Market Share Newsletter Vol 3 Issue 16

 

August 3, 2021

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“Fiscal cliff” became the buzz phrase of 2012, coined by then Federal Reserve Chair Ben Bernanke. Back then, tax cuts were set to expire and cuts in government spending created the risk of an economic recession if not addressed. However on January 1, 2013, Congress was able to get a compromise approved that helped avert a potential recession.
 
Today, a segment of consumers is in a similar situation—facing a potential fiscal cliff. Actions taken during the pandemic to ease the financial crisis for individuals are set to expire over the next two months. The first actions, that expired on July 31, are the moratorium on the eviction of renters and the foreclosure of federally backed mortgages. According to CNBC, there are over 11 million Americans behind on rent payments that are at risk of eviction, as the moratorium ends. According to the General Account Office (GAO), at the high point, approximately 3.4 million mortgages were in forbearance. Today there are still 1.75 million homes in forbearance. There are some state and local programs available to help renters with payments and federal housing agencies have also adjusted servicing rules to help with payments through December 31, 2021.
 
Next, the federal student loan repayment is set to begin again in September. In March of 2020, President Trump paused student loan payments and lowered the interest rate to zero. The action was later extended to September of 2021 by President Biden. Over 30 million current and former students will need to begin repaying those loans in October. The next two months will likely bring regular headlines on the topic. We will see if a late deal to allow the pause of payments will continue potential forgiveness of the debt—or if repayments will restart as planned.
 
The third issue is the extra $300 per week of unemployment benefits that is set to expire on September 6, 2021. There were still over 9 million individuals unemployed at the end of June. About half of all states have started to eliminate those benefits, impacting just over 4 million people.
 
Likely, there are people that fit into more than one of these categories of expiring assistance. This may result in millions of consumers with less money to spend on discretionary items come this fall. We will see how this impacts industries like hospitality, entertainment and retail as time unfolds.
 
However, there are a few items that make us think the impact of these assistance programs will not lead us into a significant drop in economic activity or a recession. First, the savings rate in the U.S. is near historically high levels, with a total of $4 trillion currently deposited in U.S. checking and saving accounts. In addition, there are over 9.2 million job openings with wage rates continuing to rise. And as we saw from the fiscal cliff in 2012, a deal can be made at the last minute that can turn around a potential recession.
 
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

  • GDP in the second quarter increased by 6.5%. Excluding the third quarter of 2020, it was the largest quarterly (QoQ) increase since the third quarter of 2003, but still well below the expected growth of 8.4%. Personal consumption was the major contributor to economic growth in the second quarter as it increased by 11.8% QoQ. But net exports, gross private domestic investment, and government consumption were all major detractors from GDP.
  • The Institute for Supply Management (ISM) reported lower than expected growth in U.S. manufacturing activity, but 17 of 18 manufacturing industries reported overall growth. The vast majority of industries reported an increase in new orders, an increase in production, and an increase in order backlogs. Though there has been a slowdown in the rate of growth, it is more likely that the U.S. manufacturing industry can sustainably grow at these lower but still historically strong levels.
  • Though dropping in June, the current U.S. savings rate (the percentage saved of one’s disposable income) of 9.4% is well above the 30-year average of 6.7%. Compensation of employees hit an all-time high of $12.38 trillion in June, but as government social benefits have waned over the past few months, so has the savings rate.
  • The Caixin China Manufacturing PMI index showed Monday that the Chinese manufacturing sector continues to grow at slower and slower levels as it reached its lowest level since April 2020. The decline in manufacturing activity prompted hopes from investors that China would initiate more economic stimulus.
Economic Data: Recent
  Actual Survey Prior
Initial Jobless Claims 400k 385k 424k
GDP Annualized QoQ 6.5% 8.4% 6.3%
Univ. of Michigan Sentiment 81.2 80.8 80.8
New Home Sales 676k 796k 724k
Economic Data: Upcoming
    Survey Prior
Change in Nonfarm Payrolls   875k 850k
Consumer Price Index (CPI) MoM   0.5% 0.9%
Unemployment Rate   5.7% 5.9%
Durable Goods Orders   2.1% 2.3%
Unemployment rate
Source: Bloomberg


