Market Share Newsletter Vol 2 Issue 27

 

November 10, 2020

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A week later with more clarity on the election and the economy, the focus has shifted to Georgia, where control for the Senate will be determined by two runoff elections on January 5, 2021. Republicans currently have a 50-48 majority in the Senate. Late last week, we received more news showing improvement in the economy both in a lower unemployment rate and fewer continuing jobless claims.
 
Over the last week of election updates, global stock markets soared higher and interest rates fell. The idea of a split congress was well received by the market. The outcome moved both the NASDAQ and S&P 500 to all-time highs on the week. Technology stocks lead the rally and recovered the decline we discussed last week. A good sign of a broader rally is that small cap stocks, as measured by the Russell 2000 index, also reached an all-time high.
 
The biggest impact to our positive outlook for equities was Pfizer’s positive news on the vaccine it has been developing. Moderna, which made news early-on with the success of a small trial, is using a similar vaccine technology and should be announcing their results soon as well. Any good news on this front would be welcomed as new cases of the virus increase across most of the globe.
 
It is uncertain if Congress will pass another stimulus bill. While the economy has improved, parts of the economy still are struggling and could use additional stimulus even with this week’s positive news. Last week, Senate majority leader Mitch McConnell continued to reiterate their interest in at least a small stimulus bill.
 
We are pleased by the market’s exuberant response to the election and positive news on an effective vaccine in the same week. This is why we continue to work with clients to stay invested, even during uncertainty, while also expecting increased volatility going forward.
 
Thank you for the continued opportunity to work with you and your family.
 
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 U.S. unemployment rate declined to 6.9% in October as the nonfarm payrolls increased by 638,000—ahead of the expected 580K increase. The increase in payrolls came entirely from the private sector as the federal government shed 268K jobs, including 147K temporary census workers. The unemployment rate is the lowest since March when the economic destruction from the Coronavirus pandemic began.
  • The U.S. presidential election appears to be concluding, despite legal challenges from the Trump administration. As world leaders congratulate President-elect Joe Biden, the media has moved forward with the presumption that Joe Biden will be the next president. On January 5, 2021 Georgia will have a Senate runoff for both seats as the Senate is currently 50-48 in favor of the Republicans. The Republicans increased their seats in the House of Representatives, but Democrats still have the majority.
  • The National Federation of Independent Business (NFIB), through their Small Business Optimism Index, reported that 13% of small businesses stated that it is a good time to expand. This result is flat from the previous month but is only half of the 26% of small businesses that thought it was a good time to expand in back in February. Small businesses are still struggling to hire as 33% of positions are unable to be filled—slightly down from 36% in September.
  • The Bank of Japan has made a unique attempt to consolidate their banking industry by offering to pay 0.1% on some reserves of banks that are willing to merge through March 2023. The Japanese banking industry has struggled as their economy has languished. The 0.1% may not appear enticing but the Bank of Japan currently has a policy rate of -0.10% and the 3-year Japanese government bond yields -0.11%.
Economic Data: Recent
  Actual Survey Prior
Change in Nonfarm Payrolls 638k 580k 672k
FOMC Rate Decision 0%-0.25% 0%-0.25% 0%-0.25%
Continuing Jobless Claims 7285k 7200k 7823k
Unemployment Rate 6.9% 7.6% 7.9%
Economic Data: Upcoming
    Survey Prior
Consumer Price Index ("CPI") MoM   0.1% 0.2%
Continuing Jobless Claims   6900k 7285k
University of Michigan Sentiment   82.0 81.8
Retail Sales Advance MoM   0.5% 1.9%


Equities

  • Pfizer announced Monday morning that their vaccine to protect people from Covid-19 was 90% effective. The legitimacy of the trial of comes from 43,538 participants that either received the vaccine or a placebo (a control in testing the effectiveness relative to the vaccine). Pfizer’s stock price rose by 7.7% on Monday and the dividend yield was 3.88% at Monday’s market close.
  • McDonald’s posted good quarterly results as U.S. same-store sales increased by 4.6%, but globally same-store sales declined 2.2%. McDonald’s highlighted that they are the world’s number two coffee brand based on servings and they have also joined the plant-based meat market with their own plant-based burger called the “McPlant.”
  • Small cap stocks responded positively to the Pfizer vaccine news on Monday as the trading of Russell 2000 futures were halted due to being up 7% in early trading (the Russell 2000 represents the overall small cap market). Retailers also strongly benefited yesterday as TJX Companies, parent company of TJ Maxx and Home Goods, was up 12.9% and Ross Stores increased by 15.6%.
Equity Index Values and Total Returns
  Value YTD 1-Year
S&P 500 3,550.5 11.62% 15.83%
Dow Jones Industrial Average 29,158.0 4.15% 7.86%
NASDAQ Composite 11,713.8 31.63% 36.38%
Russell 2000 (small-cap index) 1,705.0 3.34% 8.81%
MSCI EAFE (developed intl.) 1,968.9 -0.82% 2.47%
MSCI Emerging Markets 575.1 9.02% 14.46%
 

Source: Bloomberg
 

Fixed Income, Commodities and Currencies

  • Amidst the positive news coming from Pfizer with the production of an effective vaccine for virus, the yield on the ten-year U.S. Treasury note increased to its highest level (0.973%) since March 20. The increase comes from the idea that an effective vaccine will allow our economy to get back to normal quicker and an economic expansion will accelerate as all parts of the economy will participate. The ten-year hit an all-time low yield of 0.318% on March 9.
  • The Federal Reserve (Fed) maintained their target interest rate within a range of 0%-0.25% at their meeting this past week. The Fed continues to be concerned with the virus and stated “the path of the economy will depend significantly on the course of the virus” and later followed that statement with “given the generally high level of leverage in the non-financial business sector, prolonged weak profits could trigger financial stress and defaults.”
  • The price of oil also experienced a big bump on Monday from the vaccine news. The market perceives that the demand for oil will rise as consumers and businesses are able to get back to a more normal lifestyle in the near-term. The price of the exchange traded fund representing energy (XLE) increased by 14.3% on Monday.
Fixed Income Index Yields & Total Returns
  Yield YTD 1-Year
B’berg Barclays Inter Govt./Credit 0.72% 5.69% 6.40%
B’berg Barclays US Aggregate Bond 1.27% 6.32% 7.29%
B’berg Barclays US Corp.High Yield 4.56% 4.39% 6.62%
B’berg Barclays Municipal Bond 1.35% 3.44% 4.59%
Key Interest Rates
  11/9/20 12/31/19 11/12/15
Federal Funds Target Rate 0-0.25% 1.5-1.75% 0-0.25%
3-Month LIBOR 0.21% 1.91% 0.34%
2-Year U.S. Treasury Note 0.17% 1.57% 0.87%
10-Year U.S. Treasury Note 0.92% 1.92% 2.34%
Prime Rate 3.25% 4.75% 3.25%
Commodities & Currency
  11/9/20 12/31/19 YoY Change
Gold 1,854.4 1,550.6 25.58%
Crude Oil 40.3 61.1 -28.09%
Natural Gas 2.86 2.19 6.96%
Corn 407.5 387.8 8.88%
Soybean 1,105.0 943.0 20.99%
USD: Euro 1.181 1.121 7.09%
 

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:
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