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  Worst-Performing S&P 500 Index Subsectors YTD (Thru 3/12)
Posted Under: Sectors
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View from the Observation Deck  

Today's blog post is for those investors who want to drill down below the sector level to see what is not performing well in the stock market. The S&P 500 Index was comprised of 11 sectors and 126 subsectors as of 3/8/24, according to S&P Dow Jones Indices. The 15 worst-performing subsectors in today’s chart posted total returns ranging from -5.12% (Cable & Satellite) to -24.31% (Automobile Manufacturers) over the period. Click here to view our last post on the worst performing subsectors.

  • As indicated in the chart above, four of the 15 worst-performing subsectors came from the S&P 500 Index Consumer Discretionary sector, followed by two subsectors from the Communication Services, Consumer Staples, Information Technology, and Utilities sectors. Automobile Manufacturers, a subsector of the Consumer Discretionary sector was the worst performer, posting a total return of -24.31% for the period.
  • Ten of the 11 sectors that comprise the S&P 500 Index were positive on a year-to-date (YTD) basis through 3/12/24. Real Estate was the only sector with a negative total return (-0.48%). The second and third-worst performers were the Utilities and Consumer Discretionary sectors, with total returns of 0.16% and 3.13%, respectively. For comparison, the S&P 500 Index posted a total return of 8.82% for the period.
  • The price of one troy ounce of gold increased by 4.55% on a YTD basis through 3/12/24, according to data from Bloomberg. Even so, the Gold Index has been third-worst performing subsector over the same time frame. In our view, this highlights the potential disconnect between commodity prices and the price of the companies that make up the underlying industry.
  • The most heavily weighted sector in the S&P 500 Index was Information Technology at 29.84% as of 3/8/24, according to S&P Dow Jones Indices. For comparison, the Financials sector was second highest with a weighting of 12.99%.
  • Using 2024 consensus earnings estimates, the Information Technology and Energy sectors had the highest and lowest price-to-earnings (P/E) ratios at 29.12 and 12.30, respectively, as of 3/11/24. For comparison, the S&P 500 Index had a P/E ratio of 21.28 when calculated using its 2024 consensus earnings estimates as of the same date.

Takeaway: The Consumer Discretionary sector accounts for four of the fifteen worst-performing subsectors in today’s chart. That said, the sector has enjoyed a total return of 3.13% on a YTD basis through 3/12/24. In fact, Real Estate is the only sector with a negative total return over the period, down just 0.48%. For comparison, the S&P 500 Index boasts a YTD total return of 8.82%, led by Information Technology and Communication Services stocks, with total returns of 13.67% and 11.91%, respectively, over the time frame. As always, there are no guarantees, but there could be some potential deep value opportunities in this group of subsectors. For those investors who have interest, there are a growing number of packaged products, such as exchange-traded funds, that feature S&P 500 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 Index is an unmanaged index of 500 companies 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 Thursday, March 14, 2024 @ 3:42 PM • Post Link Print this post Printer Friendly
  Top-Performing S&P 500 Index Subsectors YTD (Thru 3/8)
Posted Under: Sectors
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View from the Observation Deck  
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. The S&P 500 Index was comprised of 11 sectors and 126 subsectors as of 3/8/24, according to S&P Dow Jones Indices. The 15 top-performing subsectors in the chart posted total returns ranging from 39.63% (Semiconductors) to 13.83% (Metal, Glass, & Plastic Containers. Click here to view our last post on the top performing subsectors.

  • As indicated in the chart above, the Consumer Discretionary and Industrial sectors each had three subsectors represented in the top 15 performers on a year-to-date basis. Information Technology and Materials each had two subsectors represented in the top 15 over the same time frame.
  • With respect to the 11 major sectors that comprise the S&P 500 Index, Information Technology posted the highest total return for the period captured in the chart, increasing by 11.27%, according to data from Bloomberg. The second and third-best performers were Communication Services and Financials, with total returns of 10.86% and 8.00%, respectively. The S&P 500 Index posted a total return of 7.73% over the period.
  • As of 3/8/24, the most heavily weighted sector in the S&P 500 Index was Information Technology at 29.84%, according to S&P Dow Jones Indices. For comparison, the Communication Services and Financials sectors had weightings of 8.83% and 12.99%, respectively.
  • Using 2024 consensus earnings estimates, the Information Technology and Energy sectors had the highest and lowest price-to-earnings (P/E) ratios at 29.12 and 12.30, respectively, as of 3/11/24. For comparison, the S&P 500 Index had a P/E ratio of 21.28 when calculated using its 2024 consensus earnings estimates as of the same date.

Takeaway: The Information Technology, Communication Services, and Financial sectors accounted for 43.37%, 13.72%, and 13.26%, respectively, of the total return of the S&P 500 Index YTD through 2/29/24, according to data from S&P Dow Jones Indices. With a total return of 11.27%, technology stocks are the top-performer in the S&P 500 Index YTD through 3/8/24, followed closely by communication services companies (10.86%). Notably, three of the 15 subsectors in today’s chart come from the S&P 500 Industrials sector. We maintain that the sector may be reaping the benefits of renewed governmental funding via the CHIPS Act. For those investors who may have an interest, there are a growing number of packaged products, such as exchange-traded funds, that feature S&P 500 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 Index is an unmanaged index of 500 companies 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, March 12, 2024 @ 3:26 PM • Post Link Print this post Printer Friendly
  A Check Up On Health Care
Posted Under: Sectors
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View from the Observation Deck  

Today's blog post focuses on the health care sector and shows its total returns over two distinct time frames: year-to-date (YTD) through 3/5/24 and over the trailing 10-year period ended on the same date. For comparative purposes, we have included the return on the S&P 500 Index to reflect the broader market. To view our last post on this topic, please click here.

