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  Tracking The Retail Investor’s Appetite For High Yield Corporate Bonds
Posted Under: Bond Market

 
View from the Observation Deck  
  1. High yield corporate bonds are speculative-grade securities (a much higher level of credit risk) that tend to pay a higher rate of interest than their investment-grade counterparts. 
  2. One of the primary indicators used for assessing risk levels in the high yield corporate bond market is the industry default rate. A bond default occurs when the issuer fails to make an interest or principal payment within the specified period.
  3. The long-term global speculative-grade default rate, as tracked by Moody's, has averaged 4.1% since 1983, according to its own release. In April 2019, the default rate stood at 2.1%. 
  4. Moody's believes that the default rate will be lower a year from now. It is currently forecasting a default rate of 1.3% at the end of April 2020. 
  5. As indicated in the chart, asset levels in high yield corporate bond funds relative to total taxable bond fund assets dropped dramatically during the 2008-2009 financial crisis. 
  6. Except for 2013, a year in which bond yields rose markedly, asset levels have remained below the category's average from 2000-2018 (see chart). 
  7. In 2013, the yield on the benchmark 10-year Treasury note increased 127 basis points, from 1.76% to 3.03%, according to Bloomberg. We believe yields rose on the belief that U.S. economic growth could accelerate in 2014. It did not come to fruition.  
  8. From 2000-2018, total high yield corporate bond issuance as a percentage of total corporate bond issuance averaged 16.7% (not shown in chart), according to data from SIFMA. 
  9. From 12/31/99-12/31/18, a period that included many challenges and shocks to the economy, the BofA Merrill Lynch U.S. High Yield Constrained Index posted an average annual total return of 6.69%, according to Bloomberg. For comparative purposes, the S&P 500 Index posted an average annual total return of 4.86% over the same period.

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 of the projections cited will occur. The BofA Merrill Lynch 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 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, May 21, 2019 @ 1:42 PM • Post Link Share: 
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  US Stock Markets Ended May 17, 2019
Posted Under: Weekly Market Commentary

 
After reaching a new high on the last day of April, the S&P 500 has trended down in May. Despite trading higher in the middle of the week, the index traded lower by -0.76% to close out last week and is up over 14% since the start of the year. The markets rode the wave of trade talks with China. The potential talks have been a highly watched event leading up to the Group of 20 meeting in Japan next month. On Friday, President Trump announced a delay on tariffs on imported vehicles from the EU, Japan, and other nations. The delay allows the focus to be on China and not with some of the United States key allies. The trade war was felt in Deere shares as the stock traded lower after releasing lower than expected earnings which highlighted a dimming company outlook. Tensions in the Middle East have come back into play with President Donald Trump trying to navigate the conflict and its implications on his chances at winning a second term. The global risk-off trade has pushed emerging market stocks down since the mid-April highs. The basket of emerging market currencies has erased its year to date gain. Back in the domestic markets, some highlights were in consumer stocks. COTY, Inc, a manufacturer of beauty products, was the best performing stock in the S&P 500 after insider filings showed its management have been purchasing the stock after an additional 20% of the company was purchased by JAB Investments in April. Under Armour, a sports apparel manufacturer, was upgraded by analysts after the company completed a 3-year strategic initiative focused on inventory and cost reduction. Looking ahead to next week, housing and jobs numbers will be on investor's radar.
Posted on Monday, May 20, 2019 @ 8:25 AM • Post Link Share: 
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  US Economy and Credit Markets Ended May 17, 2019
Posted Under: Weekly Market Commentary

