Market Share Newsletter Vol 4 Issue 9

 

April 26, 2022

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Once every 40 years sounds relatively rare, doesn’t it? For those that may recall, the start of the 1980s was not a great time for investors due to a double-dip recession, interest rates over 10%, oil exceeding $140 per barrel (inflation adjusted), food prices rising, inflation over 8% and the Federal Reserve (Fed) aggressively raising interest rates. Today, higher oil and food prices, inflation and an aggressive Fed are occurring, however, the similarities are not quite the same.
 
Many of us have not lived, worked, or managed through long bouts of high inflation. The U.S. population has grown by 105 million since 1980, meaning one third of us have not experienced this type of market. However, there are still many of us that do recall that challenging time. While there are similarities, several key economic factors differ and should help us weather this bout of inflation and higher interest rates better than in the 80s. Even with more positives this time around, we can still experience more volatility and losses in the interim.
 
U.S. consumers, corporations and municipalities are in better financial shape today which should help to soften (but not entirely offset) all three challenges. Currently, unemployment is at 3.8% vs. 8% in 1980, cash balances are high, and energy prices (though the highest in a decade) are actually less when adjusted for inflation than they were in the early 80s. Energy, as part of our economy, has fallen by nearly 50% in the last 60 years, making the impact relatively smaller. Interest rates have risen 2-2.5% points since the Fall of 2021, creating bond portfolio prices to decline 5-10%. The overall level of rates is still historically low and have already moved in advance of the more aggressive interest rate hikes the Fed is expected to put in place this year.
 
There has been a growing number of articles and commentary on a pending recession in the U.S. in the next year or so, which makes for great headlines. We believe a recession is likely more than a year or even two years away, given the strength of the consumer, corporations, and municipalities. We also believe that it would be a softer recession given the previously mentioned dynamics of the economy. Of course, other factors could speed up that timeline.
 
We are more cautious investing in the current markets than we have been in recent years. Which means modestly reducing equity exposure, reducing interest rate risk, and increasing cash holdings. Even with that strategy, the weak stock and bond markets have portfolio values down since the beginning of the year.
 
While a flashback to the early 1980s is helpful to learn our history, identifying the differences helps us to manage portfolios today.
 
As always, thank you for the opportunity to be of service to 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 Consumer Price Index (CPI) increased by 1.2% during the month of March, which was the largest monthly increase in the inflation gauge since September 2005. A silver lining within the inflation data was the slowdown in the increase of CPI (excluding food & energy). It increased by 0.5% in February and was forecasted to increase by 0.5% again, but only increased 0.3%. The price of used cars and trucks declined for the second consecutive month but was still up 35.3% over the past 12 months.
  • Housing starts increased to their highest level in March since June 2006. They moved higher due to a 4.6% month-over-month increase in multifamily housing as single-family housing starts declined and have declined three of the past four months. Over the past 12 months, single-family housing starts have declined by 3.6% but multifamily housing has increased by 28.1%.
  • The National Federation of Independent Business (NFIB) reported that their Optimism Index declined to its lowest level since April 2020. The NFIB index reported that 72% of small businesses had higher selling prices in March and 47% had job openings they were not able to fill and according to the NFIB it is more than double its average since the index was created 48 years ago. The net percentage of businesses expecting a better economy fell to its lowest level on record.
  • Fears over the Chinese government’s response to COVID and their Zero-COVID policy has increased fears of additional supply chain disruption. China recently reported better than expected industrial production of 5% YoY growth, but YoY retail sales were worse than expected at -3.5% ending in March.
Economic Data: Recent
  Actual Survey Prior
Consumer Price Index (CPI MoM) 1.2% 1.2% 0.8%
University of Michigan Sentiment 65.7 59.0 59.4
Retail Sales Advance MoM
0.5% 0.6% 1.7%
Industrial Production MoM 0.9% 0.4% 0.9%
Economic Data: Upcoming
    Survey Prior
FOMC Rate Decision   0.75%-1.00% 0.25%-0.50%
GDP Annualized QoQ - 1Q   1.1% 6.9%
PCE Deflator MoM   0.3% 0.4%
Change in Nonfarm Payrolls   400k 431k