Equities

  • Amazon.com reported good second quarter sales and earnings but disappointed the lofty forecast of $115.1 billion as actual net sales were $113.1 billion. However, the net sales of $113.1 billion is 27% higher than last year. Likely, the reason the stock traded 4.5% lower after the report was due to the company’s third quarter guidance for net sales and operating income being well below forecasts.
  • Over the past 30 days, the utility and real estate sectors have been the two best performing sectors in the S&P 500 as they are up 3.73% and 3.70%. The move into these two sectors has happened amidst longer-term interest rates dropping back to their lowest levels in months and a shift out of less cyclical stocks, such as banks and energy. A positive for utilities is the U.S. Energy Information Administration forecast that electricity consumption will increase 2.8% in 2021 after declining 3.9% last year.
  • The MSCI Emerging Market Index declined by 6.73% in July as China implemented a crackdown on the private education industry, which created greater concerns over what the Chinese government would be willing to do to other private companies in China. The Chinese government, among other rules, is requiring education and tutoring firms to convert to nonprofit status and not allowing foreigners to teach remotely.
Equity Index Values and Total Returns
  Value YTD 1-Year
S&P 500 4,387.2 17.76% 35.20%
Dow Jones Industrial Average 34,838.2 14.99% 33.23%
NASDAQ Composite 14,681.1 14.33% 35.68%
Russell 2000 (small-cap index) 2,215.5 12.74% 48.61%
MSCI EAFE (developed intl.) 2,349.5 11.40% 31.19%
MSCI Emerging Markets 633.1 1.43% 22.21%
 
Equities chart
Source: Bloomberg
 

Fixed Income, Commodities and Currencies

  • The Federal Open Market Committee (FOMC) decided on July 26 to not change the Federal Funds Target Rate and maintain a rate of 0%-0.25%. The FOMC indicated that they will soon begin discussions on how they will start reducing their $120 billion bond-buying program but put no time parameters around “soon.” They also reaffirmed their more recent goal of achieving inflation that is moderately above two percent for some time so that longer-term inflation averages two percent.
  • Inflation has continued to well outpace the yield on longer-term bonds for the past four months as the Consumer Price Index (CPI) increased by 5.4% over the past 12 months for the period ending June 30. The yield on the 10-year U.S. Treasury note dropped to a yield as low as 1.148% yesterday. The return on Treasury Inflation Protected Securities (TIPS) has been 4.44% year-to-date while the return on the total bond market was -0.26% through Monday as measured by Bloomberg Barclays indices.
  • The Swiss franc has enjoyed two strong weeks as investors have moved to perceived higher quality due to concerns with growth in the eurozone and higher than expected inflation in the United States. The Swiss franc has historically been treated as a safe-haven currency and strengthens in times of global uncertainty.
Fixed Income Index Yields & Total Returns
  Yield YTD 1-Year
B’berg Barclays Inter Govt./Credit 0.77% 0.02% 0.38%
B’berg Barclays US Aggregate Bond 1.34% -0.26% -0.36%
B’berg Barclays US Corp.High Yield 3.88% 4.02% 10.41%
B’berg Barclays Municipal Bond 0.87% 1.94% 3.30%
Key Interest Rates
  8/2/21 12/31/20 8/4/16
Federal Funds Target Rate 0-0.25% 0-0.25% 0.25-0.5%
3-Month LIBOR 0.12% 0.24% 0.76%
2-Year U.S. Treasury Note 0.17% 0.12% 0.67%
10-Year U.S. Treasury Note 1.18% 0.91% 1.54%
Prime Rate 3.25% 3.25% 3.50%
Commodities & Currency
  8/2/21 12/31/20 YoY Change
Gold 1,822.2 1,911.2 -10.55%
Crude Oil 71.3 48.5 72.79%
Natural Gas 3.94 2.54 87.39%
Corn 558.8 484.0 74.49%
Soybean 1,418.8 1,315.3 56.49%
USD: Euro 1.187 1.222 1.03%
 
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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