Market Share Newsletter Vol 2 Issue 25

 

October 27, 2020

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The “Big Three” in the automotive industry has long been associated with Chrysler, General Motors, and Ford. In economic terms, “The Big Three” are: consumers, corporations and the U.S. government. As we enter the last two months of the year, with the election pending and the pandemic continuing, discussions of “The Big Three are ongoing. During a recent investment meeting with our research partner, the Leuthold Group, we gained insights on the dynamics of “The Big Three” in the economy as the recession began and where it stands today.
 
The Consumer
Going into the recession, the U.S. consumer was in a far better financial situation relative to the recessions in 2000 and 2008 (with a savings rate near 8% compared to 3-4%). Since then, the savings rate has grown during the pandemic, peaking at 33% in April and currently stands at 14%. This has appeared in the balances of money market mutual funds—setting a record at over $4.7 trillion. Consumers also improved their own cash flow by reducing their debt payments, as a percent of income, to a 49-year low just before the pandemic. The combination of low interest rates and the excellent job market helped. Employment is improving from the record job losses that have occurred as a result of the pandemic, but not enough to return to levels of early 2020. As interest rates have lowered again (mortgage interest rates are reaching all-time lows) and employment improves into 2021, the consumer will likely remain strong.
 
Corporations
Corporations were also more financially prepared for a recession thanks to cash flow and debt service. Larger corporations are adapting to the current environment and may even thrive (excluding the travel industry). They have also been able to access the capital markets, specifically the debt markets, at historically low interest rates. This has helped preserve cash for any issues that arise over the next couple of years. While the Payroll Protection Program has helped many smaller companies, there will be many that will struggle as regions experience unique challenges from the pandemic. Fortunately, in Northern Indiana, the RV and boating industries have both been benefactors of the changes in consumer spending.
 
The Government
The U.S. Government responded quickly to the downturn given the depth of the economic pain created by the shutdowns. The value of the various bills passed and the efforts of the Federal Reserve injected more than $7 trillion into the economy when it was needed most. Today, there continues to be discussion about providing more support for individuals, small companies, municipalities and the healthcare industry. Perhaps after the election, another stimulus bill will be passed to aid unemployed Americans and struggling industry sectors.
 
We are continuously monitoring “The Big Three” for long-term trends that will impact the economy, employment and corporate earnings. Stay tuned for the next edition of The Market Share during the week of the election. It is wonderful that a record 59 million Americans have casted their early vote and hopefully millions more will exercise that right in the next week. In the meantime, 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 most recent filing of continuing claims (those who have filed a jobless claim for two weeks or more) dropped to its lowest level since the week ending March 27. The 8.37 million claims were significantly lower than the forecasted 9.63 million, and continued the downward trend. We expect continuing claims to remain elevated as the economy moves through the pandemic and businesses are forced to adjust their operations around the virus.
  • Home prices increased by more than 5% over the past year based on S&P CoreLogic data. This was the first increase greater than 5% (5.18% to be precise) since September 2018. As the single-family housing market continues to experience strong demand, authorized building permits reached their highest level since March 2007—signaling a good outlook for housing and the construction industry.
  • Retail sales increased by 1.9% in September over the previous month and more than doubled the forecast. The increase in sales largely came from auto sales and clothing stores. Though clothing stores are only weighted as 3.5% of total retail sales, they contributed 20.5% of the monthly growth in September’s retail sales.
  • Preliminary Purchasing Managers’ Index (PMI) data showed the service sector in the Eurozone contracted in the month of October while manufacturing grew at its fastest pace since early 2018. The decline in the service sector has clearly been attributed to the increased restrictions on the economy due to the rising COVID-19 cases throughout Europe.
Economic Data: Recent
  Actual Survey Prior
Consumer Price Index (CPI) MoM 0.2% 0.2% 0.4%
Retail Sales Advance MoM 1.9% 0.8% 0.6%
Industrial Production MoM -0.6% 0.5% 0.4%
Capacity Utilization 71.5% 71.8% 72.0%
Economic Data: Upcoming
    Survey Prior
Continuing Claims   7700k 8373k
GDP Annualized QoQ (3Q)   32.0% -31.4%
ISM Manufacturing   55.6 55.4
Personal Income   0.4% -2.7%


