Market Share Newsletter Vol 3 Issue 8

 

April 13, 2021

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Over the past several months we have seen multiple headlines of outsized investment returns. The most notable activity in the financial media has been GameStop whose stock soared in price as investors from a Reddit forum promoted the stock as an opportunity. Many institutional investors had “shorted” the stock, believing the price would fall. We also saw the Hertz stock price rise even though the company has filed for bankruptcy.
 
Special Purpose Acquisition Companies (SPACs) are another investment tactic garnering media attention. SPACs are basically blank checks for these entities to buy companies or bring others public, skipping the traditional initial public offering. Celebrities such as Shaquille O’Neal, Serena Williams and Alex Rodriquez have all launched SPACs as part of the trend. The number of SPACs has increased to over 500 in recent months.
 
Cryptocurrencies are another asset class that have also seen a surge in prices over the last several months, the most notable being Bitcoin which has seen its price increase over 400% in the last 6 months.
 
The most recent headlines include Archegos Capital, a hedge fund that used extreme amounts of leverage (borrowed money) to increase returns. Seems easy to make money, right? Even tempting?
 
Throughout history there has been a variety of “get rich quick” schemes and with today’s instantaneous news cycle and online accessibility, it is easier to hear about and be tempted by them. Many of those who partake in these schemes end up as case studies on not what to do. That doesn’t mean they aren’t interesting and even occasionally people make money from them.
 
We believe investing is a long-term, persistent, and intentional process based on spending less than you make and investing in companies that are growing their revenue and earnings. Many of our clients do this by making investments in their own businesses and others in the stock market.
 
The investment management group at 1st Source has been helping clients build and preserve wealth for many generations. We do this by working with clients to determine the right amount of risk they are willing and able to take. We assist clients in understanding the expectations of price volatility that is possible in markets. This also helps decrease the likelihood clients will want out of the stock market when it drops dramatically. We balance the stock market volatility with a well-constructed fixed income portfolio to balance risk and provide needed cashflow.
 
A consistent and diversified approach to investing is a key part of our investment philosophy–no room for “get rich quick” tactics. Actively managing the opportunities during business cycles or accommodative monetary and fiscal policy are part of our approach and the value we provide.
 
There is no harm in following these types of headlines, but in the end, remember that wealth, in many forms, is built from making good decisions over time and compounding those good returns. We are here to do that for you.
 
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

  • The Institute for Supply Management (ISM) reported that manufacturing activity grew in March at its fastest pace since November 1983. More data inside of the index points to increasing confidence that the manufacturing sector has a runway of growth ahead. New manufacturing orders grew at their fastest pace since January 2004, backlogged orders grew at their fastest pace on record, and manufacturing employment grew at its fastest pace in over three years.
  • Change in nonfarm payrolls increased unexpectedly by 916k jobs in March against a forecast of 675k and a previous increase of 658k jobs. The unemployment rate dropped from 6.2% to 6.0% despite 347k additional people starting to look for jobs. The augmented unemployment rate, which includes job seekers not in the labor force, fell below 10% for the first time since March 2020. Despite manufacturing being one of the strongest parts of the U.S. economy, the total number of workers employed in that industry is down 3.4% year-over-year.
  • The Producer Price Index (PPI) increased by 4.2% over the past 12 months. The monthly change in the cost of goods for producers increased by 1.7% in March, and was the largest increase since December 2009 based on Bloomberg data. This was primarily driven higher by a 5.9% increase in energy prices. The Consumer Price Index (CPI) has been tame, yet still increased by 2.6% over the same time frame. Removing food and energy from the index, CPI (CPI Core) only increased by 1.6%.
  • The Institute for Supply Management (ISM) also reported in March that the service sector grew by its fastest pace on record—dating back to July 1997. All 18 industries reported growth in March, yet the service sector prices continue to be an issue as 100% of industries reported they are paying higher prices.
Economic Data: Recent
  Actual Survey Prior
Change in Nonfarm Payrolls 916k 660k 468k
ISM Manufacturing Index 64.7 61.5 60.8
Consumer Price Index (CPI) MoM 0.6% 0.5% 0.4%
Trade Balance -$71.1b -$70.5b -$67.8b
Economic Data: Upcoming
    Survey Prior
Retail Sales Advance MoM   5.8% -3.0%
Industrial Production   2.5% -2.2%
Housing Starts   1611k 1421k
FOMC Rate Decision   0-0.25% 0-0.25%
Unemployment rate
Source: Bureau of Labor Statistics


