Market Share Newsletter Vol 2 Issue 12

April 28, 2020

Your 1st Source for market information

The Federal Reserve and federal government have implemented many steps to support the economy during this expansive shut down. As they lead our states and cities, governors and mayors are making decisions on when and how to reopen the economy, yet many have experienced considerably different effects from the virus. There are parts of the country that still face challenges with COVID-19 and will be slow to re-open. Other states like Georgia and South Carolina are opening businesses, such as salons and tattoo parlors, that operate with little or no physical distancing. Even as officials have opened some states, local businesses are making their own decisions whether to open or remain closed. As we wrote last week, we expect a rebound in economic activity, followed by a slower period of growth—as opposed to a traditional “V” shaped recovery. Even though businesses and organizations are making decisions to reopen, it will ultimately be the American consumer and the COVID-19 virus that determines the speed and success of the economic recovery.

The focus on the consumer is important in any economic recovery. U.S. consumer spending is responsible for approximately 70% of our gross domestic product (GDP). Consumer spending in the U.S. comprises a greater portion of GDP than in other developed economies. The past five weeks have not been good for consumers, as over 26 million have filed for unemployment insurance. Many of those have been furloughed versus laid off. Furloughed employees typically return to their jobs and continue to accrue benefits during the time off. Layoffs are permanent reductions of employment by a company. Furloughs can last weeks to months but it allows employers to quickly increase business as those furloughed are able to return to work much quicker. The difference is important at this time, although to those impacted it is of little solace.

The first step for consumers is to see the furloughs ending, then there should be some improvement, albeit uneven, over the next few weeks. As consumers go back to work, they will likely work to replenish their depleted bank accounts before increasing their spending. The second step for consumers (even if they have earnings) is to decide if they are ready to go out. There appears to be a portion of consumers that will wait for much better news on COVID-19 before they venture out. The mindset of consumers will be closely followed as part of the recovery story.

Consumer behavior will be one of the factors that investors will watch in the coming months. While the S&P 500 has risen nicely since March 23, there will likely be continued volatility and bigger drops in the equity markets. As the country reopens, it will take two to four weeks to determine if the number of COVID-19 cases increases. If cases do increase, at what rate? What will the governments’ response be and how will it stress our healthcare capacity? As you can see, there are many issues that might keep the economy from a robust recovery.

As we monitor these developments, we are cautious in buying large positions in equities or equity funds. We have done some limited buying over the past couple of weeks as we analyze and wait to see more developments.

While we are making sure to be physically distant to keep us all safe, it doesn’t mean we are distant in any other way. Your 1st Source teams continue to be here for you. Whether it be assisting you with the payroll protection program, or just checking in with a call or email, we want to know how you are doing and how we can help. Please continue to let us know your questions and concerns, we are in this together.

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

Total auto sales in the United States are expected to decline to an annual pace of 6.5 million during the month of April (16.8 million in February). The slowest pace of auto sales on record is presently 8.8 million from December 1981. We expect significant pent-up demand for auto buying and possibly a government program reminiscent to the Car Allowance Rebate System in 2009 when the economy can fully reopen.
The Dallas Fed Manufacturing index declined to its lowest level on record in April. Despite the index reporting a slightly better than expected result, virtually every component of the index was well into negative territory as the energy industry has taken a major toll on manufacturing in Texas.
Initial jobless claims have now exceeded 26 million over the past five weeks for the week ending April 18. The forecasted rate of unemployment is 16% as of the end of this month.
Despite some of the bad news in U.S. meat packing plants and the concerns over supply chains, both corn and soybeans have been planted and have emerged at a faster rate than last year based on a recent USDA report. The same can be stated for most major U.S. crop progress through April 26.

Economic Data: Recent
	Actual	Survey	Prior
Initial Jobless Claims	4427k	4500k	5245k
Markit US Manufacturing PMI	36.9	35.0	48.5
New Home Sales	627k	642k	765k
Durable Goods Orders	-14.4%	-12.0%	1.2%
Economic Data: Upcoming
		Survey	Prior
Initial Jobless Claims		3500k	4427k
GDP Annualized QoQ (first quarter)		-3.9%	2.1%
Personal Consumption (first quarter)		-3.5%	1.8%
Total Vehicle Sales		6.50m	11.37m

Equities

A diverse group of companies continue to report quarterly results with very mixed numbers. Pepsi beat earnings estimates by 3.9% and they increased by 10.3% over the first quarter in 2019 (YoY). Sales also beat estimates by 5.2% and increased YoY by 7.7%. Caterpillar reported very weak quarterly results but stated China has “definitely” recovered from their economic lows in February.
According to the Stoxx Europe 600 index, stocks in Europe reached their highest level since March 11. A few large companies in Europe have reported better than expected quarterly results and the spread of the coronavirus has continued to slow throughout the continent. The year-to-date performance has been led by health care, technology, and personal and household goods.

Equity Index Values and Total Returns
	Value	YTD	1-Year
S&P 500	2,878.5	-10.36%	0.78%
Dow Jones Industrial Average	24,133.8	-14.81%	-5.86%
NASDAQ Composite	8,730.2	-2.36%	8.88%
Russell 2000 (small-cap index)	1,281.9	-22.83%	-16.18%
MSCI EAFE (developed intl.)	1,622.6	-19.44%	-12.44%
MSCI Emerging Markets	425.8	-19.28%	-14.73%

Source: Bloomberg

Fixed Income

High yield bonds rose to their highest yield of 8.41% in more than two weeks as the energy sector continues its monumental decline. Junk-bond issuers have raised capital through the debt markets the past few weeks as Delta borrowed $3.5 billion, Carnival Cruise $6 billion, Ford $8 billion, and The Gap borrowed $2.25 billion.
The Bank of Japan (BOJ) announced on Monday that they will now buy an unlimited amount of bonds to keep borrowing costs low—the buying will include corporate bonds and commercial paper. The BOJ’s goal is to keep long-term interest rates around its 0% target.

Fixed Income Index Yields & Total Returns
	Yield	YTD	1-Year
B’berg Barclays Inter Govt./Credit	1.06%	3.55%	7.95%
B’berg Barclays US Aggregate Bond	1.43%	4.69%	10.54%
B’berg Barclays US Corp.High Yield	8.41%	-9.60%	-4.89%
B’berg Barclays Municipal Bond	2.12%	-1.20%	2.95%
Key Interest Rates
	4/27/20	12/31/19	4/30/15
Federal Funds Target Rate	0-0.25%	1.5-1.75%	0-0.25%
3-Month LIBOR	0.89%	1.91%	0.28%
2-Year U.S. Treasury Note	0.22%	1.57%	0.56%
10-Year U.S. Treasury Note	0.66%	1.92%	2%
Prime Rate	3.25%	4.75%	3.25%

Source: Bloomberg

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.