Market Share Newsletter Vol 2 Issue 4

Subscribe

Volume 2 Issue #4: February 18, 2020

February 18, 2020

data abstract illustration
Market Share logo
Your 1st Source for market information
oil field image
The coronavirus continues to cast a shadow over Asian equity markets. We see mixed data and signals in Europe, but the Europe 600 Index hit an all-time high on improved earnings outlook. The S&P 500 and NASDAQ also reached new highs in recent days. Continued reasonable earnings reports, strong jobs growth and a Federal Reserve on-hold are all supporting the new highs in U.S. markets.
 
Even though the equity markets have been doing very well, there will be periods throughout the year when investor sentiment or conditions change, and stock prices will adjust to lower levels. Drops in prices of 5% or more usually occur a few times per year.
 
Market drops (down 5%), corrections (down 10%) and bear markets (20%+ drops) all happen over several year periods. The last 5+ years have been below average in their occurrences.
 
Discussing comfort levels when the market drops is a regular part of our client meetings. We would like to know how our readers feel.
 


We appreciate your participation in our first The Market Share poll!
 
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

  • January’s change in non-farm payrolls was higher than expected, 225k vs 165k. However, manufacturing payrolls declined more than expected with a tick up in unemployment to 3.6%. This up-tick was due to new entrants into the labor market. The labor market continues to be strong and new entrants into the labor market is a positive sign for the U.S. economy.
  • U.S. retail sales met expectations for January, increasing by 0.3% for the fourth consecutive month. Monthly sales of building materials have increased at a much greater pace than normal over the past two months due to unseasonably warm weather in December and January.
  • The coronavirus continues to weigh on the globe as the number of diagnosed people and deaths increase. The world waits for hard economic data on the virus’s effect within China, but the Hang Seng index has declined by over 5% in the past month. The Chinese manufacturing and non-manufacturing data is expected to be released on February 28.
  • Industrial production in Germany shrank by 3.5% in December, much worse than the -0.2% forecast and the November increase of 1.2%. This data was preceded by December’s factory orders being reported the previous day, at their lowest level in over a decade. Investor sentiment also moved back to its lowest level since November.
Economic Data: Recent
  Actual Survey Prior
Change in Nonfarm Payrolls
206k 165k  145k 
Consumer Price Index MoM  0.1% 0.2% 0.2%
Retail Sales Advance MoM 0.3% 0.3% 0.3%
Univ. of Michigan Sentiment 100.9 99.5 99.8
Economic Data: Upcoming
    Survey Prior
GDP Annualized QoQ (second release)   2.2% 2.1%
ISM Manufacturing   49.5 50.9
Conference Board Consumer Confidence 132.5 131.6
New Home Sales   710k 694k

Equities

  • Apple announced on February 17 that it would miss its quarterly revenue target because of the coronavirus in China. Most of Apple’s 42 stores in China have been inactive and their manufacturing in China has been slow to reboot. The effects of this virus have caused concern over Apple’s reliance on China and China’s ability to be a dependable market.
  • Walmart Inc.’s most recent quarterly revenue, earnings and same-store sales disappointed against estimates. It was a small miss and despite the initial response being negative, the stock turned positive by the time markets opened for trading. Walmart’s positive outlook for the current year helped push the stock higher.
  • Despite some recent negative data coming from Germany, the world’s fourth largest economy and the largest in the Eurozone, their stock market has increased by almost 3.5% year-to-date. Meanwhile, the major French index is only up approximately 1.8%. Spain and Italy are up an impressive (and approximate) 4.6% and 7.7% as they outpace the Eurozone’s two largest economies.
Equity Index Values and Total Returns
  Value YTD 1-Year
S&P 500 3,380.2 4.86% 23.90%
Dow Jones Industrial Average 29,398.1 3.34% 15.89%
NASDAQ Composite 9,731.2 8.62% 31.62%
Russell 2000 (small-cap index) 1,687.6 1.26% 8.94%
MSCI EAFE (developed intl.) 2,026.9 -0.37% 13.14%
MSCI Emerging Markets 524.7 -0.54% 9.63%
Federal Reserve's Inflation Target
Source: Bloomberg

Fixed Income

  • Longer-term U.S. treasury yields continue to hover around long-term lows as geopolitical concerns weigh on investors and drive them into these safe assets. Despite these concerns, the stronger economic data in the U.S. keeps the Federal Reserve (the Fed) in a wait-and-see mode. The Fed is forecasting no change to their target rate for 2020.
  • After dropping below $11 trillion in mid-January, the illogical pile of negative yielding bonds around the world has risen above $13 trillion with no end in sight. The rise has come on the back of the coronavirus and recently reported weaker than expected economic data. The 30-year Swiss government bond currently yields -0.36%.
  • Bloomberg data currently shows 10-year New York municipal bonds yielding 1.09%. That is approximately 70% of what the U.S. Treasury yields. Municipal bonds within all states that have high income tax rates (i.e. Illinois, California, New Jersey, Connecticut), have become attractive in the past two years as double income taxation is avoided. However, individuals are now limited to a maximum $10,000 deduction for state and local taxes (“SALT”)—previously it was unlimited.
Fixed Income Index Yields & Total Returns
  Yield YTD 1-Year
B’berg Barclays Inter Govt./Credit 1.70% 1.25% 7.22%
B’berg Barclays US Aggregate Bond 2.06% 1.88% 9.56%
B’berg Barclays US Corp.High Yield 5.11% 1.11% 9.66%
B’berg Barclays Municipal Bond 1.50% 1.78% 8.32%
Key Interest Rates
  2/17/20 12/31/19 2/19/15
Federal Funds Target Rate 1.5-1.75% 1.5-1.75% 0-0.25%
3-Month LIBOR 1.69% 1.91% 0.26%
2-Year U.S. Treasury Note 1.43% 1.57% 0.6%
10-Year U.S. Treasury Note 1.58% 1.92%
2.08%
Prime Rate 4.75% 4.75% 3.25%
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:
  • 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.