Market Share Newsletter Vol 2 Issue 19


July 28, 2020

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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
Erik Clapsaddle, CFA, CFP®
Vice President and Senior Fixed Income Portfolio Manager
Wealth Advisory Services
Investment Management Group
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 


  • 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%
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
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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