Market Share Newsletter Vol 3 Issue 1

 

January 5, 2021

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Happy New Year! Every year our team reflects on the past year and compiles our thoughts and insights into what the next year might hold from an investment perspective. Looking ahead into a year of potential progress and change, we are pleased to share with you The Market Share Investment Outlook 2021. If you would like to receive a printed copy in the mail, please let us know.
 
Outlook 2021
 
We are currently in an “in-between” period–between earnings announcements and between the beginning and the end of the pandemic. Investment markets go through periods like this with not much news to drive the market in one direction or another. When investment markets are in-between catalysts, day to day volatility is tied to the news of the day. We have seen that volatility with vaccine news. On days when there is good news regarding vaccines, stocks go up (particularly those that would benefit from a greater reopening of the economy). Negative news on vaccines or delayed stimulus bills brings the inverse–growth and technology stocks perform better.
 
Investors are actively watching the results of today’s Senatorial run-off election in the state of Georgia. Thus far, the stock market has been comfortable enough to continue the post-election rally of over 13% for the S&P 500 and twice that for small cap stocks (+26%). We have communicated that earnings, interest rates and other metrics to value stocks are the most important, but today’s election results will have a greater impact on the market as we wait for corporate earnings releases.
 
When managing portfolios, we are patient during these in-between times and looking for trends to begin. We would rather be a bit late than too early. This has helped us manage risk in portfolios by avoiding unnecessary trading and ultimately working towards the goal of long-term, consistent results for our clients.
 
If you feel stuck in-between, you are not alone, we feel it also. We are looking forward to a better 2021 and continue to research, read, discuss, plan and implement any needed adjustments to your investments.
 
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

  • President Trump signed a new $900 billion stimulus bill on December 27 that includes $600 checks to individuals that meet specific income guidelines, it brings back enhanced, federal jobless benefits for 11 weeks and extends the Pandemic Unemployment Assistance. The bill also provides funding for education, $285 billion to refill the Payment Protection Program, funding for nursing homes and the purchase of vaccines, and a few less notable line items. As expected, the stimulus bill was not perfect, but it provides another bridge to the hopeful end of the COVID-19 pandemic.
  • The third and final estimate of third quarter GDP grew by a record 33.4% in the United States and helped us disremember the 31.4% decline in GDP in the second quarter—the largest decline on record. The largest contributor to GDP in the third quarter was the manufacturing industry as it contributed 17.9% of total economic growth in the quarter and was followed by the healthcare industry and hospitality and food services.
  • The Institute for Supply Management (ISM) reported that manufacturing activity in December expanded at its fastest pace since August 2018. Employment continued to be a constraint within manufacturing, but it started to grow again for only the second time in the past 17 months. We have written about the manufacturing sector for months and how we have seen it as the strongest part of the U.S. economy, and we continue to see it as a catalyst going forward.
Economic Data: Recent
  Actual Survey Prior
FOMC Rate Decision 0%-0.25% 0%-0.25% 0%-0.25%
ISM Manufacturing Index 60.7 56.8 57.5
Retail Sales Advance MoM -1.1% -0.3% -0.1%
New Home Sales MoM -11.0% -0.5% -2.1%
Economic Data: Upcoming
    Survey Prior
Consumer Price Index (CPI) MoM   0.4% 0.2%
University of Michigan Sentiment   81.0 80.7
Housing Starts   1560k 1547k
Existing Home Sales   6.64m 6.69m


Equities

  • On Monday, shareholders approved the merger of Fiat Chrysler, an Italian-American automaker, and PSA Groupe, a French automaker. This will create the fourth largest global automaker based on volume. The company will change its name to Stellantis. Shares are expected to start trading in mid-January as Carlos Tavares, the new CEO of Stellantis, stated the combined company has cleared all regulatory barriers.
  • Small cap stocks, as measured by the Russell 2000 index, outpaced the S&P 500 by 19.3 percentage points in the fourth quarter. The Russell 2000 returned 31.4% while the S&P 500 returned 12.1%. The performance of small cap stocks comes on the heels of U.S. regulators approving multiple vaccines for use against COVID-19 and the idea that the economy will continue to recover quickly.
  • Fourth quarter earnings releases will begin tomorrow as Carnival Corp, the struggling cruise line company, will release their earnings with an expected loss of $1.86 per share. The remaining part of the week will be followed by Walgreens and Conagra. Next week, the larger financial companies will start to report—Blackrock, Wells Fargo, Charles Schwab, and JPMorgan Chase—but the week will start with Delta Airlines with an expected loss of approximately $2.40 per share.
Equity Index Values and Total Returns
  Value YTD 1-Year
S&P 500 3,700.7 -1.47% 16.84%
Dow Jones Industrial Average 30,223.9 -1.24% 8.14%
NASDAQ Composite 12,698.5 -1.47% 42.92%
Russell 2000 (small-cap index) 1,945.9 -1.46% 20.02%
MSCI EAFE (developed intl.) 2,162.4 0.70% 8.85%
MSCI Emerging Markets 630.5 1.02% 18.53%
 

Source: Bloomberg
 

Fixed Income, Commodities and Currencies

  • More corporate bond ratings went down than up in 2020, also known as the up/down ratio. The ratio was at its lowest level since 2009 based off of Moody’s credit rating. A few of the major borrowers that received downgrades in 2020 were Pfizer, Intercontinental Exchange, Macy’s, L Brands, and Exxon Mobil. Fallen Angels are companies that have their debt downgraded from investment grade to high yield. In 2020, 24 companies became Fallen Angels—the highest level since 2016.
  • Municipal bonds have had an excellent year, despite the inevitable budget strains and weak revenue that have arisen from national and local shutdowns throughout the COVID-19 pandemic. This is the seventh consecutive year of positive returns in municipal bonds, based on data from the Bloomberg Barclays Municipal Bond Index, as the index returned 5.22% in 2020.
Fixed Income Index Yields & Total Returns
  Yield YTD 1-Year
B’berg Barclays Inter Govt./Credit 0.59% 0.00% 6.08%
B’berg Barclays US Aggregate Bond 1.13% -0.06% 6.87%
B’berg Barclays US Corp.High Yield 4.22% -0.01% 6.89%
B’berg Barclays Municipal Bond 1.06% 0.06% 4.83%
Key Interest Rates
  1/4/21 12/31/19 1/7/16
Federal Funds Target Rate 0-0.25% 0-0.25% 0.25-0.5%
3-Month LIBOR 0.24% 0.24% 0.61%
2-Year U.S. Treasury Note 0.11% 0.12% 1.01%
10-Year U.S. Treasury Note 0.91% 0.91% 2.24%
Prime Rate 3.25% 3.25% 3.50%
Commodities & Currency
  1/4/21 12/31/19 YoY Change
Gold 1,946.6 1,895.1 23.08%
Crude Oil 47.6 48.5 -21.08%
Natural Gas 2.58 2.54 27.93%
Corn 483.8 484.0 27.75%
Soybean 1,316.5 1,315.3 47.29%
USD: Euro 1.225 1.222 9.72%
 

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:
  • 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.