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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) favored passive investing over active management on a massive scale for the 12-month period ended 12/31/20. This has been the case for the past several years.   
  2. Passive mutual funds and ETFs reported estimated net inflows totaling $400.45 billion, compared to estimated net outflows totaling $188.03 billion for those actively managed.  
  3. The largest amount of total net inflows (active and passive) in the period belonged to the Taxable Bond, Sector Equity and Municipal Bond categories at $441.40 billion, $56.32 billion and $55.36 billion, respectively. 
  4. The only active category garnering more interest from investors than their passive counterpart via net inflows was Municipal Bond. 
  5. In 2020, open-end mutual funds endured a record high $289 billion of outflows, compared to record high inflows totaling $502 billion for ETFs, according to Morningstar. 
  6. Over the past three calendar years (2018-2020), passive mutual funds and ETFs reported combined estimated net inflows totaling $1.33 trillion, compared to combined estimated net outflows totaling $550.17 billion for actively managed funds, according to Morningstar. 
  7. 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, January 21, 2021 @ 2:00 PM • Post Link Share: 
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  One Measure Of Corporate Cash Holdings
Posted Under: Sectors

 
View from the Observation Deck  
  1. In Q3'20, S&P 500 Industrials (Old) cash and equivalents stood at a near-record high of $1.88 trillion (see chart). The all-time high was $1.89 trillion, set in Q2'20.
  2. From Q3'15 through Q3'20, cash holdings rose from $1.30 trillion to $1.88 trillion, or a gain of 44.62%. The S&P 500 Index posted a cumulative total return of 93.80% over the same period, according to Bloomberg.
  3. What is interesting is that S&P 500 Index companies spent a combined $5.59 trillion on stock dividend distributions and stock buybacks over that same period (not shown in chart), according to S&P Dow Jones Indices. Stock buybacks accounted for 58.68% of the $5.59 trillion. 
  4. Keep in mind that S&P 500 companies also utilize capital for such things as mergers and acquisitions, investment in plants and factories, and to purchase software and equipment.
  5. Seeing S&P 500 Index cash holdings continue to set all-time highs suggests that Corporate America, overall, is on solid footing, 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 an unmanaged index of 500 stocks used to measure large-cap U.S. stock market performance. 

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Posted on Tuesday, January 19, 2021 @ 12:24 PM • Post Link Share: 
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  US Stock Markets Ended Jan. 15, 2021
Posted Under: Weekly Market Commentary

 
Stocks closed lower on Friday as President-elect Joe Biden released plans for a $1.9 trillion dollar COVID-19 relief package. On Friday, tech shares gained while banks led the decline of financial stocks after some of the largest players released less than stellar earnings reports. This short-term selloff goes against the longer upward trend for stocks. The S&P 500 hit a record high during the first week of the year, only to fade slightly last week. Energy stocks led the market last week as oil prices reached levels not seen since February 2020. Investors will look for guidance from the new administration and congress as the shifting political landscape has businesses changing strategies while the economy has yet to pick back up from last year. While retail sales fell in December, production increased more than expected. The increase marked eight straight months of gains and could be a bright spot for a battered economic recovery. In a shift from mega retailers, e-commerce retailer Etsy was the top performing stock in the S&P 500 last week. The company was touted by analysts after strong data pointing to increased sales has investors looking to the company's earnings release next month. General Motors was also a top performer last week after the company announced a new electric Corvette SUV to compete with Ford. Looking ahead to next week, the world will be focused on Wednesday's inauguration and the following days as the Biden administration begins its first 100 days with ambitious plans to fight the virus and support the economy.
Posted on Tuesday, January 19, 2021 @ 8:11 AM • Post Link Share: 
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  US Economy and Credit Markets Ended Jan. 15, 2021
Posted Under: Weekly Market Commentary

 
Making news last week was President-elect Joe Biden's proposed $1.9 trillion stimulus package, including $1,400 stimulus checks for individuals and aid for state and local governments. The announced amount seemed to be less than what was being anticipated by markets as equities were weak, gold little changed and bond yields only making small gains. For the week, oil prices continued to rise on the back of the January 5th surprise OPEC cut and generally weak dollar. Mid-week news included Wednesday's Consumer Price Index data which registered a 0.4% increase for December as energy prices rose 4.0%. Last Friday was littered with economic reports. Industrial Production was found increasing for December and easily beat consensus expectations of 0.5% with a 1.6% gain. This was the third consecutive month of rising industrial production and utilities led the way with a 6.3% increase as December temperatures fell increasing heating demand. Producer Prices (the PPI) rose 0.3% on the back of a 5.5% increase in energy prices. Goods and services also had small increases. Producer prices excluding food and energy were up 1.2% this past year. The Friday Retail Sales report disappointed with a 0.7% December decline. The decline is attributed to the decline in stimulus as the latest round of stimulus checks were not sent until the end of the month. Major economic reports (related consensus forecasts, prior data) for the upcoming week include Wednesday: January 15 MBA Mortgage Applications (N/A, 16.7%); Thursday: January 15 Initial Jobless Claims (885k, 965k) and December Housing Starts (1.56M, 1.55M); Friday: January preliminary Markit US Manufacturing PMI (56.5, 57.1) and December Existing Home Sales (6.55M, 6.69M).
Posted on Tuesday, January 19, 2021 @ 8:09 AM • Post Link Share: 
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  Every Year Looks Volatile Compared To 2017
Posted Under: Broader Stock Market

