Market Share Newsletter Vol 2 Issue 19
July 28, 2020
Your 1st Source for market information
As the country awaits another stimulus package from Congress,
concerns raise over the amount of money borrowed to help ease the economic
challenges of the pandemic. During the election season, marginal and corporate
tax rates are an important issue as presidential candidates present their
economic and social plans. Likewise, in the last several weeks, we have
experienced a growing number of questions about taxes, investments and stock
market returns.
Federal income tax rates are shown in the first chart and it is
clear that the top individual income tax rates have varied greatly over the 107-year
history. The second chart illustrates the fluctuation of corporate tax rates
over the past 100 years. Both saw modest changes from 1980 to 2017. The Tax Cut
and Jobs Act (TCJA) was passed late in 2017 and implemented the largest drop in
U.S. corporate income tax rates in 35 years.
Taxes impact decisions and expectations for corporations,
business owners, employees, investors, and local and national government
entities alike. As we manage portfolios, taxes and tax rates are variables in
the decision-making process. We actively manage accounts with the goal of
providing the best after-tax returns for investors. Changes in tax rates will
change return expectations for a variety of investments, which will impact
investment decisions as well. However, tax rates are not 100% so they cannot be
the sole decision-making factor. History shows that entities and individuals will
ultimately adjust to changes in taxes over time.
Our third chart joins the individual and corporate tax rates
with historical returns for the S&P 500. The chart below shows both good
and bad investment returns in years that tax rates rise or fall. A recent
example is in 2018 (the first year of TCJA) when the S&P 500 was down 4.4%.
The returns are annual and as such do not show some of the short-term
volatility in stock prices, which you would expect with changes that impact so
many aspects of the economy.
Our team has been working on a list of strategies to implement
if tax rates change. There are still many months until any changes will be
presented to Congress, if passed. We will continue monitor both individual and
corporate tax rates as we do other factors in the investment decision process. The
state of the economy, earnings, employment and the pandemic will be the most important
factors affecting investment returns in the meantime.
We appreciate all of the questions we receive from our
interactions with you. Thank you for the opportunity to serve as a trusted
advisor.
Paul Gifford, CFA
Chief Investment Officer
Wealth Advisory Services
Investment Management Group
GiffordP@1stsource.com
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
Vice President and Senior Fixed Income Portfolio Manager
Wealth Advisory Services
Investment Management Group
ClapsaddleE@1stsource.com
Considerations for your portfolio
The Economy
- The Health, Economic Assistance, Liability and Schools (HEALS) Act was recently announced by a group of Republican senators that would include a second stimulus check of up to $1,200 per individual and $500 for each dependent. The bill also includes $100 billion for school reopening and an extra $200 per week of unemployment insurance to qualified filers. This is down from the extra $600 benefit that expires July 31. The bill will continue to move through Congress and may likely grow from the current $1 trillion.
- New home sales in June exceeded expectations by almost 11% and increased by nearly 14% from the previous month to an annual pace of 776,000. This was the highest annual rate of home sales since July 2007. The Northeast region is the smallest contributor to new home sales, but it did experience the largest MoM increase of 90%.
- The price of gold hit an all-time high on July 27 of $1,981 per ounce. Interest rates largely below 1%, $15+ trillion in negative-yielding bonds, fear of the continued economic recession, stress due to the global pandemic, and the substantial weakening of the U.S. dollar are all contributing conditions.
- China reported economic growth of 3.2% YoY in the second quarter after their GDP declined by 6.8% in the first quarter. Retail sales in China declined by 1.8% in June but were forecasted to slightly increase. A large survey of economists sourced by Bloomberg is forecasting that the Chinese economy will expand by 5.2% in the third quarter.
| Economic Data: Recent | |||
|---|---|---|---|
| Actual | Survey | Prior | |
|
Initial Jobless Claims
|
1,416k | 1,300k | 1,307k |
| U. of Mich. Sentiment | 73.2 | 79.0 | 78.1 |
| Durable Goods Orders | 7.3% | 6.9% | 15.1% |
| Retail Sales Advance MoM | 7.5% | 5.0% | 18.2% |
| Economic Data: Upcoming | |||
| Survey | Prior | ||
| Change in Nonfarm Payrolls | 2,000k | 4,800k | |
| FOMC Rate Decision | 0.25% | 0.25% | |
| GDP Annualized QoQ (2Q, first announcement) | -34.8% | -5.0% | |
| ISM Manufacturing | 53.6 | 52.6 | |
Equities
- This is an important week for earnings from the technology, communication, and industrial sectors. This Wednesday kicks into high gear with Facebook, Boeing, PayPal, and General Electric reporting. Thursday and Friday will conclude the week with reports from UPS, Amazon, Apple, Alphabet, Eli Lilly, ExxonMobil, and Caterpillar.
