Market Share Newsletter Vol 2 Issue 30

 

December 15, 2020

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The first COVID-19 vaccine is now being administered in the U.S. This welcomed news has helped create a positive outlook for the economy and stocks in 2021. Analysts are quickly raising their forecasts for the growth of corporate earnings next year. 2020 earnings for the S&P 500 should be down approximately 13% and even more for small cap stocks due to the pandemic. In 2021, analysts are expecting significant improvement and some forecasts of record earnings for next year. We are encouraged by these forecasts but are cautiously optimistic.
 
The “reopen” trade, which has gained momentum since the election, has strengthened with the positive vaccine news and particularly for small companies. Small cap stocks have appreciated nearly 4% in December and logged more record highs. The S&P 500 has been relatively flat as investors are slowly shifting focus to stocks that are most sensitive to a rapid economic recovery. Growth and value stocks have similar forecasted earnings growth for next year, except value stocks as measured by price-to-earnings are much cheaper than growth stocks. Thus, this may be the beginning movement to value stocks. We have seen value outperform for short periods, over the past decade, only to go back to underperformance. The impact of the vaccine, reopening, short term regional shutdowns and the continued low interest rates set by the Federal Reserve are preeminent Tuesday.
 
While we work to make the best decisions for each client’s portfolio, we want to take a moment to say thank you and express our gratitude. Thank you to all of our great clients for the opportunity to work with you and your family, in good times and bad, as we help you achieve security, build wealth and realize your dreams. We are also grateful to be part of a dedicated team in Wealth Advisory Services and 1st Source Bank.
 
Happy Holidays and Happy New Year.
 
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

  • As a result of the current state of the pandemic, the output and growth rate within manufacturing slipped in November as customers’ inventories reached a 10-year low, the backlog of orders grew, and employment dipped into contraction territory. Despite labor issues, manufacturing is still in a strong expansion as 89% of manufacturing industries reported overall growth.
  • The change in nonfarm payrolls disappointed in November as only 245K jobs were added, compared to the 460K expected. The unemployment rate dropped from 6.9% to 6.7% as 400K individuals left the labor force. The decline in the labor force moved the participation rate from 61.7% to 61.5% and continued to show the slack that exists in the labor market. In the past four years the labor force participation rate peaked in February 2020 at 63.4%.
  • The Job Opening Labor Turnover Survey (JOLTS) recently reported that the U.S. economy had the most private sector job openings (6.4 million) since October 2019. This number will likely decline when November’s data is released as state governments throughout the country have moved back to partial business shutdowns as reflected in initial jobless claims over the past month.
  • The Federal Reserve reported that net worth in United States households increased by $3.8 trillion in the third quarter to a new record. Debt also grew by 3.8% in the third quarter as federal government debt grew by 9.1% and household debt increased by 5.6%. Surprisingly, corporate debt declined by 3.7% in the quarter after debt grew by 13.4% and 23.9% in the second and first quarters respectively.
Economic Data: Recent
  Actual Survey Prior
Change in Nonfarm Payrolls 245k 460k 610k
University of Michigan Confidence 81.4 76.0 76.9
Consumer Price Index (CPI) MoM 0.2% 0.1% 0.0%
Unemployment Rate 6.7% 6.7% 6.9%
Economic Data: Upcoming
    Survey Prior
FOMC Rate Decision   0%-0.25% 0%-0.25%
Conference Board Consumer Confidence   96.8 96.1
Retail Sales Advance MoM   -0.3% 0.3%
Personal Income   -0.2% -0.7%


Equities

  • The equity markets have risen on the news of the distribution and administration of the approved Pfizer/BioNTech coronavirus vaccine. The other driving force in equities has been a two-part $908 billion stimulus package that continues to meander through Congress and appears to be close to gaining approval. Warren Buffett spoke up this week stating, “Just renew the PPP and get us to the end of the tunnel.”
  • U.S. regulators stated today that Moderna’s vaccine is safe and effective and is clearing the way for a second vaccine to be distributed. According to the Food and Drug Administration, Moderna’s vaccine is 94.1% effective at preventing symptomatic COVID-19. Additional COVID-19 vaccines, including ones from Johnson & Johnson and AstraZeneca, continue to be researched and worked on as cases and deaths around the world remain at high levels.
  • The fourth quarter has been good to small cap stocks through December 15 as the Russell 2000, the most prominent index for the small cap equities, was up 28.2% and the S&P 500 was only up 9.6%. The extreme returns this quarter have moved the year-to-date total return on the Russell 2000 ahead of the S&P 500.
Equity Index Values and Total Returns
  Value YTD 1-Year
S&P 500 3,647.5 14.91% 17.72%
Dow Jones Industrial Average 29,861.6 7.05% 8.78%
NASDAQ Composite 12,440.0 39.97% 44.76%
Russell 2000 (small-cap index) 1,913.9 16.15% 19.54%
MSCI EAFE (developed intl.) 2,099.5 5.89% 7.10%
MSCI Emerging Markets 603.4 14.38% 17.58%
 

Source: Bloomberg
 

Fixed Income, Commodities and Currencies

  • CreditSights, one of the most prominent credit research firms, recently stated that investors should buy AT&T bonds as they are set to outperform in 2021. Their stance comes from AT&T’s refocus on their core telecom business and their ability to sell assets and continue to trim their total debt. Based on Bloomberg data, AT&T reduced their total debt from $196.8 billion on March 31, 2019 to $184.4 billion on September 30, 2020.
  • On December 4, the yield on the ten-year U.S. Treasury reached 0.984%. This was the highest yield on the bond since March 2020, but the yield has since retreated back to 0.90% and we expect it to hover in this territory for the next few months.
  • The price of brent crude oil rose above $50 per barrel this past Thursday for the first time since March 6 amidst optimism on the progress of the coronavirus vaccines. This upward move in price is despite the move back to partial business and government shutdowns throughout the United States and Europe.
Fixed Income Index Yields & Total Returns
  Yield YTD 1-Year
B’berg Barclays Inter Govt./Credit 0.62% 6.25% 6.32%
B’berg Barclays US Aggregate Bond 1.16% 7.24% 7.09%
B’berg Barclays US Corp.High Yield 4.41% 6.25% 7.18%
B’berg Barclays Municipal Bond 1.10% 5.00% 5.00%
Key Interest Rates
  12/14/20 12/31/19 12/17/15
Federal Funds Target Rate 0-0.25% 1.5-1.75% 0-0.25%
3-Month LIBOR 0.22% 1.91% 0.51%
2-Year U.S. Treasury Note 0.12% 1.57% 0.96%
10-Year U.S. Treasury Note 0.89% 1.92% 2.27%
Prime Rate 3.25% 4.75% 3.25%
Commodities & Currency
  12/14/20 12/31/19 YoY Change
Gold 1,832.1 1,555.2 22.79%
Crude Oil 47.0 61.1 -20.98%
Natural Gas 2.68 2.19 15.46%
Corn 424.0 387.8 15.15%
Soybean 1,169.5 943.0 28.65%
USD: Euro 1.214 1.121 9.08%
 

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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