Market Share Newsletter Vol 2 Issue 24

 

October 6, 2020

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The U.S. elections will dominate the news for the next four weeks and potentially longer if the results are not known on election night, or if they are contested. The most recent example of delayed results in a presidential election was in 2000 when the winner was not determined until December 13. The daily news on the election will likely increase stock market volatility, although history shows that the 100 days before and after a presidential election are actually less-volatile than normal times.
 
Part of a solid investment strategy is staying invested even when there is uncertainty—and right now there is plenty. As we have seen in 2020, financial markets can experience tremendous drops and recoveries in very short periods of time. Client conversations are quickly moving past the economic recovery and COVID to the election and potential changes in income, capital gains and estate tax rates. Potential changes to taxes quickly get people’s attention. Income and capital gains changes would alter investment outcomes, but do not indicate that markets need to drop dramatically. As we shared a few weeks ago, stock markets performed well during periods of higher tax rates than those being proposed. While tax changes are important, adjustments over the next several weeks are not necessary for a vast majority of investments. Keep in mind that tax changes are “proposed” and we have not yet had a change in government.
 
Patience and avoiding guessing at what lies ahead is important. As we all know, there have been surprises in the past elections! Even when a single political party has control of the U.S. House, Senate and Presidency, passing meaningful legislation can still take months, or longer, or not even happen. Recent examples of completed legislation have been the Affordable Care Act (2009) and the Tax Cuts and Jobs Act (2017).
 
Our investment team is actively researching ideas for potential changes to portfolios to help determine which clients could be impacted by practicing patience and creating plans.
 
To help keep clients informed, the Wealth Advisory Services team will be presenting our first live webinar on October 20 covering timely estate planning and investment topics and issues. For more information on Great Planning Strategies, click here to learn more and register. We hope you will join us!
 
Stay well and safe.
 
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 increase in nonfarm payrolls for the month of September was 661K relative to the forecast of 859K. Despite the headline disappointment, the increase of 877K in private payrolls was stronger than the expected 850K. Manufacturing payrolls (though they do not get the headlines) have been quickly rising. Manufacturing unemployment has dropped from 13.2% at the peak of the pandemic to 6.2% in September which is better than the overall unemployment rate of 7.9%.
  • The Institute for Supply Management (ISM) reported that the service sector was stronger than expected in September. The employment index moved above 50 for the first time since the pandemic began—signaling employment growth within the service sector. The other strong growth areas of the ISM service index were new orders and business activity.
  • The restaurant industry continues to adapt to a world with COVID, but restaurant data points to some degree are normalizing. According to opentable.com data, seated diners from online, phone, and walk-in reservations, were only down 14.8% on October 5 relative to one year ago (though it has averaged in the -30% to -40% range). The percentage of restaurants open for reservations on September 30 was 79.7%, compared to 56.8% on June 30. The increased usage of reservations will certainly be a lasting effect of the pandemic.
  • We continue to reiterate the major bounce in GDP as we watch the third quarter—expectations are for 20-35% improvement depending on the source. The Atlanta Fed GDPNow forecast is predicting an increase of 34.6% in the third quarter. The Federal Reserve is forecasting GDP in the United States to decline by 6.5% this year, but increase by 5% in 2021, and by 3.5% in 2022. The 20-year average GDP growth rate in the U.S. has been 2.1% ending December 31, 2019 (removing pandemic effects).
Economic Data: Recent
  Actual Survey Prior
Change in Nonfarm Payrolls 661k 859k 1489k
ISM Manufacturing 55.4 56.5 56.0
University of Michigan Sentiment 80.4 79.0 78.9
New Home Sales 1011k 890k 965k
Economic Data: Upcoming
    Survey Prior
Consumer Price Index (CPI) MoM   0.2% 0.4%
Retail Sales Advance MoM   0.6% 0.6%
Industrial Production MoM   0.7% 0.4%
Capacity Utilization   72.1% 71.4%


Equities

  • McCormick & Company (the spice and seasonings company) reported excellent third quarter earnings last week. Their earnings increased by 5% on a year-over-year (YoY) basis and exceeded expectations, but the real story was the 8% YoY increase in revenues despite some currency headwinds. The company also announced a 2-for-1 stock split.
  • We are now on the cusp of third quarter earnings season with Paychex (the payroll and human resources company) reporting a significant top- and bottom-line beat. The remaining part of this week will include third quarter results from Domino’s Pizza on Thursday and next Tuesday JPMorgan Chase, Johnson & Johnson, Blackrock, Delta Airlines, and Citigroup all report.
  • Cineworld, the globe’s second-largest movie theater chain, announced on October 5 that they plan to suspend operations at their 700 locations in the United States and the United Kingdom as movie releases continue to be delayed and consumers have shifted away from crowded gatherings. This news affected both AMC Theaters and Cinemark stock prices, but both vowed to stay open. Cineworld stock is down 88.5% year-to-date through October 5 (AMC was down 42.6% and Cinemark -75%).
Equity Index Values and Total Returns
  Value YTD 1-Year
S&P 500 3,408.6 7.02% 17.55%
Dow Jones Industrial Average 28,148.6 0.43% 8.55%
NASDAQ Composite 11,332.5 27.27% 42.96%
Russell 2000 (small-cap index) 1,582.0 -4.19% 8.03%
MSCI EAFE (developed intl.) 1,884.1 -5.21% 4.51%
MSCI Emerging Markets 526.1 -0.27% 12.00%
 

Source: Bloomberg
 

Fixed Income, Commodities and Currencies

  • Based on Bloomberg data, the yields on the lowest rated debt, in the CCC tier, have fallen to their lowest level in two-years. The difference in yields is now 898 basis points more than their comparable U.S. treasury bond.
  • Costco, the warehouse club, is now offering gold and silver bars in the United Kingdom. Certainly, the price of gold has had an excellent year and has attracted the mainstream media and consumers’ attention. The global pandemic has created a greater demand for gold, but the United Kingdom creates a different dynamic with Brexit still on the horizon.
Fixed Income Index Yields & Total Returns
  Yield YTD 1-Year
B’berg Barclays Inter Govt./Credit 0.69% 5.79% 5.38%
B’berg Barclays US Aggregate Bond 1.22% 6.46% 5.84%
B’berg Barclays US Corp.High Yield 5.53% 1.18% 4.33%
B’berg Barclays Municipal Bond 1.36% 3.17% 3.34%
Key Interest Rates
  10/5/20 12/31/19 10/8/15
Federal Funds Target Rate 0-0.25% 1.5-1.75% 0-0.25%
3-Month LIBOR 0.22% 1.91% 0.32%
2-Year U.S. Treasury Note 0.14% 1.57% 0.6%
10-Year U.S. Treasury Note 0.78% 1.92% 2.03%
Prime Rate 3.25% 4.75% 3.25%
Commodities & Currency
  10/5/20 12/31/19 YoY Change
Gold 1,920.1 1,550.6 23.87%
Crude Oil 39.2 61.1 -23.63%
Natural Gas 2.62 2.19 10.42%
Corn 379.5 387.8 0.71%
Soybean 1,021.5 943.0 14.54%
USD: Euro 1.178 1.121 7.36%
 

Source: Federal Reserve
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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