Three of the six health care related sectors/subsectors represented in today’s chart have outperformed the S&P 500 Index over the 10-year period ended 3/5/24. 

The three subsectors and their average annual total returns are as follows: Providers & Services (14.41%); Life Sciences Tools & Services (13.37%); and Equipment & Supplies (13.25%). For comparison, the S&P 500 Health Care Index and the broader S&P 500 Index saw total returns of 11.15% and 12.54%, respectively, over the same 10-year period. Notably, the top performing subsector on a 10-year basis is also the worst performer so far in 2024 (Providers & Services). 

The S&P 500 Health Care Index’s 11.15% 10-year average annual total return was the third highest of the 11 major sectors that comprise the S&P 500 Index, behind the S&P 500 Information Technology and S&P 500 Consumer Discretionary sectors, which registered average annual total returns of 21.61% and 11.88%, respectively (not in chart).

As of 3/1/24, the S&P 500 Health Care Index is estimated to experience earnings and revenue growth of 13.7% and 7.1%, respectively, in 2024. 

The only sector with higher expected revenue growth in 2024 is Real Estate at 11.5%. For comparison, the earnings and revenue growth estimates for the S&P 500 Index stood at 9.7% and 4.4%, respectively, as of the same date.

Takeaway: A study by Fidelity Investments revealed that a 65-year-old couple who retired in 2023 should expect to spend an average of $315,000 on health care expenses through retirement, and the figure is expected to rise. The Centers for Medicare and Medicaid Services project that national health care expenditures will grow by 5.4% per year on average through 2031. In 2022, health spending accounted for 17.3% of U.S. Gross Domestic Product. Outside of near-term political headwinds, we think the health care sector presents a unique opportunity, especially given its future demand profile.

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 S&P 500 Health Care Index and the S&P subsector indices are capitalization-weighted and comprised of S&P 500 constituents representing a specific sector or industry.

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Posted on Thursday, March 7, 2024 @ 3:09 PM • Post Link Print this post Printer Friendly
  A Snapshot Of The S&P 500 Earnings Beat Rate
Posted Under: Broader Stock Market
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View from the Observation Deck  

We update this post on an ongoing basis to provide investors with insight into the earnings beat rate for the companies that comprise the S&P 500 Index (“Index”). As many investors may know, equity analysts adjust their corporate earnings estimates higher or lower on an ongoing basis.  While these estimates may provide insight into the expected financial performance of a given company, they are not guarantees. From Q4’19 through Q4'23 (the 17 quarters in today’s chart), the average earnings beat rate for the companies that comprise the Index was 77.0%.

As indicated in today’s chart, in Q4’23, the percentage of companies in the Index that reported higher than expected earnings stood three percentage points below the 4-year average of 77.0%. 

After rising to 79.6% in Q3’23, the earnings beat rate for the Index fell back below its 4-year average, settling at 74.0% in Q4’23. Keep in mind that the Q4’23 data in the chart reflects earnings results for 485 of the 503 companies that comprise the Index and could change slightly over the coming weeks.

As of 2/29/24, the sectors with the highest earnings beat rates and their percentages were as follows: Information Technology (88.1%); Industrials (82.1%); and Consumer Staples (80.7%), according to S&P Dow Jones Indices. Real Estate had the lowest beat rate at 45.2%. Notably, the Real Estate sector also had the highest earnings miss rate, at 41.9% during the quarter.

Analyst’s Q1’24 earnings estimates have fallen by a smaller percentage than historical averages. 

Analysts do not appear to be overly concerned about the most recent quarter-over-quarter decline in the earnings beat rate. Data from FactSet revealed that Q1’24 bottom-up earnings per share (EPS) estimates for the Index fell by just 2.2% between December 31, 2023, and February 28, 2024. For comparison, over the past twenty years (80 quarters), the Index’s bottom-up EPS estimates have been reduced by an average of 2.9% during the first two months of each quarter.

Takeaway: While earnings beats are generally viewed as positive news for the overall market, they may not tell the whole story. As today’s chart reveals, the earnings beat rate for the companies that comprise the S&P 500 Index dipped below its 4-year average in Q4’23. In addition, data from FactSet shows that in aggregate, companies are reporting earnings that are 4.1% above estimates, which is below the 10-year average of 6.7%. That said, the overall blended earnings (combines actual results with estimates for companies yet to report) for the companies in the S&P 500 Index rose by 4.0% on a year-over-year (y-o-y) basis in Q4’23. If that figure holds, it will represent the second consecutive quarter of y-o-y earnings increases. As we mentioned last week (click here to read our last post), we view revenue growth as foundational to growth in earnings. While not in today’s chart, the 4Q’23 blended revenue growth rate for the Index stood at 4.2% on 2/29/24. Barring a significant change in revenue growth rates over the coming weeks, this would mark the thirteenth consecutive quarter of revenue growth for the S&P 500 Index.

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 is a capitalization-weighted index comprised of 500 companies used to measure large-cap U.S. stock market performance. 

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Posted on Tuesday, March 5, 2024 @ 4:48 PM • Post Link Print this post Printer Friendly
  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

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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