Market Share Newsletter Vol 4 Issue 3

 

February 1, 2022

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The changing of a month, or even a calendar year, does not change sentiment for investors. Although sometimes, like we are experiencing now, timing and sentiment coincide. January was not particularly kind to most investors. Equity returns had the worst start to a new year since 2008 with the S&P 500 and the NASDAQ down 5.17% and 8.96%, respectively. Bond investors also saw negative returns as yields rose more than the income earned during the month. While that sounds ominous, the drop in both markets takes us back to values seen three to six months ago. The stock market rally in 2021 was that good.
 
The largest change in sentiment has been around inflation and the Federal Reserve’s (Fed) pending actions to fight it. As inflation ended the year at 7%, the highest rate in 39 years, the term transitory is no longer used by the Fed. Prices are likely to rise in 2022, at a slower rate than in 2021, but still well over the 2% targeted by the Fed. Expectations are for the Fed to increase interest rates in March of 2022 and again three to four more times in total for the year. Last summer, the expectations were that the Fed would not raise rates until 2023, thus a big shift in policy and sentiment in the last several months. We will likely see quantitative tightening as the Fed looks to shrink their balance sheet after it more than doubled during the pandemic. The chart below shows the growth of the balance sheet since 2008.
 
Total assets of the federal reserve
 
While a change in policy is concerning, we have seen plenty of Fed tightening cycles when stocks have continued to do well. Mainly because corporate earnings and economic activity continue to be strong. Currently, we believe that both will offset higher interest rates over the next year or so.
 
As Fed policy has changed, that can also impact the performance of investments in different ways. In the short-term, value stocks have outperformed growth stocks and large companies have outperformed small companies. Last year, we saw similar stock behavior in the first quarter of 2021, only to have it reverse the next. The change in Fed policy will matter to markets. As we look forward, we will adjust portfolios as we see the trends unfold.
 
Thank you for the opportunity to serve you and your family.
 
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

  • Gross domestic product (GDP) increased by 6.9% in the fourth quarter of 2021 in comparison to the previous quarter and was much better than the forecast of 5.5%. The primary driver in the quarter was inventory. Companies increased their inventories due to strong demand and this increase added 4.9 percentage points to GDP for the quarter. The primary detractor in the quarter was government consumption as national defense declined by 5.7% over the third quarter in 2021.
  • The Personal Consumption Expenditure (PCE) increased by 5.8% in December 2021 over the previous 12 months. Removing food and energy from the index (PCE Core, the Federal Reserve’s inflation gauge), it only increased by 4.9%. The 5.8% increase in PCE was the largest since 1982. The increase in inflation will continue to not just weigh on “real earnings” (the increase in wages minus the increase in inflation) but also in spending as personal spending declined by 0.6% in the month of December.
  • Consumer confidence, as measured by the Conference Board, was better than expected in January but still well off its all-time highs in mid-2018 and slightly below December’s reading. Consumer confidence in the present economy state improved over the previous month, but their expectations for the future worsened and was responsible for moving the overall index lower.
  • The International Monetary Fund (IMF) recently cut their forecast for global economic expansion in 2022 from 4.9% to 4.4%. The decline was attributed to the Build Back Better plan not passing in Congress, supply chain issues, and the Federal Reserve removing economic accommodation sooner than expected. The additional hit to global growth was a cut in China’s forecasted growth from 5.6% to 4.8% in 2022 due to their zero-tolerance policy for COVID-19 and concerns over real estate in China.
Economic Data: Recent
  Actual Survey Prior
Change in Nonfarm Payrolls 199k 450k 249k
GDP Annualized QoQ (4th Q) 6.9% 5.5% 2.3%
Consumer Price Index (CPI) MoM
0.5% 0.4% 0.8%
PCE Core Deflator YoY 4.9% 4.8% 4.7%
Economic Data: Upcoming
    Survey Prior
Change in Nonfarm Payrolls   150k 199k
Unemployment Rate   3.9% 3.9%
Consumer Price Index (CPI) MoM   0.5% 0.5%
Trade Balance   -$83.0b -$80.2b