 
Treasury prices were up over the course of the week as trade tensions between the United States and China led investors to seek the perceived safety of Treasuries. On Monday, Chinese state-controlled newspaper editorials suggested that China was unwilling to agree to President Trump's terms and the Trump administration announced they would place a 25% tariff on the remaining $300 billion of untaxed goods. China retaliated by saying they would place tariffs on $60 billion of U.S. imports. However, President Trump confirmed that he planned to meet with Chinese President Xi at the G-20 summit and said that they could still reach a deal within the coming weeks. On Thursday, Treasury Secretary Steven Mnuchin said he would fly to Beijing to resume talks, but this optimism was countered by Trump signing an executive order that would allow the federal government to ban U.S. companies from buying telecom equipment from "foreign adversaries," which is directed at Chinese telecom giant Huawei in the 5G industry. In Europe, Italy's prime minister said they could use some fiscal strategies to increase employment, which renewed concerns that Italy's deficit to GDP level would hit the 3% fiscal ceiling imposed by the EU. The market implied probability of a Fed rate cut by the end of the year increased from 59% to 75% over the course of the week. However, strong economic data in the U.S., including better than expected housing starts, employment numbers and sentiment, dampened demand for Treasuries. Major economic reports (related consensus forecasts, prior data) for the upcoming week include: Tuesday: April Existing Home Sales (5.35m, 5.21m); Wednesday: May 17 MBA Mortgage Applications (n/a, -0.6%); Thursday: May 18 Initial Jobless Claims (215k, 212k). May Prelim. Markit US Manufacturing PMI (52.7, 52.6), April New Home Sales (675k, 692k); Friday: April Prelim. Durable Goods Orders (-2.0%, 2.6%).
Posted on Monday, May 20, 2019 @ 8:23 AM • 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.
  2. The yield on the benchmark 10-year Treasury note (T-note) fell from 3.00% at the close of 5/14/18 to 2.41% on 5/14/19, or a decline of 59 basis points (bps), according to Bloomberg. The closing low for the period was 2.37% (3/27/19), while the closing high was 3.24% (11/8/18). The all-time closing low for the yield on the 10-year T-note was 1.36% on 7/8/16, according to Bloomberg. 
  3. Since 5/14/18, the Federal Reserve ("Fed") has increased the federal funds target rate (upper bound) 75 bps, from 1.75% to 2.50%. The Fed has signaled that it does not foresee any rate hikes in 2019. 
  4. For the 30-year period ended 5/14/19, the federal funds target rate (upper bound) averaged 3.09%, according to Bloomberg. On a historical basis, the Fed's current monetary policy is not tight. 
  5. Each of the investment-grade bond indices in the chart reflect an upward adjustment in pricing year-over-year. The two speculative-grade groups, leveraged loans and high yield, were down slightly. 
  6. Investors funneled an estimated net $177.66 billion and $37.09 billion, respectively, into Taxable Bond and Municipal Bond mutual funds and exchange-traded funds for the 12-month period ended 4/30/19, 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 ICE BofAML 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 BofAML 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 BofAML 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 BofAML 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 BofAML 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 BofAML 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 Thursday, May 16, 2019 @ 2:08 PM • Post Link Share: 
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  A Snapshot of Moving Averages
Posted Under: Broader Stock Market

 
View from the Observation Deck  
  1. In today's post, we are showing the percentage of stocks in some major U.S. stock indices that are trading above their respective 50-Day and 200-Day moving averages.
  2. Moving averages tend to smooth out day-to-day price fluctuations and can be a useful tool for traders to identify both positive trends and reversals, in our opinion.
  3. On 5/13/19, the S&P 500, S&P MidCap 400 and S&P SmallCap 600 Indices closed 4.55%, 8.47% and 14.90%, respectively, below their all-time highs, according to Bloomberg.  
  4. The percentage of stocks in the S&P 500, S&P MidCap 400 and S&P SmallCap 600 Indices trading above their 50-Day moving averages on 5/14/19 were 42%, 40% and 39%, respectively.
  5. The percentage of stocks in the S&P 500, S&P MidCap 400 and S&P SmallCap 600 Indices trading above their 200-Day moving averages on 5/14/19 were 57%, 45% and 38%, respectively.
  6. The percentage of stocks trading above their 50-Day moving average by S&P 500 sector ranged from 24% (Energy & Health Care) to 71% (Utilities). 
  7. The percentage of stocks trading above their 200-Day moving average by S&P 500 sector ranged from 24% (Energy) to 93% (Utilities).
  8. Sharp sell-offs in the broader major stock indices like yesterday's create buying opportunities, 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, while the 11 major S&P 500 Sector Indices (Real Estate was added as the 11th major sector in 2016 but data is not available for this chart) 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, May 14, 2019 @ 2:17 PM • Post Link Share: 
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  Interest is 3x More Expensive than Earnings
Posted Under: Weekly Market Commentary Video
Bob Carey, Chief Market Strategist at First Trust Advisors L.P., discusses the latest developments in the market and takes a look ahead.
 
Posted on Monday, May 13, 2019 @ 12:57 PM • Post Link Share: 
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  US Stock Markets Ended May 10, 2019
Posted Under: Weekly Market Commentary

 
The S&P 500 posted its biggest one-week price drop of the year as trade talks between the U.S and China remained at the forefront of traders' minds. On Friday, tariffs increased to 25% on $200 billion of Chinese goods, which many investors fear will escalate a trade war and lead to slower economic growth. In other economic news, inflation data came in below expectations, furthering the case for the Federal Reserve to remain dovish. With over 90% of the S&P 500 names reporting for the quarter, earnings are set to grow marginally year-over-year as energy, semi-conductors and technology hardware and equipment weighed on results. In stock news, Uber Technologies closed below its IPO price of $45 and competitor Lyft Inc. fell to its lowest price since beginning trading at the end of March as investors have become wary of the large losses both ride hailing companies currently report. AIG reported strong operating results as a turnaround in the property & casualty unit takes hold. Despite beating estimates, The Trade Desk Inc. fell sharply after reporting results as a high- valuation coupled with concerns over data privacy that could lead to worse ad matching hurt sentiment. Trip Advisor's shares plunged following disappointing revenue guidance due to weakness in hotel volume.  Looking to the future, near term market movements are likely to be driven by sentiment over the trade dispute between the U.S. and China. Wal-Mart Inc. and Cisco Systems Inc., two of the last bellwethers, are set to report results as earnings season wraps up. Looking longer-term, the S&P 500 is reasonably priced at 17.4x 2019 EPS, but will likely need strong earnings growth to continue to push higher.
Posted on Monday, May 13, 2019 @ 8:07 AM • Post Link Share: 
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  US Economy and Credit Markets Ended May 10, 2019
Posted Under: Weekly Market Commentary

