Market Share Newsletter Vol 3 Issue 2

 

January 19, 2021

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MORE INSIGHTS INTO:
The recession of 2008-2009 prompted extraordinary measures by the Federal Reserve and one fiscal stimulus bill approved by Congress to fight the financial crisis. Back then, the Federal Reserve did the heavy lifting to support the economy and has continued to implement measures to manage the economic impact of the current pandemic. The significant difference this time is the fiscal policy being enacted by Congress and the President. The SECURE and CARES acts were passed early in the pandemic and a $900 billion stimulus package arrived during the 2020 holiday season.
 
As President Biden takes office, discussions of another stimulus bill have begun. Recent announcements have indicated it would include $1,400 payments to qualified individuals, a $300-$400 per week increase in unemployment benefits, $25 billion for rental assistance and money for states, cities, municipalities, and the healthcare system to fight the pandemic–which is an additional $1.9 Billion in total.
 
The pandemic stimulus packages have already reached 15% of gross domestic product (GDP) before the Biden proposal detailed above. If approved, his proposal would equate to approximately 10% of additional GDP. The expectation of additional stimulus has helped the stock markets continue to reach new highs in 2021. Stocks representing small U.S. companies have also continued their recent outperformance on the basis that the second half of 2021 should be very good for the U.S. economy.
 
Over the next couple of years, this stimulus will help the economy recover to pre-pandemic highs. A longer-term issue is the impact on inflation and interest rates throughout the world, which we will be analyzing and discussing with clients. Until then, we welcome a more focused and directed round of fiscal stimulus and an end to the pandemic.
 
Paul Gifford, CFA
Chief Investment Officer
Wealth Advisory Services
Investment Management Group
GiffordP@1stsource.com
Erik Clapsaddle, CFA, CFP®
Vice President and Senior Fixed Income Portfolio Manager
Wealth Advisory Services
Investment Management Group
ClapsaddleE@1stsource.com
Considerations for your portfolio

The Economy

  • December marked the third consecutive month of declines in retail sales with a decline of 0.7% relative to November sales. Despite the toll the pandemic took on our economy, retail sales in 2020 were up 0.6% from 2019 based on data from the U.S Census Bureau. Retail sales were buoyed by non-store retailers (sales outside of brick-and-mortar stores) as they increased by 22.1% in 2020. Conversely, sales at restaurants and bars declined by 19.5% in 2020.
  • Labor markets worsened in December as payrolls declined by 140,000, even though expectations were for an increase. The leisure and hospitality sector reduced payrolls by 498,000 as nine U.S. states, including California and New York, closed almost all indoor dining. The New Jersey Governor, Phil Murphy, made a bold move in keeping restaurants open and stating, “there is no data to support that indoor dining has significantly contributed to the spread of COVID-19.”
  • The unemployment rate hovered at 6.7% in December, but the manufacturing sector continues to be a standout in the U.S. economy. It has contributed more to economic output than recent historical norms and the manufacturing unemployment rate is presently at 4.3%. A few other manufacturing data points were better than forecasted like industrial production, capacity utilization, and durable goods orders.
  • As COVID-19 cases and deaths around the world continue to remain high and are escalating in some places, vaccinations have been ramped up globally. Based on Bloomberg data, 44 million vaccine doses in 51 different countries have been given. Approximately 14.7 million have been administered in the United States and the states with the most doses per capita have been West Virginia, Alaska, and North Dakota.
Economic Data: Recent
  Actual Survey Prior
Consumer Price Index (CPI) MoM 0.4% 0.4% 0.2%
University of Michigan Sentiment 79.2 79.5 80.7
ISM Manufacturing 60.7 56.8 57.5
Change in Nonfarm Payrolls -140k 50k 336k
Economic Data: Upcoming
    Survey Prior
Housing Starts   1560k 1547k
FOMC Rate Decision   0-0.25% 0-0.25%
GDP Annualized QoQ   4.8% 33.4%
New Home Sales   853k 841k


