Market Share Newsletter Vol 2 Issue 17

June 30, 2020

Your 1st Source for market information

As the calendar moves to the third quarter, it has us wondering if we have moved to the next chapter for markets and the pandemic. We tend to think we are in a new period for both. The pandemic is now impacting more people who are much younger than earlier cases and states are more open relative to three months ago. The U.S. equity markets have plummeted and rallied back. So, what does the next chapter have in store?

This next chapter could provide more conflicting headlines and paths for both topics as they are closely connected. It seems unlikely that there will be another national shutdown. Instead, local or regional closures seem more likely (such as Houston and Miami closing their beaches for the July 4th weekend). The stock market has had a strong recovery, yet it faces poor economic data for at least a couple more quarters and potentially well into 2021. Thus, a range-bound market might evolve as it looks forward. Intervention from the Federal Reserve and Federal Government is likely to continue, but at a less significant and slower pace. All of this could have consequential impacts to the positive or negative.

The alignment of investment markets should be revealed when the earnings-season begins during the second week of July. The actual earnings results, which for many will be the worst in years, will be overshadowed by the guidance of what companies see ahead.

Topics that have been hovering under-the-radar are the residential and commercial mortgage-backed markets. Both have seen large delinquencies in mortgage and rent payments over the past three months. Residential housing (while new sales and refinance are helping) reports nearly 30% of people either missed or made partial payments in May. Additionally, many moratoriums on evictions and foreclosures will end over the next few weeks and months.

As we are currently in a presidential election season, political party ideology will also start to weigh on the markets and certain sectors within the equity markets. During the coming months, this will garner more attention from investors as the next potential driver of the markets. It is common to have meaningful reactions to proposed legislation or ideas by either party, but the actual implementation would still be many months away. Thus, patience will be required.

Chapter one of the pandemic was painful. Chapter two will bring more challenges and a very uneven recovery. We stand steady to help you work through this.

Paul Gifford, CFA
Chief Investment Officer
Wealth Advisory Services
Investment Management Group
GiffordP@1stsource.com

Jon Cisna CFP^®
Officer and Portfolio Manager
Wealth Advisory Services
Investment Management Group
CisnaJ@1stsource.com

Considerations for your portfolio

The Economy

The number of individuals filing their second or more consecutive unemployment claim fell to below 20 million for the first time since late April. Initial jobless claims; however, were larger than expected but still a decrease of 60,000 from the week prior.
Activity data released last week, as measured by durable good orders, increased by 15.8% month-over-month. This is a sign that business investment in the second quarter may not be as weak as initially feared. Aircraft orders contributed to the bulk of the gain. Motor vehicle orders also increased 27.5% from the prior month but are still down around 40% from pre-pandemic levels.
On Monday, Gilead Sciences announced the pricing for its coronavirus treatment, Remdesivir. The company said they will charge government programs $390/vial and U.S. private insurance companies $520/vial.

Economic Data: Recent
	Actual	Survey	Prior
GDP Annualized QoQ	-5.0%	-5.0%	-5.0%
U. of Mich. Sentiment	78.1	79.2	78.9
Durable Goods Orders	15.8%	10.5%	18.1%
Continuing Claims	19,522k	20,000k	20,289k
Economic Data: Upcoming
		Survey	Prior
Initial Jobless Claims		1,350k	1,480k
Markit US Manufacturing PMI		49.7	43.1
Change in Nonfarm Payrolls		3074k	3094k
Unemployment Rate		12.5%	13.3%

Equities

The Federal Reserve released the results of its annual stress test on banks last Thursday. The Fed will limit dividend distributions to second-quarter levels or the quarterly average of income made over the last four quarters, whichever is less. Yesterday, almost all of the largest U.S. banks announced that they performed well enough to maintain their current dividend. However, Wells Fargo is expected to reduce its quarterly payout. The Fed will also require the big banks to suspend share repurchases during the third quarter of this year.
The Federal Aviation Administration began re-certification flights of the Boeing 737 Max yesterday after the planes have been grounded worldwide for more than a year. This is a key step for returning 737 Max planes to service. Boeing traded up more than 14% on that news.
Stocks are looking to close out a strong second quarter, continuing to recover from the lows in late March. The S&P 500 is up 18.7% quarter-to-date, led by large-cap growth stocks Apple Inc. and Amazon which are up 42.7% and 37.5% respectively in the second quarter as of June 29. The quarterly return would be the best since 1998.

Equity Index Values and Total Returns
	Value	YTD	1-Year
S&P 500	3,053.2	-4.56%	6.27%
Dow Jones Industrial Average	25,595.8	-9.20%	-1.51%
NASDAQ Composite	9,874.2	10.66%	25.59%
Russell 2000 (small-cap index)	1,421.2	-14.21%	-7.82%
MSCI EAFE (developed intl.)	1,775.5	-11.28%	-4.90%
MSCI Emerging Markets	475.3	-9.91%	-3.52%

Source: Bloomberg

Fixed Income

The rise in confirmed new coronavirus cases across multiple states last week had investors seeking safe-haven assets like U.S. Treasuries and gold. As a result, the yield on the 10-year Treasury is back down to 0.62%, its lowest level since May 14.
Investment-grade municipal bond’s second-quarter performance has moved the asset class back into positive territory for the year after the declines in March. The high yield sector, however, has seen a much slower recovery from the lows.

Fixed Income Index Yields & Total Returns
	Yield	YTD	1-Year
B’berg Barclays Inter Govt./Credit	0.74%	5.27%	7.11%
B’berg Barclays US Aggregate Bond	1.26%	6.14%	8.74%
B’berg Barclays US Corp.High Yield	6.89%	-3.86%	-0.03%
B’berg Barclays Municipal Bond	1.50%	2.06%	4.43%
Key Interest Rates
	6/29/20	12/31/19	7/2/15
Federal Funds Target Rate	0-0.25%	1.5-1.75%	0-0.25%
3-Month LIBOR	0.31%	1.91%	0.28%
2-Year U.S. Treasury Note	0.15%	1.57%	0.64%
10-Year U.S. Treasury Note	0.62%	1.92%	2.35%
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:

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