Market Share Newsletter Vol 3 Issue 3

 

February 2, 2021

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As the country makes slow progress on efforts to distribute vaccines to end the pandemic, stock markets continue to show optimism about the future of the economy and have a positive outlook for corporate earnings in the months ahead. The S&P 500 has already set four record highs and the Russell 2000 (small capitalization index) has set six in 2021. The positive sentiment today is reaching levels not seen in over 20 years. Another sign of optimism has been seen in the number and size of Initial Public Offerings (IPOs) and Special Purpose Acquisition Companies (SPACs). Investors can express being bearish or bullish through buying put or call options. The chart below shows the put-call ratio over the past two decades and how that ratio has fallen meaningfully since April. Investors are buying more calls (bullish) than puts.
 
Equity Put/Call Ratio chart
 
Our investment philosophy provides important guidance in how we invest client’s wealth. Investor sentiment is one of our five core tenants. We monitor and make adjustments as investor sentiment changes. Daily volatility is a challenge; therefore, we focus on trends. We also understand investment markets can stay in trends longer than many investors think they should.
 
One of several reasons for the current optimism is the expectation of larger government spending whether it be additional stimulus bills, increased spending on infrastructure or climate initiatives. Add a Federal Reserve that is committed to maintaining low interest rates with increased earnings expectations and you can see why optimism is abounding. It also means we will likely see one or two markets drops of 5-10% during the year, which is absolutely normal.
 
The recent market performance has many portfolios overweight to stocks and for now we are comfortable with that allocation. We are actively working to manage the mix of stocks by adding small capitalization stocks and emerging markets. On the bond side of the portfolios, we are lowering the interest rate risk and increasing the exposure to corporate credits. In upcoming editions of The Market Share, we will discuss the bond portfolios and thoughts on inflation. As always, we are committed to communicating the developments that you need to know. We look forward to a bright future and the opportunity to work with such great clients.
 
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 grew by 4% in the fourth quarter, slightly below the expected 4.2% growth, but still a good result given the increased shutdowns and capacity restrictions during the fourth quarter. Despite the improving economy in the second half of 2020, the year ended as the worst year of economic output since 1946 with a GDP decline of 3.5%.
  • The U.S. savings rate was 13.7% at year-end 2020. The savings rate is the percentage of one’s disposable personal income that is being saved. The rate continues to hover around this historical abnormality as the average for the past 20 years has been only 6.5%. As the federal government has created massive amounts of stimulus, it has driven the savings rate much higher–reaching 33.7% in April. This has contributed to rising equity and bond prices and we anticipate that it will continue to positively contribute to investment markets going forward.
  • The Institute for Supply Management (ISM) Manufacturing Index declined more than anticipated as 100% of manufacturing industries reported paying higher prices in January. The prices paid, as a component of the index, rose to the highest level since April 2011. Labor constraints continue to affect the sector. The substantial backlog of orders and historically low customer inventories are creating a robust backdrop for manufacturing.
  • Germany, the world’s fourth largest economy, reported retail sales falling by 9.6% in December. This was significantly worse than the forecast of -2% and even worse than the most pessimistic estimate of -7%. The purchase of clothing and shoes declined by 30.1% and even the purchase of food and tobacco declined by 3% in December. Germany’s economy has been improving, but December’s retail sales decline was alarming.
Economic Data: Recent
  Actual Survey Prior
Housing Starts 1669k 1560k 1578k
FOMC Rate Decision 0%-0.25% 0%-0.25% 0%-0.25%
GDP Annualized QoQ 4.0% 4.2% 33.4%
New Home Sales 842k 870k 829k
Economic Data: Upcoming
    Survey Prior
Change in Nonfarm Payrolls   70k -140k
Consumer Price Index (CPI) MoM   0.4% 0.4%
University of Michigan Sentiment   80.0 79.0
Trade Balance   -$65.7b -$68.1b
ISM Manufacturing chart
Source: Institute for Supply Management
 


