Market Share Newsletter Vol 2 Issue 16

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June 16, 2020

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Earlier this year, we discussed record highs in the stock market due to corporate earnings and 10+ years of economic expansion. Thoughts of new highs quickly faded as the COVID-19 pandemic took hold. Since March, the macro economic data has been worse than the great recession, albeit improving. After seeing the stock market down 12% in a day, it seemed that we were going to be in more difficult times for a while.
 
S&P chart 
 
What has changed in the last couple of months? Three crucial events have led to the stock market rally and reopening of the economy after the March 23 lows: The COVID-19 crisis easing, Federal Reserve intervention, and the issuance of Federal Government fiscal stimulus bills:
 
COVID-19 easing: The reopening of the global economy has been uneven but has been a net positive. The curve has continued to flatten. The chart below shows the number of COVID-19 cases in the U.S. since the beginning of March.There are new “hot spots” primarily in the southern part of the United States, but nationally the trend is in the right direction. For the stock market to stay close to these levels and the economic recovery to continue, the virus needs to stay manageable.
 
 
The Federal Reserve (Fed) intervention: The Fed took quick and swift action to limit the economic damage from the shutdown. As a result, the balance sheet of the Fed has grown to $7 Trillion. The support provided to the credit markets via lower interest rates and bond purchases has been well received and has kept credit flowing when needed most. Last week Chairman Powell said that they expect short-term interest rates to remain low through 2022. The Fed will do its best to support the economy and markets.
 
Stimulus bills: The Federal Government has passed stimulus bills to support both individuals and businesses. The additional funds committed to unemployment benefits and the payroll protection program are making a difference. We expect another more targeted bill to be passed this summer after both political parties agree on what needs to be accomplished. The annual deficit will soar in response to the pandemic, but the government relief was needed to limit the negative economic impact.

 
 
We will continue to monitor the actions taken by both the Federal Reserve and the Federal Government along with the trends in COVID-19 data as they provide support to both an improving economy and the markets.
 
We’re as dedicated as ever, where being strong, stable and personal will get us through anything together.
 
Paul Gifford, CFA
Chief Investment Officer
Wealth Advisory Services
Investment Management Group
GiffordP@1stsource.com
Erik Clapsaddle, CFA, CFP®
Vice President and Senior Fixed Income Portfolio Manager
Wealth Advisory Services
Investment Management Group
ClapsaddleE@1stsource.com
Considerations for your portfolio

The Economy

  • We continue to see some improvement in the U.S. economy. Over the past few weeks, initial jobless claims have continued to decline and continuing claims (the number of individuals filing at least their second consecutive unemployment claim) are down to 20.9 million from the 24.9 million high that occurred during the week ending May 30. The expectation for continuing claims is to keep declining and report below 20 million this week for the first time since the week ending April 17.
  • Retail sales increased by an incredible 17.7% in May against a forecast of 8.4% and the previous month’s decline of 14.7%. The three largest monthly increases came from clothing (+188%), furniture (+90%), and sporting goods (+88%).
  • The Empire Manufacturing Index, a survey that rates general manufacturing business conditions in the state of New York, improved to being just slightly in negative territory after two months of record declines. Every metric within the index improved and the future business component of the index increased by the largest amount since October 2009.
  • Chinese industrial output increased 4.4% in May relative to last year, but both retail sales and fixed asset investments declined and were below economists’ expectations. More importantly, the Chinese government has implemented a strict lockdown in Beijing as a notable amount of new COVID-19 cases have been reported over the past few days. A possible source is the city’s largest wholesale food market.
  • Data was released June 16 that the University of Oxford led a trial using the anti-inflammatory low-cost drug, Dexamethasone, that helped save the lives of patients that were seriously ill with the coronavirus. The trial included 6,000 patients with 2,000 of them given the actual drug.
Economic Data: Recent
  Actual Survey Prior
Retail Sales Advance MoM
 17.7% 8.4% -14.7%
NAHB Housing Market Index 58 45 37
CPI MoM -0.1% 0.0% -0.8%
Continuing Claims  20,929k 20,000k 21,268k
Economic Data: Upcoming
    Survey Prior
Initial Jobless Claims   1,290k 1,542k
GDP Annualized QoQ (1Q third estimate)   -5.0% -5.0%
New Home Sales 630k 623k
PCE Core Deflator MoM   0.1% -0.4%
 

Equities

  • Over the past few months, equities have continued to rally. Monetary policy (the Fed’s policies), fiscal policy (stimulus checks and programs), some surprisingly positive economic data from the overall decline of COVID-19 cases in the U.S., and the economy reopening are the cause of the rally. Through the close of the markets on Monday, the S&P 500 was only down 4.2% for the year. The NASDAQ, largely weighted to growth and technology, was up 9%.
  • The energy sector continues to deteriorate as demand for oil declines and the shift to renewable energy resources continues. British Petroleum (BP) announced on Monday they will take post-tax charges and write-offs in the range of $13-$17.5 billion this quarter for asset impairment. This means wells and other assets are worth significantly less than they are valued on their balance sheet.
  • Hertz Global Holdings, one of the largest car rental companies, filed for Chapter 11 bankruptcy on May 22. Despite the bankruptcy filing, the company plans to issue $500 million of common shares, yet does not expect equity holders to see a recovery without bondholders being paid in full. They stated that it would require “a significant and rapid (and currently unanticipated) improvement in business conditions.”
Equity Index Values and Total Returns
  Value YTD 1-Year
S&P 500 3,066.6 -4.19% 11.06%
Dow Jones Industrial Average 25,763.2 -8.64% 4.01%
NASDAQ Composite 9,726.0 8.98% 28.77%
Russell 2000 (small-cap index) 1,419.6 -14.36% -5.38%
MSCI EAFE (developed intl.) 1,750.5 -12.67% -3.65%
MSCI Emerging Markets 461.1 -12.59% -2.43%

Fixed Income

  • The Fed announced they will start buying corporate bonds today as part of their Secondary Market Corporate Credit Facility. Their goal is to buy a broad and diversified market index of U.S. corporate bonds. They stated the index will be “made up of all the bonds in the secondary market that have been issued by U.S. companies that satisfy the facility’s minimum rating, maximum maturity, and other criteria.”
  • President Trump’s administration is reportedly preparing a $1 trillion infrastructure plan. It would be focused on mostly traditional infrastructure work like roads and bridges, but could also include wireless infrastructure. An infrastructure plan would be positive for the municipal bond market as it would increase payrolls and ultimately consumer spending.
Fixed Income Index Yields & Total Returns
  Yield YTD 1-Year
B’berg Barclays Inter Govt./Credit 0.83% 4.87% 7.36%
B’berg Barclays US Aggregate Bond 1.32% 5.73% 9.27%
B’berg Barclays US Corp.High Yield 6.67% -3.15% 1.70%
B’berg Barclays Municipal Bond 1.53% 1.88% 4.55%
Key Interest Rates
  6/15/20 12/31/19 6/18/15
Federal Funds Target Rate 0-0.25% 1.5-1.75% 0-0.25%
3-Month LIBOR 0.32% 1.91% 0.29%
2-Year U.S. Treasury Note 0.19% 1.57% 0.69%
10-Year U.S. Treasury Note 0.72% 1.92%
2.31%
Prime Rate 3.25% 4.75% 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

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