Market Share Newsletter Vol 3 Issue 13

 

June 22, 2021

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The well-known “dot plot” has recently taken some of the limelight regarding the future of the U.S. economy. The dot plot is a chart that plots the outlook for the federal funds rate, as each dot represents the forecast by each one of the 12 members of the Federal Open Market Committee (FOMC). Recently, at the June 16 meeting, the FOMC changed their outlook and now collectively believes that they will increase their target rate twice by the end of 2023. At the end of 2020, the FOMC was not expecting to raise rates until after 2023, so what has changed?
 
The answer is that many things have changed since their previous meeting in March—the FOMC has increased their forecast of Real GDP to 7% in 2021 from the 6.5% forecast at the previous meeting just three months ago (source here). The Real GDP reflects an adjustment for inflation and removes inflation distortions on economic growth in the United States. Real GDP, year-over-year, has averaged approximately 1.7% over the past ten years. The FOMC is now forecasting a growth rate almost four times that amount. Fiscal stimulus has been a driver in economic growth and based on data from Statista, the United States has delivered COVID-19 fiscal stimulus packages equivalent to 26.5% of its GDP.
 
The most notable change within the FOMC’s projections has been their outlook on inflation, most specifically to 2021, as their longer-term views into 2022 and beyond have barely changed. The Fed has increased their 2021 inflation projection to 3.4% from 2.4% and, more importantly, has increased their outlook on core inflation, which removes food and energy, to 3% from 2.2%. The Federal Reserve continues to tell us that the uptick in inflation is transitory, or not permanent, and it will find its way back to 2% in 2022. The verdict is still out as major inflation components like health care, that are not “transitory,” have increased by 3.42% in the past 12 months.
 
The FOMC’s projections for labor changed the least, but they were already quite optimistic on labor. The unemployment rate is expected to be at 4.5% by year-end 2021 and improved to 3.8% by the end of 2022.Though the dots have been plotted, we do expect them to be replotted—and it is likely that some dots will be pushed closer to the present day, and rates will be raised sooner, rather than further into the future.
 
Thank you for the opportunity to work with you.
 
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 Consumer Price Index (CPI) recorded a 5% year-over-year (YoY) increase in May, which is the largest annual increase in CPI since month ending of August 2008. Transportation contributes to 16.2% of total inflation and has increased by 20% YoY. However, used cars and trucks increased by 29.7% YoY—the largest increase since March 1975.
  • Job openings in the United States, as measured by the JOLT Survey, reached another all-time high in April as 9.29 million openings were reported. An overwhelming number of openings are in the hospitality and leisure industry as they currently account for 42% or 3.91 million openings. Manufacturing hires declined by 38,000 jobs in April but job openings in the manufacturing industry reached an all time high of 851,000.
  • Data from the housing market has been mixed over the past few months with labor shortages, material costs, and exorbitant demand receiving much of the blame for the disappointing data. Though the data has been disappointing relative to expectations, it has been good on a historical comparison. Housing starts were at an annual pace of 1.57 million in May and have averaged 1.3 million over the past five years while the number of permits issued for new construction projects declined to an annual pace of 1.68 million, but well ahead of their five year average of 1.39 million.
  • The Japanese economy declined by 3.9% in the first quarter on an annualized basis, but was better than the forecasted 5% decline. Recent data shows that Japan’s exports rose by almost 50% YoY in May, which was the fastest pace since May 1980. This increase also follows a 38% increase in April. These massive increases are clearly lifted from the plunging economic data in April and May of 2020.
Economic Data: Recent
  Actual Survey Prior
FOMC Rate Decision 0.00-0.25% 0.00-0.25% 0.00-0.25%
Consumer Price Index ("CPI") MoM 0.6% 0.5% 0.8%
Retail Sales Advance MoM -1.3% -0.8% 0.9%
Housing Starts 1572k 1630k 1517k
Economic Data: Upcoming
    Survey Prior
Change in Nonfarm Payrolls   559k 690k
ISM Manufacturing   61.0 61.2
University of Michigan Sentiment   86.5 86.4
New Home Sales   867k 863k
Unemployment rate
Source: Bloomberg


