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Kevin D. Mahn joined Parsippany, NJ based Hennion & Walsh as a Managing Director in 2004. Currently serving as the President and Chief Investment Officer of Hennion & Walsh Asset Management, Mr. Mahn is responsible for all of the Wealth and Asset Management products and services offered... More
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  • Is The Government Shutdown A Convenient Excuse For A Market Pullback?

    While it is true that there has not been a shutdown of the federal government in over 17 years, the current partial shutdown of the federal government is the 18th such shutdown since 1976. According to a recent "Investment Insights" article from Ashvin Chhabra of Merrill Lynch, the market impact, in the short term, of a U.S. government shutdown - which has been the defined result of a failure of Congress to pass a budget since 1981 - has been relatively insignificant and perhaps slightly positive for equity investors.

    While each shutdown has its own set of circumstances and variables and arguably no previous shutdown had the confluence of factors; including the combination of the ongoing fiscal debate over the Affordable Care Act and upcoming Debt Ceiling deadline, that the current shutdown includes, the historical results are nonetheless interesting. To start, the average duration of the previous shutdowns was just over 6 days. The present shutdown, which officially began on October 3, stands at 6 days already and counting. The average market performance during previous shutdowns was just under a 1% loss. The present shutdown shows the S&P 500 as being down approximately 1% on a total return basis. Finally, the average market performance 2 weeks after, and 1 month after, each previous shutdown has been just over a 1% gain. It is not yet known how the market will perform when the shutdown is ended this time around.

    S&P 500 Performance Prior, During and Subsequent to Historical Government Shutdowns

     

     

    ShutdownDuration (days)1 month prior2 weeks priorDuring2 weeks after1 month after
    9/30/1976103.1%-0.1%-3.4%-1.5%-2.0%
    9/30/1997120.2%0.1%-3.2%-1.2%2.7%
    10/31/19778-4.3%-1.2%0.7%3.8%0.7%
    11/30/197782.4%-0.6%-1.2%1.1%-3.2%
    9/30/197817-0.9%-1.5%-2.0%-3.6%-6.0%
    9/30/1979110.3%0.5%-4.4%-3.8%-0.9%
    11/20/198121.2%-0.8%-0.1%3.0%0.6%
    9/30/198212.3%-2.7%1.3%9.5%12.7%
    12/17/19823-0.3%-0.9%0.8%2.0%3.8%
    11/10/19833-4.8%-0.3%1.3%0.0%-2.0%
    9/30/19842-0.3%-1.6%-2.2%1.0%3.1%
    10/3/19841-2.5%-2.7%0.1%3.2%3.6%
    10/16/198613.4%2.4%-0.3%2.2%-0.9%
    12/18/198711.5%11.3%0.0%-0.8%-2.6%
    10/5/19903-4.0%0.1%-2.1%2.4%2.8%
    11/13/199551.3%1.6%1.3%1.2%2.0%
    12/5/1995213.8%1.5%0.1%-0.8%4.8%
    Average6.40.1%0.3%-0.8%1.0%1.1%
    Median30.3%-0.3%-0.1%1.1%0.7%

    Source: BofA ML US Equity & Quant Strategy, Strategy Snippet: The shutdown saga continues. Sept. 27, 2013. Past performance is not an indication of future results. The S&P 500 is an unmanaged, capitalization-weighted index. You cannot invest directly in an index.

    While the consternation in Washington has no doubt created uncertainty amongst investors and volatility in the markets, perhaps another reason for the recent pullback in equity markets was that this shutdown created a convenient excuse for equity investors to take some profits that have been realized during this current bull market run while looking for ways to redeploy these assets to different areas of the market that may stand to benefit for the next transitional phase of the U.S. and global economies.

