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Source: Bloomberg

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FIRST TRUST ADVISORS L.P. 800-621-1675
Robert F. Carey, CFA
Chief Market Strategist
Its Harder To Move Forward When Youre Looking Over Your Shoulder
Mr. Carey has over a quarter century of experience as an Equity and Fixed-Income Analyst and is a
recipient of the Chartered Financial Analyst (CFA) designation. He is a graduate of the University of
Illinois at Champaign-Urbana with a B.S. in Physics. He is also a member of the CFA Society of
Chicago and the CFA Institute. As Chief Market Strategist, Bob and his staff supervise approximately
$98 billion in assets as of 6/30/14. Mr. Carey has appeared throughout the United States and Canada
as a guest on television and radio programs. These programs include: Bloomberg TV, CNBC and on
Chicagos WBBM Newsradio 780s Noon Business Hour. He has been quoted by several publications,
including The Wall Street Journal, The Wall Street Reporter, Bloomberg News Service, and Registered Rep.
Continued
Quarterly Market Overview
Issue 58, July 2014
We invite you to visit Bobs Market Commentary Blog at www.ftportfolios.com for more insight.
For the better part of the past six years, we have been steadfast in encouraging investors to assume more risk in the markets in an effort to potentially capture
higher investment returns, and we made it known that we favored equities over bonds. Brian Wesbury, Chief Economist at First Trust Advisors L.P., has been
equally as steadfast in arguing that the recession that accompanied the financial crisis in 2008 was not a garden variety contraction, but rather something
closer to a systemic-induced panic.Wesbury has always contended that, while the panic was difficult to endure, the underlying fundamentals in the economy
were actually better than people were led to believe by the media and politicians. While opinions can certainly vary on this issue, one statistic really lends
support to Wesburys perspective: corporate cash holdings. The cash and equivalent levels of the so-called S&P 500 Old Industrials (excludes Financial, Utility
and Transportation companies) rose from approximately $610 billion at the close of 2007 to around $831 billion in 2009, or an increase of about 36.2%,
according to data from Standard & Poors. That is a notable accomplishment considering that some pundits and politicians characterized the recession (12/07-
6/09) as perhaps the worst since the Great Depression. In doing so, they conveniently passed over a relatively nasty recession in 1980-1982. The
unemployment rate in the U.S. rose from 6.0% in December 1979 to a recessionary peak of 10.8% in November 1982. The cash and equivalent holdings of the
S&P 500 Old Industrials rose from approximately $76 billion at the close of 1980 to around $77 billion in 1982, or an increase of about 1.3%. That result is much
closer to what one would expect in a traditional recessionary climate, in our opinion. As of December 2013, the cash and equivalent holdings of the S&P 500
Old Industrials stood at a record $1.29 trillion, according to S&P. Not too bad for an economic recovery deemed by some as one of the weakest on record.
The U.S. economic recovery turned five years old in June 2014. The bull market in stocks began around four months before the recession ended in June
2009. From 3/9/09-6/30/14, the S&P 500 posted a cumulative total return of 224.4%, or an average annualized gain of 24.80%. The U.S.s share of the worlds
total equity market capitalization rose from 31.7% on 3/9/09 to 36.2% on 6/30/14, according to data from Bloomberg. If you recall, there was some concern
around the 2008 Summer Olympics in Beijing that China, considering the pace it was growing at, was perhaps on the verge of supplanting the U.S. as the
worlds most dominant economic force. A similar discussion was held in the late 1980s when Japans economy was booming. It hasnt happened. The 500
largest companies in the world (Fortune 500) generated a combined $31.1 trillion in revenues and nearly $2 trillion in profits in 2013, according to Fortune.
The U.S. had the most companies on the list at 128 ($8.6 trillion in combined revenues), while China had 95 ($5.8 trillion in combined revenues).
Despite the progress that has been made since the recession ended, we are aware that some investors and some in the financial media are still waiting for
the next shoe to drop that will inspire a sell-off in the stock market (see chart at top of next page). The S&P 500 has not experienced a 10% correction in 1,000
days, as of 6/30/14. Investors leery of committing capital to the stock market at current levels should know that the longest stretch without a 10% correction
was 2,553 days (10/11/90-10/7/97), according to Bespoke Investment Group. That period was more than double the current stretch. The lack of volatility in the
market also seems to have some on edge. The VIX Index, which uses S&P 500 options activity to gauge investors expectations of volatility, stood at a reading
of 11.57 at the end of June, well below its 10-year average of 20.05. Whether or not we experience a correction in the market in the months ahead, investors
should still have a game plan for their capital. The chart below reflects how many stock indices/risk-oriented assets have performed in the bull market.
