Market Share Newsletter Vol 3 Issue 10

 

May 11, 2021

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Very good economic news abounds in the U.S. First quarter corporate earnings have been very strong, vaccination progress continues, and states are opening. The stock market has responded by continuing to reach new highs. While we expect solid economic growth for the next three to four quarters, we also look ahead for factors that could cause a slowdown. Below are a few areas we are carefully watching:
 
Accelerating manufacturing
The news here is great and surprising in its recovery from the pandemic lows. This would be one area where the news cannot seem to get much better. For example, in a recent economic report, 100% of the industries reported overall growth. It’s hard to top that.
 
Breakeven expectations for inflation
While the economy has improved, we are starting to see short-term signs of inflation in many goods. The expectation for inflation over the next ten years has reached highs of 2.40%–levels not seen since 2013. 100% of manufacturing sectors reported increases in material costs last month. According to Janet Yellen, the former Federal Reserve Chairperson and current Treasury Secretary, a prolonged increase in inflation would move the Federal Reserve to raise rates sooner than expected.
 
COVID-19
The pandemic is not over in the U.S. or globally. Cases continue to surge in several countries, most notably India and Brazil, which represent over 20% of the world’s population. COVID-19 can still cause economic shutdowns that will slow or dampen the global recovery.
 
Disruptions in the supply chain
This one seems to be surfacing with more regularity and may be the most likely to slow down the recovery. Shortages are experienced with microchips, home building supplies, and plastics. The shortages are impacting the production of cars and new homes. Even pool supplies are in a shortage due to the lack of plastic buckets.
 
Employee Shortage
In March, 916,000 people gained employment, which is great. However, April only saw 266,000 people gain employment. The number of job openings is back to pre-pandemic levels and although wages are higher, many industries are reporting that the lack of job applicants is limiting their ability to meet demand. Economic growth will be limited in industries that are struggling to fulfill their staffing needs.
 
It is our practice to look ahead to see what the market may be missing, good or bad. We will keep watching for trends that require action. Thank you for following The Market Share.
 
Paul Gifford, CFA
Chief Investment Officer
Wealth Advisory Services
Investment Management Group
GiffordP@1stsource.com
Erik Clapsaddle, CFA, CFP®
V.P. and Sr. Fixed Income Portfolio Manager
Wealth Advisory Services
Investment Management Group
ClapsaddleE@1stsource.com
Considerations for your portfolio

The Economy

  • The change in nonfarm payrolls announced this past Friday greatly disappointed as payrolls increased by 266K but expectations were for an increase of 1 million. The entire labor market data was disappointing as the number of jobs added in February and March were revised downward by 78K jobs. Manufacturing payrolls declined by 18K in April and were specifically driven lower by a 27K decline in motor vehicle and parts manufacturing jobs mostly attributable to the global semiconductor chip shortage. The unemployment rate slightly increased to 6.09%.
  • Job openings in the United States, as revealed by the Job Openings and Labor Turnover Survey, increased to a record high of 8.12 million in March. The lack of supply in labor will likely be a damper on the economy as individuals choose to wait longer to reenter the labor force. The total number of individuals unemployed at the end of April was 9.81 million.
  • GDP increased by 6.4% in the first quarter relative to expectations of 6.7%. Personal consumption increased more than total GDP in the quarter as it rose by a little more than 7%. This was driven by a 25.9% quarterly increase in the consumption of durable goods—goods that typically last for at least three years. A primary detractor within GDP was the change in net exports as imports increased by 5% and exports declined by 8.9%.
  • The Institute for Supply Management (ISM) released their monthly manufacturing index that showed lower growth than expected within manufacturing, but still well into growth territory though inhibited by a few headwinds. For the past five months, 100% of the18 manufacturing industries reporting have indicated they are paying higher prices. The most positive forward-looking news for the economy was that 0% of industries reported their customers have excessive inventory and 78% of manufacturing industries reported they experienced an increase in backlogged orders.
  • In April, Consumer confidence, as reported by a Conference Board survey, rose to its highest level since February 2020, well ahead of expectations. In the survey, 14% of all respondents stated that they plan to buy an automobile in the next six months, the highest percentage since May 2019, and those that plan to buy a home in the next six months reached an all-time high of 8.9%.
Economic Data: Recent
  Actual Survey Prior
Change in Nonfarm Payrolls 266k 1000k 770k
FOMC Rate Decision 0-0.25% 0-0.25% 0-0.25%
ISM Manufacturing 60.7 65.0 64.7
GDP 1Q QoQ 6.4% 6.7% 4.3%
Economic Data: Upcoming
    Survey Prior
Consumer Price Index (CPI) MoM   0.2% 0.6%
Retail Sales Advance MoM   1.0% 9.7%
Housing Starts   1705k 1739k
Existing Home Sales   6.04m 6.01m
Unemployment rate
Source: Bureau of Labor Statistics


