Market Share Newsletter Vol 1 Issue 3

Issue #3: September 18, 2019 

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Beyond the headlines of trade wars and inverted yield curves, a couple of newsworthy records were set over the past quarter:
  • The S&P 500 index closed at an all-time high of 3,025.86 points
  • The 30-year treasury yield hit an all-time low of 1.91 points
Historically, there has been a low to slightly negative correlation between the returns on stocks and bonds. For the past decade, unconventional monetary policy efforts to increase money supply and encourage lending and investment around the world seems to have altered that relationship. Since 2009, stock market highs and record low yields have occurred a couple of times, most recently in 2015.
 
In upcoming emails and communications, we will continue to share our thoughts on what this means for the markets going forward. We hope you continue to find value in this information.
 
We appreciate the opportunity to work with you!
 
Paul Gifford, CFA
Chief Investment Officer
1st Source Corporation Investment Advisors, Inc.
GiffordP@1stsource.com
Erik Clapsaddle, CFA, CFP®
Senior Fixed Income Portfolio Manager
1st Source Corporation Investment Advisors, Inc.
ClapsaddleE@1stsource.com
Considerations for your portfolio

The Economy

  • Oil prices soared approximately 20% this weekend (momentarily above $71/barrel) in response to an attack on Saudi Arabia’s oil facilities. The attack was facilitated by rebels within the region that dropped bombs from inexpensive drones that were flown long distances.
  • Approximately 50,000 United Auto Workers at General Motors are participating in a strike this week. Union leaders resumed negotiations on Monday regarding wages and health care benefits. Based on early readings, it appears that this will have little impact on the economy—if an agreement can be reached in the short term.
  • Retail sales increased by 0.4% month over month in August, better than the expected 0.2%, and July’s retail sales were revised even higher than the previous result. There was some softness inside the number, as less than half of the retail categories increased, and non-store retailers (i.e. Amazon) primarily drove the increase.
  • China’s industrial production slowed to its lowest level since February 2002—the economy also slowed in the second quarter to its slowest pace in almost three decades. China, which has the world’s second largest economy, has slowed on the back of the trade war with the U.S. and the global slowdown.
Economic Data: Recent
  Actual Survey Prior
ISM Manufacturing 49.1% 51.3% 51.2%
ADP Employment Change    195k 148k 142k
Change in Nonfarm Payrolls 130k 160k 159k
Retail Sales Advance MoM 0.4% 0.2% 0.8%
Economic Data: Upcoming
    Survey Prior
Housing Starts   1,250k 1,191k
FOMC Rate Decision   1.75-2.0% 2.0-2.25%
Markit US Manufacturing PMI 50.2 50.3
PCE Core Deflator   0.2% 0.2%
Federal Reserve's Inflation Target

Equities

  • The return on the S&P 500 over the past two weeks has been driven by more value-based sectors, as both the energy and financial sectors returned approximately 6.3% and 6.0%.
  • Small cap stocks have returned almost double the S&P 500 since August 30, having performed poorly prior to that date. Based on Bloomberg data, investors have been apportioning the most money into small-cap exchange-traded funds (ETFs) since November 2016.
  • All companies within the S&P 500 have reported their second quarter results. Sales/revenue surprised to the upside by 0.5% and earnings surprised by 4.8%, based on Bloomberg data. The largest contributors to the earnings surprise came from health care and technology.
Equity Index Values and Total Returns
  Value YTD 1-Year
S&P 500 3,007.4 21.73% 5.24%
Dow Jones Industrial Average 27,219.5 18.83% 6.06%
NASDAQ Composite 8,176.7 24.22% 2.83%
Russell 2000 (small-cap index) 1,578.1 18.14% -6.64%
MSCI EAFE (developed intl.) 1,919.6 14.92% 2.64%
MSCI Emerging Markets 483.2 8.46% 2.38%
Federal Reserve's Inflation Target

Fixed Income

  • The Federal Reserve will meet this coming Wednesday to decide if they want to cut interest rates for the second time this year. The market is currently pricing a 90% chance that they cut by 25 basis points, which would bring their target rate to a range of 1.75%-2.0%.
  • Interest rates rose rapidly for the trading week ending September 13. The ten-year U.S. treasury note rose 33 basis points during the week—a 21% increase in its yield. As an asset class, government bond yields recorded their largest gain in over six years. Most of the movement was due to positive economic data, both domestically and outside of the U.S.
  • The European Central Bank cut their benchmark rate even further into negative territory on September 12, as they changed their rate from -0.40% to -0.50%. There needs to be a limit to the easing of monetary policy within the Eurozone, but it seems their central bank does not believe they have reached that mark.
Fixed Income Index Yields & Total Returns
  Yield YTD 1-Year
B’berg Barclays Inter Govt./Credit 2.13% 5.47% 7.21%
B’berg Barclays US Aggregate Bond 2.46% 7.13% 8.78%
B’berg Barclays US Corp.High Yield 5.69% 11.51% 6.71%
B’berg Barclays Municipal Bond 1.92% 6.27% 7.86%
Key Interest Rates
  9/14/19 12/31/18 9/18/14
Federal Funds Target Rate 2-2.25% 2.25-2.5% 0-0.25%
3-Month LIBOR 2.14% 2.81% 0.23%
2-Year U.S. Treasury Note 1.8% 2.49% 0.54%
10-Year U.S. Treasury Note 1.9% 2.68% 2.59%
Prime Rate 5.25% 5.50% 3.25%
DISCLOSURES
The information in this email was prepared from sources believed to be reliable; it is for informational purposes only and does not provide recommendations based on the investment objectives, financial situation, or needs of any individual or entity. Past performance is no guarantee of future results. A risk of loss is involved with investments in stock markets. The information in this email is not a comprehensive statement of the matters discussed. Unless specifically indicated otherwise, this email is not an offer to sell or a solicitation of any investment products or other financial product or service or a confirmation of any transaction. If you have questions about the information in this email, please contact your trust administrator at 1st Source Bank Wealth Advisory Services or call 800 882-6935. Investment and Insurance products are:
  • Not insured by the FDIC or any Federal Government Agency
  • Not a deposit or other obligation of, or guaranteed by, the Bank or any bank affiliate
  • Subject to investment risks, including possible loss of the principal amount invested
1st Source Corporation Investment Advisors, Inc. is a wholly owned subsidiary of 1st Source Bank.