Market Share Newsletter Vol 3 Issue 5

 

March 2, 2021

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At the start of the Daytona 500 this past February, the pace car was leading the cars around the track at a moderate speed. As the green flag dropped, race cars accelerated to near 200 miles per hour! The U.S. and many global economies seem to be in the warm-up laps waiting for the green flag to drop. Some speed has been built up but is still limited by the pandemic restrictions in place, like the pace car.
 
As we have written over the past year, the economy needs good news and vast improvements surrounding COVID to grow faster and recover from the shutdown in the second quarter of 2020. The U.S. economy is 3.5% below its peak in the 4th quarter of 2019, according to the Bureau of Economic Analysis. This past weekend, the Food and Drug Administration approved the third vaccine to fight the COVID virus and 3.9 million single-shot doses of the Johnson & Johnson vaccine are being shipped and will begin being administered this week. The Moderna and Pfizer vaccines are also seeing a ramp-up in production and distribution. Combined with the significant drop in the number of daily cases and hospitalizations, the news on COVID is looking more positive. It appears we are headed toward the green flag.
 
There are other positive bits of news as well. Congress and President Biden continue to move forward with a $1.9 trillion stimulus plan that proposes payments of $1,400 per person for many eligible Americans. During the pandemic, the savings rate in America has surged to over $4 trillion in savings. If spent down to pre-pandemic levels, it could mean over $1 trillion in additional demand for goods and services over the next year. The Federal Reserve continues to buy bonds and maintain low short-term interest rates. All three of these efforts should help the economy get back to a record GDP and a strong labor market.
 
The potential benefit of these factors has the economy ready for the green flag in 2021 and into 2022. The stock market strength is already expecting this surge in growth and earnings. Delays or stumbles will likely cause more volatility and keep us in the warm-up laps, instead of getting the green flag. Regardless of the flag color, we continually work on managing your portfolios to meet your needs and prepare for the next stage in the economic race.
 
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

  • On Monday, the Institute for Supply Management (ISM) released their ISM Manufacturing index revealing that the manufacturing sector grew faster than forecasted in February but also grew at its fastest pace since February 2018. One of the primary drivers in the sector was the price paid for inputs that reached its highest level since July 2008—meaning the cost of materials has accelerated. The most astonishing result was that 6% of manufacturing industries reported that their customers had excessive inventory, pointing to a positive outlook in labor.
  • The Conference Board, a non-profit research organization, released their consumer confidence data indicating the Pacific region in the United States reached its lowest level of confidence in January since June 2012. However, consumers experienced a big boost in confidence in February as state governments eased restrictions due to the lessening pandemic. California began to allow outdoor dining, some youth sports to resume, and more leniency for social mixing.
  • Brazos Electric Power Cooperative, a Waco, Texas based generator and transmitter of electricity, filed for Chapter 11 bankruptcy on Monday. Brazos cited a $1.8 billion charge from the state’s grid operator that they are disputing. They are just one of many utility companies struggling with the recent weather disaster in Texas that knocked out the power to approximately 4.3 million people in the state.
  • Based on data from the Centers for Disease Control and Prevention (CDC), the number of COVID cases in the United States dropped to their lowest daily level on Sunday since October 18. Even more encouraging than the decline in cases has been the decline in hospitalizations. The CDC’s most recent release on February 27 of 4,093 admissions was at its lowest level since October 4.
Economic Data: Recent
  Actual Survey Prior
Initial Jobless Claims 730k 825k 841k
Retail Sales Advance MoM 5.3% 1.1% -1.0%
New Home Sales 923k 856k 885k
Housing Starts 1580k 1660k 1680k
Economic Data: Upcoming
    Survey Prior
Change in Nonfarm Payrolls   195k 49k
Consumer Price Index (CPI) MoM   0.3% 0.3%
University of Michigan Sentiment   77.2 76.8
Unemployment Rate   6.3% 6.3%
ISM Manufacturing chart
Source: Bloomberg
 