Equities

  • Bank of America, the second largest U.S. bank based on deposits, reported $0.80 earnings per share against the forecasted $0.74 per share and revenue grew by 2% to $23.23 billion—also exceeding the forecast. The bank’s net interest income, their largest contributor to revenue, increased by 13% in the quarter to $11.6 billion. Total deposits at Bank of America reached $2.07 trillion and Brian Moynihan, the bank’s CEO, stated that there is “a lot of pent-up demand that hasn’t been fulfilled” in the U.S. economy.
  • Netflix reported very disappointing first quarter 2022 results as their paid streaming subscriptions declined by 200k but were forecasted to increase by 2.5 million. The company forecasted an additional net decline of 2 million subscribers in the second quarter—far worse than the 2.4 million estimated increase. The stock was pummeled for this and declined by over 35% between earnings release and the markets close the following day.
  • Elon Musk agreed to buy Twitter for $44 billion in a deal financed by approximately $26 billion in debt and $21 billion in equity from Elon Musk and the deal was unanimously approved by the board. Investors will receive $54.20 per share, which is up 73% from its 12-month low of $31.30 on February 20. Elon Musk accumulated approximately 9% of the company in January prior to his outspoken criticism on their approach to “free speech.”
  • Alphabet, Microsoft, Apple, and Amazon all release their quarterly earnings this week. They start today with Alphabet, the parent company of Google, reporting after the market closes.
Equity Index Values and Total Returns
  Value YTD 1-Year
S&P 500 4,296.1 -9.47% 2.29%
Dow Jones Industrial Average 34,049.5 -5.76% 0.86%
NASDAQ Composite 13,004.9 -16.71% -9.89%
Russell 2000 (small-cap index) 1,954.2 -12.68% -15.45%
MSCI EAFE (developed intl.) 2,039.9 -11.65% -8.57%
MSCI Emerging Markets 519.3 -14.63% -21.38%
 
Equities chart
Source: Bloomberg
 

Fixed Income, Commodities and Currencies

  • The Bloomberg Aggregate Total Return Bond Index lost 9.02% through April 25 year-to-date (YTD) this year. Bonds across all maturities have experienced an unprecedented and challenging year as the yield on the two-year Treasury note has increased from 0.73% to approximately 2.52% and the yield on the ten-year has increased from 1.51% to 2.74% today.
  • The Federal Reserve’s Dot Plot now projects that the Federal Reserve (Fed) will increase their target rate to a range of 1.75%-2% by year-end, with many Fed officials believing it should be higher than that by year-end. The Fed has already increased its projections by 100 basis points from 0.75%-1% at the end of 2021. The next Fed meeting is on May 4 where they are expected to increase their target rate by 50 basis points to a range of 0.75%-1%.
  • As mentioned earlier, China’s Zero-COVID policy is having rippling effects across the global economy as metals have soured this month due to a concern over a decline in short-term demand. The price of aluminum, iron ore, and copper are down approximately 11.5%, 8.6%, and 5.8% month-to-date. Despite the short-term gyration, all three of those metals have increased in price YTD—iron ore is up approximately 26.5% YTD.
Fixed Income Index Yields & Total Returns
  Yield YTD 1-Year
B’berg Barclays Inter Govt./Credit 3.13% -6.11% -6.21%
B’berg Barclays US Aggregate Bond 3.40% -9.02% -8.14%
B’berg Barclays US Corp.High Yield 6.76% -7.50% -4.37%
B’berg Barclays Municipal Bond 3.12% -8.57% -7.81%
Key Interest Rates
  4/25/22 12/31/21 4/27/17
Federal Funds Target Rate 0.25-0.5% 0-0.25% 0.75-1%
3-Month LIBOR 1.21% 0.21% 1.16%
2-Year U.S. Treasury Note 2.63% 0.73% 1.27%
10-Year U.S. Treasury Note 2.82% 1.51% 2.3%
Prime Rate 3.50% 3.25% 4.00%
Commodities & Currency
  4/25/22 12/31/21 YoY Change
Gold 1,896.0 1,833.4 6.20%
Crude Oil 98.5 75.2 60.33%
Natural Gas 6.67 3.73 146.24%
Corn 800.3 593.3 16.90%
Soybean 1,703.5 1,328.8 8.67%
USD: Euro 1.071 1.137 -11.82%
 
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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  • 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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