- Second quarter revenue and earnings reports for companies in the S&P 500 have exceeded expectations (161 of 497 companies reported to date). These expectations were scaled back due to the global pandemic and the more telling sign has been the 8.4% decline in sales, and the 16% decline in earnings relative to the first quarter.
- Emerging market equities started the second half of the year with a strong rally as the MSCI Emerging Markets index was up 8.4% through the first 27 days of July. The Shanghai Composite Index, in U.S. dollars, was up approximately 9.5% over the same time frame.
- Data from Bloomberg Intelligence and Fiserv showed that sales from grocers, which included Walmart, Costco, and Kroger, increased by 10.7% in the first half of July. Despite transactions falling by 7.5%, there was a 19.7% increase in the average amount spent on each shopping transaction.
| Equity Index Values and Total Returns | |||
|---|---|---|---|
| Value | YTD | 1-Year | |
| S&P 500 | 3,239.4 | 1.36% | 9.18% |
| Dow Jones Industrial Average | 26,584.8 | -5.59% | 0.19% |
| NASDAQ Composite | 10,536.3 | 18.11% | 27.89% |
| Russell 2000 (small-cap index) | 1,484.7 | -10.33% | -4.60% |
| MSCI EAFE (developed intl.) | 1,876.1 | -6.14% | 0.96% |
| MSCI Emerging Markets | 515.6 | -2.27% | 4.81% |
Source: Bloomberg
Fixed Income, Commodities and Currencies
- Mortgage rates in the United States fell below 3% for the first time ever as the 30-year fixed-rate mortgage moved to 2.98% on July 16 (slightly up since then). The 15-year mortgage rate declined to 2.48% on the same date using rates from Freddie Mac. An example of this impact would be if $250,000 was borrowed one year ago, the mortgage payment (principal and interest) would be $1,166; if borrowing the same amount at today’s rate, the payment would be $1,051.
- Some major new issuance in corporate bonds have hit the market as AT&T has issued $11 billion in new debt to pay down their current debt (the newly issued debt has much lower interest rates). A few other major borrowers on Monday were Kinder Morgan, UBS Group, and Prosus N.V. (a Dutch media company).
| Fixed Income Index Yields & Total Returns | |||
|---|---|---|---|
| Yield | YTD | 1-Year | |
| B’berg Barclays Inter Govt./Credit | 0.67% | 5.76% | 7.74% |
| B’berg Barclays US Aggregate Bond | 1.15% | 7.33% | 9.98% |
| B’berg Barclays US Corp.High Yield | 5.57% | -0.02% | 3.39% |
| B’berg Barclays Municipal Bond | 1.26% | 3.46% | 5.13% |
| Key Interest Rates | |||
| 7/27/20 | 12/31/19 | 7/30/15 | |
| Federal Funds Target Rate | 0-0.25% | 1.5-1.75% | 0-0.25% |
| 3-Month LIBOR | 0.25% | 1.91% | 0.29% |
| 2-Year U.S. Treasury Note | 0.15% | 1.57% | 0.67% |
| 10-Year U.S. Treasury Note | 0.62% | 1.92% |
2.25%
|
| Prime Rate | 3.25% | 4.75% | 3.25% |
| Commodities & Currency | |||
| 7/27/20 | 12/31/19 | YoY Change | |
| Gold | 1,955.4 | 1,550.6 | 34.13% |
| Crude Oil | 41.6 | 61.1 | -26.65% |
| Natural Gas | 1.73 | 2.19 | -17.57% |
| Corn | 325.0 | 387.8 | -22.44% |
| Soybean | 906.5 | 943.0 | 1.59% |
| USD:Euro | 1.175 | 1.121 | 5.23% |
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:
Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.
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
Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.