 
View from the Observation Deck  
  1. In 2017, the S&P 500 Index ("index") did not register a single down month on a total return basis, which includes reinvested dividends. That is not typically the case. 
  2. In 12 of the past 13 calendar years, which includes the 2008-2009 financial crisis, the index endured no less than two negative total return months and as many as eight (see table). 
  3. In 2019, the index posted two negative total returns: -6.35% (May) and -1.58% (August), according to Bloomberg. Despite the steep decline in May, the index finished 2019 with a total return of 31.49%, more than three times the historical norm for a calendar year (see point 6).  
  4. In 2020, there were five down months and the -12.35% total return posted in March marked the largest monthly decline for any year in the table following 2008. Despite the five down months, the index posted a total return of 18.40%.
  5. From 2008 through 2020, the S&P 500 Index endured a loss in 50 of the 156 months on a total return basis, or approximately 32.1% of the time. Over that same period, the index posted an average annualized total return of 9.77%, according to Bloomberg. 
  6. For comparative purposes, from 1926 through 2019, the S&P 500 Index posted a loss in 25 of the 94 calendar years on a total return basis, or approximately 26.6% of the time, according to data from Ibbotson Associates/Morningstar. Over that same period, the index posted an average annual total return of 10.20%.
  7. Stock prices don't rise in a straight line. Investors are going to encounter some turbulent times along the way. Remember, the S&P 500 Index has never failed to fully recoup any losses sustained from corrections or bear markets over time. 
  8. A Bloomberg survey of 17 equity strategists found that their average 2021 year-end price target for the S&P 500 Index was 4,035 as of 12/12/20, according to its own release. The highest and lowest estimates were 4,400 and 3,800, respectively. Brian Wesbury, Chief Economist at First Trust Advisors L.P., has a year-end price target of 4,200. The S&P 500 Index closed at 3,809.84 on 1/13/21. It stood 0.39% below its all-time closing high of 3,824.68 on 1/8/21, according to Bloomberg. 

This chart is for illustrative purposes only and not indicative of any actual investment. The illustration excludes the effects of taxes and brokerage commissions and other expenses incurred when investing. Investors cannot invest directly in an index. There can be no assurance that any past trends will continue or that projections cited will occur. The S&P 500 Index is an unmanaged index of 500 stocks used to measure large-cap U.S. stock market performance.

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Posted on Thursday, January 14, 2021 @ 12:20 PM • Post Link Share: 
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  A Snapshot Of Bond Valuations
Posted Under: Bond Market

 
View from the Observation Deck  
  1. Today's blog post is one we do ongoing so that investors can monitor fluctuations in bond prices relative to changes in interest rates. The dates in the chart mark some recent posts.  
  2. Since 4/7/20 (green bars in chart), the Federal Reserve ("Fed") has kept the federal funds target rate (upper bound) at 25 basis points (bps). 
  3. For the 30-year period ended 1/8/21, the federal funds target rate (upper bound) averaged 2.69%, according to Bloomberg.
  4. With respect to the Fed's guidance on monetary policy, it stated that it expects to hold short-term interest rates near zero until two things happen: (1) the U.S. unemployment rate is back to normal, or around the 4.0% level, and (2) having achieved an inflation rate at or above 2.0%, according to Brian Wesbury, Chief Economist at First Trust Advisors L.P. The Fed believes it could keep the federal funds target rate near zero through 2023.  
  5. The yield on the benchmark 10-year Treasury note (T-note) rose from 0.71% at the close on 4/7/20 to 1.12% at the close on 1/8/21, or an increase of 41 basis points, according to Bloomberg. Brian Wesbury, Chief Economist at First Trust Advisors L.P., believes that the yield on the 10-year T-note will close 2021 at around 1.40%. 
  6. For comparative purposes, here are the closing yields as of 1/8/21 for the indices featured in the chart: 3.76% (U.S. Leveraged Loan 100); 4.96% (U.S. High Yield Constrained); 3.50% (22+ Yr. Municipal Securities); 4.25% (Fixed Rate Preferred Securities); 0.96% (7-10 Yr. U.S. Treasury); 1.13% (Freddie Mac Mortgage); 1.96% (U.S. Corporate ); and 1.50% (Global Corporate), according to Bloomberg. 
This chart is for illustrative purposes only and not indicative of any actual investment. The illustration excludes the effects of taxes and brokerage commissions or other expenses incurred when investing. Investors cannot invest directly in an index. 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 S&P/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 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. 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 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. The ICE BofA Freddie Mac Mortgage Backed Securities Index is a subset of the ICE BofA U.S. Mortgage Backed Securities Index including all generics representing pools issued by Freddie Mac.

