Market Share Newsletter Vol 3 Issue 12

 

June 8, 2021

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In most sporting events, the United States vs. a foreign nation is a battle of foes. However, in investing, U.S. and international stocks can be a beneficial partnership. In previous issues of The Market Share, we have addressed behavioral finance and how different influences can affect investment decisions. A behavior often seen in investors is having a home bias. Investors may have a bias to investing in their home country even though many investment opportunities are available abroad. Today, for example, the total market value of all stocks is $95 Trillion, with $40 trillion of the total being non-U.S. domiciled stocks.
 
1st Source recognized the value of investing outside of the U.S. and started adding international stocks to client accounts in the late 1990s and has consistently held 10-20% of equity portfolios in such stocks. Today, we allocate 15-20% of the stock portfolio to international stocks. In addition, many of the U.S. companies we invest in, like Microsoft and Pepsi, generate significant sales outside of the U.S. (almost 50% and 40% respectively). When we look at the equity portfolios we manage and where their sales are generated, approximately 45% of the revenue is from countries outside the U.S. This is also very close to the ratio seen in the market values discussed above.
 
The addition of international stocks serves multiple investment purposes—adding diversity to the portfolio has historically improved returns and reduced risk. These two things are critical in building portfolios. There are also many countries whose economies still have room to develop and should experience greater economic growth than the developed world. Recent data shows that 87% of the world’s population is living in countries considered to be “emerging economies”, yet they only account for about 45% of consumption. The potential to invest and benefit from the economic growth of those countries is attractive.
 
In the past 10 years, international market performance has lagged that of the U.S. stock markets, especially relative to the S&P 500. We have had many clients ask us why we still allocate internationally after seeing the difference in performance. Historically, we have seen periods when the U.S. stock markets do well and other times when international stocks outperform. Like other equities strategies, we increase or decrease the stocks in either sector depending on our outlook. As we look forward for opportunities in stocks, investing in international companies is attractive from the prospect of earnings growth and attractive valuations.
 
Understanding how investments work with each other and the right mix (asset allocation) is a large part of what we do behind the scenes. If you were to stop by our offices, you would find us comparing market data, analyzing and researching various materials as we work hard to meet your needs.
 
Thank you for the opportunity to be of service to you and your family.
 
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

  • Change in nonfarm payrolls increased by 559K in May, below their 675K forecasted increase, but a positive change relative to the disappointing increase of only 278K in April. The unemployment rate dropped to 5.8% from 6.1%. Despite the Job Openings & Labor Turnover Survey (JOLTS) reporting that there were 706K job openings in the manufacturing industry on March 31, manufacturing payrolls have contracted by 9K jobs over the past two months.
  • The Institute for Supply Management (ISM) reported another month of positive momentum in the manufacturing industry—though there is some mixed data given the difficulties in hiring and a continuous increase in order backlogs. The increase in order backlogs, zero percent of 18 manufacturing industries reporting excessive inventory, and a lack of needed labor point to a longer, but lower, runway for overall growth in the manufacturing industry.
  • Initial jobless claims declined for the fifth consecutive week and fell to 385K for the week ending May 29—the lowest they have been since the week ending March 13, 2020 and they have fallen 74% over the prior year. Prior to the pandemic, initial jobless claims had averaged 233K for the previous four years.
  • Consumer credit in the U.S. increased by $18.6 billion in April. Nonrevolving credit, which includes auto loans and others, increased $20.6 billion in April. Consumers continue to shift away from revolving debt, primarily credit cards, which declined by almost $2 billion in April and has declined by approximately $139 billion since March 2020. Consumers have increased their usage of nonrevolving credit over the same time frame by $154 billion—this debt carries a much lower average interest rate than revolving credit.
  • Italy’s unemployment rate unexpectedly increased to 10.7% from 10.4% and was expected to decline to 10.1%. According to data from Istat, Italy’s statistics office, and Dow Jones, the total number of individuals unemployed rose by 88,000 in April as inactive people returned to the labor markets. Canada’s unemployment rate of 8.2% is the closest to Italy’s amongst the G7 countries.
Economic Data: Recent
  Actual Survey Prior
Change in Nonfarm Payrolls 559k 675k 278k
Unemployment Rate 5.8% 5.9% 6.1%
ISM Manufacturing 61.2 61.0 60.7
University of Michigan Sentiment 82.9 83.0 82.8
Economic Data: Upcoming
    Survey Prior
FOMC Rate Decision   0.00-0.25% 0.00-0.25%
Consumer Price Index (CPI) MoM   0.4% 0.8%
Retail Sales Advance MoM   -0.5% 0.0%
Housing Starts   1652k 1569k
Unemployment rate
Source: Bureau of Labor Statistics


