New Sector Joining S&P 500 Index – Equity Markets Update

Domestic stock market indices closed at new highs in August as earnings and economic data helped propel equity prices. Even with recent new highs, volume remains relatively low. Some market analysts believe that the increased regulation of banks and brokerage firms has taken a toll on trading. The use of various derivatives have been discouraged by regulators, which have in the past added activity and volume to equity markets.

The positive performance of the high-yield bond sector so far this year is indicative of improving credit characteristics for smaller company stocks. Since most smaller companies tend to rely more on debt for cash flow, a continued low rate environment has been beneficial for earnings and growth.

The S&P 500 index is adding a new sector to its mix. REITs will become part of the S&P 500 compilation on September 16^th, making it the 11^th sector. The growth and capital representation of REITs in the markets will now formally allow REITs to sit along side the other 10 sectors as a standalone class. REITs have been part of the financial sector for years, but now have earned their own designated category.

REITs have become increasingly popular with investors as their management teams have become more professional and the companies have become larger. There are two main types of REITs, equity REITs and mortgage REITs. The newly added sector will only include equity REITs that own physical property such as apartments, office buildings, industrial buildings, malls, hotels, cellular towers, data storage facilities, self-storage facilities, movie theaters, timber and even prisons.

REITs currently constitute about 3% of the S&P 500, so it is estimated that the newly created 11^th sector will make up about 3% of the total index.

Sector weightings comprising the S&P 500 vary as the economy shifts and industries evolve. Technology currently encompasses the largest portion of the S&P 500 at 21%, yet made up as much as 35% in 2000 during the height of the technology boom. (Sources: S&P, Bloomberg, Global Industry Classification Standard (GICS))

Continued Low Rates – Global Fixed Income Update

Short-term U.S. bonds have been rising slowly as long-term bond yields have been dropping, leading to a “flattening of the yield curve.” Such a dynamic helps bond analysts and economists to determine if there’s an economic slowdown or even inflation on the horizon.

The Bank of England launched its biggest stimulus package since the financial crisis with its first rate cut in more than seven years and a new £70 billion bond-buying program. The Bank of England is forecasting that unemployment will rise, housing prices will fall and inflation will go up. The Bank of England is joining central banks in Japan and the eurozone in buying large amounts of sovereign bonds, as global benchmark yields continue to descend to new lows, exacerbating the matching of future long-term liabilities for pension plans and insurance companies. The amount of global negative yielding debt has now risen to $12.64 trillion, and is dominated by European and Japanese bonds. The Fed continues to be at odds with other central banks worldwide, as lower rates and stimulus efforts are underway in Europe and Japan, while the Fed prepares to tighten in the United States. (Sources: Bank of England, Eurostat, U.S. Treasury)

What An Olympic Gold Medal Is Actually Worth – Market Fact

Of the 78 countries that won medals in Rio, the U.S. won more Olympic medals than any other country that participated with a total of 121 medals. Of those, 46 were gold, 37 silver, and 38 bronze.

Surprisingly enough, U.S. Olympic athletes receive no formal financial support from the U.S. government. Instead, financial assistance is provided by the U.S. Olympic Committee, which is a federally chartered nonprofit entity receiving no federal funding whatsoever. Conversely, almost every other country that participated in the Rio Olympics offered government sponsored financial support. Countries such as Canada, China and the U.K. have appointed sports ministers that have dedicated resources available for Olympic athletes. Uniquely, Team USA athletes rely on the generosity of the American people to achieve their Olympic dreams. In addition to receiving a medal, the U.S. Olympic Committee also awards a cash prize along with each metal. Athletes are awarded $25,000 for gold metals, $15,000 for silver, and $10,000 for bronze. What’s interesting is that the cash prizes are worth much more than the medals themselves. Based on recent commodity prices, the value of a gold medal is about $564, silver is roughly $305, and bronze is barely worth anything. (Sources: U.S. Olympic Committee)

Credit Card Debt On The Rise – Consumer Finance

U.S. banks have ramped up lending to consumers through credit cards at the fastest pace since 2007. The industry has accumulated an additional $18 billion of credit card loans and other types of revolving credit in the past three months.

Data released by the Federal Reserve shows that the U.S. banking industry has seen credit card and other revolving loans rise at a annual rate of 7.6% in the second quarter of 2016, to $685 billion. The credit card business remains among the most profitable in banking as banks can charge much higher interest rates than other loan types, with average credit card rates between 12% and 14%.

Yet as credit card debt levels have risen, so have reserves for losses as banks anticipate delinquencies to rise. Within the past year U.S. banks have piled on about $54 billion worth of loans to consumers through credit cards, according to Federal Reserve data. Financially savvy consumers that pay their balances down each month avoid hefty interest charges, but those that don’t, known as “revolvers,” pay average rates of between 12% to 14% and significantly more if they are considered higher risk. Seven years since the recession ended, consumers who were hit hard during the financial crisis have found their credit scores improving. Bankers attribute a rise in credit card issuance to rising home prices and low unemployment. Banks are also lending more since one of the most important drivers of their profits are net interest margins, the difference between returns on assets and the cost of funds, which remain near their lowest levels in decades. The average credit limit per card for a subprime borrower is about $2,300, compared with about $11,500 for the safest customers.

Source: Federal Reserve