Equities

  • JPMorgan Chase reported fourth quarter earnings of $3.79 per share relative to the expected $2.62 per share. The $3.79 per share excludes a $2.9 billion credit reserve that the bank released for expected loan defaults, but investment banking fees were strong enough to create the positive earnings surprise, even if the reserves were not part of the number ($3.07 per share without the release). The bank’s deposits grew by 35% year-over-year but the bank only experienced 1% growth in their loan portfolio.
  • Many corporations release their quarterly earnings this week. Netflix releases their earnings today. Proctor & Gamble, United Airlines, and Morgan Stanley release their earnings on Wednesday followed by IBM, Intel, CSX, and Travelers on Thursday. The week ends with Ally Financial and Schlumberger with earnings being reported on Friday. The data from this diverse set of companies will give us a broader perspective of how the economy is doing.
  • The American government has banned Americans from investing in several Chinese companies due to their support of the Chinese military. However, the U.S. government has spared the most prominent technology companies like Alibaba, Tencent, and Baidu. Alibaba, an e-commerce giant, would be the eighth largest company in the S&P 500 based on market capitalization.
Equity Index Values and Total Returns
  Value YTD 1-Year
S&P 500 3,768.3 0.38% 15.85%
Dow Jones Industrial Average 30,814.3 0.73% 7.86%
NASDAQ Composite 12,998.5 0.87% 40.85%
Russell 2000 (small-cap index) 2,123.2 7.53% 27.37%
MSCI EAFE (developed intl.) 2,181.2 1.61% 8.98%
MSCI Emerging Markets 656.9 5.26% 21.00%
 

Source: Bloomberg
 

Fixed Income, Commodities and Currencies

  • The yield on the 10-year U.S. Treasury note reached 1.186% on January 12. This was the highest yield on the 10-year since March 19. The yield has been driven higher by the expectation that the federal government will continue to have substantial budget deficits, growing debt, and another stimulus package from the future Biden administration.
  • Treasury Inflation-Protected Securities (TIPS) are forecasting that overall inflation in the United States will average 2.1% over the next ten years. Though it may feel like a stretch from current reality, the Consumer Price Index (CPI) has averaged exactly 2.1% over the past ten years. Given the low starting point of energy prices today, it would not be a surprise to see CPI average 2.1% or greater over the next ten years.
  • U.S. President-elect Joe Biden plans to sign an executive order on his first day that would remove the building permit for the Keystone XL pipeline. The Keystone XL plan to build a crude oil pipeline across the U.S. was revived by President Trump. The leader of the province of Alberta, Canada, Jason Kenney, stated that they would seek legal action against the United States if the pipeline is canceled.
Fixed Income Index Yields & Total Returns
  Yield YTD 1-Year
B’berg Barclays Inter Govt./Credit 0.67% -0.36% 5.73%
B’berg Barclays US Aggregate Bond 1.18% -0.76% 6.15%
B’berg Barclays US Corp.High Yield 4.18% 0.35% 6.73%
B’berg Barclays Municipal Bond 1.07% 0.02% 4.14%
Key Interest Rates
  1/18/21 12/31/19 1/21/16
Federal Funds Target Rate 0-0.25% 0-0.25% 0.25-0.5%
3-Month LIBOR 0.22% 0.24% 0.62%
2-Year U.S. Treasury Note 0.13% 0.12% 0.87%
10-Year U.S. Treasury Note 1.08% 0.91% 2.06%
Prime Rate 3.25% 3.25% 3.50%
Commodities & Currency
  1/18/21 12/31/19 YoY Change
Gold 1,829.9 1,895.1 15.27%
Crude Oil 52.4 48.5 -9.75%
Natural Gas 2.74 2.54 29.31%
Corn 531.5 484.0 35.58%
Soybean 1,416.8 1,315.3 49.48%
USD: Euro 1.208 1.222 9.34%
 

Source: Bureau of Economic Analysis
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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