a total return of 57.84%, technology stocks were the top-performing sector in 2023.

Promising developments in AI, an easing in the global chip shortage, and expectations that the federal reserve (“Fed”) could cut interest rates as early as March 2024 propelled the S&P 500 Information Technology Index to the top of the list in terms of total return through in 2023. In our view, these factors remain in play today, and could be among the reasons why, despite stagnating semiconductor sales, technology stocks outperformed their peers in 2023. 

Takeaway: It is nearly impossible to discuss semiconductors and technology stocks without mentioning developments in AI, and rightly so. One forecast suggests the global AI market could grow to nearly $600 billion by 2026 and $1.8 trillion by 2030, according to Ryan Issakainen, ETF Strategist at First Trust Portfolios L.P. These growth projections, coupled with expectations that the Fed could cut interest rates in the first half of 2024, led to an unprecedented surge in the S&P 500 Information Technology Index, which rose by 57.84% on a total return basis in 2023. That growth has continued in 2024, with the S&P 500 Technology Index boasting a total return of 5.38% year-to-date through 1/22/24. While the valuations of technology companies are spiking, global semiconductor sales remain below their all-time high set in 2022. With the chip shortage behind us, and increased demand due to the compute power required for AI, global semiconductor sales are expected to recover in the coming year. In November 2023 (most recent data), the WSTS estimated that the global semiconductor market will grow by 13.1% in 2024.

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 Information Technology Index is capitalization-weighted and comprised of S&P 500 constituents representing the technology sector.

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Posted on Tuesday, January 23, 2024 @ 3:50 PM • Post Link Print this post Printer Friendly

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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