Market Share Newsletter Vol 2 Issue 22

 

September 8, 2020

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This summer has been good for investors even though it has not been good for the millions of people looking for jobs or trying to keep businesses open. Technology stocks have been a bright spot as the sector has been soaring since mid-March. Many tech companies are seeing increased sales and earnings improvements as individuals and businesses adjust to the need for more digital solutions in a pandemic world.
 
On August 28, Apple stock became the first U.S. stock to reach a value of over $2 trillion. Then on September 3rd, the value fell over 8% ($180 billion in value)—the largest drop in value for a U.S. company in history. This sounds ominous but the drop simply took the stock back to the August 20, 2020 price. As we saw significant drops this spring and have seen tremendous increases this summer, trend adjustments are normal for the market and investors.
 
The outperformance of growth stocks over the past several years has some investors experiencing a “fear of missing out” or “FOMO”. One of our core philosophies is to monitor investor sentiment and, when it gets to extremes, position to take advantage of the situation. When we see FOMO used in reference to a sector or style of investing, it gets our attention. In the last couple of months, we have started to trim some of the various holdings we have in growth stocks, as this sentiment has been positive for quite a while. The timing of when markets reach interim peaks is near impossible to predict. We believe making adjustments at certain times (like extremes in investor sentiment) adds value to the portfolio and reduces long-term volatility. Stocks cannot defy gravity, which gives us the opportunity to sell them when elevated.
 
We continue to hear from clients with concerns surrounding the upcoming election and the potential changes coming that could impact investors. We have been analyzing the potential outcomes and will adjust our strategies as we watch events unfold over the coming months. Conjecture is not a strategy that we use, so we will wait for more clarity on the makeup of the government and the bills being introduced before making changes to portfolios. Even with that strategy, certain events could create short term volatility that we will manage through.
 
In the meantime, we are here for you and will help keep you informed throughout any notable market changes. Thank you for continuing to follow The Market Share.
 
 
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 unemployment rate in the U.S. declined to 8.4% for the month ending August 2020 and has quickly descended from the 14.7% unemployment rate in April when 20.5 million people lost their jobs. Total payrolls increased by 1.4 million in August. The federal government was the largest contributor to the job gains in August as 238,000 temporary 2020 Census workers were hired.
  • The percent of people who teleworked because of the coronavirus pandemic declined from 26.4% in July to 24.3% in August as the labor markets shift back to more normalcy. This is down from the high of 35.4% in May. The survey conducted by the Bureau of Labor Statistics asked, “At any time in the last 4 weeks, did you telework or work at home for pay because of the coronavirus pandemic?” Although a broad question, it clearly shows the trend of employees returning to their traditional place of employment.
  • The ISM Manufacturing index reported the highest month-over-month growth level since November 2018, but clearly growing off of a much lower base than in November 2018. The positives within the data were 83% of manufacturing industries reported overall growth, increased new orders and increased production. The number of industries reporting export order growth has reached the highest level since June 2018.
  • The composite PMI Index, a measure of both manufacturing and service industries, has shown an early divergence in the economic improvement within Europe. Germany and France (along with the entire Euro Zone) have started to expand again while Italy and Spain contracted in August. This is only one month of data, but it shows the continual struggle within the Euro Zone of the strong economies ultimately supporting the weaker ones.
Economic Data: Recent
  Actual Survey Prior
Change in Nonfarm Payrolls 1371k 1350k 1734k
Unemployment Rate 8.4% 9.8% 10.2%
ISM Manufacturing Index 56.0 54.8 54.2
ISM New Orders 67.6 58.8 61.5
Economic Data: Upcoming
    Survey Prior
FOMC Rate Decision (upper bound)   0.25% 0.25%
Retail Sales Advance MoM   1.2% 1.2%
Housing Starts   1463k 1496k
CPI Ex Food and Energy MoM   0.2% 0.6%


Equities

  • Tesla, the electric vehicle manufacturer, experienced a significant decline in their stock price Tuesday morning as the company was not added to the S&P 500. Instead the S&P 500 Index Committee chose to add Etsy, Catalent, and Teradyne. Tesla recently had a stock split of 5-to-1 followed by an issuance of $5 billion in new stock last week.
  • Disney released Mulan on September 4 through their streaming service Disney+. Based on data from Sensor Tower Inc., downloads of Disney+ rose by 68% to 890,000 during the weekend. Mulan is a live-action movie that has been adapted from the 1998 animated version. Disney stock moved higher based on this news, but they are still managing through the pandemic and the major effects it has had on its theme park business.
  • General Motors (GM) made a $2 billion equity stake in Nikola Corp, an electric vehicle company that has not yet reported any revenue. GM will additionally provide manufacturing and technology for Nikola’s Badger electric pickup truck model in exchange for an 11% stake and the right to nominate one individual to Nikola’s board. According to a Bloomberg report, the Badger pickup will be able to go 0-60 miles per hour in less than 3 seconds and have a 600-mile range between charging sessions.
Equity Index Values and Total Returns
  Value YTD 1-Year
S&P 500 3,427.0 7.47% 15.33%
Dow Jones Industrial Average 28,133.3 0.27% 5.73%
NASDAQ Composite 11,313.1 26.98% 38.32%
Russell 2000 (small-cap index) 1,535.3 -7.13% 1.72%
MSCI EAFE (developed intl.) 1,891.5 -5.07% 3.44%
MSCI Emerging Markets 526.7 -0.16% 11.09%
 

Source: Bloomberg
 

Fixed Income, Commodities and Currencies

  • Northern Trust, a large fiduciary bank and investment manager, made a statement this past week on high yield bonds (junk bonds), “on a risk-adjusted basis, we think it’s still going to be one of the best-performing asset classes.” We continue to have an allocation to this asset class and would agree that in a zero-interest rate world with a Federal Reserve that is far more accommodative than just zero rates, high yield will perform well.
  • The amount of bonds around the world with negative yields continues to hover above $14 trillion. This push by central banks around the world to keep yields in negative territory is another cap on the outlook for U.S. Treasury yields.
  • The price of Brent crude dropped below $40/barrel on September 8 for the first time since June 16 as the demand outlook is worsening and the U.S. dollar’s recent rally has put a damper on the price. The continual and increasing economic tensions and trade issues between the United States and China will likely put an additional obstruction on crude prices.
Fixed Income Index Yields & Total Returns
  Yield YTD 1-Year
B’berg Barclays Inter Govt./Credit 0.67% 5.83% 5.93%
B’berg Barclays US Aggregate Bond 1.17% 6.76% 6.55%
B’berg Barclays US Corp.High Yield 5.51% 1.57% 4.32%
B’berg Barclays Municipal Bond 1.33% 3.23% 3.32%
Key Interest Rates
  9/7/20 12/31/19 9/10/15
Federal Funds Target Rate 0-0.25% 1.5-1.75% 0-0.25%
3-Month LIBOR 0.25% 1.91% 0.33%
2-Year U.S. Treasury Note 0.14% 1.57% 0.73%
10-Year U.S. Treasury Note 0.72% 1.92% 2.18%
Prime Rate 3.25% 4.75% 3.25%
Commodities & Currency
  9/7/20 12/31/19 YoY Change
Gold 1,934.3 1,550.6 24.43%
Crude Oil 39.8 61.1 -35.26%
Natural Gas 2.59 2.19 0.72%
Corn 347.3 387.8 1.46%
Soybean 969.5 943.0 14.53%
USD: Euro 1.182 1.121 6.73%
 

Source: Institute for Supply Management
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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  • Subject to investment risks, including possible loss of the principal amount invested

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