Equities

  • Biogen, a biotechnology company, shares increased by 38% on Monday as U.S. regulators approved its Alzheimer’s disease therapy. According to the Food & Drug Administration (FDA), they have provided an accelerated approval—it will remain on the market as long as Biogen continues to research and establish the drug’s benefits. The company also released the list price of the drug at $56,000 per year and vowed to not change the price for at least four years.
  • Small cap stocks have continued their outperformance this year as they were up 17.9%, as measured by the Russell 2000, while the S&P 500 was up 13.3% through yesterday. The index has been captive to the returns of speculative stocks like AMC Entertainment, up 2,494% year-to-date through Monday, and GameStop, up 1,386%. Both stocks have been driven higher by retail investors in social media, specifically a Reddit group, purchasing their shares.
  • Costco reported quarterly results for the three-month period ending May 9, 2021. The company’s revenue increased by 21.5% over the same three-month time period in 2020 and reported earnings of $2.75 per share beating the expected $2.34 per share. Same store sales increased by 20.6% and were forecasted to grow 16%. The company stated they plan to open 21 net new stores in the current fiscal year.
Equity Index Values and Total Returns
  Value YTD 1-Year
S&P 500 4,226.5 13.25% 32.68%
Dow Jones Industrial Average 34,630.2 14.13% 27.85%
NASDAQ Composite 13,881.7 8.03% 41.27%
Russell 2000 (small-cap index) 2,319.2 17.86% 53.08%
MSCI EAFE (developed intl.) 2,366.7 12.01% 31.30%
MSCI Emerging Markets 671.9 7.65% 39.81%
 
Equities chart
Source: Bloomberg
 

Fixed Income, Commodities and Currencies

  • Janet Yellen, Secretary of the U.S. Treasury, told Bloomberg News on Sunday that “if we ended up with a slightly higher interest rate environment it would actually be a plus for society’s point of view and the Fed’s point of view.” Yellen attended a G7 meeting over the weekend where she brought leaders of the six other countries together in agreement with a minimum global corporate tax rate of at least 15%. In October, there will be a G20 meeting where this will be pushed forward.
  • The yield on the ten-year U.S. Treasury reached its lowest yield of 1.51% since May 7 as some disappointing, but still good, economic data has been released as the past two job reports have both been disappointing relative to expectations. The increased talk and shortened time frame of when the Federal Reserve might reduce its expansionary monetary policy has also added volatility to Treasury yields as the relationship between risk assets and Treasuries may take the spotlight.
  • The price of lumber reached an all-time high on May 10, but through yesterday has retreated by almost 29%. The price of copper, looked at as an indicator for the global economy, had also recently reached an all-time high but has retreated from its highs by a much smaller percentage than lumber.
Fixed Income Index Yields & Total Returns
  Yield YTD 1-Year
B’berg Barclays Inter Govt./Credit 0.88% -0.96% 0.82%
B’berg Barclays US Aggregate Bond 1.50% -2.23% -0.04%
B’berg Barclays US Corp.High Yield 3.96% 2.63% 11.57%
B’berg Barclays Municipal Bond 0.98% 1.04% 4.94%
Key Interest Rates
  6/7/21 12/31/20 6/9/16
Federal Funds Target Rate 0-0.25% 0-0.25% 0.25-0.5%
3-Month LIBOR 0.13% 0.24% 0.68%
2-Year U.S. Treasury Note 0.15% 0.12% 0.78%
10-Year U.S. Treasury Note 1.57% 0.91% 1.7%
Prime Rate 3.25% 3.25% 3.50%
Commodities & Currency
  6/7/21 12/31/20 YoY Change
Gold 1,898.8 1,905.8 8.95%
Crude Oil 69.2 48.5 79.76%
Natural Gas 3.07 2.54 77.86%
Corn 679.3 484.0 106.97%
Soybean 1,560.3 1,315.3 83.87%
USD: Euro 1.219 1.222 7.84%
 
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

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