    Consider this, according to MFS Investment Management in an article entitled, "By the Numbers"; the bull market for the S&P 500 is now entering its 56th month. Since the market hit bottom in March of 2009, the S&P 500 has gain 176% on a total return basis through 10/4/13. Quite a run indeed! However, also according to the research cited in this article, the average bull market since 1950 has lasted 57 months….perhaps the run is due to come to an end?

    Recognizing the global implications of any form of a default with respect to U.S. debt obligations, we do not believe, at this time, that Washington will allow the U.S. to default on any of our debt and that some form of a compromise is likely due to occur (whether good or bad) with respect to budget negotiations prior to the October 17th deadline for the decision to raise the debt ceiling. Regardless, the volatility that investors have witnessed, and the uncertainty that is likely to persist through the fourth quarter of 2013, should serve as a reminder to all investors of the importance of asset allocation and the benefits of diversification.

    Asset allocation remains of the upmost importance, from our point of view, and should always be constructed in accordance with one's investment objectives, investment timeframe and tolerance for risk. While past performance cannot guarantee future results, and asset allocation cannot ensure a profit or protect against a loss, applying a historical perspective and maintaining an appropriate strategic asset allocation can help provide comfort and direction to investors during periods of great volatility.

    As a result, this partial government shutdown can be used as a convenient, and necessary, excuse for individual investors to reexamine their asset allocation strategies with their trusted advisors and make appropriate adjustments as necessary.

    Oct 10 12:03 PM | Link | Comment!
  • June Fund Flows Suggest Overall Rotational Shift By Investors

    When the Federal Reserve (the "Fed") announced in June that the U.S. economic recovery was showing such progress, based on their assessments at that time, that they may consider starting to taper their bond buying program (i.e. quantitative easing) sooner than originally expected, perhaps as early as the Fall of 2013, investors fled the markets; bonds and equities, in droves. Order was eventually restored to the markets as investors came to their senses, realizing after some additional time to digest the entirety of the comments from the Fed, that the Fed did not suggest that they were going to start raising interest rates, or even sell bonds, in 2013, the damage was already done. Mutual fund and Exchange-traded fund (ETF) flows for the month of June provide evidence of this exiting behavior on the part of investors as well as what we believe to be a re-positioning of portfolios by investors (presumably with diversified growth objectives) to brace for an environment of rising interest rates - where economic, and stock market, growth would be expected to continue to progress to some degree.

    On top of the rotational shift of investors moving out of fixed income into equities during the early stages of 2013, investors fled fixed income funds at an even higher velocity in June of 2013. According to Lipper's FundFlows Insight Report dated June 30, 2013, the following were highlights of mutual fund flow activity:

    · For the first time in the last twelve (12) month period, mutual fund investors were net redeemers of fund assets in June (i.e. $59.9 billion)

    · Mutual fund investors redeemed the largest amount of bond funds since at least January 2008, registering approximately $65.2 billion of outflows

    · Bond fund outflows were equally split across long-term and short/intermediate term maturity types

    · Taxable bond funds (i.e. $48.5 billion) registered much larger outflows than municipal bond funds (i.e.$16.6 billion)

    · Stock & mixed equity funds registered net inflows for the month of June (i.e. $21.8 billion), on top of the net inflow total that they registered in May (i.e. $33.4 billion)

    · The net inflows for stock & mixed equity funds in June represented the sixth consecutive month of strong inflows for this mutual fund type

    · Whereas, significant funds flowed into money market funds in May, mutual fund investors were net redeemers of money market funds in June (i.e. $16.4 billion)

    Estimated Net Flows by Major Fund Types, June vs. May 2013 ($ Billion)

    Mutual Fund TypeJune 2013May 2013
    Stock & Mixed Equity Funds21.833.4
    Bond Funds-65.20.7
    Money Market Funds-16.429.8
    Total-59.963.9

    Source: Lipper Research Series, FundFlows Insight Report, June 30, 2013

    According to this same report, the following were highlights of ETF flow activity:

