Market Share Newsletter Vol 3 Issue 4

 

February 16, 2021

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It has been a generation since inflation was a regular topic of concern. However, over the past few months, questions about inflation have become more common in discussions with clients. In the last three decades, we have seen inflation drop from 3% to 2.5% to 1.5%. The drop in inflation has kept interest rates low, which has also helped improve profitability and ultimately stock prices. For example, in 1999 Johnson & Johnson issued a 30-year bond at 6.95% and this past year issued a 30-year bond at 2.25%. Based on the original $300 million borrowing at 6.95%, Johnson & Johnson will save 68% in interest expense, which equates to an annual savings of $14.1 million.
 
Early in the pandemic, economists leaned towards a prolonged deflationary environment as demand and supply were disrupted by the global shutdowns. Since then, the topic of inflation has become more common as economies have reopened and the supply of money has surged across the globe. U.S. Treasury Inflation Protected Securities (TIPS) recorded expectations for inflation to fall to 0.50% in May 2020 and have recently increased to 2.2%–the highest since 2014. Money supply growth has added to the concerns about the future inflation. The chart below shows the over 25% increase in money supply in the United States.
 
Equity Put/Call Ratio chart
 
To a certain degree, money supply growth is a positive for economic growth; however, in excess or in contraction, it will typically create other consequences.
 
The pandemic is still with us and the need to propel the economy forward and generate jobs is the short-term priority. The long-term impact of the efforts to increase money supply and the fiscal policy to support it will be another challenge to be addressed in the future. In the short-term, we will likely see an increase in inflation as we reopen the economy. The Federal Reserve tends to agree with that outlook. As we analyze and research the longer-term consequences and trends, know you have a partner with 1st Source Bank 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

  • Nonfarm payrolls only increased by 49K in January, but this was an improvement from December’s surprising 227K jobs cut. The unemployment rate fell to 6.3% from 6.7% but the underlying data points to a soft labor market in January as the total labor force declined by approximately 406K and the labor force participation rate dropped to 61.4%. This was the lowest level since September and was down compared to 63.4% in January 2020.
  • Based on data from the Job Openings and Labor Turnover Survey, job openings in the United States remained consistent through the latter half of 2020 and ended the year with 6.6 million job openings. The number of job openings in the manufacturing industry has increased by approximately 32% for the 12-month period ending December 31, 2020 to a total of 475,000 openings.
  • The National Federation of Independent Business (NFIB) reported the Small Business Optimism Index to be approximately three points below its 47-year average in January as it fell for the third consecutive month to a level of 95.0—its lowest level since May. A positive note was that a seasonally adjusted net 17% of business owners plan to create new jobs in the next three months.
  • China recorded its first bout of deflation in core prices (removing food and energy) in January since November 2009 and the Consumer Price Index (CPI) declined by 0.3% in comparison to January 2020. Service prices declined by 0.7% but the biggest decline came from transportation and communication products as they recorded a -4.6% change in price.
Economic Data: Recent
  Actual Survey Prior
Change in Nonfarm Payrolls 49k 105k -227k
Consumer Price Index (CPI) MoM 0.3% 0.3% 0.2%
University of Michigan Sentiment 76.2 80.9 79.0
Trade Balance -$66.6B -$65.7B -$69.0B
Economic Data: Upcoming
    Survey Prior
Initial Jobless Claims   770k 793k
Retail Sales Advance MoM   1.1% -0.7%
New Home Sales   869k 842k
Housing Starts   1660k 1669k
ISM Manufacturing chart
Source: Bloomberg
 


Equities

  • Disney reported a quarterly profit of $0.32 per share against expectations of a $0.34 per share loss. Revenue also exceed expectations by 2.2% as revenue was $16.25 billion–the highest level since the first quarter of 2020. Disney+ (Disney’s streaming service) subscribers increased to 94.9 million, up from 86 million just three months ago. Disney has set a goal to reach 260 million subscribers by 2024.
  • Year-to-date, the global risk-on move has continued as small-cap stocks (as measured the by the Russell 2000) have increased by 16% and emerging market stocks (as measured by the MSCI Emerging Market index) have increased by 10.7% while the S&P 500 has increased by only 4.9%. Since the beginning of the fourth quarter 2020, small cap stocks have increased by 52.4%.
  • The Japanese stock market, based off the Nikkei 225 index, rose above the 30,000 level for the first time since August 2, 1990. Japanese stocks have performed well amidst the overall perspective of a global recovery from the pandemic and more cyclical stocks have outperformed. In August 2020, Berkshire Hathaway invested $6.4 billion in five Japanese stocks that have increased by more than 20% since the initial investment.
Equity Index Values and Total Returns
  Value YTD 1-Year
S&P 500 3,934.8 4.93% 18.59%
Dow Jones Industrial Average 31,458.4 3.00% 9.60%
NASDAQ Composite 14,095.5 9.44% 46.33%
Russell 2000 (small-cap index) 2,289.4 16.01% 37.47%
MSCI EAFE (developed intl.) 2,254.6 5.06% 14.22%
MSCI Emerging Markets 695.7 11.47% 32.80%
 
Equities chart
Source: Bloomberg
 

Fixed Income, Commodities and Currencies

  • The yield on the 10-year U.S. Treasury note increased to 1.28% today—the highest yield on the 10-year since February 28, 2020. The recent increase in bond yields occurred as more investors expect inflation to rise, an additional stimulus plan for up to $1.9 trillion is expected to move forward, and the economy expansion is expected as effective vaccines are more widely distributed.
  • The national average on gasoline prices in the United States has continued to move higher from the low point of $1.77 per gallon on April 27, 2020 to $2.52 on February 15, 2021, as measured by AAA. Gasoline prices elsewhere around the world have hit more extreme levels. In India, gas prices have reached a record high. As second most populated country and the world’s fifth largest economy, India has historically been a significant importer of crude oil, accounting for more than 80% of their oil consumption.
Fixed Income Index Yields & Total Returns
  Yield YTD 1-Year
B’berg Barclays Inter Govt./Credit 0.68% -0.40% 4.70%
B’berg Barclays US Aggregate Bond 1.24% -1.23% 4.22%
B’berg Barclays US Corp.High Yield 3.96% 1.34% 7.36%
B’berg Barclays Municipal Bond 0.90% 1.01% 4.41%
Key Interest Rates
  2/15/21 12/31/19 2/18/16
Federal Funds Target Rate 0-0.25% 0-0.25% 0.25-0.5%
3-Month LIBOR 0.19% 0.24% 0.62%
2-Year U.S. Treasury Note 0.11% 0.12% 0.72%
10-Year U.S. Treasury Note 1.21% 0.91% 1.77%
Prime Rate 3.25% 3.25% 3.50%
Commodities & Currency
  2/15/21 12/31/19 YoY Change
Gold 1,823.2 1,899.6 12.10%
Crude Oil 59.5 48.5 15.10%
Natural Gas 2.91 2.54 65.87%
Corn 538.8 484.0 44.41%
Soybean 1,372.0 1,315.3 54.41%
USD: Euro 1.213 1.222 11.77%
 
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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