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  The Low U.S. Consumer Credit Default Rate Is Good For Discretionary Stocks
Posted Under: Sectors

 
View from the Observation Deck  

  1. The S&P/Experian Consumer Default Index Composite measures the default rates across mortgages, bank cards and auto loans. Its inception date was July 2004. 
  2. The index registered a default rate of just 0.83% in May 2019, well below its 1.87% average since inception, according to Bloomberg. Its all-time high was set in May 2009 at 5.51%, while its all-time low was set in May 2016 at 0.81%.
  3. The index's default rate has been below the 1.0% mark since April 2015. The combination of U.S. households getting their fiscal houses in order and the strong U.S. job market has helped fuel demand for consumer discretionary stocks following the 2008-2009 financial crisis, in our opinion. 
  4. Consumer spending accounts for more than two-thirds of U.S. economic activity, according to Reuters. 
  5. From 3/9/09-5/31/19 (current bull market), the S&P 500 Consumer Discretionary Index posted a cumulative total return of 717.22%, the highest of the 11 major sectors that comprise the S&P 500 Index, according to Bloomberg. For comparative purposes, the S&P 500 Index posted a cumulative total return of 403.59%. 
  6. Investors funneled an estimated net $670 million into Consumer Cyclical mutual funds and exchange-traded funds in Q2'19, 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 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 an unmanaged index of 500 stocks used to measure large-cap U.S. stock market performance. 

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Posted on Thursday, July 18, 2019 @ 12:46 PM • Post Link Share: 
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  S&P 500 Index Earnings & Revenue Growth Rate Projections
Posted Under: Sectors

 
View from the Observation Deck  
  1. On 7/12/19, the S&P 500 Index closed the trading session at an all-time high of 3,013.77, according to Bloomberg. 
  2. For the market to trend higher, we believe that corporate earnings will need to grow, and perhaps the best catalyst for growing earnings is to increase revenues.
  3. From 1926-2018 (93 years), the S&P 500 Index posted an average annual total return of 9.99%, according to Ibbotson & Associates/Morningstar. 
  4. As indicated in the table, Bloomberg's 2019 and 2020 consensus year-over-year (y-o-y) earnings growth rate estimates for the index were 3.7% and 10.6%, respectively, as of 7/12/19. 
  5. Only one (Consumer Discretionary) of the 11 major sectors that comprise the index reflects a positive double-digit y-o-y earnings growth rate estimate for 2019, compared to five in 2020. 
  6. Bloomberg's 2019 and 2020 consensus y-o-y revenue growth rate estimates for the S&P 500 Index were 4.1% and 4.8%, respectively, as of 7/12/19.
  7. Three of the 11 major sectors reflect y-o-y revenue growth rate estimates of 5.0% or more for 2019, compared to five for 2020.
  8. Click here to compare today's estimates to those from 4/2/19. 

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 stocks used to measure large-cap U.S. stock market performance. 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 Tuesday, July 16, 2019 @ 2:18 PM • Post Link Share: 
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  More Than Just the Fed
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, July 15, 2019 @ 4:25 PM • Post Link Share: 
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  US Stock Markets Ended July 12, 2019
Posted Under: Weekly Market Commentary

 
The S&P 500 set multiple record highs for the week, closing above 3,000 for the first time on Friday, led by testimony from Federal Reserve Chairman Jerome Powell indicating the central bank will likely cut rates soon. In economic news, inflation readings came in above expectations but remained around the Fed's target of 2%. Shares of UnitedHealth Group Inc. and other managed care names gained following the announcement the Trump administration will not look to limit drug rebates to pharmacy benefit managers. By contrast, drug makers and healthcare equipment names posted steep losses as the current administration is likely to look to other ways to reign in healthcare costs. Shares of Costco Wholesale Corp. rose after reported strong comparable-store-sales versus a year ago on strength in e-commerce, store traffic and higher prices. Shares of Deutsche Bank AG were hit hard on skeptisim the newest turnaround plan will be effective. Large U.S. banks, including JP Morgan Chase & Co. and Morgan Stanley, are likely to gain market share in equity trading with the large German bank shuttering their unit. In merger news, Cisco Systems announced the acquisition of Acacia Communications, Inc. for roughly $2.6 billion. Looking near term, markets are likely to be driven by sentiment over future rate moves, with good economic news now being viewed as negative news by many traders because it could delay potential rates cuts. Earnings season is also set to start next week with JP Morgan Chase & Co and Goldman Sachs Group set to report on Tuesday.
Posted on Monday, July 15, 2019 @ 8:08 AM • Post Link Share: 
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  US Economy and Credit Markets Ended July 12, 2019
Posted Under: Weekly Market Commentary

