Market Share Newsletter Vol 3 Issue 18

 

August 31, 2021

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Adages are very common when explaining investment ideas and strategies. Over the past 25 years, “Don’t fight the Fed” (the Federal Reserve) has been followed and preached by many and is usually quite profitable for investors.
 
In the 1990s, former Federal Reserve Chairman, Alan Greenspan, is credited with lowering interest rates and taking other measures when stock markets became turbulent. Starting with the Asian Contagion Economic crisis in 1997, his actions became known as the “Greenspan Put” which was the term used to describe the action he took to limit the downside of the stock market. Successive Federal Reserve Chairs have used similar responses during volatile market situations. Since the pandemic began in 2020, the Federal Reserve continues to keep monetary policy accommodative at unprecedented levels.
 
This past week, investment markets listened closely to comments coming from the Jackson Hole Economic Symposium, and Chairperson Jerome Powell’s comments were dissected word-by-word. Even though several other members of the Federal Reserve have talked about tapering (reducing) the accommodation over the past 18 months, Chair Powell said they would remain accommodative. This sent the S&P 500 to its 52nd record high of the year and supported a strong rally in small cap stocks and equity markets across the globe. It seems to be a good time not to “fight the Fed”.
 
As the strength of the economic recovery continues, there will be changes in Fed policy, starting with a reduction in the number of treasuries and mortgages purchased each month. Eventually, the Fed will also increase their short-term target rate. These are similar to steps taken in 2015 after accommodative policies were used to address the Great Recession of 2007-09. These changes created some volatility in the equity markets, but nothing more than expected during an economic cycle. In fact, equity markets continued the bull market for another four years. Mark Twain is credited with saying “history never repeats itself, but it often rhymes.” The current path of the Federal Reserve may not be identical to previous crises, but it will likely look similar. We are watching to see if the investment markets react in a likewise manner.
 
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
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

  • Personal income rose by 1.1% in July and personal spending increased by 0.3%. The increase in personal income was much greater than the forecasted 0.3% as the largest increase came from government social benefits, specifically the Child Tax Credit payments as authorized by the American Rescue Plan, and additionally from wages and salaries to employees. Income from government social benefits increased by 3.4% month-over-month in July.
  • The Federal Reserve’s (the Fed) primary inflation gauge, the Personal Consumption Expenditure Core (PCE Core), increased by 0.3% in July and by 3.6% over the past 12 months. The result was well ahead of the Fed’s 2% target and has been above the target for the past four months. PCE Core removes the inflationary effects of food and energy, but when including them inflation has increased by 4.2% over the past 12 months.
  • There is currently a 2.6-month supply of homes, based on the current pace of sales, off its all-time low of 1.9 months in December 2020. The housing market has been strong, but challenges are present for buyers as the median price for single family homes has increased 18.6% year-over-year (YoY) and homes are only averaging 17 days on the market for the past four months.
  • China recently announced that they plan to target 55 million new urban jobs by 2025, which would include increased training of the labor force and improved rights for workers. The Chinese government stated that the unemployment rate will be capped at 5.5%. China also announced Monday that they will limit the use of online videogames to three hours a week for those under 18 years of age.
Economic Data: Recent
  Actual Survey Prior
S&P CoreLogic CS 20-City YoY 19.1% 18.6% 17.1%
GDP Annualized 2Q (second) 6.6% 6.7% 6.5%
University of Michigan Sentiment 70.3 70.8 70.2
New Home Sales 708k 697k 701k
Economic Data: Upcoming
    Survey Prior
Change in Nonfarm Payrolls   745k 943k
ISM Manufacturing   58.5 59.5
Unemployment Rate   5.2% 5.4%
Producer Price Index MoM   0.6% 1.0%
Unemployment rate
Source: Bloomberg