Equities

  • Yesterday, the S&P 500 had its best day since June 5 as it rose by 2.38%. Confidence in the outlook for the U.S. and global economies continues to mostly outweigh the increase in yields for longer-dated U.S. Treasuries. European stocks also increased by the most since November 9 as the Stoxx 600 increased by 1.84%. Small cap stocks, as measured by the Russell 2000, were up 3.38% on Monday and are now up 15.34% year-to-date (YTD) while the S&P 500 has only returned 4.13%.
  • Zoom Video Communications, a teleconference software company and beneficiary of the work-from-home environment, reported stellar fourth quarter numbers. Adjusted earnings per share were $1.22, 54% higher than expected. Free cash flow, the darling data point of shareholder value, increased to $378 million from $202 million one year ago. Additionally, revenue exceed expectations by approximately 9% and the company now has $2.24 billion of cash on their balance sheet.
  • The S&P 500 Energy Index has returned 29.1% year-to-date through Monday as the price of crude oil has risen by 23.21% YTD. The following two best-performing sectors have been Financials and Communications Services, which are up 12.6% and 7% respectively. The two worst performing sectors, Utilities and Communication Services, are down 5.4% and 5.8% respectively. This year’s short-term result from the Energy Index pales in comparison to last year’s 37.3% decline.
Equity Index Values and Total Returns
  Value YTD 1-Year
S&P 500 3,901.8 4.13% 28.48%
Dow Jones Industrial Average 31,535.5 3.42% 20.72%
NASDAQ Composite 13,558.8 5.55% 53.13%
Russell 2000 (small-cap index) 2,275.3 15.34% 51.75%
MSCI EAFE (developed intl.) 2,198.6 2.60% 23.48%
MSCI Emerging Markets 659.4 5.66% 36.83%
 
Equities chart
Source: Bloomberg
 

Fixed Income, Commodities and Currencies

  • Longer-term rates continued their upward trajectory over the past few weeks as the 10-year note reached 1.60%, its highest level since February 14. Investors’ outlook for inflation continues to be one of the primary drivers for the higher yields.
  • Annualized inflation data continues to show inflation being below the Fed’s goal of a 2% or higher average. This has been the goal for some time to make up for the past two decades of a 1.7% annualized average. Recent monthly data has shown inflation rising quicker as the effects of the pandemic will likely start to show up in annualized inflation data.
  • The price of gold has quietly declined by 18.2% since its all-time high in August as the global economy has improved, interest rates have started to rise, and the amount of negative yielding debt around the world has fallen from over $18 trillion to approximately $13 trillion. Gold is less attractive than it was back then, but new legislation on cryptocurrencies or a move lower in interest rates could quickly push the price of gold higher.
Fixed Income Index Yields & Total Returns
  Yield YTD 1-Year
B’berg Barclays Inter Govt./Credit 0.83% -1.09% 2.21%
B’berg Barclays US Aggregate Bond 1.43% -2.32% 1.07%
B’berg Barclays US Corp.High Yield 4.13% 0.95% 9.27%
B’berg Barclays Municipal Bond 1.27% -0.96% 1.04%
Key Interest Rates
  3/1/21 12/31/19 3/3/16
Federal Funds Target Rate 0-0.25% 0-0.25% 0.25-0.5%
3-Month LIBOR 0.19% 0.24% 0.64%
2-Year U.S. Treasury Note 0.12% 0.12% 0.84%
10-Year U.S. Treasury Note 1.42% 0.91% 1.84%
Prime Rate 3.25% 3.25% 3.50%
Commodities & Currency
  3/1/21 12/31/19 YoY Change
Gold 1,723.0 1,899.6 6.84%
Crude Oil 60.6 48.5 30.61%
Natural Gas 2.78 2.54 60.31%
Corn 547.5 484.0 45.90%
Soybean 1,392.5 1,315.3 56.06%
USD: Euro 1.205 1.222 8.15%
 
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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