Market Share Newsletter Vol 2 Issue 3

Volume 2 Issue #3: February 5, 2020

 

February 5, 2020

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The presidential impeachment, conflict in Iran and the Coronavirus are all issues impacting markets this week. In today’s Market Share video, we talk about geopolitical risk and how it factors into investment decisions.
 
The broader economic health of the U.S. economy still looks good and now shows an improvement in manufacturing. Several outside influences seem to be impeding large advancements in stock prices in the near term. This is not bad news following such a large positive move in 2019. As positive earnings are announced, higher stock prices will be supported and some of today’s geopolitical influences will wane.
 
Thank you for taking time to review The Market Share, and as always, we appreciate the opportunity to work with you!
 
Paul Gifford, CFA
Chief Investment Officer
1st Source Corporation Investment Advisors, Inc.
GiffordP@1stsource.com
Erik Clapsaddle, CFA, CFP®
Senior Fixed Income Portfolio Manager
1st Source Corporation Investment Advisors, Inc.
ClapsaddleE@1stsource.com
Geopolitical Risk in Today's Markets

Watch Paul Gifford and Jackie Kronewitter explain how current geopolitical risks are impacting market trends.

Considerations for your portfolio

The Economy

  • The Institute for Supply Management (ISM) released their manufacturing index that moved into growth territory for the first time since last July. New orders within manufacturing; not only grew for the first time in six months, but they were also at their highest level since May 2019. The growth within manufacturing could be short-lived as the global affects from the coronavirus in China become known.
  • The coronavirus outbreak in China left a mark on the Chinese stock market as the Shanghai Composite fell 7.7% on February 3 (the first day of trading after China’s Lunar New Year holiday). The market has partially recovered since then, but the virus continues to grow with over 400 deaths and 20,000 confirmed cases reported.
  • GDP for the fourth quarter of 2019 increased by 2.1% as net exports were an abnormally large contributor to economic growth for the quarter. The quarterly growth in consumer spending increased at its slowest pace of the year (+1.8%) during the fourth quarter—a stalwart of GDP growth in the U.S. GDP grew by 2.3% for the full year of 2019.
  • Global manufacturing data also ticked up in January for Germany, Japan, France, and the United Kingdom while the service sector was more mixed amongst these four large international economies. We still see the Eurozone searching for an economic bottom as they most recently reported fourth quarter GDP growth of 0.1%.
  • A job report from ADP showed that 291,000 private payroll jobs were added in January—the forecast was for only an additional 150,000 jobs.
Economic Data: Recent
  Actual Survey Prior
FOMC Rate Decision (upper bound) 
1.75% 1.75% 1.75%
GDP Annualized 4Q (first release)   2.1% 2.0% 2.1%
Conf. Board Consumer Confidence 131.6 128.0 126.5
ADP Employment Change 291k 157k 202k
Economic Data: Upcoming
    Survey Prior
Change in Nonfarm Payrolls   162k 145k
Consumer Price Index MoM   0.2% 0.2%
Retail Sales Advance MoM 0.3% 0.3%
Housing Starts   1370k 1608k

Equities

  • Amazon.com reported impressive 2019 fourth quarter results as earnings were almost 60% higher than expected and total revenue was $87.4 billion. Sales in North America and internationally were up 22% and 14% in comparison to the fourth quarter of 2018. The stock reacted positively to the quarterly results and reached a record high.
  • According to data from FactSet, the energy sector has reported a year-on-year earnings decline of -42.5%. Both ExxonMobil and Chevron have reported disappointing numbers against forecast. One bright spot was BP beating quarterly expectations which caused the stock to rise despite these macro pressures.
  • Apple, Microsoft, and Amazon.com have each eclipsed a market capitalization of $1 trillion. Alphabet Inc., parent company of Google, has now been over and under the trillion-dollar line. Market capitalization is the total value of all a company’s outstanding shares.
  • The Shanghai Stock Exchange Composite Index is off to a rough start this year as the concerns and uncertainty of the coronavirus have pushed the index down 7.6% year-to-date through February 5.
Equity Index Values and Total Returns
  Value YTD 1-Year
S&P 500 3,297.6 2.19% 22.85%
Dow Jones Industrial Average 28,807.6 1.05% 16.14%
NASDAQ Composite 9,468.0 5.62% 29.41%
Russell 2000 (small-cap index) 1,656.8 -0.64% 10.53%
MSCI EAFE (developed intl.) 2,006.3 -1.45% 12.52%
MSCI Emerging Markets 513.8 -2.60% 5.85%
Federal Reserve's Inflation Target
Source: Bloomberg

Fixed Income

  • Treasury-inflation Protected Securities (TIPS) have recorded a good 12 months for the period ending February 4, 2020 (based on Bloomberg indices), as they have returned 8.9% which is a slight outperformance relative to their fixed rate counterpart of 8.74%.
  • The United States Treasury may start issuing 20-year bonds as part of their auctions starting in May this year. The Treasury Borrowing Advisory Committee recommended this as there would be strong demand for this maturity amongst primary dealers.
  • Investment grade bond funds had net inflows of $23.4 billion in January making it one of the biggest months on record for net inflows. Despite the strong January for investment-grade funds, junk-bond funds experienced net withdrawals of $2.9 billion for the week ending January 31.
Fixed Income Index Yields & Total Returns
  Yield YTD 1-Year
B’berg Barclays Inter Govt./Credit 1.72% 1.12% 7.24%
B’berg Barclays US Aggregate Bond 2.09% 1.57% 9.45%
B’berg Barclays US Corp.High Yield 5.41% 0.28% 9.05%
B’berg Barclays Municipal Bond 1.50% 1.69% 8.60%
Key Interest Rates
  2/4/20 12/31/19 2/6/15
Federal Funds Target Rate 1.5-1.75% 1.5-1.75% 0-0.25%
3-Month LIBOR 1.74% 1.91% 0.26%
2-Year U.S. Treasury Note 1.41% 1.57% 0.52%
10-Year U.S. Treasury Note 1.6% 1.92% 1.82%
Prime Rate 4.75% 4.75% 3.25%
fixed income chart
Source: Trading Economics
 
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
1st Source Corporation Investment Advisors, Inc. is a wholly owned subsidiary of 1st Source Bank.