Equities

  • Blackstone Group, one of the world’s largest private equity firms, announced a $6 billion acquisition of Home Partners of America. Home Partners, a private company that currently owns 17,000 homes, acquires single family homes and offers them for rent with an option to ultimately purchase. Blackstone previously built up a similar company, Invitation Homes, which they took public in 2017.
  • Kroger, the country’s largest supermarket chain by revenue, reported adjusted earnings of $1.19 per share, which is much better than the forecasted $0.94 per share. Sales at Kroger were also better than expected, though they were still down 4.1%. The supermarket chain raised their guidance for improved revenue and earnings and their board of directors approved a $1 billion share buyback program.
  • Asian stock markets experienced a challenging week as investors became concerned with a Federal Reserve that shifted a rate hike sooner and thus strengthened the US dollar. The Japanese stock market declined by approximately 4.4% between Thursday of last week and yesterday, but as investors realize that the Fed will likely be gradual with any policy move, the Japanese stock markets will quickly recover.
Equity Index Values and Total Returns
  Value YTD 1-Year
S&P 500 4,224.8 13.27% 37.51%
Dow Jones Industrial Average 33,877.0 11.72% 32.36%
NASDAQ Composite 14,141.5 10.09% 41.73%
Russell 2000 (small-cap index) 2,286.1 16.23% 60.22%
MSCI EAFE (developed intl.) 2,309.4 9.33% 31.76%
MSCI Emerging Markets 658.0 5.42% 37.68%
 
Equities chart
Source: Bloomberg
 

Fixed Income, Commodities and Currencies

  • Despite increased inflation in the United States and an increased expectation for inflation around the world, the amount of negative yielding debt continues to remain at illogical levels. Central banks outside of the United States have continued monetary policy that includes pushing yields negative. As of June 21, there were $13.25 trillion of bonds that carried negative yields around the world. Switzerland’s 50-year government bond yields -0.02%.
  • At their most recent meeting, the Federal Open Market Committee (FOMC) improved their outlook on the U.S. economy and now expects to increase their target interest rate by 50 basis points before year-end 2023. Prior to this meeting, the FOMC had no rate increases planned until beyond 2023, or what they prefer to call “longer term.”
  • Commodity prices have precipitously declined since early May, but lumber has gained the most attraction as its price has fallen approximately 42% from its high. The price of lumber skyrocketed amidst this past year’s renovation and housing boom, but recently lumber mills have been able to ramp up and restart production. The volatile price of lumber has been nothing more than a classic case of supply-and-demand.
Fixed Income Index Yields & Total Returns
  Yield YTD 1-Year
B’berg Barclays Inter Govt./Credit 0.95% -1.04% 0.22%
B’berg Barclays US Aggregate Bond 1.53% -1.88% -0.41%
B’berg Barclays US Corp.High Yield 3.92% 3.05% 13.00%
B’berg Barclays Municipal Bond 0.99% 1.11% 4.37%
Key Interest Rates
  6/21/21 12/31/20 6/23/16
Federal Funds Target Rate 0-0.25% 0-0.25% 0.25-0.5%
3-Month LIBOR 0.13% 0.24% 0.64%
2-Year U.S. Treasury Note 0.25% 0.12% 0.74%
10-Year U.S. Treasury Note 1.49% 0.91% 1.69%
Prime Rate 3.25% 3.25% 3.50%
Commodities & Currency
  6/21/21 12/31/20 YoY Change
Gold 1,782.9 1,905.8 -1.10%
Crude Oil 73.7 48.5 82.28%
Natural Gas 3.19 2.54 95.37%
Corn 659.3 484.0 101.37%
Soybean 1,415.0 1,315.3 61.74%
USD: Euro 1.192 1.222 5.71%
 
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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