Market Share Newsletter Vol 3 Issue 15

 

July 20, 2021

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Investment markets are acting like they are in the summer doldrums. Even though data is regularly reported, the market has had little or no reaction. For the past two and a half months, daily movements in stock prices have been the lowest in a year—with many stock indices having little change in price. This could change as the number of COVID cases increase here and around the world and is a reminder that we are not quite done with the pandemic nor its impact on the health of the nation and the economy.
 
While we may be in the summer doldrum period, we have seen much more volatility in a few underlying markets. Small cap stocks, which have been performing very well as part of the re-opening of trade in the U.S., have now fallen almost 10%–their largest drop since March 2020. Emerging market stocks are also down over 5%. Part of this is driven by the Chinese government reducing stimulus as their economy recovers, in addition to the crackdown on Chinese based tech companies. One market that has improving prices is the U.S. Treasury market. The 10-year Treasury bond has risen in price by 4% since March 31, 2021. The bad news about rising Treasury bond prices is that the yield is down to 1.20% for those buying the bonds today. The drop in bond yields could be the result of various factors, but U.S. yields are still attractive versus most global bonds. The bond market does not reflect the recent spike in inflation continuing or that more volatility in equity prices might be ahead. Additionally, the U.S. government is set to hit the self-imposed debt ceiling limit on 8/1/2021 and at the moment, no one is discussing it in the news.
 
The experience of having market sectors go through dips and corrections is quite normal and is actually good for the markets. The stimulus money from the U.S. Federal government and the Federal Reserve’s actions continue to support stock prices and the consumer in the year ahead.
 
Even in times of relative calm, our team’s investment philosophy creates a path to follow, regardless of what the investment markets are doing. We emphasize a client-centric philosophy combined with long-term focused market strategies and portfolio diversification, all the while managing through economic cycles and monitoring investment sentiment.
 
We appreciate 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 National Bureau of Economic Research announced yesterday that the pandemic-induced recession ended in April 2020. Lasting just two months, this was the shortest recession on record.
  • The University of Michigan Consumer Sentiment Index fell to a five-month low of 80.8 in July. The weakness in the sentiment survey suggest consumers are becoming more cautious, which could negatively impact spending growth in the coming months.
  • Retail sales were up 0.6% in June while expectations were for a 0.4% decline. Categories with notable gains were electronics and appliance sales (3.3%), apparel (2.6%) and food services (2.3%). Some of those gains were offset by declines in vehicles (-2.0%), furniture (-3.6%) and building materials (-1.6%).
  • According to the Labor Department, the most recent report on initial claims for unemployment insurance fell to 360,000. This is the lowest level for initial claims since the start of the pandemic last March. According to a Reuters analysis of the weekly federal unemployment data from May 1 through the week ending June 12, continuing claims for state unemployment benefits fell 17.8% in the 26 states ending benefits early and by 12.6% in the rest of the country. The federal benefits are set to expire in September.
Economic Data: Recent
  Actual Survey Prior
Housing Starts MoM 6.3% 1.2% 2.1%
Consumer Price Index (CPI) MoM 0.9% 0.5% 0.6%
Retail Sales Advance MoM 0.6% 0.3% -1.7%
U. of MI Sentiment 80.8 86.5 85.5
Economic Data: Upcoming
    Survey Prior
Initial Jobless Claims   350k 360k
Leading Index   0.9% 1.3%
New Home Sales   800k 769k
Durable Goods Orders   2.1% 2.3%
Unemployment rate
Source: Bloomberg


Equities

  • Equity markets started the week off with declines on concerns that increasing COVID cases would slow global economic growth. Even with yesterday’s decline, the S&P 500 is up 13.38% year-to-date and just 3.1% below the record levels reached last week.
  • Last week, PepsiCo Inc. reported revenues and earnings for the second quarter that were better than expectations. On a year-over-year basis, the beverage company’s revenues and earnings per share grew 20.5% and 27%, the strong quarter was helped by consumer demand from reopened economies.
  • Netflix is set to report earnings after the close Tuesday, as investors will be looking closely at the company’s outlook for subscriber growth and what that could convey for the other video streaming services. Netflix is the first of the mega-cap tech companies to report; we will get second quarter earnings from Facebook, Apple Inc., Alphabet and Amazon next week.
Equity Index Values and Total Returns
  Value YTD 1-Year
S&P 500 4,258.5 14.26% 33.25%
Dow Jones Industrial Average 33,962.0 12.08% 31.20%
NASDAQ Composite 14,275.0 11.15% 34.00%
Russell 2000 (small-cap index) 2,130.7 8.41% 47.12%
MSCI EAFE (developed intl.) 2,260.6 7.16% 24.66%
MSCI Emerging Markets 644.1 3.21% 26.01%
 
Equities chart
Source: Bloomberg
 

Fixed Income, Commodities and Currencies

  • The yield on the 10-year U.S. Treasury fell to 1.19% on Monday. The yield has now declined by 55 basis points since reaching a high of 1.74% on March 31. The decline in Treasury yields comes despite higher inflation and strong economic growth in the United States.
  • West Texas Intermediate crude oil (WTI) had its worst day since September 2020 on Monday falling to $66.42 per barrel. The Organization of the Petroleum Exporting Countries (OPEC) agreed over the weekend to increase production by 400,000 barrels each month starting in August.
  • Municipal bonds continue to post strong gains in 2021, as of 7/19/21 the Bloomberg Barclays Municipal Bond Index is up 1.93% and the high yield municipal bond index is up 7.26%.
Fixed Income Index Yields & Total Returns
  Yield YTD 1-Year
B’berg Barclays Inter Govt./Credit 0.81% -0.21% 0.50%
B’berg Barclays US Aggregate Bond 1.37% -0.44% -0.05%
B’berg Barclays US Corp.High Yield 4.02% 3.38% 12.08%
B’berg Barclays Municipal Bond 0.87% 1.93% 3.94%
Key Interest Rates
  7/19/21 12/31/20 7/21/16
Federal Funds Target Rate 0-0.25% 0-0.25% 0.25-0.5%
3-Month LIBOR 0.13% 0.24% 0.69%
2-Year U.S. Treasury Note 0.22% 0.12% 0.71%
10-Year U.S. Treasury Note 1.19% 0.91% 1.58%
Prime Rate 3.25% 3.25% 3.50%
Commodities & Currency
  7/19/21 12/31/20 YoY Change
Gold 1,809.2 1,905.8 -1.97%
Crude Oil 66.4 48.5 60.55%
Natural Gas 3.78 2.54 134.13%
Corn 556.0 484.0 74.18%
Soybean 1,428.0 1,315.3 60.13%
USD: Euro 1.180 1.222 2.80%
 
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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  • 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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