Market Share Newsletter Vol 2 Issue 30
December 15, 2020
Your 1st Source for market information
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
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
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:
Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.
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:
- Not insured by the FDIC or any Federal Government Agency
- Not a deposit or other obligation of, or guaranteed by, the Bank or any bank affiliate
- Subject to investment risks, including possible loss of the principal amount invested
Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.