 
Long-term U.S. Treasury yields climbed last week as short-term U.S. Treasury yields retreated, widening the yield curve. Federal Reserve Chairman Jerome Powell addressed Congress last week. Fed Chairman Powell mentioned the Fed will "act as appropriate to sustain the expansion" as uncertainties surrounding weak global growth and trade tensions continue to mount. Powell also mentioned the U.S. economy is solid and remains on track. The Consumer Price Index, or CPI, rose 0.1% in June, above the expectation of no change. CPI, an inflation indicator, is up to an annualized 2.1%. Also, real average hourly earnings rose 0.2% in June and are up 1.5% in the past year, signaling continued strength in the labor market. Strong labor market data along with inflation in-line with the Fed's target wasn't enough to sway sentiment as the Fed Chairman's testimony was interpreted as a sign that rate cuts are forthcoming. Major economic reports (related consensus forecasts, prior data) for the upcoming week include Monday: July Empire Manufacturing (2.0, -8.6); Tuesday: June Import Price Index MoM (-0.6%, -0.3%), June Retail Sales Advance MoM (0.1%, 0.5%), June Industrial Production MoM (0.1%, 0.4%); Wednesday: July 12 MBA Mortgage Applications (N/A, -2.4%), June Housing Starts (1260k, 1269k), June Building Permits (1300k, 1294k); Thursday: July 13 Initial Jobless Claims (216k, 209k), June Leading Index (0.1%, 0.0%); Friday: July Preliminary University of Michigan Sentiment (98.6, 98.2).
Posted on Monday, July 15, 2019 @ 8:05 AM • 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. From 2006-2018, however, no sector in the S&P 500 Index was able to repeat as the top-performer on a calendar year basis.
  5. S&P 500 Index sector returns were mostly strong for the 12-month period ended 6/28/19. While the S&P 500 Index posted a total return of 10.41% for the period, six of the 11 sectors outperformed the broader index, according to Bloomberg.
  6. Despite the strong showing, investors were net sellers over the 12-month period ended May 2019 (most recent data). Sector Equity mutual funds and exchange-traded funds (ETFs) reported estimated net outflows totaling $42.5 billion, according to Morningstar. For comparative purposes, U.S. Equity mutual funds and ETFs reported estimated net inflows totaling $49.3 billion.

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. Past performance is no guarantee of future results. 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 Thursday, July 11, 2019 @ 11:42 AM • Post Link Share: 
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  Some Perspective On The Outsized Gains In Stocks in 2019
Posted Under: Conceptual Investing

 
View from the Observation Deck  
  1. Today's blog post features the total return performance of the S&P 500 Index and its 11 major sectors over three specific time periods. All three periods end on 7/5/19.
  2. As indicated in the table, the last column shows year-to-date (YTD) performance and the total returns are eye-popping. That is why we feel the need to add some perspective to the current climate in the stock market.   
  3. As we often point out, from 1926-2018 (93 years), the S&P 500 Index posted an average annual total return of 9.99%, according to Ibbotson & Associates/Morningstar. Some of the YTD total returns have doubled, and even tripled, that 9.99% historical annual average.  
  4. The all-time closing high for the S&P 500 Index was registered on 7/3/19 at 2,995.82, according to Bloomberg. Two prior all-time closing highs that stood out in 2018 were made on 1/26/18 (2,872.87) and 9/20/18 (2,930.75). They are the start dates for the other two columns in the table.  
  5. Investors need to remember that the S&P 500 Index experienced a correction (decline of 10.00% to 19.99% from the recent peak) following each of those 2018 highs. From 1/26/18-2/8/18, the S&P 500 Index declined in price by 10.16%, according to Bloomberg. From 9/20/18-12/24/18, the index plunged 19.78% in price, nearly falling into bear market territory (20% or more price decline from the recent peak).
  6. Our takeaway is that equity investors should not let the hot start to 2019 dissuade them from adding more capital to the market moving forward. A good percentage of this year's performance helped recoup last year's downside.     
  7. As noted, the current all-time closing high for the index is 2,995.82 (7/3/19). Brian Wesbury, Chief Economist at First Trust Advisors L.P., just raised his 2019 year-end target for the S&P 500 Index from 3,100 to 3,250.  
  8. This chart is for illustrative purposes only and not indicative of any actual investment. 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 are capitalization-weighted and comprised of S&P 500 constituents representing a specific sector. 

