Market Share Newsletter Vol 3 Issue 11

May 25, 2021


Your 1st Source for market information
Disinflation is the word used to describe falling inflation
rates. Over the past 30 years, inflation has steadily declined and has averaged
around 2% over the past 20 years, as depicted by the chart below. We have seen
inflation rise in the past during times of increasing economic growth, for
example 2003-2005, 2015-2018, and now in 2021 as we reopen the economy. Two
weeks ago, we mentioned inflation and inflation expectations are at the highest
levels in eight years. One of the primary areas we are watching for potential
concerns is in equity prices. Google search for the word “inflation” has also
spiked to the highest level since 2008 and according to a survey by Bank of
America—inflation is now considered the top risk to markets for investors.

Several industries have seen tremendous price increases, such as
housing and lumber, used cars, and even average hourly earnings. In the
short-term, it is impacting prices. Recent price quotes on metals and other raw
materials may only be valid for two weeks, which is a much shorter timeframe than
usual.
As we frequently mention, the market is a forward-looking
vehicle and may already be expecting higher inflation. Similar to the equity
markets quickly pricing-in the coronavirus in spring of 2020 but recovering as
it looked forward to a robust economic recovery. The U.S. Treasury market also
seems to acknowledge higher inflation as the 10-year U.S. Treasury bond saw yields
climb from 0.50% to a range of 1.5-1.7% today. Both markets, at this time, seem
to indicate that the current spike in inflation will last for more than a
transitory period, but still not become a substantial issue.
The idea of inflation transitioning to lower levels over the
next few years is also the view of the Federal Reserve and is one of the
reasons they are keeping short term interest rates low in the face of higher
inflation today.
As it is common in investing, markets are always worried about
something—which is good. The notion of climbing the wall of worry for stock
prices is the norm. Today, inflation is a brick in the wall that the markets
must climb to continue to reach new highs.
Thank you for the opportunity to work with you and your family.
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®
V.P. and Sr. Fixed Income Portfolio Manager
Wealth Advisory Services
Investment Management Group
ClapsaddleE@1stsource.com
V.P. and Sr. Fixed Income Portfolio Manager
Wealth Advisory Services
Investment Management Group
ClapsaddleE@1stsource.com
Considerations for your portfolio
The Economy
- Initial jobless claims dropped to 444K for the week ending May 15, but continuing claims (those who have filed for unemployment benefits at least two weeks ago) unexpectedly increased for the week ending May 8 to their highest level in almost two months. California’s economy has struggled through the pandemic and currently makes up 14.2% of total claims while being less than 12% of the U.S. population.
- The IHS Markit Economics released their service sector index this past week and reported that it reached its highest level on record since the index series began. In a separate index, the manufacturing sector also grew at a record pace in May’s reading as new manufacturing orders grew at their fastest pace on record and continued an eleven-month streak of expansion.
- The Consumer Price Index (CPI) increased by 0.8% in April and by 4.2% over the past 12 months for the period ending April 30, 2021. The average annual increase in CPI over the past decade has been 1.7%, but the dramatic increase over the past 12 months in gasoline prices (+49.6%), transportation (+14.9%), and commodities (+6.8%) has pushed inflation much higher than average as we also began the past 12 months at much lower prices coming out of the COVID-induced recession.
- Despite the robust growth that the United States has experienced since the third quarter of 2020 and the first quarter GDP of 6.4%, Europe is still not experiencing the same growth. Germany reported a first quarter GDP decline of 1.8%, France increased by only 0.4%, and Greece’s output is forecasted to decline by 9.2%.
Economic Data: Recent | |||
---|---|---|---|
Actual | Survey | Prior | |
Consumer Price Index (CPI) MoM | 0.8% | 0.2% | 0.6% |
Retail Sales Advance MoM | 0.0% | 1.0% | 10.7% |
Housing Starts | 1569k | 1704k | 1733k |
Existing Home Sales | 5.85m | 6.07m | 6.01m |
Economic Data: Upcoming | |||
Survey | Prior | ||
Change in Nonfarm Payrolls | 620k | 266k | |
Unemployment Rate | 5.9% | 6.1% | |
ISM Manufacturing | 61.0 | 60.7 | |
University of Michigan Sentiment | 83.0 | 82.8 |