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Posted on Tuesday, January 12, 2021 @ 1:11 PM • Post Link Share: 
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  US Stock Markets Ended Jan. 8, 2021
Posted Under: Weekly Market Commentary

 
Equity markets surged higher on expectations that Washington DC is poised to deliver more financial stimulus. The Senate runoff races in Georgia were both won by Democrats and they have been promising $2000 stimulus checks to a large portion of the U.S. population. As a result, inflation expectations and a potential rise in economic activity fueled the S&P 500 index to a 1.59% gain last week. Cyclicals led the way as Energy, Materials and Financials were the top three sectors. Oil rallied to over $50 for the first time since last February on news that Saudi Arabia decided to cut oil production as inventories are falling. Last week, four of the top ten performing stocks in the S&P 500 were energy names. They were up an average of 19.31% with oil servicing company TechnipFCM PLC up 24.46% as the top performing Energy name. With the cyclical rally, value trounced growth as the S&P 500 Value index was up 2.35% and the S&P 500 Growth index managed only a 0.37% return. Tesla Inc. returned 24.70% last week which pushed its market cap to $834b, 5th largest in U.S. names passing Facebook Inc. This week's rally also pushed Tesla Founder/CEO Elon Musk to the top of the world wealth list with $209b, passing Amazon.Com Inc Founder/CEO Jeff Bezos who is worth a meager $186b. Walgreens Boots Alliance Inc. announced 4Q earnings and revenue higher than analyst estimates. Walgreens also announced a plan to sell their Alliance Healthcare wholesaling business to AmerisourceBergen Corp. for $6.5b. Walgreens is seeking a business restructuring after losing half of its market cap over the last few years. Looking ahead to next week, we remain constructive on equities. News headlines on the size of Government stimulus will likely push stocks higher or lower. The 10-year Treasury went from 92bps to 112bps last week and as stimulus expectations grow its likely that inflation and interest rate expectations will grow in lockstep. Equities have historically been a very strong inflation hedge and we believe that will continue.
Posted on Monday, January 11, 2021 @ 8:36 AM • Post Link Share: 
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  US Economy and Credit Markets Ended Jan. 8, 2021
Posted Under: Weekly Market Commentary

 
Longer-term Treasury yields began the year moving significantly higher last week, with the U.S. 10-year Treasury yield rising above 1% for the first time since March. Yields rose after Democrats won control of the Senate, winning both runoff elections in Georgia, as the market priced in more economic stimulus and higher inflation. The 10-year breakeven rate, which gauges the market's expectation of inflation, topped 2% for the first time since 2018 last week. The jobs report released on Friday showed the U.S. lost 140,000 jobs in December, which broke a streak of 7 months of job growth since the economy lost over 20 million jobs in April. Restaurants and bars bore the brunt of the decline, losing 372,000 jobs last month. The unemployment rate remained at 6.7%, which remains elevated from pre-pandemic levels but is still a significant recovery from the 14.8% unemployment rate in April. Meanwhile, manufacturing finished the year strongly with the ISM Manufacturing Index beating expectations and registering its highest level since 2018. Major economic reports (related consensus forecasts, prior data) for the upcoming week include Wednesday: December CPI MoM (0.4%, 0.2%), January 8 MBA Mortgage Applications (N/A, 1.7%); Thursday: January 9 Initial Jobless Claims (785k, 787k); Friday: January Preliminary U. of Mich. Sentiment (80.0, 80.7), December Retail Sales Advance MoM (0.0%, -1.1%), December Industrial Production MoM (0.4%, 0.4%), December PPI Final Demand MoM (0.4%, 0.1%), January Empire Manufacturing (5.7, 4.9).
Posted on Monday, January 11, 2021 @ 8:35 AM • Post Link Share: 
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  A Snapshot Of How Stocks Have Performed So Far In This Millennium
Posted Under: Broader Stock Market

