Market Share Newsletter Vol 2 Issue 26

 

November 4, 2020

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“Next” is keeping our patience while the election results for the Presidency and Congress are finalized (even if it takes longer than we like). While these challenges persist, there is plenty of economic data to review. Last week the economy had a historic recovery after the momentous collapse in the second quarter. However, the recovery still leaves us 3-4% below the peak of the U.S. Gross Domestic Product from the 4th quarter of 2019. The economy will be challenged to grow at an above-average rate going forward if we have local and regional slowdowns or shutdowns due to the pandemic. It is plausible that we may be into 2022 before the economy fully recovers.
 
“Next” also means looking ahead to a holiday season during a pandemic. Last week we discussed how the consumer is positioned to spend but pending election results and an increase in COVID cases across the country may affect that. “Pre-Black Friday” sales have already begun in efforts to reduce the in-person traffic on a single day during the pandemic. Most retailers that normally open on Thanksgiving are opting to remain closed this year. According to a survey by Lending Tree, nearly 25% of Americans are already done with their holiday shopping!
 
“Next” is looking at a global market where China is growing, emerging market stocks have been performing well over the past several weeks, and parts of Europe are shutting down for a month. Not a clear path as you can see. Even though most international markets have underperformed the U.S. markets for several years, it remains an area we think could provide good returns in the years ahead. Any improvement in international stock market performance would be another good sign for equity markets overall.
 
“Next” is the recent weakness (-7.5% in three the weeks ending November 2) in growth stock performance after stellar price appreciation over the past six months. Earnings have been good which fuels the market to keep stock prices moving higher. Other sectors of the stock market will need to participate for the equity rally to continue. While utility stocks performed very well last month, that is usually not the sector that leads markets higher. Broader sector performance would be a better sign for the economy.
 
There always is a “Next”…president, congress, legislation, opportunity and risk. We look to the future by always staying focused on your goals and consistently making good investment decisions. Stay well, practice patience and together we will see what is next.
 
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

  • Stocks and bonds have rallied today as it appears investors feel comfortable with the outcome of the election, which is the Senate likely remaining in Republican control and the House of Representatives remaining in Democratic control. This reduces the uncertainty around one political party having control over all three branches of government.
  • GDP increased by a historical 33.1% in the third quarter after declining by a historical 31.4% in the second quarter. Personal consumption increased by more than 40% in the third quarter as private domestic investment increased by 83% in the quarter. The only detractor to economic growth in the third quarter was net exports as the economic recovery outside of the United States has not been as V-shaped. Exports increased by 59.7% while imports increased 91.1%.
  • Despite the percentage growth in GDP in the third quarter compared to the second quarter, the U.S. economy still has some catching up to do in terms of economic output. Real Gross Domestic Product, which adjusts output for inflation, was worth $19.25 trillion at the end of 2019 and is presently at $18.58 trillion. Most economists and investment strategists place the end of 2021 to early 2022 as the as the date when the country will be back to previous highs in economic output.
  • New manufacturing orders in the United States increased to their highest level since January 2004 according to data from the Institute for Supply Management (ISM). The importance of manufacturing in the U.S. economy, and the future, should not be understated as manufacturers account for 11.3% of economic output and employ approximately 8.5% of the entire workforce.
  • The U.S. savings rate continues to remain elevated at 14.3% after reaching an all-time high of 32.2% in April. A higher savings rate typically means more caution amongst people, but it also provides a greater level of stability to the economy and consumers. When the pandemic ultimately subsides, the economy can experience a quicker recovery as there will be pent-up demand to consume. The 50-year average for the savings rate has been 8.4%.
Economic Data: Recent
  Actual Survey Prior
Continuing Jobless Claims 7756k 7775k 8465k
GDP Annualized QoQ (3Q) 33.1% 32.0% -31.4%
ISM Manufacturing 59.3 56.0 55.4
Personal Income 0.9% 0.4% -2.5%
Economic Data: Upcoming
    Survey Prior
Change in Nonfarm Payrolls   600k 661k
FOMC Rate Decision   0%-0.25% 0%-0.25%
Continuing Jobless Claims   7200k 7756k
Unemployment Rate   7.6% 7.9%


Equities

  • Alphabet Inc, the parent company of Google, reported excellent third quarter results and was likely the best performer of the “FAANG” stocks (Facebook, Amazon, Apple, Netflix and Google). Alphabet’s earnings per share (EPS) were up 61% year-over-year (YoY) and revenue grew by 15% over the same time period. YouTube continues to be the crown jewel of advertising growth for Alphabet as their revenue increased by 32.4%.
  • PayPal also reported excellent third quarter results as EPS grew to $1.07 from $0.51 and revenues increased by 25% YoY. PayPal is a prime example of how quickly payment processing in this country is shifting to digital.
  • One major disappointment in the quarter was Twitter, as user growth disappointed at the social media company—analysts were expecting 195.6 million daily users, but the company only reported 187 million daily users. Twitter dropped by approximately 20% on October 30 after reporting their quarterly result.
Equity Index Values and Total Returns
  Value YTD 1-Year
S&P 500 3,369.2 5.88% 14.71%
Dow Jones Industrial Average 27,480.0 -1.89% 4.84%
NASDAQ Composite 11,160.6 25.37% 39.02%
Russell 2000 (small-cap index) 1,614.3 -2.19% 3.02%
MSCI EAFE (developed intl.) 1,848.8 -6.92% -3.82%
MSCI Emerging Markets 540.6 2.47% 7.63%
 

Source: Bloomberg
 

Fixed Income, Commodities and Currencies

  • The corporate bond market continues its outperformance in the investment grade bond market as the Bloomberg Barclays Corporate Index has returned 5.61% over the past six months and the Bloomberg Barclays Aggregate Bond Index only returned 1.42%. The extraordinary measures by the Federal Reserve have helped riskier assets well-outperform government securities in the bond market.
  • Though the price of gold has done well over the past 12 months, it has flatlined for the past three months. This was due to more certainty surrounding the political landscape and interest rates moving slightly higher (from the sub-50 basis points the ten-year Treasury note was at in early March). Gold still has a promising outlook as there are $16+ trillion of negative yielding bonds and is seen as an alternative investment during periods of uncertainty.
Fixed Income Index Yields & Total Returns
  Yield YTD 1-Year
B’berg Barclays Inter Govt./Credit 0.72% 5.67% 5.93%
B’berg Barclays US Aggregate Bond 1.26% 6.30% 6.58%
B’berg Barclays US Corp.High Yield 5.52% 1.78% 3.79%
B’berg Barclays Municipal Bond 1.41% 3.04% 3.67%
Key Interest Rates
  11/3/20 12/31/19 11/6/15
Federal Funds Target Rate 0-0.25% 1.5-1.75% 0-0.25%
3-Month LIBOR 0.22% 1.91% 0.33%
2-Year U.S. Treasury Note 0.17% 1.57% 0.81%
10-Year U.S. Treasury Note 0.9% 1.92% 2.23%
Prime Rate 3.25% 4.75% 3.25%
Commodities & Currency
  11/3/20 12/31/19 YoY Change
Gold 1,910.4 1,550.6 23.31%
Crude Oil 37.7 61.1 -31.46%
Natural Gas 3.06 2.19 7.69%
Corn 401.1 387.8 4.17%
Soybean 1,059.0 943.0 15.28%
USD: Euro 1.172 1.121 5.26%
 

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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