Equities

  • According to FactSet through January 28, 33% of S&P 500 companies have reported quarterly earnings and 77% have reported earnings above estimates and 75% have reported revenues above estimates. The blended year-over-year (YoY) revenue growth rate in the energy sector was 74.9% as Valero Energy reported revenue growth of approximately 116% and Chevron reported 85% growth.
  • Microsoft reported 20% YoY growth in sales for the quarter ending December 31, and net income growth of 21%. Though Microsoft’s growing cloud business gets the headlines, its ad revenue grew to more than $10 billion in 2021 and they agreed to acquire Xandr, an advertising analytics company, from AT&T. Microsoft announced on January 18 that they would acquire Activision Blizzard Inc. for approximately $74 billion in an all-cash deal, which equated to a 46% premium on Activision stock when the deal was announced.
  • European stocks have outperformed U.S. stocks since the close on December 30, 2021 as the FTSE 100, the United Kingdom’s primary stock index, was up 0.87% through January 31 and the S&P was down approximately 5.42%. Italy’s primary stock index is only down 0.77% and France is down 2.31%. For a longer-term perspective, over the past five years, the S&P 500 has returned 16.8% annually and the FTSE 100 has only returned 5% as domestic equities have well outperformed international equities.
Equity Index Values and Total Returns
  Value YTD 1-Year
S&P 500 4,515.6 -5.17% 20.80%
Dow Jones Industrial Average 35,131.9 -3.24% 18.21%
NASDAQ Composite 14,239.9 -8.96% 6.26%
Russell 2000 (small-cap index) 2,028.5 -9.63% -3.65%
MSCI EAFE (developed intl.) 2,222.5 -4.82% 6.84%
MSCI Emerging Markets 596.8 -1.89% -9.39%
 
Equities chart
Source: Bloomberg
 

Fixed Income, Commodities and Currencies

  • The Federal Reserve is currently forecasting three 25 basis point rate hikes in 2022 with their target rate being at 0.75% to 1% by the end of the year. At the most recent meeting Jerome Powell, Federal Reserve chairperson, stated that they believe the economy is at full employment and the reason for tightening up monetary policy is to not allow employment to move beyond full employment.
  • Interest rates quickly moved higher in the first month of 2022 as the 10-year U.S. Treasury note increased by 27 basis points to 1.78%. Short-term rates moved at an even greater amount as the 2-year Treasury note increased by 45 basis points to 1.18%. The swifter move in short-term rates has been driven by the Federal Reserve’s discussion of raising rates at a nearer date.
  • As countries like Germany and Switzerland report YoY inflation of 4.9% and 2.9%, the amount of bonds with negative yields continues to decline. The cumulative amount has been cut by more than half from August 5 when the total amount of negative yielding debt around the globe reached $16.9 trillion, compared to $8.2 trillion at close yesterday.
Fixed Income Index Yields & Total Returns
  Yield YTD 1-Year
B’berg Barclays Inter Govt./Credit 1.72% -1.47% -2.66%
B’berg Barclays US Aggregate Bond 2.11% -2.15% -3.01%
B’berg Barclays US Corp.High Yield 5.27% -2.73% 1.99%
B’berg Barclays Municipal Bond 1.73% -2.74% -1.91%
Key Interest Rates
  1/31/22 12/31/21 2/2/17
Federal Funds Target Rate 0-0.25% 0-0.25% 0.5-0.75%
3-Month LIBOR 0.32% 0.21% 1.04%
2-Year U.S. Treasury Note 1.18% 0.73% 1.21%
10-Year U.S. Treasury Note 1.78% 1.51% 2.47%
Prime Rate 3.25% 3.25% 3.75%
Commodities & Currency
  1/31/22 12/31/21 YoY Change
Gold 1,796.4 1,831.0 -3.69%
Crude Oil 88.2 75.2 64.71%
Natural Gas 4.87 3.73 68.49%
Corn 626.0 593.3 15.61%
Soybean 1,490.5 1,328.8 11.83%
USD: Euro 1.124 1.137 -6.69%
 
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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  • Subject to investment risks, including possible loss of the principal amount invested

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