Market Share Newsletter Vol 4 Issue 13

 

June 21, 2022

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Expensive is an appropriate way to describe how most feel about our economic lives today. The Michigan Consumer Confidence sentiment indicator confirms that description with a new record low reading in May. The Federal Reserve raised its Fed Funds rate 0.75% points last week, 30-year fixed mortgage rates are over 5.5% and the national average for gasoline is more than $5 per gallon. In fact, each broad sector of inflation was up last month. We see it, feel it, and it’s expensive.
 
The Federal Reserve is committed to lowering the rate of inflation and is implementing the largest increase in the Fed Funds rates since 1994. This is an effort to slow the economy and lower inflation. President Biden has also discussed actions to lower inflation, focusing on oil companies and gas prices. Though Congress isn’t expected to get involved in lowering inflation, we may see states or the President’s administration implement their own measures, such as suspending a state gas tax.
 
The current situation suggests that inflation will take longer to fall back towards the Federal Reserve’s 2% target. COVID shutdowns, particularly in China, continue to disrupt the supply chain, the war in Ukraine will keep certain food and oil prices elevated and we have a shortage of workers. These are just a few examples of what is keeping inflation higher and are unlikely to fall as quickly as previously expected.
 
The stock and bond markets have not been receptive to higher inflation and the Fed’s raising of interest rates. Major stock indices such as the S&P 500, NASDAQ and many international stock markets are down over 20%. Until stock markets start to anticipate that these factors are improving, we will see volatility and potentially more downward moves. Company earnings will face challenges from rising costs and a slowing economy.
 
Staying invested while feeling poorly about the economy and seeing your portfolio value decline is difficult. Historically, we have seen the largest positive days during market cycles like this, which aligns with our philosophy of staying invested in stocks­­­-even during difficult times. Selling out entirely, is generally not advised and historically has not been wise for investors over a longer time period.
 
Sticking to your investment plan and making modest adjustments, are all part of getting through expensive and challenging times like these.
 
Paul Gifford, CFA
Chief Investment Officer
Wealth Advisory Services
Investment Management Group
[email protected]
Erik Clapsaddle, CFA, CFP®
V.P. and Sr. Fixed Income Portfolio Manager
Wealth Advisory Services
Investment Management Group
[email protected]
Considerations for your portfolio

The Economy

  • The Consumer Price Index (CPI) came in higher than expected in May as prices increased by 1% month-over-month (MoM) and by 8.6% year-over-year (YoY). The biggest driver in price increases in May were food and energy. Based on data from the U.S. Labor Department, the price of meat, poultry and eggs have increased by 14.2% YoY and airfare has increased by 37.8%. The smallest price increases have come from parts of the medical industry.
  • Housing starts declined by 14.4% MoM in May, which was the largest decline since April 2020. The South region of the United States recorded the largest decline in May of 20.7%. Building permits, considered a leading indicator to housing and the overall economy, declined by 7% in May. The housing market has quickly changed with interest rates rising and the Federal Reserve increasing their target rate by 1.25% points over the past two months.
  • Existing home sales in May were better than expected at a 5.41 million annualized pace, but the 5.41 million level was the lowest since Jun 2020. This was the fourth consecutive month of declines as the housing market has gone from dealing with a lack of supply and high prices to significantly higher borrowing rates today.
Economic Data: Recent
  Actual Survey Prior
FOMC Rate Decision 1.50%-1.75% 1.25%-1.50% 0.75%-1.00%
Retail Sales Ex Auto MoM 0.5% 0.7% 0.4%
Consumer Price Index (CPI) MoM
1.0% 0.7% 0.3%
Capacity Utilization
79.0%
79.2% 78.9%
Economic Data: Upcoming
    Survey Prior
University of Michigan Sentiment   50.2 50.2
Change in Nonfarm Payrolls   303k 390k
ISM Manufacturing   55.8 56.1
New Home Sales   590k 591k 
 

