Market Share Newsletter Vol 3 Issue 7


March 30, 2021

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In the last edition of The Market Share, we broke down the most recent stimulus bill passed by Congress and discussed the significant aggregate financial response to the pandemic. Over the past year, the U.S. Government has spent over $4 trillion more than their revenue. Our clients frequently ask us about the size of the federal deficit and the accumulation of over $27 trillion in public debt (see chart below). With our many years of experience managing fixed income (debt) securities, we have been analyzing the same question for decades. The answer thus far has been that the debt has not mattered because interest rates have been declining and the economy has been growing. And, as the U.S. economy continues to globally be the strongest, buyers continue to purchase its debt. That said, the Federal Reserve’s purchases do help.
The two common components of debt are interest and principal. One of the two components—interest—isn’t currently an issue. Looking at the chart below, note that the average interest rate paid on the national debt has plummeted from nearly 7% at the turn of the 21st century to just 1.5% today. Also, interest payments have been growing at a much slower rate than debt. In fact, with the pandemic and the Federal Reserve’s lowering of rates, interest payments will drop to the lowest level in three years. Last week, the Federal Reserve confirmed their intent to keep short term interest rates low into 2023 which currently makes the interest payments a non-issue, despite the high debt levels.
The second component of debt is the principal amount borrowed. Repaying the principal is more complex. There are several ideal ways to repay the principal or keep it manageable; cut spending, increase revenue (taxes), or grow the economy at a rate faster than debt is increased. Today, there has not been significant progress made on any of the three fronts. The U.S. is still considered one of the safest borrowers in the world and that will allow many years to resolve the principal payment portion. This may be the reason many are not concerned with the amount of debt today—that in itself might be cause for concern. The U.S. has become very good at “kicking the can down the road.”
In the long term, we believe that government debt could become the largest strain on global economies if not taken more seriously. Though all our hands are tied to what fiscal and monetary policy may be in the U.S. and globally, it is an issue that we follow, analyze, and contemplate closely.
We appreciate receiving your feedback on topics of interest to you. Thank you for continuing to ask good questions of our Wealth Advisory Services team.
Paul Gifford, CFA
Chief Investment Officer
Wealth Advisory Services
Investment Management Group
Erik Clapsaddle, CFA, CFP®
V.P. and Sr. Fixed Income Portfolio Manager
Wealth Advisory Services
Investment Management Group
Considerations for your portfolio

The Economy

  • Industrial production declined by 2.2% in February as inclement weather conditions largely contributed to the decline and capacity utilization (the amount of actual output relative to potential output). This was the largest one-month decline since the beginning of the pandemic in April 2020. Expectations for the decline in production are temporary as we believe the economy will continue to recover and industrial production will expand accordingly.
  • Retail sales were also hit by the weather in February as they declined by 3%, versus the expected 0.5% decline, but this also followed an increase in retail sales of 7.6% in January. The biggest contributor to the decline came from nonstore retailers, which are retail sellers outside of brick-and-mortar buildings and are largely made up of online merchants. They comprised 28% of the decline, but with the U.S. Savings Rate being 13.6%; we expected this decline to also be short-lived.
  • The S&P CoreLogic Case-Shiller Home Price Index reported today that home prices in the United States increased by 11.22% over the past year. The metropolitan areas that lead the annual increase were Phoenix (+14.4%), Seattle (+13.6%), San Diego (+13%), and Cleveland (+11.5%). The three metropolitan areas with the lowest annual increase, Chicago, Las Vegas, and Dallas, still reported a positive change in housing prices. Over the past 12 months, the 20-City Home Price Index increased by its largest amount since March 2014.
  • Italy has continued to carry the baton for nations with the most looming debt problems as expectations are for Italy’s debt to reach close to 159% of their GDP. Italian officials are now forecasting economic growth of 4.1% this year in comparison to their original forecast of 6%.
Economic Data: Recent
  Actual Survey Prior
New Home Sales 775k 870k 948k
FOMC Rate Decision 0-0.25% 0-0.25% 0-0.25%
PCE Core Deflator YoY 1.4% 1.5% 1.5%
S&P CoreLogic CS 20-City YoY 11.1% 11.2% 10.17%
Economic Data: Upcoming
    Survey Prior
Change in Nonfarm Payrolls   650k 379k
Markit US Manufacturing PMI   59.1 59.0
Unemployment Rate   6.0% 6.2%
Trade Balance   -$69.9b -$68.2b
Unemployment rate
Source: Bureau of Labor Statistics