How many of the major equity indices have fared in the current bull market (Avg. Annualized Total Returns from 3/9/09-6/30/14)
FIRST TRUST ADVISORS L.P. 800-621-1675
A Look Ahead:
The outlook for earnings (year-over-year comparison in $)...
What would you do if the market experienced a correction of 10% or more?
MISCNLBC0714
Total returns for Q2 and past 12 months (6/30/14)
S&P 500
DJIA
NASDAQ 100
S&P 400 (Mid)
Russell 2000 (Small)
MSCI World (Ex-US)
MSCI Emerging
Consumer Disc.
Consumer Staples
Energy
Financials
Health Care
Industrials
Info Technology
Materials
Telecom. Svcs
Utilities
Barclays GNMA
Barclays U.S. Aggregate
Barclays High Yield
Barclays Muni (L-T)
EM Hard Currency Aggr.
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Q314E Q313A Q414E Q413A 2014E 2013E
Financials 5.37 5.15 5.70 5.27 21.87 21.07
Information Technology 9.67 8.07 12.09 9.81 39.18 33.58
Health Care 10.19 8.27 10.45 7.83 39.15 32.43
Consumer Staples 6.53 6.17 6.86 6.57 25.13 23.95
Consumer Discretionary 7.39 6.53 7.82 6.69 28.28 25.12
Industrials 7.22 6.52 7.49 6.63 27.62 24.88
Telecom. Services 3.05 2.49 2.68 5.58 11.60 12.31
Energy 12.41 10.26 12.35 9.42 48.21 42.35
Utilities 4.42 4.13 2.75 2.58 13.41 12.15
Materials 4.08 3.38 4.18 3.03 17.31 14.04
S&P 500 Index 30.64 26.92 32.30 28.25 119.50 107.31
S&P 400 Index (Mid-Cap) 19.47 15.60 20.91 16.11 71.91 60.00
S&P 600 Index (Small-Cap) 9.03 6.28 9.44 6.92 32.46 25.33
Source: Standard & Poors (7/1/14)
The last time the S&P 500 experienced a
correction of 10% or more the sell-off
concluded on October 3, 2011. We nearly had
another in Q212, but the S&P 500 only fell
9.9%, just shy of a correction. For those
investors waiting for some event to trigger a
correction in the market before taking the
plunge, take a moment and study the chart to
the right. It captures the earnings growth of the
S&P 500 Index since mid-1990, complete with
16 noteworthy events that may or may not
have impacted the markets. Even after
discounting these events, and those not
mentioned, the S&P 500s price and earnings
levels still managed to ascend to record highs.
The S&P 500 has never failed to recover from a
bear market (decline of 20% or more), let
alone a correction. On average, the market
experiences a correction every 18 months,
according to S&P Capitals Sam Stovall. Its been
about 33 months since the last one. Fearing a
correction is one thing being prepared to
exploit one is another thing entirely.
Nikkei 225 Index (Japan)
7000
9000
11000
13000
15000
17000
6/14 1/14 7/13 1/13 7/12 1/12 7/11 1/11
In our Q112 newsletter, we discussed the recovery underway in Japan and noted
that the Nikkei 225 Index had stayed range-bound (8000 to 11000) since October
2008. As indicated in the chart to the right, the index was at the lower end of that
range in January 2012, when we floated the notion that a trade could potentially
be had. While the Nikkei 225 Index has managed to reach the 15000 level, we
believe that this rally may have some additional legs. The index stood 16.9%
below its 10-year high (7/13/07) on 6/30/14. Bloombergs 2014 & 2015 estimated
earnings growth rates for the Nikkei 225 Index were 16.25% and 12.00%,
respectively, as of 7/15/14. Its 2014 P/E was 17.45, as of 7/15/14, well below its 5-
year average of 21.98. Investors funneled a net $923 million into Japanese
open-end stock funds in the first half of 2014, according to Morningstar.
A quick take on Japan...
Source: Bloomberg. Data is weekly from 1/14/11 to 6/30/14.
Source: Standard and Poors. Note: 6/30/14 quarterly number is estimated.