Equities

  • Apple hit another milestone on Monday as their market value passed $2.5 trillion. The company’s stock rose by more than 3% on Monday and according to Bloomberg data, it’s the biggest one-day percentage increase since March 9. One of the more notable financial statistics about Apple is that their cash and short-term investments exceed their total debt by $71.8 billion. This frees up a lot of liquidity for shareholder benefits.
  • Toll Brothers, one of the largest home builders in the U.S. and the largest homebuilder in the luxury market, reported that homebuilding revenues were up 37% YoY, earnings well exceeded expectations, and the average delivered price was $860,400—compared to the nationwide average of $446,000 as provided by the U.S. Commerce Department. The company stated demand continues to be strong due to household formation by the millennial generation, a low supply of new homes, and a decade of pent-up demand.
  • Berkshire Hathaway increased its stake in Kroger during the second quarter by approximately 20%, which now represents 8.3% of shares outstanding of the supermarket company. Berkshire pulled back its investments in healthcare as they sold their entire position in Biogen and made notable cuts in Merck, AbbVie, and Bristol-Myers Squibb.
Equity Index Values and Total Returns
  Value YTD 1-Year
S&P 500 4,528.8 21.72% 31.32%
Dow Jones Industrial Average 35,399.8 17.09% 26.91%
NASDAQ Composite 15,265.9 18.98% 30.61%
Russell 2000 (small-cap index) 2,266.0 15.41% 46.55%
MSCI EAFE (developed intl.) 2,358.3 12.11% 26.85%
MSCI Emerging Markets 630.4 1.00% 18.96%
 
Equities chart
Source: Bloomberg
 

Fixed Income, Commodities and Currencies

  • Jerome Powell, Federal Reserve chairperson, recently stated that the Fed could start tapering their bond purchases this year and additional Fed members have been more open and clearer that tapering should start this year. The more pressing decision is when the Fed will raise rates and though we believe that date has seemed to be pushed sooner, the Fed still has the first rate hike penciled in for 2023.
  • The municipal bond sector has well outperformed the taxable bond sector this year, which includes U.S. Treasuries, government Mortgage-Backed Securities (MBS), and investment grade corporate bonds. The Bloomberg Barclays 1-15 Year Municipal Bond index has returned 1.09% through Monday while the taxable index, the Bloomberg Barclays Aggregate Bond index, has lost 0.57%. The outperformance has slowed down recently, and we expect that to continue given the low yields in municipal bonds.
  • The price of aluminum reached a 10-year high on Monday as many commodity prices continue to ascend. According to a Bloomberg report, the supply of aluminum has become the primary issue pushing prices higher as China has begun to crackdown on pollution and a “seasonal power crunch has also dented output.” The price of aluminum is up 33.9% year-to-date through August 27.
Fixed Income Index Yields & Total Returns
  Yield YTD 1-Year
B’berg Barclays Inter Govt./Credit 0.84% -0.26% 0.21%
B’berg Barclays US Aggregate Bond 1.41% -0.57% 0.04%
B’berg Barclays US Corp.High Yield 3.84% 4.47% 10.07%
B’berg Barclays Municipal Bond 0.95% 1.52% 3.39%
Key Interest Rates
  8/30/21 12/31/20 9/1/16
Federal Funds Target Rate 0-0.25% 0-0.25% 0.25-0.5%
3-Month LIBOR 0.12% 0.24% 0.83%
2-Year U.S. Treasury Note 0.2% 0.12% 0.81%
10-Year U.S. Treasury Note 1.28% 0.91% 1.58%
Prime Rate 3.25% 3.25% 3.50%
Commodities & Currency
  8/30/21 12/31/20 YoY Change
Gold 1,812.2 1,911.2 -9.74%
Crude Oil 69.2 48.5 60.62%
Natural Gas 4.31 2.54 62.02%
Corn 540.3 484.0 53.59%
Soybean 1,304.8 1,315.3 37.48%
USD: Euro 1.180 1.222 -0.96%
 
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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