Equities

  • Kellogg announced plans to split into three different companies. The goal is to focus on their snack division, which was responsible for 80% of its $14.2 billion of net sales in 2021. The other two companies will be focused on their cereals and the plant-based foods. The cereal segment of Kellogg reported $2.4 billion in 2021 sales and plant-based foods were responsible for $340 million.
  • Kroger reported good top line growth in their most recent quarter and same-store sales excluding fuel were up 4.1% year-over-year (YoY). Despite the positive news, Kroger’s stock price dropped precipitously the following day due to their margins shrinking from high levels of inflation. The Labor Department reported that grocery prices increased by 11.9% over the past 12 months ending on May 31.
  • Lennar, one of the nation’s largest home builders, reported an excellent quarter through May as purchase contracts increased 4% YoY, the total dollar value of its deals increased 20%, and their gross margins expanded to 29.5% from 26.1% YoY. The company’s chairman stated, “The weight of a rapid doubling of interest rates over six months, together with accelerated price appreciation, began to drive buyers in many markets to pause and reconsider. We began to see these effects after quarter-end.”
Equity Index Values and Total Returns
  Value YTD 1-Year
S&P 500 3,674.8 -22.34% -9.46%
Dow Jones Industrial Average 29,888.8 -16.91% -8.36%
NASDAQ Composite 10,798.4 -30.71% -20.61%
Russell 2000 (small-cap index) 1,665.7 -25.39% -24.74%
MSCI EAFE (developed intl.) 1,842.4 -19.45% -17.57%
MSCI Emerging Markets 499.2 -17.94% -24.13%
 
Equities chart
Source: Bloomberg
 

Fixed Income, Commodities and Currencies

  • The Federal Reserve raised their target rate by 0.75% points on June 15 to a range of 1.50% - 1.75%. The Fed was initially expected to increase by 0.50% percentage points but higher-than-expected recent inflation data pushed the Fed to increase more and they provided guidance that they would get to 3.25%-3.5% by year-end. At the March 16 meeting, the Fed was expected to only raise their target rate to 1.75%-2% by year-end.
  • According to Bloomberg data, the yield to worst on the U.S. Corporate Investment Grade Bond index reached 4.99% on June 14. This was the highest yield since September 9 during the global financial crisis. Refinitiv Lipper has reported that U.S. investment-grade bond mutual funds have experienced 12 consecutive weeks of net withdrawals.
  • According to the Mortgage Bankers Association (MBA) the 30-year fixed rate mortgage rose to 5.65% for the week ending June 10, which is the highest rate since November 2008. Additionally, mortgage refinances were down 75.7% YoY and mortgages originated for purchases were down 15.6% YoY.
  • ProShares started a new ETF, Short Bitcoin Strategy, that allows investors to benefit from the decline in Bitcoin prices. Bitcoin has declined in price by approximately 70% since November 10, 2021.
Fixed Income Index Yields & Total Returns
  Yield YTD 1-Year
B’berg Barclays Inter Govt./Credit 3.70% -7.66% -8.10%
B’berg Barclays US Aggregate Bond 3.93% -11.48% -11.43%
B’berg Barclays US Corp.High Yield 8.51% -13.10% -11.15%
B’berg Barclays Municipal Bond 3.38% -10.06% -9.68%
Key Interest Rates
  6/20/22 12/31/21 6/22/17
Federal Funds Target Rate 1.5-1.75% 0-0.25% 1-1.25%
3-Month LIBOR 2.1% 0.21% 1.27%
2-Year U.S. Treasury Note 3.18% 0.73% 1.35%
10-Year U.S. Treasury Note 3.23% 1.51% 2.16%
Prime Rate 4.75% 3.25% 4.25%
Commodities & Currency
  6/20/22 12/31/21 YoY Change
Gold 1,840.6 1,835.9 2.78%
Crude Oil 109.6 75.2 51.07%
Natural Gas 6.94 3.73 112.03%
Corn 784.5 593.3 15.62%
Soybean 1,702.0 1,328.8 19.20%
USD: Euro 1.051 1.137 -11.44%
 
Fixed Income chart
Source: Bloomberg
 
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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