Equities

  • Both Goldman Sachs and Morgan Stanley, two large non-traditional banks, beat quarterly sales and earnings expectations as they rely less on lending activities and more on equity and fixed income trading and investment banking. Morgan Stanley’s revenue was up 16.7% year-over-year, $1.1 billion ahead of expectations.
  • Netflix reported a disappointing quarterly result by adding only 2.2 million new subscribers globally, 1.2 million fewer than expected. Netflix’s revenue increased by almost 23% in the quarter, but their earnings per share reported at $1.74, missing the forecasted $2.13 per share. Netflix has seen positive growth in the wake of the pandemic’s effects on consumers’ desires to be at home.
  • Two companies in the semiconductor industry, Advanced Micro Devices (AMD) and Xilinx, agreed to merge this week as AMD will buy Xilinx for $35 billion in stock. This will help to diversify the company. AMD has been improving their financial position by broadening its end-market exposure and diversifying into industrial, medical, and aerospace/defense semiconductors.
  • Crocs, the foam clog shoe company, reported sensational quarterly numbers as quarterly e-commerce sales increased by 35.5% and comparable retail sales increased by 16%, despite the pressures of the pandemic. In comparison, the popular shoemaker, Steve Madden, reported a 31% drop in revenue for the same quarter.
Equity Index Values and Total Returns
  Value YTD 1-Year
S&P 500 3,401.0 6.86% 14.59%
Dow Jones Industrial Average 27,685.4 -1.16% 4.80%
NASDAQ Composite 11,358.9 27.58% 39.99%
Russell 2000 (small-cap index) 1,605.2 -2.75% 4.35%
MSCI EAFE (developed intl.) 1,860.2 -6.39% -1.61%
MSCI Emerging Markets 545.2 3.35% 11.57%
 

Source: Bloomberg
 

Fixed Income, Commodities and Currencies

  • Since the week ending May 13, the Federal Reserve has purchased $45.4 billion in corporate bonds through their Corporate Credit Facilities, which were created to provide liquidity and support credit to the new issue market and to the secondary market where outstanding bonds trade.
  • Taxable municipal bonds continue to be a larger and more prominent part of the bond market as JPMorgan has forecasted the issuance of taxable municipal bonds will reach its highest level on record. Some increased and newer regulations have driven this increase in issuance along with municipalities around the country needing more capital due to the pandemic and issuing taxable debt expands their base of buyers. JPMorgan is forecasting $180 billion in issuance. The record was $159 billion in 2010 with the Build America Bond program.
  • Clean energy continues to put a damper on traditional forms of energy. Forbes recently pointed to West Virginia and Wyoming emerging as two of America’s leaders in renewable energy and storage. Despite the lows in traditional energy prices right now, the U.S. economy and corresponding businesses continue to move toward renewable energy.
Fixed Income Index Yields & Total Returns
  Yield YTD 1-Year
B’berg Barclays Inter Govt./Credit 0.67% 5.86% 6.29%
B’berg Barclays US Aggregate Bond 1.21% 6.57% 7.10%
B’berg Barclays US Corp.High Yield 5.47% 1.97% 4.09%
B’berg Barclays Municipal Bond 1.41% 2.97% 3.78%
Key Interest Rates
  10/26/20 12/31/19 10/29/15
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 0.15% 1.57% 0.62%
10-Year U.S. Treasury Note 0.8% 1.92% 2.04%
Prime Rate 3.25% 4.75% 3.25%
Commodities & Currency
  10/26/20 12/31/19 YoY Change
Gold 1,905.7 1,550.6 24.36%
Crude Oil 38.6 61.1 -30.99%
Natural Gas 3.02 2.19 33.00%
Corn 417.8 387.8 8.27%
Soybean 1,087.8 943.0 18.07%
USD: Euro 1.181 1.121 6.60%
 

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:
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