    · For the first time in the last nineteen (19) month period, ETFs suffered net redemptions for the month of June 2013 (i.e. $18.8 billion)

    · The June outflow total marked the highest outflow amount for ETFs on record

    · In contrast to mutual funds, ETF investors were net redeemers of both stock & mixed equity ETFs (i.e. $9.6 billion) as well as bond ETFs (i.e. $9.2 billion) experienced net outflows

    · Not all equity-based ETFs suffered net redemptions for the month of June as international and sector-based ETFs accounted for the majority of the outflow totals:

    o U.S. diversified equity ETFs ($4.5 billion) posted their eighth consecutive month of inflows with Large-Cap Value leading all of the other classifications with a net inflow total of $2.0 billion

    o World equity ETFs suffered its first month of net redemptions in the last three (3) months and its largest month of redemptions on record (i.e. $10.9 billion)

    o For the second month in a row, sector equity ETFs suffered net redemptions (i.e. $3.2 billion)

    Estimated Net Flows by Major ETF Types, June vs. May 2013 ($ Billion)

    ETF TypeJune 2013May 2013
    Stock & Mixed Equity Funds-9.616.1
    Bond Funds-9.23.7
    Total-18.819.7

    Source: Lipper Research Series, FundFlows Insight Report, June 30, 2013

    At Hennion & Walsh, we prefer to look at both mutual fund and ETF flow information to discern overall investor sentiment as different types of investors generally tend to invest one product type over the other. For example, institutional investors seem to continue to gravitate towards ETFs for a wide variety of reasons while retail investors, fueled in large part by 401(k)/Defined Contribution Plan investments, generally tend to use a great deal of mutual funds for their own household portfolios. Overall, although fund assets (and number of funds) are flowing to ETFs at a greater relative percentage than mutual funds in recent years, mutual funds still hold a significant advantage over ETFs in terms of overall assets and overall number of funds.

    Based on the fund flow information presented above, I would contend that the rotational shift from bond funds to equity funds (specifically U.S. equity funds), not only continued in June but even picked-up pace overall based on the net totals across both fund types. To this end, at the beginning of July, the Investment Company Institute (ICI) estimated that equity funds held a roughly 3-to-1 advantage in terms of net fund flows over bond funds thus far in 2013 (though bond funds held a slight advantage of equity funds heading into June).

    A preliminary look at July 2013 flow information suggests that the momentum with respect to the bond funds-->equity funds rotational shift is not letting up - at least as it relates to ETFs. According to ConvergEx, over the first twelve (12) trading days of July, money has flowed into ETFs which focus on U.S. equities at a run rate of $2 billion a day. This current rate represents almost four (4) times the pace of flows into ETFs with a focus on U.S. equities that took place during the first half of 2013.

    Aug 12 10:53 AM | Link | Comment!
  • Worried About Rising Interest Rates?

    Worried about Rising Interest Rates?

    Many individual and institutional investors are growing more concerned that we may be entering an environment of rising interest rates sooner than many expected. The behavior of yields on 10-year U.S. Treasury Notes since the beginning of May provides credence to this sentiment as 10-year Treasury yields have risen by 59 basis points, or nearly 36% (from 1.66% to 2.25%), during the time period of May 1, 2013 - June 12, 2013.

    (click to enlarge)

    Source: U.S. Department of the Treasury, Daily Treasury Yield Curve Rate, June 2013

    Causes for this recent rise in yields have been primarily attributed to comments from the Federal Reserve suggesting that they may be able to start winding down their stimulus-oriented bond buying program if the U.S. economy continues to shows signs of continual improvement. Hence, some investors have been selling bonds to get ahead of Fed selling, recognizing the effect that large amounts of selling will have on bond prices.

