Market Share Newsletter Vol 2 Issue 28

 

November 17, 2020

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Two weeks ago, we discussed signs of a broader stock market rally. Since then, new highs have been made in both the MSCI International Index and the Russell 2000 Index, which measures small-cap stocks. The previous high for the Russell 2000 Index was made back on August 31, 2018. For comparison, in this more than two-year gap, the S&P 500 has notched over 30 new record highs. Seeing positive stock news outside of the big technology sector indicates a long-lasting market rally. More good news on a COVID-19 vaccine development from Moderna is causing a broader market rally as those businesses most impacted by the pandemic have an improved outlook.
 
Despite the pandemic, in the last eight months, stocks have continued the historic rally to reach new highs. Markets are looking past the next several weeks and months, focusing on recent news of corporate earnings, the “V” shaped recovery in manufacturing and consumer spending, as well as positive news on the progress of a vaccine.
 
With major holidays approaching and possibly more local restrictions in place, these times will continue to be challenging for us all. We would like to say thank you to all our wonderful clients and colleagues. We are honored that you have entrusted us to manage your assets and feel so fortunate to be your financial partner. We will continue to be here for you.
 
Stay well, stay safe, and have a wonderful Thanksgiving!
 
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

  • In October, retail sales (excluding automobiles and gasoline) were slightly disappointing as they only increased by 0.2%, in comparison to the forecasted 0.6% over September. This was the slowest level of retail sales growth since April. Clothing and sporting goods experienced the largest monthly declines in sales of 4.2%, while non-store retailers (i.e. Amazon) reported the largest increase of 3.1%.
  • Inflation, as measured by the Consumer Price Index (CPI), continues to remain lukewarm, at best, as overall inflation in the United States increased by only 1.2% over the past 12 months and did not change in October. Over the past 12 months, the price of fuel oil fell by 28.2%, airline fare declined by 20%, and motor vehicle insurance declined by 7.1%. The largest year-over-year increase was an 11.5% increase in the price of used cars and trucks.
  • Presumed President-elect Joe Biden has called on Congress to pass a stimulus bill to bring relief to Americans that are struggling the most from the economic toil of the coronavirus pandemic. As Biden met with leaders from Microsoft and General Motors, he reiterated part of his economic plan that companies will not receive government contracts if their products are not built in the United States.
  • Industrial production in China exceeded expectations as it grew by 6.9% over the past 12 months ending in September—ahead of the forecasted 6.7% increase. The biggest industrial production increases across all major industries, over the past 12 months, were in auto manufacturing up 16.4%, machinery up 15.9%, and metal products up 12.6%. Based on the data from the National Bureau of Statistics of China, no major industries experienced a decline in industrial production.
Economic Data: Recent
  Actual Survey Prior
Consumer Price Index (CPI) MoM 0.0% 0.1% 0.2%
Continuing Jobless Claims 6786k 6825k 7222k
University of Michigan Sentiment 77.0 82.0 81.8
Retail Sales Advance MoM 0.3% 0.5% 1.6%
Economic Data: Upcoming
    Survey Prior
Housing Starts   1460k 1415k
Continuing Jobless Claims   6420k 6786k
Consumer Confidence   99.5 100.9
New Home Sales   970k 959k


Equities

  • Walmart reported third quarter earnings per share of $1.34, forecasted to be $1.19, and comparable same-store sales growth of 6.4% relative to an expected 3.2% increase. Walmart’s e-commerce sales increased by 79% YoY, but shares of Walmart stock reacted negatively to the lack of outlook provided by the company and their inability to stock key items during the pandemic.
  • Disney reported a loss of $0.20 per share against a forecasted loss of $0.73 per share. Disney stock responded favorably to the quarterly result. Disney+, Disney’s streaming service, has 73.7 million subscribers surpassing the estimated 65.5 million subscribers. Even ESPN+, a sports streaming service owned by Disney, exceeded expectations with its 10.3 million current subscribers. The company also stated that Walt Disney World is now operating at 35% of capacity.
  • Based on data from FactSet, the third quarter has been filled with positive earnings surprises across the S&P 500. In fact, 84% of the companies that have reported earnings through November 13 reported a positive earnings surprise. If this number holds, it will be tied for the highest percentage since FactSet started tracking this data in 2008. Despite the positive surprise, blended earnings for the S&P 500 are down 7.1% year-over-year.
Equity Index Values and Total Returns
  Value YTD 1-Year
S&P 500 3,626.9 14.08% 17.82%
Dow Jones Industrial Average 29,950.4 7.05% 8.69%
NASDAQ Composite 11,924.1 34.02% 40.50%
Russell 2000 (small-cap index) 1,785.3 8.25% 12.22%
MSCI EAFE (developed intl.) 2,028.2 2.21% 5.49%
MSCI Emerging Markets 580.3 10.00% 17.25%
 

Source: Bloomberg
 

Fixed Income, Commodities and Currencies

  • The Bloomberg Barclays High Yield Bond Index has returned 14.1% over the past six months while the overall bond market has only returned 1.8%. On November 9, the credit spread, the difference in yield between a bond and a U.S. Treasury with a comparable maturity, reached its lowest level since the pandemic began. Given the Federal Reserve’s current monetary policy, we expect the spread to continue to tighten.
  • Inflation has not been of concern for consumers or bond markets over the past decade. An unexpected increase in inflation can wreak havoc on bond prices, but we have not experienced anything of that nature. Treasury Inflation Protected Securities (TIPS) are priced for inflation, as measured by CPI, to average 1.7% over the next ten years. Over the past ten years, inflation has averaged exactly 1.7%.
Fixed Income Index Yields & Total Returns
  Yield YTD 1-Year
B’berg Barclays Inter Govt./Credit 0.70% 5.85% 6.19%
B’berg Barclays US Aggregate Bond 1.23% 6.69% 7.09%
B’berg Barclays US Corp.High Yield 4.89% 4.07% 6.36%
B’berg Barclays Municipal Bond 1.28% 3.82% 4.69%
Key Interest Rates
  11/16/20 12/31/19 11/19/15
Federal Funds Target Rate 0-0.25% 1.5-1.75% 0-0.25%
3-Month LIBOR 0.22% 1.91% 0.36%
2-Year U.S. Treasury Note 0.18% 1.57% 0.85%
10-Year U.S. Treasury Note 0.91% 1.92% 2.27%
Prime Rate 3.25% 4.75% 3.25%
Commodities & Currency
  11/16/20 12/31/19 YoY Change
Gold 1,887.8 1,550.6 25.82%
Crude Oil 41.3 61.1 -28.81%
Natural Gas 2.70 2.19 0.11%
Corn 416.3 387.8 13.06%
Soybean 1,153.5 943.0 27.74%
USD: Euro 1.185 1.121 7.16%
 

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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