 
Yields fell last week on softer-than-expected inflation data and an escalation in trade tensions between the U.S. and China, with the yield on the U.S. 10-year Treasury ending the week below 2.50%. On Friday, the U.S. increased tariffs on $200 billion of Chinese goods to 25%, and the political uncertainty added to demand for Treasurys. Concerns that trade tensions between the world's two largest economies could slow economic growth also weighed on yields. Meanwhile, the Consumer Price Index came in slightly below expectations, rising 0.3% over the prior month. Core consumer prices, which exclude food and energy, also came in below expectations. The muted inflation data seemingly reinforced the market's view that the Fed won't raise rates this year, with the market-implied probability of a rate hike holding steady at 0% and the probability of cut rising from 50% at the end of last week to about 60% at the end of this week. Major economic reports (related consensus forecasts, prior data) for the upcoming week include: Wednesday: May 10 MBA Mortgage Applications (N/A, 2.7%), April Retail Sales Advance MoM (0.2%, 1.6%), April Industrial Production MoM (0.0%, -0.1%), May Empire Manufacturing (8.0, 10.1); Thursday: May 11 Initial Jobless Claims (220k, 228k), April Housing Starts (1,210k, 1,139k); Friday: May Preliminary U. of Mich. Sentiment (97.5, 97.2), April Leading Index (0.2%, 0.4%).
Posted on Monday, May 13, 2019 @ 8:04 AM • Post Link Share: 
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  U.S. Major Stock Indices Have Outperformed Their Foreign Counterparts Since Trump Was Elected
Posted Under: Conceptual Investing

 
View from the Observation Deck  
  1. Today's blog post indicates that equity investors have prospered since Donald Trump won the presidential election on 11/8/16.
  2. The major U.S. stock indices have outperformed their foreign counterparts to date. 
  3. President Trump campaigned on the promise that his administration would put America's interests first.
  4. The passage of the Tax Cuts and Jobs Act in December 2017 and the administration's efforts to remove some of the regulatory burdens plaguing U.S. businesses are just two examples of Trump keeping that promise.
  5. The 41.6% cumulative total return posted by the S&P 500 Index (see chart) equates to a 14.98% average annualized total return, according to Bloomberg. For comparative purposes, from 1926-2018 (93 years), the S&P 500 posted an average annual total return of 9.99%, according to Ibbotson & Associates/Morningstar.
  6. From 11/8/16 through 5/7/19, the U.S. dollar declined by 0.24%, as measured by the U.S. Dollar Index (DXY), according to Bloomberg. An essentially flat U.S. dollar likely had minimal influence on the performance of the foreign stock indices, in our opinion.  
  7. Fund investors have slightly favored U.S. stock portfolios over their foreign counterparts over the past year. For the 12-month period ended 3/31/19 (most recent data available), investors funneled an estimated net $27.85 billion into U.S. Equity and Sector Equity mutual funds and exchange-traded funds (ETFs), compared to estimated net inflows totaling $24.42 billion to International Equity mutual funds and ETFs offered in the U.S., 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 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 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 600 Index is a capitalization-weighted index that tracks U.S. stocks with a small market capitalization. The S&P 400 Index is a capitalization-weighted index that tracks the mid-range sector of the U.S. stock market. The MSCI 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 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 Europe Index is a free-float weighted index designed to measure the equity market performance of the developed markets in Europe. 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.

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Posted on Thursday, May 9, 2019 @ 1:11 PM • Post Link Share: 
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  Top-Performing S&P 500 Index Subsectors in 2019
Posted Under: Sectors

 
View from the Observation Deck  
  1. Today's blog post is for those investors who want to drill down below the sector level to see what is performing well in the stock market.
  2. The S&P 500 Index is currently comprised of 11 sectors and 126 subsectors, according to S&P Dow Jones Indices.
  3. Of the 15 subsectors featured in the chart, 9 are classified as either Consumer Discretionary or Information Technology. 
  4. As of today, the most heavily weighted sector in the S&P 500 Index is Information Technology at 21.57%, followed by Health Care at 13.85%, according to Bloomberg. Consumer Discretionary ranks fifth at 10.34%. 
  5. The 15 top-performing subsectors in the chart posted total returns ranging from 30.60% (Metal & Glass Containers) to 42.56% (Semiconductor Equipment).
  6. For comparative purposes, from 12/31/18-4/30/19, the top-performing S&P 500 sector indices were Information Technology and Consumer Discretionary, up 27.57% and 22.33%, respectively, on a total return basis, according to Bloomberg. All 11 sectors were in positive territory. The S&P 500 Index posted a total return of 18.25% for the period. 
  7. There are a growing number of packaged products, such as exchange-traded funds, that feature index subsectors.
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 is a capitalization-weighted index comprised of 500 stocks (currently 505) used to measure large-cap U.S. stock market performance, while the S&P sector and subsector indices are capitalization-weighted and comprised of S&P 500 constituents representing a specific sector or industry.

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Posted on Tuesday, May 7, 2019 @ 2:28 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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