Equities

  • Apple reported their first ever quarterly sales topping $100 billion with a revenue of $111.4 billion. Sales of the iPhone were up 17% year-over-year (YoY) and the International Data Corporation (IDC) estimated that Apple shipped 90.1 million phones during the quarter. The product with the most growth in the fourth quarter was the iPad, which grew by 41% YoY and accounted for $8.44 billion in revenue. The company did warn that wearable device sales will decelerate.
  • The CEOs of Exxon Mobil and Chevron, the two largest oil companies in America, had talks in 2020 about the possibility of merging and ultimately creating the second largest oil company in the world. Aramco, a Saudi Arabian company, is the largest. The talks have ceased but have stirred political concerns. Senator Klobuchar stated, “I am very concerned about reports of further consolidations in the energy industry and the harm it could inflict on consumers and competing businesses.”
  • Exxon Mobil reported a fourth straight quarter of loss at $20.1 billion and revenue missed expectations by approximately 4.5%. The company also reported that they will create a business unit that will focus exclusively on reducing carbon emissions. Exxon will invest approximately $3 billion through 2025 into this business unit.
  • Ford Motor Company and Google reported a six-year “strategic partnership” that will use Google’s Android to power their infotainment systems in millions of Ford automobiles. According to The Detroit News, it will span Ford’s entire lineup and reportedly will not require the use of an Android smartphone. Ford’s stock responded favorably to the news, increasing by over 5% upon the announcement.
Equity Index Values and Total Returns
  Value YTD 1-Year
S&P 500 3,773.9 0.57% 20.61%
Dow Jones Industrial Average 30,211.9 -1.20% 10.89%
NASDAQ Composite 13,403.4 4.03% 49.52%
Russell 2000 (small-cap index) 2,126.2 7.69% 34.25%
MSCI EAFE (developed intl.) 2,139.3 -0.34% 10.30%
MSCI Emerging Markets 658.6 5.52% 30.94%
 
Equities chart
Source: Bloomberg
 

Fixed Income, Commodities and Currencies

  • Apple issued $14 billion of corporate debt this week that included bonds with a maturity as long as 40 years. The 40-year bond carries a coupon rate of only 2.8%. Based on Bloomberg data, Apple returned 34.5% on capital for the quarter ending December 26. The capital raised from the bond offering will primarily be used for stock repurchases and dividends along with other general corporate purposes.
  • The U.S. budget deficit was $143.6 billion in December. Government receipts collected from individual income taxes were down 5.4% YoY, while spending on Medicare was up 99%, income security was up 97.7%, and veterans’ benefits were up 64.7%. The last month that the federal government had a budget surplus was April 2019. Budget deficits have historically affected yields on U.S. Treasuries, but an unprecedented monetary policy has been able to keep interest rates lower for longer.
  • The price of silver reached an 8-year high on February 1, but has fallen precipitously since. It has been assumed that the price increase in silver has come from a similar group that recently pushed stocks like GameStop and AMC higher. The increase in price has not been driven by historical fundamentals that would push the price of silver higher.
Fixed Income Index Yields & Total Returns
  Yield YTD 1-Year
B’berg Barclays Inter Govt./Credit 0.65% -0.23% 4.70%
B’berg Barclays US Aggregate Bond 1.17% -0.67% 4.77%
B’berg Barclays US Corp.High Yield 4.24% 0.40% 7.52%
B’berg Barclays Municipal Bond 0.95% 0.66% 4.04%
Key Interest Rates
  2/1/21 12/31/19 2/4/16
Federal Funds Target Rate 0-0.25% 0-0.25% 0.25-0.5%
3-Month LIBOR 0.20% 0.24% 0.61%
2-Year U.S. Treasury Note 0.11% 0.12% 0.72%
10-Year U.S. Treasury Note 1.08% 0.91% 1.84%
Prime Rate 3.25% 3.25% 3.50%
Commodities & Currency
  2/1/21 12/31/19 YoY Change
Gold 1,863.9 1,899.6 13.42%
Crude Oil 53.6 48.5 6.56%
Natural Gas 2.85 2.54 60.84%
Corn 549.3 484.0 42.10%
Soybean 1,365.3 1,315.3 53.93%
USD: Euro 1.206 1.222 8.74%
 
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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