Market Share Newsletter Vol 2 Issue 29

 

December 1, 2020

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As we near the end of a tumultuous 2020, it appears that we may stumble across the finish line setting new records. The news of COVID vaccines has been positive for stock markets. This has been accentuated by the Dow Jones Industrial Average that reached a record high of 30,000 last week. This comes at a time of state and regional shutdowns, slightly rising initial jobless claims, increasing COVID cases, the ending of unemployment payments for 12 million Americans, and the Centers for Disease Control moratorium on evictions ending on December 31. While investors are enjoying record stock prices, millions of Americans will feel like a lump of coal will be in their stockings this Christmas.
 
We see the U.S. economy expanding in the fourth quarter of 2020 and possibly a slow start to the new year as we await the distribution of a vaccine and a new stimulus bill passing. A delay in either may lead to a potentially weak or even negative change in first quarter GDP, but a strong recovery for the rest of 2021. More outlook details will be in The Market Share: Outlook 2021 scheduled for publication later this month.
 
Equities are pricing in an open economy with a strong rebound happening in the travel, dining, entertainment, and credit markets. We also see stock prices appreciating within industrial, financial and green energy companies on the “reopen trade”. The stock market continues looking ahead to better times and receiving a positive impact when President-elect Joe Biden nominated Janet Yellen, former chairperson of the Federal Reserve, to be his Secretary of the Treasury.
 
One of the core tenets of our investment philosophy is that the economy and markets move in cycles and we make tactical adjustments around them. The current outlook has the economy and stocks in a positive cycle, which has us maintaining a neutral to overweight in equity positions as we go into 2021.
 
Thank you for reading. Please stay safe and well.
 
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

  • Initial jobless claims (new unemployment benefit claims) have increased in the past two weeks to their highest level in five weeks, reaching 778k for the week ending November 21. Renewed restrictions and lockdowns across the country are triggering the increase in layoffs. Continuing jobless claims (those filing for unemployment benefits for at least two weeks) have fallen to their lowest level since the beginning of the pandemic.
  • The S&P Case-Shiller Home Price Index, which uses a composite of data from 20 major metropolitan regions, increased by 6.6% over the past 12 months. This was the largest year-over-year (YoY) increase since April 2018. Phoenix, Seattle, and San Diego have the three best performing housing markets within the index, while Chicago, New York, and San Francisco have the three worst performing markets.
  • Janet Yellen, former chairperson of the Federal Reserve, was nominated last week by President-elect Joe Biden to be the next United States Secretary of the Treasury. If confirmed by the U.S. Senate, Janet Yellen would become the first woman to serve in this role. Yellen’s appointment gives investors what they like—certainty. Both equities and the U.S. dollar notably increased in value after this announcement.
  • According to the Purchasing Managers’ Index (PMI) released by China’s National Bureau of Statistics, Chinese manufacturing expanded for the ninth consecutive month. The PMI increased to its highest level since September 2017 due to strong improvements in output, new orders, and export sales. Xi Jinping, President of China, recently stated that it is completely possible for China to double the size of its economy by 2035.
Economic Data: Recent
  Actual Survey Prior
Housing Starts 1530k 1460k 1459k
Consumer Confidence 96.1 98.0 101.4
New Home Sales 999k 975k 1002k
ISM Manufacturing 57.5 58.0 59.3
Economic Data: Upcoming
    Survey Prior
Change in Nonfarm Payrolls   486k 638k
University of Michigan Confidence   76.3 76.9
Consumer Price Index (CPI) MoM   0.1% 0.0%
Unemployment Rate   6.8% 6.9%


Equities

  • Deere & Company (Deere) reported a strong quarter as both their revenue and margins exceeded expectations. Deere’s sales beat expectations but were down 2% YoY as the trade war with China and the global pandemic created the headwinds. Most importantly, the company provided a strong outlook for 2021, forecasting net income for 2021 to be between $3.6 billion to $4 billion. This compares to their May forecast of $1.6 billion to $2.0 billion.
  • The total return on the Dow Jones Industrial Average was 11.8% in November. This was the largest increase since January 1987 as Boeing was up 45.9% in the month, followed by American Express (+30%), Chevron (+25.4%), and Honeywell (+23.6%). All 30 stocks within the index were positive with Procter & Gamble being the worst performer, only up 1.3%.
  • On November 18, Boeing received approval from the Federal Aviation Administration to fly the 737 Max again after being grounded for approximately 20 months. The plane had been grounded since March 2019 due to two crashes that resulted in 346 deaths. Although the stock returned 45.9%, in November, many headwinds remain due to passenger uncertainty and dampened air traffic demand during the pandemic.
Equity Index Values and Total Returns
  Value YTD 1-Year
S&P 500 3,621.6 14.01% 18.96%
Dow Jones Industrial Average 29,638.6 6.11% 9.51%
NASDAQ Composite 12,198.7 37.17% 43.78%
Russell 2000 (small-cap index) 1,819.8 10.39% 15.11%
MSCI EAFE (developed intl.) 2,053.8 3.54% 6.93%
MSCI Emerging Markets 581.4 10.20% 18.43%
 

Source: Bloomberg
 

Fixed Income, Commodities and Currencies

  • The Federal Reserve announced Monday that LIBOR, the key bank lending rate, will be phased out by June 30, 2023 and will be replaced by the Secured Overnight Financing Rate. Banks have been told to discontinue the use of LIBOR in lending by the end of 2021. LIBOR has experienced multiple issues. During the 2008 financial crisis it spiked due to the banking sector’s near collapse and again in 2012 when a few large banks colluded to fix the rate.
  • The risk-on trade continues to ripple its way through all asset classes as high yield returned 4% in November based on the Bloomberg Barclays High Yield Index. For the week ending November 25, high yield funds reported cash inflows of $1.2 billion. This is up from $490 million of inflows the previous week, according to data from Refinitiv Lipper. High yield has experienced massive inflows. During the week following the presidential election, $4.6 billion flowed into high yield funds.
  • Based on data from the Commodity Futures Trading Commission, money managers have decreased their bullish position in gold as the net-long position in gold futures and gold options were at their lowest level in 18 months. Bitcoin is receiving some of the blame for gold’s price decline as it has moved to a record high price amidst the decline of the price of gold. Institutional money has also notably reduced its net position in gold.
Fixed Income Index Yields & Total Returns
  Yield YTD 1-Year
B’berg Barclays Inter Govt./Credit 0.63% 6.22% 6.35%
B’berg Barclays US Aggregate Bond 1.15% 7.36% 7.28%
B’berg Barclays US Corp.High Yield 4.70% 5.13% 7.24%
B’berg Barclays Municipal Bond 1.17% 4.58% 4.89%
Key Interest Rates
  11/30/20 12/31/19 12/3/15
Federal Funds Target Rate 0-0.25% 1.5-1.75% 0-0.25%
3-Month LIBOR 0.23% 1.91% 0.41%
2-Year U.S. Treasury Note 0.15% 1.57% 0.91%
10-Year U.S. Treasury Note 0.84% 1.92% 2.14%
Prime Rate 3.25% 4.75% 3.25%
Commodities & Currency
  11/30/20 12/31/19 YoY Change
Gold 1,780.9 1,555.2 20.80%
Crude Oil 45.3 61.1 -18.83%
Natural Gas 2.88 2.19 24.46%
Corn 419.8 387.8 13.20%
Soybean 1,168.5 943.0 33.70%
USD: Euro 1.193 1.121 8.27%
 

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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