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Posted on Tuesday, July 9, 2019 @ 2:36 PM • Post Link Share: 
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  US Stock Markets Ended July 5, 2019
Posted Under: Weekly Market Commentary

 
The S&P 500 reached record levels to start Wednesday's shortened trading session before dropping after the holiday to close out last week with a 1.69% return. Friday's job report added to the case that an interest rate cut by the Federal Reserve is not as necessary as President Trump believes. Chairman Powell has maintained the Fed's political independence, but a possible shift of opinion on the Board of Governors is looming with the potential nomination of some of the President's partisan allies. Ten of the 11 sectors in the S&P 500 traded higher last week. Pressure in the Energy sector was felt as the group traded down with oil falling by over 1.6%. Communication Services, led by Viacom Inc., was the best performing group in the index with group returning over 2.8%. Even as stocks trade higher, merger and acquisition activity are steady. Last week it was reported Broadcom Inc. is rumored to be considering a $16 billion-dollar takeover of cybersecurity software maker Symantec Inc. Cybersecurity remains a top concern for companies as more and more business depends on secure data warehousing. As investors look out into the second half of the year, behind them is a stock market that had its best first half since 1997. The same market drivers will persist into the second half of the year. With trade, interest rates, and geopolitical risks keeping investors on alert in the second half.
Posted on Monday, July 8, 2019 @ 8:56 AM • Post Link Share: 
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  US Economy and Credit Markets Ended July 5, 2019
Posted Under: Weekly Market Commentary

 
Treasury yields rose last week, boosted by a stronger-than-expected U.S. jobs report released on Friday. The report showed that the U.S. economy added a robust 224,000 jobs in June, well above the forecasted gain of 165,000. June marked 105 consecutive months that the U.S. economy has added jobs, the longest streak on record. The last month the U.S. economy lost jobs was September 2010. The report also showed that average hourly earnings for all employees increased 3.1% from a year ago, near February's 10-year high of 3.4%. Despite the strong jobs report, the Federal Reserve is still widely expected to cut interest rates at its July 30-31 meeting. Meanwhile, International Monetary Fund chief Christine Lagarde was nominated to succeed Mario Draghi as president of the European Central Bank when his term ends on October 31. Major economic reports (related consensus forecasts, prior data) for the upcoming week include Wednesday: July 5 MBA Mortgage Applications (N/A, -0.1%), May Final Wholesale Inventories MoM (0.4%, 0.4%); Thursday: July 6 Initial Jobless Claims (221k, 221k), June CPI MoM (0.0%, 0.1%); Friday: June PPI Final Demand MoM (0.1%, 0.1%).
Posted on Monday, July 8, 2019 @ 8:49 AM • Post Link Share: 
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  A Snapshot Of Growth vs. Value Investing (Small-Caps)
Posted Under: Themes

 
View from the Observation Deck  

  1. As indicated in the chart, stocks are off to a positive start in 2019. We intend to update this post on small-capitalization (cap) stocks moving forward so that investors can see which of the two styles (growth or value) have delivered the best results.
  2. The S&P SmallCap 600 Index closed at 953.25 on 6/28/19. It stood 13.21% below its all-time closing high of 1,098.36 on 8/31/18, according to Bloomberg.
  3. The S&P SmallCap 600 Pure Growth Index outperformed its value counterpart in five of the six periods featured in the chart. Value has outpaced growth on a year-to-date basis. 
  4. The returns through 6/28/19 were as follows (Pure Growth vs. Pure Value): Since Inception (12/16/05) average annualized (9.05% vs. 5.77%); 10-year average annualized (14.91% vs. 10.96%); 5-year average annualized (7.38% vs. 0.99%); 3-year average annualized (11.50% vs. 4.64%); 1-year (-11.28% vs. -17.56%) and year-to-date (7.34% vs. 9.07%).
  5. As of 6/28/19, the two largest sector weightings in the S&P Small-Cap 600 Pure Growth Index were Health Care (22.5%) and Consumer Discretionary (16.4%), compared to Consumer Discretionary (33.7%) and Industrials (20.5%) for the S&P 600 Pure Value Index, according to S&P Dow Jones Indices.
  6. Small-cap stocks have struggled more than their large-cap counterparts over the past year. We believe that the ongoing trade conflict with China (15 months and counting) has negatively impacted their performance. The escalation of tariffs has tempered the outlook on global growth in general. There is also concern that a relatively flat yield curve in the U.S. government bond market is potentially signaling that a recession might be looming for the U.S. economy. Small-cap stocks inherently carry a higher degree of market risk than do large-cap stocks. 
  7. Click here to see the most our recent review of growth stocks versus value stocks in the large-cap space. 

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 stocks 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.

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Posted on Tuesday, July 2, 2019 @ 12:55 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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