Source: Bloomberg
Equities
- AT&T has recently announced that they are looking to spin off their media. In other words, they are looking to unwind their widely-criticized $85 billion acquisition of Time Warner in 2018. AT&T and Discovery Media announced May 17 that they would combine their streaming and cable businesses—including HBO, CNN, TNT, Food Network, Animal Planet, and HGTV. This would form a new publicly traded company and AT&T would receive approximately $43 billion in cash and securities. AT&T has already stated they plan to cut their dividend post spin-off to reflect their smaller size.
- Energy and financials have been the best performing sectors within the S&P 500 year-to-date as energy has gained 37.6% and financials have gained 27.7% through May 25. Cyclical stocks have performed very well this year as they depend on the economy doing well and investors, including us, believe that the U.S. economy will continue to expand at a robust pace. The worst performing sectors year-to-date have been consumer discretionary and utilities.
- Based on Bloomberg data, foreign investors purchased a record amount of $3.4 billion in Chinese stocks on May 25. Investors have moved into Chinese stocks as the Chinese government is trying to maintain better control over commodity prices and announced plans that they will attempt to make Shanghai a global financial hub where multinational companies would set up regional centers.
Equity Index Values and Total Returns | |||
---|---|---|---|
Value | YTD | 1-Year | |
S&P 500 | 4,197.1 | 12.40% | 43.97% |
Dow Jones Industrial Average | 34,394.0 | 13.24% | 43.24% |
NASDAQ Composite | 13,661.2 | 6.29% | 47.38% |
Russell 2000 (small-cap index) | 2,227.3 | 13.16% | 65.84% |
MSCI EAFE (developed intl.) | 2,324.2 | 9.90% | 43.58% |
MSCI Emerging Markets | 644.9 | 3.32% | 48.54% |

Source: Bloomberg
Fixed Income, Commodities and Currencies
- The 5-year breakeven inflation rate, which measures inflation expectations in the bond market, reached its highest level since April 2005 of 2.82% on May 18. The 5-year breakeven rate is the inflation rate that bond investors will need to average in order to have bonds linked to inflation equal to the yield on a 5-year U.S. Treasury note that pays a fixed interest rate.
- Despite rising rates over the past few months and a strong increase in inflation expectations, there is still $12.7 trillion of global bonds that carry negative yield to maturities. As we have addressed repeatedly, Switzerland’s 50-year government bond continues to trade with a negative yield and currently yields -0.01%.
- The largest countries from around the world have again started negotiations with Iran to revive an agreement that puts caps on how much uranium Iran can stockpile, as it recently became 15 times larger than allowed, based on data from the International Atomic Energy Agency. Iran holds the world’s second largest natural gas reserve and the fourth largest oil reserve.
Fixed Income Index Yields & Total Returns | |||
---|---|---|---|
Yield | YTD | 1-Year | |
B’berg Barclays Inter Govt./Credit | 0.90% | -1.12% | 0.87% |
B’berg Barclays US Aggregate Bond | 1.52% | -2.49% | -0.38% |
B’berg Barclays US Corp.High Yield | 4.10% | 1.99% | 16.73% |
B’berg Barclays Municipal Bond | 1.04% | 0.65% | 4.82% |
Key Interest Rates | |||
5/24/21 | 12/31/20 | 5/26/16 | |
Federal Funds Target Rate | 0-0.25% | 0-0.25% | 0.25-0.5% |
3-Month LIBOR | 0.14% | 0.24% | 0.67% |
2-Year U.S. Treasury Note | 0.15% | 0.12% | 0.92% |
10-Year U.S. Treasury Note | 1.6% | 0.91% | 1.87% |
Prime Rate | 3.25% | 3.25% | 3.50% |
Commodities & Currency | |||
5/24/21 | 12/31/20 | YoY Change | |
Gold | 1,886.7 | 1,905.8 | 6.98% |
Crude Oil | 66.1 | 48.5 | 98.59% |
Natural Gas | 2.89 | 2.54 | 67.30% |
Corn | 657.3 | 484.0 | 96.86% |
Soybean | 1,522.8 | 1,315.3 | 80.59% |
USD: Euro | 1.222 | 1.222 | 12.29% |
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.