Market Share Newsletter Vol 2 Issue 2

Volume 2 Issue #1: January 21, 2020

January 21, 2020

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Your 1st Source for market information

Some say that signs are all around us. As such, our local classic rock radio station frequently plays the song “Signs,” written and produced by the Five Man Electrical Band in 1970. You may recognize the chorus, that goes something like this:giving tuesday logo

“Sign, sign, everywhere a sign
Blockin' out the scenery, breakin' my mind
Do this, don't do that, can't you read the sign?”

This got us thinking of all the signs we see in life—and when investing. These signs can be very subtle or even flashing. Today’s signs are helping the equity markets start strong. Holiday sales were good, corporate profitability thus far has been good and the U.S. and China signed phase one of a trade deal. These signs are all green. We continue to see caution or yellow signs in areas of geopolitical concern, increasing debt levels and our current place in the business cycle. Know that your investment team is watching the signs and ready to take necessary steps along the road.

Thank you for taking time to review The Market Share, we appreciate the opportunity to help you read the signs!

 
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

  • The United States and China signed a “Phase One” deal on January 15. This will halt the trade war and strengthen laws protecting U.S. intellectual property.
  • Based on data from the U.S. Commerce Department, retail sales in the United States in 2019 increased by 5.8% year-over-year (YoY). This was driven by non-store retailers, specifically digital retailers, with sales growth of 13.1% in 2019, while department stores declined 5.5%.
  • This past December, the underemployment rate (U-6) in the United States dropped to an all-time low of 6.7%, since tracking began in January 1994. The underemployment rate is much broader and includes a greater pool of individuals that are not in their ideal employment situation (i.e. part-time for economic reasons). The headline unemployment rate remained static at 3.5% in December.
  • Housing starts in the U.S. rose to their highest level in 13 years, which was attributed to “unseasonably warm weather.” The data confirmed that single-family housing starts increased by 56.5% in the Midwest for the month of December, while they declined in the Northeast and West regions of the U.S.
  • Investor confidence in Germany vastly improved this month, raising to a four-year high. However, Bundesbank, an acting central bank for Germany, reported Monday that manufacturing could bottom out at the beginning of this year.
Economic Data: Recent
  Actual Survey Prior
Change in Nonfarm Payrolls  
145k 160k 266k
Consumer Price Index MoM 0.2% 0.3% 0.3%
University of Michigan Sentiment 99.1 99.3 99.3
Retail Sales Advance MoM 0.3% 0.3% 0.2%
Economic Data: Upcoming
    Survey Prior
FOMC Rate Decision (upper bound)   1.75% 1.75%
GDP Annualized 4Q (first release)   2.1% 2.1%
Conf. Board Consumer Confidence 128.1 126.5
Durable Goods Orders   1.0% -2.1%

Equities

  • Three of the four largest U.S. banks (JPMorgan Chase, Bank of America and Citi) reported strong fourth quarter earnings. All experienced strong growth in their fixed income trading businesses and overall revenue was better than forecasted. Wells Fargo continues to struggle from legal costs surrounding the fake-account scandal and overall businesses lagging behind their competitors.
  • Non-financial companies have reported mixed earnings for the fourth quarter. Lennar (a large homebuilder) and UnitedHealth Group (a large health insurer) reported excellent quarters, while Walgreens (a retail pharmacy) and PPG (a large paint company) missed both their sales and profit forecasts.
  • U.S. equities are off to another great start, as the S&P 500 is ahead of both developed international equities and emerging markets. As stated in the economy section, countries like Germany are seeing renewed confidence, as many developed economies appear to be finding an economic bottom and there has been more certainty surrounding geopolitics. We are starting to see signs of light at the end of the tunnel for international equities.
Equity Index Values and Total Returns
  Value YTD 1-Year
S&P 500 3,329.6 3.14% 27.17%
Dow Jones Industrial Average 29,348.1 2.92% 21.67%
NASDAQ Composite 9,388.9 4.67% 32.66%
Russell 2000 (small-cap index) 1,699.6 1.90% 16.28%
MSCI EAFE (developed intl.) 2,056.0 0.98% 18.03%
MSCI Emerging Markets 542.4 2.81% 15.42%
Federal Reserve's Inflation Target
Source: Bloomberg

Fixed Income

  • According to data from the Bond Buyer (a large newspaper that covers the municipal bond market), the 20-year index of general obligation bonds dropped to 2.56%, the lowest level since 1956. It seems hard to imagine, but presently the 30-year U.S. Treasury bond yield hovers around 2.25% and this could drive municipal bond yields even lower.
  • The next Federal Reserve meeting will be on January 29 and according to the Federal Reserve’s most recent update to their projections, they do not forecast a change to their target rate this year. All eyes will be on the European Central Bank, as talks surrounding questionable monetary policy over the past few years build and a new chairperson, Christine Lagarde, is in place.
  • On January 14, the yield on the 10-year German bund rose to its highest level (-0.153%) since May 30, as economic data out of the Europe is improving and the European Central Bank believes political risks are decreasing.
Fixed Income Index Yields & Total Returns
  Yield YTD 1-Year
B’berg Barclays Inter Govt./Credit 1.89% 0.31% 7.15%
B’berg Barclays US Aggregate Bond 2.25% 0.50% 9.28%
B’berg Barclays US Corp. High Yield 5.12% 0.71% 10.88%
B’berg Barclays Municipal Bond 1.60% 1.04% 8.25%
Key Interest Rates
  1/20/20 12/31/19 1/22/15
Federal Funds Target Rate 1.5-1.75% 1.5-1.75% 0-0.25%
3-Month LIBOR 1.82% 1.91% 0.26%
2-Year U.S. Treasury Note 1.56% 1.57% 0.51%
10-Year U.S. Treasury Note 1.82% 1.92% 1.87%
Prime Rate 4.75% 4.75% 3.25%
Federal Reserve's Inflation Target
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.