Market Share Newsletter Vol 3 Issue 22

 

October 26, 2021

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Images of large container ships at sea and thousands of containers sitting in ports represent part of the supply chain disruptions that have become prominent in the U.S. today. The unexpected surge in consumer spending in the U.S. dramatically increased demand for goods and contributed to the imbalance of availability and accessibility of goods. Also contributing to the disruptions in commerce is the shortage of employees. Today there are roughly 5 million fewer Americans working than in February 2020. Despite the shortage of employees and availability of products, the U.S. economy has managed to reach new highs in gross domestic product. These two situations would not historically coincide in most textbooks, but then again the current landscape is not one that has been experienced in the past in order to fill any textbooks.
 
Consumers dining out, whether that be at a traditional sit-down restaurant or a fast food chain, have noticed reduced hours, limited menus, and higher prices as establishments struggle with rising wages and the shortage of staff. Food service establishments are not alone as we can see from the economic data and the number of “now hiring” signs across communities in the U.S. Nationally, there are now more job openings than there are unemployed individuals. How did we get here?
 
There are several reasons for the shortage of employees and none of them are likely to see resolution soon. Early retirements, school and family issues, and resignations are contributing to this employee shortage. The pandemic has many people rethinking their priorities and that has affected employment. Over 1.5 million Americans have retired early as increasing home values, rising stock prices, and government stimulus checks have made it possible. As a result, skilled trades such as nursing, trucking, and construction are seeing exacerbated shortages. In addition, supporting children in the family unit has fallen on many women and we have seen a drop in their participation in the workforce to the magnitude of 1.8+ million. Until schools and day care facilities are fully functioning, it is unlikely that these women will return to the workforce soon. We are also experiencing “the great resignation” as people rethink priorities. Many people have quit their jobs to find new career paths and passions. Last month, over 4 million people quit their jobs and did not immediately go back to work.
 
Over the next several months, and potentially several years, we will follow the impact that the labor market imbalance has on the economy, society, and industry. We will continue to share relevant insights that help you understand the potential impact on your portfolio. Thank you for the privilege of working 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

  • Initial jobless claims declined to 290K for the week ending October 16, which is the lowest since the week ending March 13, 2020. The largest decline in jobless claims came from Virginia, Michigan, and Pennsylvania, while the largest increase was from California. Initial jobless claims are down 66% in comparison to the same period last year. Continuing claims, those who have already experienced at least one week of unemployment, are down 73%.
  • Job openings in the United States declined for the first time since December 2020 but were still around 10.4 million after the recent peak of 11.1 million in July. Based on data from the Bureau of Labor Statistics, the “quits rate”, which is the number of people quitting jobs in a month as a percentage of total employment, reached a record high of 2.9%. The strong labor market and desperate need for employees is driving the quits rate.
  • Third quarter GDP is expected to rise by 2.7% as the advanced release of the number will be reported this Thursday. Economists are expecting for GDP to re-accelerate in the fourth quarter after the likely pullback in third quarter growth as a result of the delta variant of COVID had on the economy. Personal consumption, which makes up approximately two-thirds of the U.S. economy, is forecasted to only increase by 0.8% in the third quarter—the lowest increase since the second quarter of 2020.
  • The year-over-year (YoY) change in the Consumer Price Index (CPI) has now increased by more than 5% for the past five consecutive months. The last time CPI had such a streak was in early 1991. Energy, food, and new vehicles were three of the largest monthly contributors to inflation in September.
Economic Data: Recent
  Actual Survey Prior
Change in Nonfarm Payrolls 194k 500k 366k
ISM Manufacturing 61.1 59.5 59.9
Personal Spending
0.8% 0.7% 0.3%
Unemployment Rate 4.8% 5.1% 5.2%
Economic Data: Upcoming
    Survey Prior
Change in Nonfarm Payrolls   390k 194k
FOMC Rate Decision   0-0.25% 0-0.25%
Consumer Price Index MoM   0.5% 0.4%
Personal Spending   0.6% 0.8%


