Market Share Newsletter Vol 2 Issue 13

 

May 5, 2020

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Your 1st Source for market information
Welcome sign“Uneasy anticipation” explains the mood of investors as states begin to reopen their economies this week and over the next several months. Most business owners, consumers, and government officials seem to share that feeling.
 
As our nation progresses through the pandemic, the growing economic impact is evident in the 30 million Americans that have filed for unemployment over the past six weeks. The weekly trend has started to improve, but each week would be a record on its own if not for the previous week’s report. Over the past week, the fourth stimulus bill replenishing the Payroll Protection Program (PPP) was passed and the Small Business Administration received more applications. The new version of PPP aims to help more of the smallest businesses that have had fewer opportunities to access funding. Additionally, municipalities and hospitals will receive funds for costs associated with COVID-19. As fewer cases of the virus are reported and businesses reopen, the unemployment rate should improve.
 
As 37 states implement customized plans for reopening, there are several large states and regions that remain closed. California and New York, for example, have a combined gross domestic product (GDP) equivalent to 24% of the U.S. GDP. Until those states begin to recover, GDP reports will be poor. The first quarter GDP in the U.S. was down 4.8%, the second quarter will be worse, followed by the third quarter, which is likely to resume economic growth.
 
The Federal Reserve and Congress are working together to put ‘a floor’ under the free-fall economy. Their efforts have helped ease, but not eliminate, the economic pain. Therefore, we still see challenges that will limit the stock market recovery after its historic rally from the lows of March 23. It will take time, and potentially lead to more bouts of volatility, until investors can feel more at ease about regional and global economies opening.
 
Thank you for all you are doing to help each other through these times. We are honored to continue to be here for 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
Considerations for your portfolio

The Economy

  • In March, personal income declined by 1.7% and spending declined by 7.5%. This data was not surprising, but the increase in the U.S. savings rate is noteworthy. Household savings as a percentage of disposable personal income increased to 13.1%. This is the largest percentage since November 1981. The U.S. consumers’ willingness and ability to increase and maintain savings will help provide ‘a floor’ for the current economic crisis.
  • TSA checkpoint travel numbers at airports have improved over the past week. There was an increase of 29.7% for the week ending May 4 and an increase of 50.3% from two weeks ago. Despite these small, notable increases and “green shoots”, the more relative data is not good. TSA checkpoint numbers for the week ending May 4 were only 6.3% of last year’s weekly total from the same week.
  • France reported a first-quarter GDP of -5.8% last week. This is an estimated 4% decline, as household consumption shrank by 6.1%, and capital investment fell by 11.8%. This is the largest drop on record for capital investment.
Economic Data: Recent
  Actual Survey Prior
Initial Jobless Claims
3,839k 3,500k 4,427k
GDP Annualized QoQ (first quarter) -4.8% -4.0% 2.1%
Personal Consumption (first quarter) -7.6% -3.6% 1.8%
Total Vehicle Sales  8.58m 7.00m 11.37m
Economic Data: Upcoming
    Survey Prior
Initial Jobless Claims   3,000k 3,839k
Change in Nonfarm Payrolls   -21,520k -701k
Unemployment Rate 16.0% 4.4%
Consumer Price Index ("CPI") MoM   -0.7% -0.4%
 
economy chart

 Source: Bloomberg

Equities

  • Two of the largest technology and communication companies reported strong first-quarter sales and profits last week. Alphabet (Google’s parent company) and Facebook both beat sales expectations by 14% and 17%, while earnings fell due to increased customer acquisition costs, capital expenditures, and COVID-19 related expenses. The stock of both companies reacted positively to this news.
  • Air travel and leisure companies continue to struggle despite the large government stimulus and liquidity that has been directed their way and the ability of a few of them to raise large amounts of capital. Norwegian Cruise Lines released a statement indicating that they may not be able to meet their financial obligations and Berkshire Hathaway, famed airline investor, recently sold their major stakes in Delta Air Lines, American Airlines, Southwest Airlines, and United Airlines.
  • Small-cap equities have been a drag on returns despite the month-long rally in the equity markets when risk-on took over. The Russell 2000, a major index for 2,000 small-cap companies, has returned 26.3% since the close of trading on March 23 yet has still underperformed the S&P 500 by 100 basis points. Year-to-date through May 4, the Russell 2000 is down more than double the S&P 500.
Equity Index Values and Total Returns
  Value YTD 1-Year
S&P 500 2,842.7 -11.46% -0.24%
Dow Jones Industrial Average 23,749.8 -16.17% -6.99%
NASDAQ Composite 8,710.7 -2.56% 9.58%
Russell 2000 (small-cap index) 1,264.0 -23.90% -18.25%
MSCI EAFE (developed intl.) 1,599.4 -20.52% -13.87%
MSCI Emerging Markets 422.4 -19.93% -15.81%
Federal Reserve's Inflation Target
Source: Bloomberg

Fixed Income

  • The U.S. Treasury plans to borrow $3 trillion during the second quarter, more than five times the previous record, as the government ramps up spending to offset the economic crisis. For the first time in approximately 30 years, the U.S. Treasury plans to issue 20-year securities as part of the borrowings.
  • For the week ending April 29, after two consecutive weeks of smaller inflows, municipal bond mutual funds experienced $1.25 billion of net outflows. The Bloomberg Barclays Municipal Bond Index has lost 1.35% this year while the Investment Grade Corporate Bond Index has gained 0.91%. The 226 basis point out-performance could create some crossover buying from corporate bonds to municipal bonds.
Fixed Income Index Yields & Total Returns
  Yield YTD 1-Year
B’berg Barclays Inter Govt./Credit 1.03% 3.79% 8.31%
B’berg Barclays US Aggregate Bond 1.35% 4.81% 10.73%
B’berg Barclays US Corp.High Yield 8.14% -9.09% -4.48%
B’berg Barclays Municipal Bond 2.16% -1.35% 2.58%
Key Interest Rates
  4/27/20 12/31/19 4/30/15
Federal Funds Target Rate 0-0.25% 1.5-1.75% 0-0.25%
3-Month LIBOR 0.54% 1.91% 0.28%
2-Year U.S. Treasury Note 0.18% 1.57% 0.62%
10-Year U.S. Treasury Note 0.63% 1.92%
2.19%
Prime Rate 3.25% 4.75% 3.25%
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.

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