Market Share Newsletter Vol 4 Issue 5

 

March 1, 2022

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Investor emotions are reflected daily in the investment markets and periodically they are displayed in extremes. Over the last 24 months of the pandemic, investors have experienced a full range of emotions and volatility. At the beginning of the global shut down, many people were concerned for public health and economic disaster. This is a scenario that investors do not want to experience again. That fear culminated in a 35% drop in the S&P 500, including a single day drop of 12%, on March 16, 2020, the third largest in history. The opposite has occurred since then, as we experienced the fastest recovery from a drop that size. In just five months, the S&P 500 reached a new high and nearly 80 all-time highs in 2021.
 
Behavioral studies show that losses are felt or remembered at twice the rate of wins. In investing, fear and steep losses are no different. In many conversations, clients and colleagues can quote how much their portfolio was down in 2000, 2008-09 or how much it fell in 2020. Fewer can quote the exceptionally good years (2019 & 2017), even after seeing the tremendous growth in their portfolio’s value.
 
2022 began at near all-time highs for equity markets and it was nice to look at the year-end statements. Markets have turned quickly to concerns and fears over inflation, the Federal Reserve, and the Russian invasion of Ukraine. There are a couple of indicators we follow to monitor fear and greed. First is the Individual Investor Index, shown below. This index reached levels we saw at the worst economic portion of the pandemic. Second, is the put/call ratio, which saw a spike in put purchases—which is a bearish trade. In addition, consumer sentiment dropped to its lowest level in January since October 2011, according to data from the University of Michigan.
 
SP 500 index
 
Monitoring investor sentiment is one of the five tenets in the investment philosophy we use to manage portfolios. Market extremes can create opportunities to add or reduce risk. Extremes are never looked at as the sole indicator. It takes incorporating all five tenets of our investment philosophy to build lasting portfolios. In future editions of The Market Share,we will discuss other aspects of our investment philosophy and how it is used in managing portfolios.
 
It is our role to help manage client portfolios and expectations, especially during periods of extreme fear or greed. As always, 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

  • The Producer Price Index (PPI) continued to increase at higher-than-expected levels. PPI measures the level of inflation that manufacturers and wholesalers experience. Over the past 12 months, PPI has increased by 9.7% as energy increased by approximately 29% and food increased by 13%. Even when removing the more volatile contributors to PPI (food and energy), the index increased by 8.3% over the same time frame.
  • In February, consumer confidence, as measured by the University of Michigan Sentiment index, dropped to its lowest level since October 2011. The primary factors that pushed the index lower were declines in consumer sentiment around household finances and a lowered expectation for higher income. The consumer believes that inflation will remain higher over the following 12 months at 4.9%.
  • Italy reported 2021 GDP of 6.6% year-over-year (YoY)—it’s the country’s highest level of growth since 1995. Exports increased by 13.3% and total private sector investments increased by 17%. Additionally, Italy’s labor markets continue to improve as the unemployment rate was at 9.2% at the most recent release date, compared to 12.9% on December 31, 2014. Italy has also brought their troublesome debt-to-GDP ratio down from 155.3% in 2020 to 150.4% in 2021.
Economic Data: Recent
  Actual Survey Prior
PPI Final Demand YoY 9.7% 9.1% 9.8%
Retail Sales Advance MoM 3.8% 2.0% -2.5%
ISM Manufacturing
58.6 58.0 57.6
PCE Core Deflator YoY 5.2% 5.2% 4.9%
Economic Data: Upcoming
    Survey Prior
Change in Nonfarm Payrolls   403k 467k
Unemployment Rate   3.9% 4.0%
Average Hourly Earnings YoY   5.8% 5.7%
Factory Orders MoM   0.7% -0.4%