Equities

  • Earnings reported by the largest U.S. banks have been excellent as investment banking and financial advisory businesses have ballooned towards record levels. JPMorgan reported a quarterly increase of 52% in their investment banking fees to $3.3 billion. The investment banking business of Goldman Sachs reported its second-best quarter ever with revenue of $3.7 billion.
  • Facebook Inc. reported mixed results in the third quarter as revenues did not meet expectations, $29.01 billion vs. $29.45 billion forecasted, but both earnings and daily active users were ahead of expectations. Despite the small miss in revenue, it still increased by 35% YoY and daily active users increased by 6% over the same time frame. The company also announced they will start breaking out their results from Facebook Reality Labs, which is their virtual reality division.
  • Eli Lilly & Co. reported third quarter earnings per share that slightly missed expectations, $1.94 per share vs. $1.95 per share forecasted, but the stock price reacted well due to the company raising their outlook for the full year. The delta variant dramatically increased demand for their COVID antibody treatment, Bamlanivimab, after initially denying its effectiveness. Both the U.S. government and the European Commission purchased more of it and the drug had sales of $217 million relative to the forecasted $161 million.
Equity Index Values and Total Returns
  Value YTD 1-Year
S&P 500 4,566.5 22.96% 36.71%
Dow Jones Industrial Average 35,741.2 18.51% 31.84%
NASDAQ Composite 15,226.7 18.76% 35.77%
Russell 2000 (small-cap index) 2,312.6 17.96% 45.48%
MSCI EAFE (developed intl.) 2,334.3 11.45% 28.98%
MSCI Emerging Markets 638.3 2.28% 17.08%
 
Equities chart
Source: Bloomberg
 

Fixed Income, Commodities and Currencies

  • The yield on the 10-year U.S. Treasury note has continued to increase as it reached 1.70% on October 21. Intermediate and long-term bonds have experienced a notable increase in yield this year as the 10-year Treasury note ended 2020 at a yield of 0.91% and the 30-year Treasury bond has moved from 1.64% to 2.08% through yesterday. Inflation continues to not only push the demand for yield higher, but also pressure the Federal Reserve to move sooner than later on raising their short-term target rate.
  • The story of inflation continues around the world as consumer prices in Brazil increased by 1.2% month-over-month in October. Stock prices in Brazil fell on the news as investors and traders changed their belief on rate hikes and that Brazil’s central bank will increase the pace of the hikes to 150 basis point increase or possibly greater.
  • The Bloomberg U.S. TIPS (Treasury Inflation Protected-Securities) Index has returned 4.94% year-to-date through Monday while its fixed rate counterpart, the Bloomberg U.S. Aggregate Bond Index, has lost 2.01% over the same time frame. The 695-basis point outperformance has come from the rise in the Consumer Price Index and investors’ expectations that CPI will continue to annually increase by approximately 2.7% over the next 10 years.
Fixed Income Index Yields & Total Returns
  Yield YTD 1-Year
B’berg Barclays Inter Govt./Credit 1.17% -1.47% -0.94%
B’berg Barclays US Aggregate Bond 1.69% -2.01% -1.15%
B’berg Barclays US Corp.High Yield 4.21% 4.27% 9.52%
B’berg Barclays Municipal Bond 1.22% 0.39% 2.58%
Key Interest Rates
  10/25/21 12/31/20 10/27/16
Federal Funds Target Rate 0-0.25% 0-0.25% 0.25-0.5%
3-Month LIBOR 0.12% 0.24% 0.88%
2-Year U.S. Treasury Note 0.44% 0.12% 0.87%
10-Year U.S. Treasury Note 1.63% 0.91% 1.79%
Prime Rate 3.25% 3.25% 3.50%
Commodities & Currency
  10/25/21 12/31/20 YoY Change
Gold 1,806.8 1,911.2 -6.83%
Crude Oil 83.8 48.5 117.25%
Natural Gas 5.90 2.54 88.00%
Corn 538.0 484.0 28.19%
Soybean 1,237.3 1,315.3 13.56%
USD: Euro 1.161 1.222 -1.68%
 
Economy chart
Source: Bloomberg
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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