Market Share Newsletter Vol 2 Issue 11


April 21, 2020

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Last week, we discussed the equity markets looking toward an economic recovery. Today, we will discuss the road to recovery. As the adage goes—take the road less traveled. The economy will be taking a road to recovery, just not one traveled in our lifetimes.
The United States is quickly shifting its focus to the steps needed to reopen the economy after this unprecedented shut down. First, the pandemic is still present, even though the number of cases and deaths are peaking. Second, there are many unknown factors about the virus that will create challenges in reopening. Many brilliant people are working on testing, therapeutic solutions, and ultimately a vaccine that would move the economy ahead rapidly. In the meantime, federal, state, and local governments are planning the best course with limits on testing and therapeutic solutions. As one can imagine, this will not be simple.
Letters of the alphabet can give us a picture of what recovery might look like and can be a guide. A few examples of recovery types follow:
“V” Recovery: Defined by a sharp drop in economic activity followed by a recovery nearly as fast. This was common in previous recessions.
“U” Recovery: The downtrend is sharp and stays at a lower level of economic activity longer before a strong recovery.
“W” Recovery: A sharp drop followed by modest improvement only to have a second drop before recovering. The recession in the early 1980s has been explained this way.
“L” Recovery: As the worst option, the economy drops and stays down for a much longer period and would be more associated with severe recessions and depressions.
As you can see, more than just a few options can explain the road ahead. We are going to add a twist by using the mirror-image of a square root symbol .
This forecast illustrates the economy reopening, a recovery off the bottom, then about halfway to a full recovery comes a period of slow or no growth again. This period could be created by an inability to reopen all areas of the economy or to the extent necessary to grow faster. The pause could also be due to a small but noticeable increase in COVID-19 cases and deaths after seeing those numbers fall. Or the possibility that consumers are hesitant or unable to spend after this social and economic experience.
We are looking at many different indicators as well as economic and corporate data to help make good decisions for your investment portfolios.
Thank you for your continued efforts to help our communities during this crisis. Be safe and be well.
Paul Gifford, CFA
Chief Investment Officer
1st Source Corporation Investment Advisors, Inc.
Erik Clapsaddle, CFA, CFP®
Senior Fixed Income Portfolio Manager
1st Source Corporation Investment Advisors, Inc.
Considerations for your portfolio

The Economy

  • March retail sales declined by 8.7% (which was estimated to be -8%) after a smaller decline of 0.4% in February. The retail sales ‘control group,’ a more precise method of gauging consumer spending that excludes auto dealers, building material retailers, mobile homes, tobacco stores, and office supply stores, increased by 1.7% in March. The purchase of food and beverages had a monthly increase of 25.6%.
  • Although slightly better than expected, initial jobless claims continue to stay at historically high levels as an additional 5.25 million individuals filed for unemployment benefits for the week ending April 11th. This brings the total initial jobless claims for the previous four-week period to slightly over 22 million.
  • Residential housing starts declined by 22.3% in March, the largest decline since March 1984. One bright spot within the data was the increased number of building permits of 4.9% for multifamily housing. Builders may be looking for the economy to reopen and an increase in construction to happen in late spring to early summer.
  • China’s first quarter GDP declined by 6.8% and based on Chinese data and was the largest decrease since 1992. Retail sales for the month of March in China were down approximately 16% in comparison to March 2019. Although the reliability of Chinese economic data is always questionable, we will closely watch their trends.
Economic Data: Recent
  Actual Survey Prior
Retail Sales MoM
-8.7% -8.0% -0.5%
Industrial Production MoM -5.4% -4.0% 0.6%
Capacity Utilization 72.7% 74.0% 77.0%
Housing Starts (annualized)  1216k 1300k 1599k
Economic Data: Upcoming
    Survey Prior
Initial Jobless Claims   4500k 5245k
Markit US Manufacturing PMI   35.0 48.5
New Home Sales 640k 765k
Durable Goods Orders   -12.0% 1.2%


  • First quarter earnings have been mixed thus far as banks across the country, regardless of size, continue to increase credit provisions, the amount set aside for a probable loan loss, due to the coronavirus pandemic. The largest four U.S. banks increased their credit provision by $23.5 billion in the first quarter. Comerica Inc. has been the only major U.S. bank to report a quarterly loss through April 21. They reported a loss of $0.46 per share.
  • Many non-bank corporations have reported very good numbers as Johnson & Johnson, Procter & Gamble, Progressive, and Lockheed Martin well exceeded earnings expectations.
  • The energy sector continues to be in dire straits as the price of energy declined to negative territory. Global demand for oil has plummeted amidst the virus pandemic. President Trump provided some reprieve when he tweeted “I have instructed the Secretary of Energy and Secretary of the Treasury to formulate a plan which will make funds available so these very important companies and jobs will be secured long into the future!”
Equity Index Values and Total Returns
  Value YTD 1-Year
S&P 500 2,823.2 -12.10% -2.86%
Dow Jones Industrial Average 23,650.4 -16.54% -10.40%
NASDAQ Composite 8,560.7 -4.26% 5.85%
Russell 2000 (small-cap index) 1,213.3 -26.96% -22.78%
MSCI EAFE (developed intl.) 1,621.6 -19.60% -12.74%
MSCI Emerging Markets 427.6 -18.95% -15.49%
Federal Reserve's Inflation Target
Source: Bloomberg

Fixed Income

  • The five-year U.S. Treasury note reached its lowest yield on record of 0.2991% as the energy sector slides and expectations move towards a disinflationary cycle (a reduction in the rate of inflation).
  • It has been a stressful month for corporate credit as there have been 341 one-notch downgrades by Moody’s—it took the first nine months of 2019 for 342 downgrades to take place. The total one-notch downgrades by Moody’s year-to-date have already exceeded the total for 2019. The positive has been both the Federal government and the Federal Reserve’s intervention into this market. It appears they will do almost anything to maintain liquidity and survival for those most affected by the pandemic.
Fixed Income Index Yields & Total Returns
  Yield YTD 1-Year
B’berg Barclays Inter Govt./Credit 1.04% 3.67% 8.44%
B’berg Barclays US Aggregate Bond 1.44% 4.80% 11.06%
B’berg Barclays US Corp.High Yield 7.85% -7.93% -2.93%
B’berg Barclays Municipal Bond 1.92% -0.18% 4.52%
Key Interest Rates
  4/20/20 12/31/19 4/23/15
Federal Funds Target Rate 0-0.25% 1.5-1.75% 0-0.25%
3-Month LIBOR 1.11% 1.91% 0.28%
2-Year U.S. Treasury Note 0.2% 1.57% 0.52%
10-Year U.S. Treasury Note 0.61% 1.92%
Prime Rate 3.25% 4.75% 3.25%
fixed income chart

 Source: Bloomberg
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:
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1st Source Corporation Investment Advisors, Inc. is a wholly owned subsidiary of 1st Source Bank.