Market Share Newsletter Vol 3 Issue 23

 

November 9, 2021

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Though it is early in November, signs of the holiday season (movies, music, decorations and Black Friday specials) are everywhere. This has investors wondering what to expect as 2021 ends.
 
Inflation, supply chain challenges, the potential effects of more government spending and borrowing are current concerns. Additionally, another battle over the debt ceiling limit that is set to be reached in early December is adding a measure of anxiety.
 
Despite those concerns, corporate earnings continue to be strong with over 80% of companies reporting better than expected profits in the third quarter. While starting to taper bond purchases, The Federal Reserve will be patient in raising short term interest rates. Over the weekend, the House of Representatives approved a $1 trillion infrastructure bill, which still needs approval in the Senate before President Biden signs it. Companies added over 530,000 new hires in October, shaking off the slump that was seen in the September jobs report. What more could investors ask for?
 
After a difficult September for equity investors, the start of the 4th quarter has been very good. October’s gains offset the losses of September and we saw four consecutive record highs in early November. Equity investors certainly might feel like it is going to be a joyful holiday season!
 
While the equity markets are in good shape for the end of the year, we know that there can be unexpected events that change the outlook. Thank you for trusting and investing with 1st Source Wealth Advisory Services.
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

  • Change in nonfarm payrolls greatly improved in October as the economy experienced a 531K addition to payrolls. This comes after a disappointing increase of only 312K in September, which was revised higher from the 194K initially reported in September. The biggest surprise in October was the notable 60K increase in manufacturing payrolls, only forecasted to be +30k, as it was the largest increase in manufacturing payrolls since August 1997 (minus the few months of payroll volatility in March through June 2020).
  • Average hourly earnings over the past 12 months increased 4.9% in October and that increase has been greater than or equal to 4% for four consecutive months. For perspective, the average annual increase in earnings was 2.4% for the ten-year period ending December 31, 2019. The two industries with the largest monthly increase in payrolls were leisure and transportation and warehousing as they both increased month-over-month (MoM) by 1% in October.
  • The Institute for Supply Management (ISM) reported continued strong growth in the manufacturing sector. Results were higher than forecasted in October, though slightly slower growth than the previous month. Manufacturers reported that 0% of their customers were reporting excessive inventory across all 18 manufacturing industries, but 100% reported that they were paying higher prices and 83% reported an increase in order backlogs.
  • German industrial production surprisingly declined by 1.1% MoM in September but was expected to increase 1%. This is the second consecutive month of industrial production declines in Germany after a 3.5% decline in August. Despite the soft overall numbers, building construction increased by 4.5% MoM and energy production increased by 1%.
  • Federal Reserve Chairman, Jerome Powell, stated this past Wednesday that “our baseline expectation is that supply bottlenecks and shortages will persist well into next year and elevated inflation as well.” The September reading of the Personal Consumption Expenditure Core (PCE Core), the Federal Reserve’s favorite inflation gauge, increased to its highest level since May 1991.
Economic Data: Recent
  Actual Survey Prior
Change in Nonfarm Payrolls 531k 450k 312k
FOMC Rate Decision 0-0.25% 0-0.25% 0-0.25%
GDP Annualized QoQ
2.0% 2.6% 6.7%
Personal Spending 0.6% 0.6% 0.8%
Economic Data: Upcoming
    Survey Prior
Consumer Price Index MoM   0.6% 0.4%
Consumer Price Index YoY   5.9% 5.4%
University of Michigan Sentiment   72.5 71.7
Housing Starts   1580k 1555k
Equity chart
Source: Bloomberg

Equities

  • S&P 500 companies have reported excellent revenue and earnings in the third quarter to date. According to FactSet, 81% of companies have reported earnings better than forecasted which is better than the 76% five-year average. Additionally, 75% have reported better than forecasted revenue, beating the five-year average of 67%. Companies are reporting revenues that are 2.9% higher than forecast to date and if that maintains, it will be the third highest surprise on record since FactSet started tracking in 2008.
  • Emerging market stocks, which largely include companies domiciled in China and Taiwan, have barely squeezed out a positive return of 0.07% year-to-date through Monday as the S&P 500 was up 26.7%. The Shanghai Composite, China’s primary stock market index, was down 6.2% year-to-date through Monday as government intrusion in the private sector has concerned investors and many investors additionally believe there are serious problems in the Chinese real estate market.
  • PayPal Holdings, Inc. dropped after reporting their earnings on Monday due to a change in their outlook for growth. The company originally forecasted that revenue would increase by 20% for the full year, but now expects it to increase by only 18%. PayPal reported $1.11 earnings per share which is better than the $1.07 forecast, but they missed slightly on revenue expectations of $6.23 billion as they reported $6.18 billion. The company also announced they are working with Amazon to let customers in the United States pay with Venmo.
Equity Index Values and Total Returns
  Value YTD 1-Year
S&P 500 4,701.7 26.66% 34.34%
Dow Jones Industrial Average 36,432.2 20.81% 27.31%
NASDAQ Composite 15,982.4 24.70% 37.42%
Russell 2000 (small-cap index) 2,442.7 24.63% 44.66%
MSCI EAFE (developed intl.) 2,377.9 13.65% 24.20%
MSCI Emerging Markets 624.6 0.07% 8.60%
 
Equities chart
Source: Bloomberg
 

Fixed Income, Commodities and Currencies

  • Jerome Powell announced plans this past Wednesday for the Fed to start trimming their bond purchases (tapering). They plan to start in late November or early December by reducing monthly purchases by $10 billion of U.S. Treasuries and $5 billion of mortgage-backed securities (MBS). The chairperson stated that they are not ready to start raising interest rates yet as labor market conditions are not ready for it.
  • The Polish central bank raised rates for a second consecutive month this past week and they did it by a surprising 75 basis points after increasing their target rate by 40 basis points in October. The rate currently stands at 1.25% and they have stated that they plan to be more proactive about raising rates as consumer prices continue to surge in Poland. Eurostat reported October’s annual inflation rate reached 6.8% in Poland.
  • Commodities continue to move in different directions as gold reached a two-month high on Monday due to inflation concerns in the U.S. and around the world. Iron ore has experienced four straight weekly losses due to China’s steel output constraints. Gasoline prices reached $3.42 per gallon—their highest since September 2014 according to data from AAA.
Fixed Income Index Yields & Total Returns
  Yield YTD 1-Year
B’berg Barclays Inter Govt./Credit 1.14% -1.14% -0.44%
B’berg Barclays US Aggregate Bond 1.62% -1.14% -0.04%
B’berg Barclays US Corp.High Yield 4.03% 5.10% 7.85%
B’berg Barclays Municipal Bond 1.14% 1.01% 2.74%
Key Interest Rates
  11/8/21 12/31/20 11/10/16
Federal Funds Target Rate 0-0.25% 0-0.25% 0.25-0.5%
3-Month LIBOR 0.14% 0.24% 0.88%
2-Year U.S. Treasury Note 0.44% 0.12% 0.89%
10-Year U.S. Treasury Note 1.49% 0.91% 2.06%
Prime Rate 3.25% 3.25% 3.50%
Commodities & Currency
  11/8/21 12/31/20 YoY Change
Gold 1,828.0 1,911.2 -2.78%
Crude Oil 81.9 48.5 104.42%
Natural Gas 5.43 2.54 81.99%
Corn 551.5 484.0 36.07%
Soybean 1,178.0 1,315.3 6.63%
USD: Euro 1.159 1.222 -1.85%
 
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:
  • Not insured by the FDIC or any Federal Government Agency
  • 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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