Equities

  • Welcome to opening week for first quarter earnings! Many companies in the S&P 500—primarily financial companies—begin reporting this week. JPMorgan Chase, Goldman Sachs, and Wells Fargo report their quarterly results tomorrow. Pepsi, Bank of America, UnitedHealth, Blackrock, and Delta Airlines will report on Thursday, followed by PNC and Morgan Stanley reporting on Friday. Our enthusiasm is building around the guidance these companies will provide as the economy has recently began to accelerate.
  • Constellation Brands, one of the largest alcoholic beverage producers and owner of Corona beer, reported good first quarter earnings of $1.95 per share—well ahead of the FactSet consensus of $1.58 per share. Even though the company’s earnings were down over the same time period in 2020, the company’s revenue increased by 2.6% year-over-year as they pointed to strong growth and increased demand for hard seltzers and flavored drinks.
  • The Johnson & Johnson COVID-19 vaccine is being paused by the Food & Drug Administration (FDA) as multiple women have developed a blood-clotting disorder as a result of receiving the vaccine. Though the FDA is reporting this as rare, the AstraZeneca vaccine is also causing the same concern in both Europe and Australia. Johnson & Johnson stock was down as much as 3.1% as a result of the news.
Equity Index Values and Total Returns
  Value YTD 1-Year
S&P 500 4,128.0 10.36% 51.97%
Dow Jones Industrial Average 33,745.4 10.84% 46.64%
NASDAQ Composite 13,850.0 7.66% 71.69%
Russell 2000 (small-cap index) 2,233.8 13.38% 86.46%
MSCI EAFE (developed intl.) 2,255.7 5.92% 44.26%
MSCI Emerging Markets 641.5 2.78% 52.81%
 
Equities chart
Source: Bloomberg
 

Fixed Income, Commodities and Currencies

  • In the last report from the Federal Open Market Committee (FOMC) there was no suggestion that the Federal Reserve would begin reducing their bond purchases any time soon as they believe there is still elevated risk to the domestic economy due to COVID-19. They were clear though that as members of the FOMC feel more comfortable with COVID-19 subsiding they would begin the discussion.
  • Preferred stocks (a security that pays a fixed or floating rate dividend that takes priority over the common stock dividends) have had an excellent year relative to other fixed income asset classes. Our core preferred stock fund, Nuveen Preferred Securities & Income Fund, has returned 2.46% year-to-date (YTD), while other core fixed income asset classes have returned less—high yield is up 1.51% YTD, investment grade corporate bonds are down 3.92%, and the total bond market is down 2.91% as measured by Bloomberg Barclays indices.
  • The Organization for Petroleum Exporting Countries (OPEC) has recently agreed to increase oil production by two million barrels a day from May to July as they believe it is needed due to the global economic recovery. OPEC believes that the extra oil supply will be easily absorbed by the increasing demand. TSA checkpoint travel numbers point to an improving airlines industry, a large consumer of oil, as total travelers reached their highest level on April 2 since March 12, 2020.
Fixed Income Index Yields & Total Returns
  Yield YTD 1-Year
B’berg Barclays Inter Govt./Credit 0.96% -1.62% 1.46%
B’berg Barclays US Aggregate Bond 1.56% -2.91% 0.17%
B’berg Barclays US Corp.High Yield 4.00% 1.51% 18.89%
B’berg Barclays Municipal Bond 1.09% 0.16% 5.59%
Key Interest Rates
  4/12/21 12/31/20 4/14/16
Federal Funds Target Rate 0-0.25% 0-0.25% 0.25-0.5%
3-Month LIBOR 0.19% 0.24% 0.63%
2-Year U.S. Treasury Note 0.17% 0.12% 0.75%
10-Year U.S. Treasury Note 1.67% 0.91% 1.76%
Prime Rate 3.25% 3.25% 3.50%
Commodities & Currency
  4/12/21 12/31/20 YoY Change
Gold 1,732.7 1,902.8 -0.85%
Crude Oil 59.7 48.5 168.76%
Natural Gas 2.56 2.54 51.39%
Corn 569.0 484.0 74.74%
Soybean 1,382.0 1,315.3 62.95%
USD: Euro 1.191 1.222 9.41%
 
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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