    I, on the other hand, believe that these yield changes are more reflective of the ongoing rotational shift from bonds to equities (primarily through mutual funds as it relates to individual investors) than it does to an increased likelihood of the Fed easing their bond buying program later this year or, perhaps more importantly, taking action on interest rates sooner than originally targeted. With respect to the latter, it should be noted that the Fed is still on record as saying that they intend to keep interest rates at historical lows through at least the middle of 2015 unless material improvements take place with respect to economic growth and unemployment (while always keeping an eye on inflation - which largely remains benign). Economic data reports are trending positive, but they are still a significant distance away from the Federal Reserve's GDP and unemployment targets. While the Fed may start to look to gradually back away from their bond buying stimulus program without having too large of an impact on the stock and bond markets (which they would be wise to do in my opinion), I do not see anything in the recent string of economic reports to suggest that they will raise interest rates anytime soon.

    With this said, we, at Hennion & Walsh, do recognize that many investors are looking to brace their portfolios for an upcoming environment of rising interest rates and are taking this into consideration with respect to many of our own portfolio strategies. In this regard, while asset allocation remains critical with respect to long term portfolio performance, and portfolio strategies may vary based upon each investor's objective (Ex. Growth or Income), investment timeframe and tolerance for risk, there are certain security types that have historically performed well in previous periods of rising interest rates and may be worthy of consideration for diversified growth portfolios. These security types include, but are not limited to, senior/floating rate loans, common stocks and convertible securities.

    Senior Loans- Senior loans are generally floating-rate secured debt extended to companies and typically sit at the top of the capital structure while being secured by company assets. Floating rates of senior loans typically involve a credit spread over a benchmark credit rate, such as 3-month LIBOR1. As a result, when the benchmark credit rate rises or falls, the interest rate on the senior loan will move in a similar fashion. In a rising rate environment, senior loans will see coupon payments increase while the loan value remains relatively stable. Conversely, in a declining rate environment, coupon payments on senior loans will typically decrease while the loan value remains relatively stable.

    Additionally, senior loans have historically maintained a relatively low correlation to other fixed income (i.e. bond) asset classes, based on certain representative benchmark indices, as illustrated in the chart below.

    Correlation Matrix: January 1992 - December 2012

    Fixed Income Benchmark IndexCredit Suisse Leveraged Loan Index9
    Barclays U.S. Intermediate Government Index2-0.32
    Barclays U.S. Long Term Government Index3-0.31
    Bank of America Merrill Lynch Mortgage Master Index4-0.13
    Bank of America Merrill Lynch Corporate Master Index50.31
    Barclays U.S. Aggregate Index6-0.03
    JP Morgan Emerging Markets Bond Index70.22
    Credit Suisse High Yield Index80.76

    Source: State Street Global Advisors, "Active ETF Investing in the Senior Loan Market": Credit Suisse, Bloomberg, Ibbotson Associates, Data Stream, as of 12/31/2012. Past performance is not a guarantee of future results.

    1 The LIBOR or the London Inter-Bank Offered Rate is an interest rate that banks can borrow funds from other banks in the London inter-bank market. It is fixed on a daily basis by the British Bankers' Association. The LIBOR is derived from a filtered average of the banks' interbank deposit rates for larger loans with various maturities in multiple currencies. The 3 Month LIBOR is the LIBOR for a three month deposit in US dollars.

    2 The Barclays U.S. Intermediate Government Index tracks the performance of intermediate-term US government securities. The US Government Index is comprised of the US Treasury and US Agency Indices. The US Government Index includes Treasuries (public obligations of the US Treasury that have remaining maturities of more than one year) and US agency debentures (publicly issued debt of US Government agencies, quasi-federal corporations and corporate or foreign debt guaranteed by the US Government).

    3 The Barclays U.S. Long Term Government Index tracks the performance of long-term US government securities. The US Government Index is comprised of the US Treasury and US Agency Indices. The US Government Index includes Treasuries (public obligations of the US Treasury that have remaining maturities of more than one year) and US agency debentures (publicly issued debt of US Government agencies, quasi-federal corporations and corporate or foreign debt guaranteed by the US Government).

