Market Share Newsletter Vol 1 Issue 4

Issue #4: October 1, 2019

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In this edition of The Market Share, we address negative interest rates and what they really mean for investment portfolios. Be sure to watch the video below as we explain how negative interest rates work.
 
As we prepare to write our 2020 Investment Outlook, we looked back at the last 10 years. Stock markets are much higher now and good returns from fixed income investing have been earned. The United States is in the longest economic expansion in history. Likewise, recent Census Bureau figures show that the U.S. median household income (on an inflation adjusted basis) was higher in 2018 than the previous peak set in 1999. 2019 is on pace to surpass 2018, as wage growth across all income brackets continues to improve.
 
We will continue to evaluate what this means for clients as we enter the next decade, so please stay tuned for future issues of The Market Share and our upcoming 2020 Investment Outlook. Thank you for taking time to review The Market Share, and as always, we appreciate the opportunity to work with you!
 
Paul Gifford, CFA
Chief Investment Officer
1st Source Corporation Investment Advisors, Inc.
GiffordP@1stsource.com
Erik Clapsaddle, CFA, CFP®
Senior Fixed Income Portfolio Manager
1st Source Corporation Investment Advisors, Inc.
ClapsaddleE@1stsource.com
Negative interest rates and their use by central banks around the world

Ever wonder why a bond would have a negative interest rate and why other countries would implement this policy? Hear Paul Gifford and Erik Clapsaddle explain how negative interest rates work and why they are used.

Considerations for your portfolio

The Economy

  • Housing starts in the U.S. have reached their highest level since June 2007 and housing starts of multi-family homes increased almost 33% in August–a three-month high. Building permits, a gauge for future construction, also rose to their highest level in 12 years.
  • The Chicago Business Barometer, which measures the manufacturing and non-manufacturing sectors in the Chicago region, dipped back into contraction territory in September for the third month in the past four. Manufacturing production led the decline as it fell to its lowest level since May 2009, due to a sharp decline in new orders.
  • The U.S. savings rate remains at a historically high level, as the average American today is saving 8.1% of their disposable income. Savings rates have averaged 7.4% over the past 40 years, and only 6% the past 20 years. This is a good thing for the long-term U.S. economy.
  • Today, a protestor in Hong Kong was shot by a Chinese police officer with a live round for the first time. Along with the trade war, protests in Hong Kong are continuing to escalate and prove to be an issue for the Chinese economy.
Economic Data: Recent
  Actual Survey Prior
Housing Starts 
1,364k 1,250k 1,215k
FOMC Rate Decision   1.75-2% 1.75-2% 2-2.25%
Markit US Manufacturing PMI 51.0 50.4 50.3
PCE Core Deflator MoM 0.1% 0.2% 0.2%
Economic Data: Upcoming
    Survey Prior
ADP Employment Change   140k 195k
Change in Nonfarm Payrolls   147k 130k
NFIB Small Business Optimism 102.5 103.1
Univ. of Michigan Sentiment   92.0 93.2

Equities

  • Third quarter earnings started October 1 with McCormick & Co. (the spice company) beating earnings expectations but reducing its growth outlook. Pepsi and Costco will report quarterly results on Thursday.
  • This will be an interesting quarter for earnings, as the trade war should prove to impact industrial companies. The dollar has continued to strengthen, which will hurt multinational companies, and the decline in interest rates has created a tough backdrop for banks and insurance companies.
  • Wells Fargo & Co. (Wells) was finally able to announce their new CEO, Charles Scharf. Previously, Scharf was the Chairman and CEO of the Bank of New York Mellon. Due to the scandals at Wells, the new CEO had to satisfy The Office of the Comptroller of the Currency—a department within the Treasury that supervises all national banks. Wells will report quarterly earnings on October 15.
  • The energy sector has returned 3.2% over the past decade based on the Energy Select Sector SPDR fund (an ETF that holds large-cap U.S. energy stocks). During the same time frame, the S&P 500 has averaged an annual return of 13.6% and U.S. small-cap stocks have averaged 12.1%.
Equity Index Values and Total Returns
  Value YTD 1-Year
S&P 500 2,976.7 20.55% 3.87%
Dow Jones Industrial Average 26,916.8 17.51% 3.46%
NASDAQ Composite 7,999.3 21.56% 0.67%
Russell 2000 (small-cap index) 1,523.4 14.15% -7.64%
MSCI EAFE (developed intl.) 1,889.4 13.39% -0.58%
MSCI Emerging Markets 471.7 5.89% -1.88%
Federal Reserve's Inflation Target

Fixed Income

  • The Federal Reserve cut their target rate on September 18, moving it to a range of 1.75 – 2%. They are concerned with the slowdown in the global economy and muted inflation in the United States. The Fed specifically addressed the weakness in exports—clearly on the back of the trade wars. The Fed is presently forecasting that there will be no additional rate cuts through 2020, but we doubt that will prove to be true.
  • The Federal Reserve has provided additional collateral to the repo market in the United States, thus cooling it off a bit. Though the repo market is not directly important to our traditional investors, it is important to the nation’s banking system as it allows banks to exchange their high-quality assets and securities for short-term cash needs.
  • Japan’s most recent 10-year bond auction was the weakest in three years, resulting in Japanese bond yields and other government bond yields rising. This was due to the Bank of Japan reducing how much of the auction they would buy, and adding future uncertainties to the Japanese government bond market.
  • The U.S. municipal bond market has returned 6.3% year-to-date, as investors seek the tax-free and safe income that U.S. municipal bonds provide. On a tax-equivalent basis, municipal bonds have well outperformed taxable bonds this year.
Fixed Income Index Yields & Total Returns
  Yield YTD 1-Year
B’berg Barclays Inter Govt./Credit 1.93% 6.41% 8.20%
B’berg Barclays US Aggregate Bond 2.26% 8.52% 10.40%
B’berg Barclays US Corp.High Yield 5.65% 11.41% 6.15%
B’berg Barclays Municipal Bond 1.86% 6.75% 8.56%
Key Interest Rates
  9/28/19 12/31/18 10/2/14
Federal Funds Target Rate 1.75-2% 2.25-2.5% 0-0.25%
3-Month LIBOR 2.10% 2.81% 0.23%
2-Year U.S. Treasury Note 1.62% 2.49% 0.52%
10-Year U.S. Treasury Note 1.66% 2.68% 2.39%
Prime Rate 5.00% 5.50% 3.25%
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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
1st Source Corporation Investment Advisors, Inc. is a wholly owned subsidiary of 1st Source Bank.