Market Share Newsletter Vol 2 Issue 20

 

August 11, 2020

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In an effort to fight the economic impact of the coronavirus, the United States and most other developed nations have been borrowing and spending record sums of money. Record borrowing matters in the long-term, potential outcomes may include slower economic growth, higher taxes, inflation, and/or devaluation of the dollar.
 
Today we analyze the U.S. dollar relative to other currencies. The chart below shows the dollar versus a basket of currencies (Euro, Yen, Pound, etc.). Over the past 30+ years, the dollar has experienced periods of strength (rising) and weakness (falling) relative to this basket of currencies. The value of the U.S. dollar dropped in July by nearly 5% and the corresponding surge in gold prices has investors asking if the drop is the beginning of a longer trend towards a lower dollar value or just a temporary dip.
 
 
 
There can be many reasons for the dollar to strengthen or weaken and most are a relative comparison to the other countries in the basket. Typical reasons are:
  • Economic conditions
  • Geopolitical differences
  • Interest rates and inflation expectations
  • Fiscal condition
  • Economic competitiveness
The chart also shows how the direction of the dollar has trended over longer periods of time. The reasons for the relative change of value in the U.S. dollar are seldom short-term events. The change in the value of the dollar impacts investments and consumers in different ways: 
  • U.S. exporters would benefit from their goods being cheaper for overseas consumers.
  • U.S. consumers could see higher prices for goods they purchase that are manufactured outside the U.S.
  • Investments made in international companies can benefit from a falling dollar.
  • As interest rates have fallen in the U.S. and are closer to other developed countries, it makes U.S. Treasury bonds less attractive to investors abroad. These investors may sell their dollars and buy other investments, contributing to a falling dollar.
During the last ten years, the dollar has been rising and international investments have underperformed for much of this time frame. This is a contributing factor to outperformance by U.S. equities, but not the only factor.
 
Over the past several months we have been slowly increasing international equity exposure in accounts as we see relative value in investments outside the U.S. The recent decline in the U.S. dollar has improved those returns. Whether or not it is a longer term trend remains to be seen.
 
We thank you and appreciate the opportunity to work with you and your family at 1st Source.
 
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

  • The change in nonfarm payrolls for the month of July were better than expected as there was an increase of 1.76 million against a forecast of 1.4 million. The unemployment rate dropped from 10.6% to 10.2%. The leisure and hospitality industry has recouped approximately 48% of the jobs that were cut in March and April over the past three months, while the manufacturing sector has only recouped 46%.
  • Vehicle sales have recovered much quicker than expected as auto sales in July reached an annual pace of 14.52 million—the highest since February as the sale of light trucks (which contribute 76% of total vehicle sales) are only down 8% over the same time period last year. Car sales were down 23% over the same time period last year.
  • The U.S. Congress continues to negotiate a new stimulus bill that ranges between $1 trillion and $3 trillion in size. The package will likely meet somewhere in the middle, but presently one of the primary disagreements has been over liability protection from coronavirus-related lawsuits for businesses that comply with public health guidelines.
  • The United Kingdom government has begun a program called “Eat Out to Help Out.” It has been created to encourage consumers to visit restaurants in August and gives them up to 50% off the cost of their meals. According to data from OpenTable, so far it has been effective with bookings up between 5%-20% YoY.
Economic Data: Recent
  Actual Survey Prior
Change in Nonfarm Payrolls
1763k 1480k 4791k
FOMC Rate Decision (upper bound) 0.25% 0.25% 0.25%
GDP Annualized QoQ (2Q) -32.9% -34.5% -5.0%
ISM Manufacturing  54.2 53.6 52.6
Economic Data: Upcoming
    Survey Prior
Consumer Price Index ("CPI") MoM   0.3% 0.6%
Retail Sales Advance MoM   2.0% 7.5%
University of Michigan Sentiment 72.0 72.5
Housing Starts   1230k 1186k


Equities

  • For the quarter ending June 27, Apple reported an increase of 11% in revenue and an increase of 18% in earnings. International sales comprised 60% of their total revenue in the quarter. The most notable part of the quarterly report was the company’s decision to approve a four-for-one stock split “to make the stock more accessible to a broader base of investors.” Since the close of the markets on July 30, Apple shares have returned 17.4% through Monday’s close.
  • Disney reported better than expected second quarter results of $0.08 per share versus a loss of $0.65 per share. Disney+, their direct-to-consumer streaming service, reached 60.5 million subscribers in the second quarter, well ahead of their goal to reach 60-90 million subscribers by 2024. The company’s parks business experienced a revenue decline of 85% and lost $3.5 billion in operating income.
  • The disparity between large cap growth stocks and value stocks continues to expand as growth has outperformed value by over 31 percentage points (18.26% vs. -12.95%) year-to-date through July 31. Technology and consumer discretionary have been the best performing sectors and have returned 23.7% and 19.2% through yesterday’s close. The technology sector now makes up 27.3% of the S&P 500.
Equity Index Values and Total Returns
  Value YTD 1-Year
S&P 500 3,360.5 5.21% 17.91%
Dow Jones Industrial Average 27,791.4 -1.23% 9.54%
NASDAQ Composite 10,968.4 23.01% 39.02%
Russell 2000 (small-cap index) 1,584.7 -4.25% 7.14%
MSCI EAFE (developed intl.) 1,859.4 -6.92% 4.03%
MSCI Emerging Markets 522.2 -1.01% 13.38%
 

Source: Bloomberg
 

Fixed Income, Commodities and Currencies

  • Riskier assets continue to be the driver in moving all security markets higher. High-yield debt has increased by 11% since April 30, while the total bond market has increased by 7.25% based on data from Bloomberg Barclays. Over that same time frame, the yield on high-yield debt declined from 8.05% to 5.35%.
  • The price of gold reached a record high on August 6 of $2,063 per ounce. The price of gold has moved higher amidst the weakness of the U.S. dollar and the global economic uncertainty that has been created from the pandemic. Since August 6, the price of gold has quickly retreated from that level as investors took gains from a position that was up approximately 35% year-to-date through August 6.
Fixed Income Index Yields & Total Returns
  Yield YTD 1-Year
B’berg Barclays Inter Govt./Credit 0.61% 6.13% 6.95%
B’berg Barclays US Aggregate Bond 1.04% 7.78% 8.74%
B’berg Barclays US Corp.High Yield 5.35% 1.30% 5.41%
B’berg Barclays Municipal Bond 1.12% 4.34% 4.79%
Key Interest Rates
  8/10/20 12/31/19 8/13/15
Federal Funds Target Rate 0-0.25% 1.5-1.75% 0-0.25%
3-Month LIBOR 0.26% 1.91% 0.31%
2-Year U.S. Treasury Note 0.13% 1.57% 0.67%
10-Year U.S. Treasury Note 0.58% 1.92%
2.14%
Prime Rate 3.25% 4.75% 3.25%
Commodities & Currency
  8/10/20 12/31/19 YoY Change
Gold 2,039.7 1,550.6 27.75%
Crude Oil 41.9 61.1 -22.28%
Natural Gas 2.15 2.19 2.88%
Corn 310.5 387.8       -23.95%
Soybean 876.5 943.0       0.66%
USD:Euro 1.174 1.121       5.02%
 

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

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