    4 The Bank of America Merrill Lynch Mortgage Master Index tracks the performance of US dollar-denominated fixed rate and hybrid residential mortgage pass-through securities issued by US agencies in the US domestics market having at least $5 billion per generic coupon and $250 million outstanding per generic production year.

    5 The Bank of America Merrill Lynch Corporate Master Index is a market value weighted index comprised of domestic corporate (BBB/Baa rated or better) debt issues.

    6 The Barclays U.S. Aggregate Index represents the securities of the US dollar-denominated, investment grade bond market. The Index provides a measure of the performance of the US dollar-denominated, investment grade bond market, which includes investment grade (must be Baa3/ BBB-or higher using the middle rating of Moody's Investor Service, Inc., Standard & Poor's, and Fitch Rating) government bonds, investment grade corporate bonds, mortgage pass through securities, commercial mortgage backed securities and asset backed securities that are publicly offered for sale in the United States.

    7 The JPMorgan Emerging Markets Bond Index measures total returns of external currency-denominated debt instruments.

    8 The Credit Suisse High Yield Index is designed to mirror the investible universe of the US dollar-denominated high yield debt market.

    9 The Credit Suisse Leveraged Loan is an index designed to mirror the investable universe of the US dollar-denominated leveraged loan market.

    Common Stocks - Common stocks are securities that represent equity ownership in a corporation. Historically rising interest rate environments have typically been associated with periods of economic growth and positive performance for common stocks. As such, common stocks may stand to benefit from rising interest rates, and bond price declines, as investors seek investments with greater total return potential.

    Convertible Securities - Convertible securities are bonds issued by a corporation which are convertible into common stock at a specified ratio. Because of this, convertible securities have some characteristics of both common stocks and bonds. Similar to stocks, convertible securities offer capital appreciation potential. In addition, the hybrid nature of convertible securities makes them tend to be less sensitive to interest rate changes than bonds of comparable credit quality and maturity.

    Bringing together the final two security types listed above, the chart below shows the historical performance of U.S. Treasuries, Convertible Securities and U.S. Common Stocks, based on certain representative benchmark indices, during market cycles when interest rates were rising.

    DatesBank of America Merrill Lynch 10-Year Treasury Index1Bank of America Merrill Lynch All Convertibles, All Qualities Index2S&P 500 Index3
    01/19/1996-07/08/1996-7.7%7.8%7.8%
    09/30/1998-01/31/2000-10.1%58.7%39.4%
    11/07/2001-04/01/2002-7.5%2.0%3.3%
    06/13/2003-08/15/2003-9.9%-1.4%0.5%
    12/31/2008-06/30/2009-8.7%21.0%3.2%
    08/31/2010-03/31/2011-6.0%19.2%27.8%

    Source: Lord Abbett, "A Convertible Counter to Rising Rate Concerns: Bloomberg, 2013. Past performance is not a guarantee of future results. Indexes are unmanaged, do not reflect the deduction of fees or expenses, and are not available for direct investment.

    1 The Bank of America Merrill Lynch 10-Year U.S. Treasury Index is a one-security index comprising the most recently issued 10-year U.S. Treasury note. The index is rebalanced monthly.
    2 The Bank of America Merrill Lynch All Convertibles, All Qualities Index contains issues that have a greater than $50 million aggregate value. The issues are U.S. dollar-denominated, sold into the U.S. market, and publicly traded in the United States.
    3 The S&P 500 Index is widely recognized as the standard for measuring large cap U.S. stock market performance and includes a sampling of leading companies in leading industries.

    ________________________________________________________________________________________________________

    Disclosure: Hennion & Walsh has investments within several of its SmartTrust® Unit Investment Trusts (UITs) consistent with the product strategies cited above. This is for informational purposes only and is not a solicitation to buy or sell.

    Jun 17 9:27 AM | Link | Comment!
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