  • Small cap stocks, as measured by the Russell 2000, have outperformed the S&P 500 year-to-date by 3.75%. Despite the good performance year-to-date, small cap stocks are down by 6.9% over the past two weeks while the S&P 500 is only down 0.13%. Small cap stocks appeared to have just taken a breather from their outperformance as an economic expansion, improving corporate fundamentals, and continual loose fiscal policy provide a good backdrop.
  • The Financial Select Sector SPDR Fund, an exchange-traded fund (ETF) representing the financial sector, has returned over 16% year-to-date (YTD) through Monday. The three largest holdings in the fund are Berkshire Hathaway, JPMorgan Chase, and Bank of America. Berkshire has lagged the overall sector’s performance (up 11.6% YTD), but JPMorgan and Bank of America have returned 22.6% and 29.6% respectively YTD. Like small cap stocks, we would expect banks to perform well based on our economic outlook.
  • As we approach first quarter earnings releases, companies have started to project both earnings and revenue guidance. Data gathered by FactSet shows that the information technology sector has been providing the most upbeat outlook and is projecting year-over-year (YoY) earnings growth of 22.3% and the semiconductor industry, a subset of information technology, is forecasting YoY earnings growth of 24.3%.
Equity Index Values and Total Returns
  Value YTD 1-Year
S&P 500 3,971.1 6.10% 53.35%
Dow Jones Industrial Average 33,171.4 8.90% 51.60%
NASDAQ Composite 13,059.7 1.49% 68.77%
Russell 2000 (small-cap index) 2,158.7 9.52% 89.81%
MSCI EAFE (developed intl.) 2,218.4 3.88% 46.10%
MSCI Emerging Markets 635.1 1.76% 60.71%
Equities chart
Source: Bloomberg

Fixed Income, Commodities and Currencies

  • Issuance of corporate debt through the bond market continues to be strong despite longer-term interest rates moving well off their lows. Issuance has mostly been for general corporate purposes and refinancing current debt, but junk bond issuance has ballooned as it reached its second largest month on record according to Bloomberg data.
  • While most of the fixed income has negative returns YTD, the Bloomberg Barclays high yield bond index has returned 0.65%. For the same aforementioned reasons, we believe small cap stocks and big banks should perform well in the near term, we would also attribute relative outperformance to high yield bonds as well. The yield on the high yield index is currently 4.31%, which is 2.71 percentage points more than the total bond market.
Fixed Income Index Yields & Total Returns
  Yield YTD 1-Year
B’berg Barclays Inter Govt./Credit 0.97% -1.80% 2.25%
B’berg Barclays US Aggregate Bond 1.60% -3.43% 0.55%
B’berg Barclays US Corp.High Yield 4.31% 0.65% 24.26%
B’berg Barclays Municipal Bond 1.16% -0.30% 5.10%
Key Interest Rates
  3/29/21 12/31/20 3/31/16
Federal Funds Target Rate 0-0.25% 0-0.25% 0.25-0.5%
3-Month LIBOR 0.2% 0.24% 0.63%
2-Year U.S. Treasury Note 0.14% 0.12% 0.76%
10-Year U.S. Treasury Note 1.71% 0.91% 1.82%
Prime Rate 3.25% 3.25% 3.50%
Commodities & Currency
  3/29/21 12/31/20 YoY Change
Gold 1,714.6 1,902.8 2.24%
Crude Oil 61.6 48.5 202.49%
Natural Gas 2.65 2.54 56.27%
Corn 546.8 484.0 59.19%
Soybean 1,393.0 1,315.3 57.16%
USD: Euro 1.177 1.222 6.14%
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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