Equities

  • Target stock jumped more than 14% this morning as they released stellar fourth quarter results and 2021 annual results. Sales increased by 9.4% YoY in the fourth quarter and earnings per share of $3.19 beat the forecasted $2.86. Target’s CEO, Brian Cornell, provided a positive long-term outlook for the company which is what pushed the stock even higher. They plan to continue to expand their e-commerce business and he stated that their earnings will increase in the high single digits.
  • Despite the turmoil that is taking place on Europe’s eastern border between Russia and Ukraine, developed international stocks have outperformed U.S. equities through the first two months of the year. The MSCI EAFE, the primary index for developed international stocks, was down 6.46% while the S&P 500 was down 8.02%. International stocks have long been out of favor with investors despite their cheaper valuations as international economies have had much greater fiscal and economic challenges than the United States.
  • The energy index, as a sector of the S&P 500, increased by 26.5% the first two months of 2022 and was the only positive sector of the 11 sectors that make up the S&P 500. Energy stocks had been performing well and returned 47.7% in 2021 as consumption and demand remained strong globally, but energy stocks have received an additional bounce due to concerns over supply from the Russian invasion into Ukraine and the sanctions that the world has placed on Russia. Exxon Mobil, the most notable energy company, was up 28.2% in the first two months of 2022.
  • Standard & Poor’s (S&P) lowered Russia’s credit rating to BB+, considered junk bond status, from BBB- and has placed a Negative Watch on their debt.
Equity Index Values and Total Returns
  Value YTD 1-Year
S&P 500 4,373.9 -8.02% 12.61%
Dow Jones Industrial Average 33,892.6 -6.43% 7.99%
NASDAQ Composite 13,751.4 -12.00% 1.09%
Russell 2000 (small-cap index) 2,048.1 -8.67% -10.01%
MSCI EAFE (developed intl.) 2,179.1 -6.46% 1.99%
MSCI Emerging Markets 578.9 -4.83% -12.21%
 
Equities chart
Source: Bloomberg
 

Fixed Income, Commodities and Currencies

  • U.S. Treasuries have nicely recovered over the past two weeks as the ten-year Treasury note reached 2.06% on February 16 and as of this morning it has fallen below 1.75%. The move to treasuries has been driven by a flight to safety over the continual turmoil in Ukraine. If the Russian invasion concludes quickly, we expect Treasury yields to return to their previous highs.
  • The next Federal Reserve meeting is on March 16 and presently the markets are placing a 98% chance on the Fed increasing interest rates from 0-0.25% to 0.25%-0.5%. Only two weeks ago, traders were placing a 163% probability on the Fed raising rates, which means they were under the belief that the Fed would raise rates by 50 basis points instead of the currently expected 25 basis points increase.
  • The Russian ruble declined in value by 20.5%, relative to the US dollar, on February 28. During the previous week, the ruble had already fallen by approximately 4.5%. The currency will likely continue to fall amidst the unprecedented levels of sanctions on the country as global governments use these sanctions as an attempt to drive Russia out of Ukraine and keep their militaries uninvolved in the war.
  • Lumber prices are back in the news as prices have returned to the all-time high levels experienced in spring 2021. Lumber prices bottomed in August 2021, but due to supply problems from the Northwest U.S. and British Columbia, as reported by Fortune, and demand being at extremely high levels, lumber prices have increased by approximately 45% over the past three months.
Fixed Income Index Yields & Total Returns
  Yield YTD 1-Year
B’berg Barclays Inter Govt./Credit 1.96% -2.11% -2.46%
B’berg Barclays US Aggregate Bond 2.33% -3.25% -2.48%
B’berg Barclays US Corp.High Yield 5.62% -3.73% 0.39%
B’berg Barclays Municipal Bond 1.86% -3.09% -0.67%
Key Interest Rates
  2/28/22 12/31/21 3/2/17
Federal Funds Target Rate 0-0.25% 0-0.25% 0.5-0.75%
3-Month LIBOR .05% 0.21% 1.06%
2-Year U.S. Treasury Note 1.43% 0.73% 1.28%
10-Year U.S. Treasury Note 1.83% 1.51% 2.45%
Prime Rate 3.25% 3.25% 3.75%
Commodities & Currency
  2/28/22 12/31/21 YoY Change
Gold 1,900.7 1,831.0 11.17%
Crude Oil 95.7 75.2 70.98%
Natural Gas 4.40 3.73 64.10%
Corn 697.5 593.3 34.43%
Soybean 1,644.3 1,328.8 21.65%
USD: Euro 1.122 1.137 -7.76%
 
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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