Market Share Newsletter Vol 4 Issue 1

 

January 4, 2022

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Happy New Year! We hope you enjoyed our three-part video series covering our 2022 Investment Outlook. If you missed any, please view The Market Share archive here.
 
A new year has begun with many of the same problems experienced during the fourth quarter of 2021. Inflation, COVID, supply chain, employment, and the Federal Reserve’s responses remain challenges for investors in 2022.
 
Clearly, the challenge garnering the most headlines and impacting our wallets has been inflation. Consumer prices rose at the highest rate in 39 years and producer/manufacturing prices are at the highest level since 2010. The only easing we have seen is gas prices, which have fallen to $3.29 per gallon from $3.42 per gallon, based on November 7 data from AAA. We do not expect to see price increases to slow for several months. The longer than expected surge in inflation has pushed the Federal Reserve to change positions on bond purchases and interest rates. Bond purchases will end sooner than originally anticipated and interest rates will begin to increase closer to summer 2022.
 
The S&P 500 has been in the news often as it finished by returning over 28% and topping the Dow Jones and NASDAQ indices. During the year 2021, it reached new highs 70 times! After such strong markets, stocks have generally been positive 8 out of 10 times and up over 7% annually. We are closely watching small/mid-cap and international stocks to see if they can gain momentum in 2022. Both did well in the first half of last year only to fade into year-end with gains about half of the S&P 500. This dampened some of the enthusiasm about the great returns experienced in large-cap stocks.
 
Our team will monitor the market’s reaction to the many challenges ahead. We are actively looking for the portfolio adjustments that may be necessary to adapt to the changes with the central banks’ monetary policy and the global economy.
 
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

  • Initial jobless claims have hovered around long-term lows as they touched 188k for the week ending December 4, which was the lowest level of initial claims since September 1969. Despite low claims, the labor markets continue to be stressed by too few workers to meet labor needs. Job openings, based on data from the Bureau of Labor Statistics, were at 11.03 million as of October 31. There are only 6.9 million unemployed people in this country and 46% of those not in the labor force are age 65 and over. This is near the recent high seen in July.
  • The Federal Reserve’s favorite inflation gauge, the Personal Consumption Expenditure Core (PCE Core), exceeded forecasts in November. The index showed that prices increased by 4.7% over the past 12 months, which removes food and energy from the index, and was above the forecasted 4.5%. Personal income rose by 0.4% over the previous month in November and personal spending rose by 0.6%.
  • The housing market continued to be robust as housing starts in November moved to their highest level since January. Housing starts rose 8.3% year-over-year relative to a very strong November 2020 as multi-family housing starts increased by 37.1% over 12 months and single-family housing starts surprisingly declined by 0.8%. Home prices throughout the United States have increased by 18.41% over the past 12 months, based on data from S&P CoreLogic.
  • As inflation continues to rise around the world, many countries are experiencing extraordinary levels of inflation as Turkey, the 20th largest economy in the world ranked by GDP, reported 36.1% consumer inflation over the past 12 months. Turkey’s benchmark interest rate is currently 14% and, according to Bloomberg, Turkey’s real yield (adjusted for inflation) is the lowest in the world at -22.08%.
Economic Data: Recent
  Actual Survey Prior
Change in Nonfarm Payrolls 210k 550k 546k
ISM Manufacturing 58.7 60.0 61.1
GDP Annualized QoQ 3rd Quarter
2.3% 2.1% 2.1%
PCE Core Deflator YoY 4.7% 4.5% 4.2%
Economic Data: Upcoming
    Survey Prior
Change in Nonfarm Payrolls   420k 210k
Unemployment Rate   4.1% 4.2%
Average Hourly Earnings YoY   4.2% 4.8%
Consumer Price Index (CPI) MoM   0.4% 0.8%
Equity chart
Source: Bloomberg

 