 
View from the Observation Deck  
  1. Today's blog post features the cumulative total return performance of five major equity indices (three domestic and two foreign) since the start of 2000. 
  2. We chose to highlight rolling 5-year periods because equity investors have endured two severe and lengthy bear markets (20% or more price decline from recent peak) since the start of 2000, and we came very close to registering a third one in Q4'18. Investors have also weathered a significant number of challenging global events since 2000. 
  3. We also like to occasionally remind investors that the buy and hold strategy can still serve them well over time.  
  4. The two bear markets in stocks ran from 3/24/00 through 10/9/02 and from 10/9/07 through 3/9/09, as measured by the S&P 500 Index. The S&P 500 Index posted total returns of -47.38% and -55.25%, respectively, according to Bloomberg. In Q4'18, the S&P 500 Index declined 19.36% on a total return basis from its all-time high set on 9/20/18 through the low for the quarter on 12/24/18. It never declined by 20% on a closing basis. 
  5. Here are just a few of the challenging global events we alluded to: 9/11 terrorist attacks in U.S. (2001); Invasion of Iraq/2nd Gulf War (2003); U.S./Global financial crisis (2008-2009); Greek debt crisis (2009); U.S. stock market flash crash (2010); Japan's tsunami/9.0 earthquake (2011); the UK's decision (Brexit vote) to leave the European Union (2016); an escalating trade conflict between the U.S. and China (2018-present) and the COVID-19 pandemic (February 2020 to present).  
  6. Emerging markets equities clearly performed the best in the first decade covered in the table, but have underperformed the U.S. indices since.
  7. Large-, mid- and small-capitalization (cap) stocks in the U.S. have shared the spotlight dating back to 2007, with large-caps (S&P 500 Index) dominating the last three five-year rolling periods. 
  8. A weaker U.S. dollar can boost returns for U.S. investors holding positions in unhedged foreign securities, and vice versa. From 2000-2009, the U.S. Dollar Index declined by 23.57% − a nice tailwind for foreign holdings, according to Bloomberg. From 2010-2019, the index appreciated by 23.80% − a notable headwind for foreign holdings. In 2020, the index declined 6.69% to a reading of 89.94, just slightly below its 20-year average reading of 89.99. 
  9. From 12/31/99-12/31/19, the average annual total returns for the five equity indices were as follows (not shown in table): 6.61% (S&P 500); 9.68% (S&P MidCap 400); 9.86% (S&P SmallCap 600); 3.64% (MSCI Daily TR Net World ex-U.S. in USD); and 7.21% (MSCI Daily TR Net Emerging Markets in USD), according to Bloomberg.
This chart is for illustrative purposes only and not indicative of any actual investment. The illustration excludes the effects of taxes and brokerage commissions and other expenses incurred when investing. Investors cannot invest directly in an index. The S&P 500 Index is 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. The MSCI World (ex-U.S.) Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets 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 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 Thursday, January 7, 2021 @ 12:43 PM • Post Link Share: 
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  The Only Constant Is Change
Posted Under: Sectors

 
View from the Observation Deck  
  1. One of the most common questions we field on an ongoing basis is the following: What are your favorite sectors?
  2. Sometimes the answer is more evident than at other times, in our opinion.
  3. You didn't need much of a crystal ball to tout Information Technology in 1998 and 1999 (top-performing S&P 500 sector both years by a wide margin), as was the case with Energy in 2004 & 2005, according to performance data from Bloomberg.
  4. For the first time since 2005, a sector in the S&P 500 Index was able to repeat as the top-performer on a calendar year basis. Information Technology posted the highest total return in 2019 (+50.29%) and 2020 (43.89%), according to Bloomberg. 
  5. The top-performing sectors in Q4'20 were as follows (total returns): 27.76% (Energy), 23.19% (Financials) and 15.67% (Industrials). The total return on the S&P 500 Index was 12.14%. The other eight sectors generated total returns ranging from 4.94% (Real Estate) to 14.47% (Materials).  
  6. Investors were net buyers of passive sector funds for the 12-month period ended 11/30/20, but net sellers of active sector funds. Sector Equity mutual funds and exchange-traded funds (ETFs) reported estimated net inflows totaling $34.26 billion ($44.60 billion/Passive vs. -$10.34 billion/Active), according to Morningstar.
  7. Fund flows to the Sector Equity category were strong in November 2020. Net inflows totaled an estimated $19.66 billion, according to Morningstar. 
  8. Click here to access the post featuring the top-performing sectors in Q1'19, Q2'19, Q3'19 and Q4'19. 
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 stocks 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, January 5, 2021 @ 12:47 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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