Equities

  • Technology stocks have performed poorly this year as inflation fears have been a driving force in pushing investors out of stocks that appear to be relatively expensive. After years of outperformance, a few of the biggest technology companies, with a discretionary tilt, have been struggling in 2021. Amazon is down 2% through May 11, Apple is down 4.1%, and Netflix is down 10% year-to-date (YTD). Alphabet, the parent company of Google, has bucked the trend and is up 30.8% YTD.
  • Pfizer, one of the primary manufacturers of COVID-19 vaccines, reported first quarter earnings and easily exceeded expectations in both revenue and net income. Pfizer’s quarterly revenue grew by 45% year-over-year (YoY) and was largely attributable to revenue from vaccines growing to $4.89 billion from $1.61 billion YoY. The growth in vaccine revenue comprised approximately 23% of Pfizer’s total revenue in the quarter and the company raised its outlook for the year as they increased their revenue outlook for the COVID-19 vaccine by 73%.
  • The following ten days should give us a better glimpse of how the consumer has been doing as Disney, Walmart, Home Depot, Target, Lowe’s, and L Brands all report their first quarter earnings. The price of Home Depot and Lowe’s stocks are up 29.2% and 32.5% YTD through May 10 as the strong housing market, and the lack of housing inventory, has guided investors into these two companies.
Equity Index Values and Total Returns
  Value YTD 1-Year
S&P 500 4,188.4 12.07% 43.35%
Dow Jones Industrial Average 34,742.8 14.22% 44.38%
NASDAQ Composite 13,401.9 4.22% 45.05%
Russell 2000 (small-cap index) 2,212.7 12.36% 67.61%
MSCI EAFE (developed intl.) 2,336.2 10.22% 46.11%
MSCI Emerging Markets 653.9 4.77% 50.04%
 
Equities chart
Source: Bloomberg
 

Fixed Income, Commodities and Currencies

  • The Federal Open Market Committee (FOMC) maintained their target rate at 0%-0.25% on April 28 and each month the Federal Reserve will continue to buy $120 billion of bonds. The FOMC continued to address their concerns that the economic recovery, though accelerating, is “uneven and far from complete” and gave no sign that they will change their current monetary policy stance.
  • The breakeven inflation rate, an inflation projection calculated by U.S. Treasury notes and bonds, is projecting that inflation will average approximately 2.7% over the next five years. The last time the Consumer Price Index (CPI) increased by 2.7% on an annualized basis was the month ending July 2018 and it has only happened twice since 2012.
  • President Joe Biden and his administration temporarily removed a few environmental regulations today that allowed more gasoline to be supplied to Maryland, Virginia, Pennsylvania, and Washington D.C. This decision was made due to the Colonial Pipeline being shut down for four consecutive days and creating fuel shortages on the East Coast. Through May 11 the price of crude oil has increased 27.6% YTD.
Fixed Income Index Yields & Total Returns
  Yield YTD 1-Year
B’berg Barclays Inter Govt./Credit 0.89% -1.15% 1.48%
B’berg Barclays US Aggregate Bond 1.51% -2.53% 0.57%
B’berg Barclays US Corp.High Yield 3.89% 2.29% 19.24%
B’berg Barclays Municipal Bond 1.01% 0.72% 6.63%
Key Interest Rates
  5/10/21 12/31/20 5/12/16
Federal Funds Target Rate 0-0.25% 0-0.25% 0.25-0.5%
3-Month LIBOR 0.16% 0.24% 0.63%
2-Year U.S. Treasury Note 0.15% 0.12% 0.73%
10-Year U.S. Treasury Note 1.6% 0.91% 1.74%
Prime Rate 3.25% 3.25% 3.50%
Commodities & Currency
  5/10/21 12/31/20 YoY Change
Gold 1,837.6 1,902.8 5.97%
Crude Oil 64.9 48.5 169.97%
Natural Gas 2.93 2.54 59.26%
Corn 748.0 484.0 141.44%
Soybean 1,620.0 1,315.3 92.08%
USD: Euro 1.213 1.222 12.59%
 
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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