Equities

  • The S&P 500 returned 28.7% in 2021 as it reached 70 record high closes during the year—only to be eclipsed by 1995 when it occurred 77 times, based on data from CNBC. In 2021, the best performing sectors in the S&P 500 were energy (54.4%), real estate (46.1%), and financials (34.9%). The best performing group within the S&P 500, which is a subset of an industry, was Auto & Components as Ford Motor Co. returned 137.5% and Tesla 49.8%.
  • It was another year of woeful relative performance for European stocks relative to the S&P 500. The DAX Index, Germany’s primary stock market index, returned 15.8%, and the FTSE 100, the UK’s index, returned 17% for the year. The bright spot within international equities was the 31.1% return in France’s stock market, as measured by the CAC index.
  • Fourth quarter earnings will begin today with Teledyne Technologies, an electronics and industrial conglomerate, expected to report after the stock market closes. The more notable earnings releases start next Thursday and Friday as Delta Airlines, Wells Fargo, Blackrock, JPMorgan Chase, and Citigroup all report. The week of January 17 will bring daily occurrences of many companies reporting their fourth quarter earnings.
Equity Index Values and Total Returns
  Value YTD 1-Year
S&P 500 4,796.6 0.64% 32.00%
Dow Jones Industrial Average 36,585.1 0.68% 24.25%
NASDAQ Composite 15,832.8 1.20% 25.34%
Russell 2000 (small-cap index) 2,272.6 1.22% 18.64%
MSCI EAFE (developed intl.) 2,330.4 -0.23% 10.83%
MSCI Emerging Markets 609.0 0.12% -3.41%
 
Equities chart
Source: Bloomberg
 

Fixed Income, Commodities and Currencies

  • Jerome Powell, the chairperson of the Federal Reserve, announced on December 15 that the Federal Reserve (the Fed) would start slowing their bond purchases by $30 billion a month starting in January following bond purchasing reductions in November and December. We expect the Fed to wrap up their bond purchasing mid-2022 and begin increasing interest rates shortly after and possibly even before that if inflation data continues to be at the current levels.
  • According to the Fed’s own projections, they are presently forecasting their target rate to increase from 0%-0.25% to 0.75%-1.00% by the end of 2022 and then an additional increase of 75 basis points in 2023 to 1.50%-1.75%. Bonds have started to finally see the writing on the wall as the two-year Treasury note has increased from 0.36% on October 16 to approximately 0.78% today.
  • The Bloomberg U.S. Corporate High Yield bond index, a benchmark for bonds rated below investment grade, returned 5.28% in 2021 as the more aggressive sectors within fixed income well outperformed higher-rated bond sectors like U.S. Treasuries. The Bloomberg U.S. Aggregate bond market, primarily allocated to government securities, lost 1.54% in 2021. This was their first negative year since 2018 and worst performing year since 2013.
Fixed Income Index Yields & Total Returns
  Yield YTD 1-Year
B’berg Barclays Inter Govt./Credit 1.40% -0.42% -1.86%
B’berg Barclays US Aggregate Bond 1.86% -0.81% -2.28%
B’berg Barclays US Corp.High Yield 4.26% -0.08% 5.20%
B’berg Barclays Municipal Bond 1.12% -0.03% 1.43%
Key Interest Rates
  1/3/22 12/31/21 1/5/17
Federal Funds Target Rate 0-0.25% 0-0.25% 0.5-0.75%
3-Month LIBOR 0.21% 0.24% 1%
2-Year U.S. Treasury Note 0.77% 0.73% 1.21%
10-Year U.S. Treasury Note 1.63% 1.51% 2.44%
Prime Rate 3.25% 3.25% 3.75%
Commodities & Currency
  1/3/22 12/31/21 YoY Change
Gold 1,800.1 1,828.6 -8.07%
Crude Oil 76.1 75.2 61.55%
Natural Gas 3.82 3.73 48.70%
Corn 589.3 593.3 23.67%
Soybean 1,344.0 1,328.8 2.56%
USD: Euro 1.130 1.137 -7.85%
 
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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