Market Share Newsletter Vol 2 Issue 5

 

March 3, 2020

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Since the last The Market Share newsletter edition, the stock market has set both good and bad records as fears over the potential impact of the Coronavirus spread across economic markets worldwide. On February 19, the S&P 500 set an all-time high. By February 27, we had seen the fastest correction in the S&P 500–down 12.7% in eight days (source: Deutsche Bank).
 
Other news:
  • There was a $5 trillion drop in equity market values last week
  • The Dow Jones Industrial Average reported its largest point gain of 1,294 on March 2, while reporting its largest point loss of 1,191 the previous Thursday (February 27)
  • Volatility measures reached 2008 levels
 
Some relative facts:
  • The S&P 500 is around the same level as late October 2019
  • Most portfolios are positive, year-over-year, due to broad diversification
  • The Chinese stock market is outperforming the U.S. markets year-to-date
 
So far this week, we are seeing a rebound in stock prices from the tremendous sell-off, largely on the belief that central banks will lower rates to offset some of the potential impact of any economic slowdown here or overseas. There will be an economic impact from the Coronavirus, whether it be in a supply chain disruption, shipping delays or individuals making choices to not travel or spend on dining out or entertainment. It is too early to know the length and potential impact with certainty, but many industries could recover quickly as we move through this event.
 
1st Source has been working with clients to manage their wealth through many market cycles over the decades. We are here to listen and help by actively analyzing and researching the markets and economies and ultimately making appropriate adjustments within portfolios.
 
Thank you for taking time to review The Market Share. We appreciate the opportunity to work with you, especially in times of market turbulence.
 
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 February, Chinese manufacturing activity declined to its lowest level on record based on China’s official Purchasing Managers’ Index. The non-manufacturing sector also fell to its lowest level on record. This was the first round of economic data illustrating the full effects that the Coronavirus has had on the nation.
  • U.S. housing starts in January flourished as they hit their second highest annual pace since the recession. The previous high was on December 2019. Starts have been driven higher by lower mortgage rates, a housing shortage, and a strong employment backdrop.
  • Personal income was up 0.6% in January—the largest monthly increase since February 2019, when it also increased 0.6%. Despite the strong growth in income, personal spending only increased by 0.2% in January and the U.S. savings rate increased to 7.9%. The savings rate is the percentage of disposable income that one saves.
  • The Coronavirus has continued to take its toll beyond the economies it has halted, as there have been approximately 90,000 cases confirmed and more than 3,000 deaths through March 2. The Organization for Economic Cooperation & Development (OECD) has warned that global economic growth will shrink to its lowest level since 2009 and thus has reduced its growth forecast from 2.9% to 2.4% in 2020.
Economic Data: Recent
  Actual Survey Prior
GDP Ann. QoQ (second release)
2.1% 2.1% 2.1%
ISM Manufacturing 50.1 50.5 50.9
Conf. Board Consumer Confidence 130.7 132.2 131.6
New Home Sales 764k 718k 694k
Economic Data: Upcoming
    Survey Prior
ADP Employment Change   170k 291k
Change in Nonfarm Payrolls   175k 225k
Trade Balance -$46.1b $-48.9b
Consumer Price Index MoM   0.0% 0.1%

Equities

  • February was a tumultuous month for equities. After the 12.7% decline in the S&P 500, the equity markets rallied the first day of March (S&P was up 4.6%), as market fears were reduced on the prospects of central banks cutting interest rates around the world.
  • Home Depot reported a stellar fourth quarter ending February 2, as both earnings and revenue well exceeded expectations. Same store sales grew by 5.2% vs. the expected 4.7%, while Lowe’s same store sales only grew by 2.5%. We expect home improvement stores to perform well due to the positive outlook and strength of U.S. housing.
  • Even though the Coronavirus has had a major impact both economically and socially on China this year, its stock market (the Shanghai Composite), was only down 0.13% through March 3. Though the market has been resilient, it has been buoyed by the government adding $171 billion to their financial system as well as multiple benchmark lending rate cuts.
  • Target had a decent fourth quarter in 2019 as they beat expectations on both earnings and same store sales growth, but they missed revenue expectations by 1.3% ($23.1B in sales versus $23.4B expected). Target continues to rapidly grow its e-commerce and is expected to break into the top 10 for e-commerce sales this year.
Equity Index Values and Total Returns
  Value YTD 1-Year
S&P 500 3,090.2 -4.05% 12.39%
Dow Jones Industrial Average 26,703.3 -6.00% 5.11%
NASDAQ Composite 8,952.2 -0.02% 19.21%
Russell 2000 (small-cap index) 1,518.5 -8.83% -3.11%
MSCI EAFE (developed intl.) 1,829.9 -9.90% 0.95%
MSCI Emerging Markets 481.9 -8.65% -0.81%
Federal Reserve's Inflation Target
Source: Bloomberg

Fixed Income

  • In response to the potential economic impact from the Coronavirus, the Federal Reserve (the Fed) announced an emergency rate cut this morning of 0.5%. After the cut, the Fed’s benchmark range now sits at 1.0-1.25%. Trading probabilities had been showing a 100% chance that the Fed would cut rates at their next meeting on March 18.
  • Since our last edition of The Market Share on February 18, interest rates have continued their decline. The 10-year U.S. Treasury note has declined from 1.58% to 1.16% and most notably the yield has been cut in half since its close on May 24, 2019.
  • The Reserve Bank of Australia (RBA) cut their key interest rate by 25 basis points to 0.50%. This is a record low for Australia as it becomes the first developed nation to start cutting rates since the outbreak of the Coronavirus. Philip Lowe, Governor of the RBA, stated they are “prepared to ease monetary policy further to support the Australian economy.”
Fixed Income Index Yields & Total Returns
  Yield YTD 1-Year
B’berg Barclays Inter Govt./Credit 1.25% 3.00% 9.12%
B’berg Barclays US Aggregate Bond 1.64% 3.90% 12.06%
B’berg Barclays US Corp.High Yield 6.06% -1.04% 6.42%
B’berg Barclays Municipal Bond 1.27% 3.12% 9.56%
Key Interest Rates
  3/2/20 12/31/19 3/5/15
Federal Funds Target Rate 1.5-1.75% 1.5-1.75% 0-0.25%
3-Month LIBOR 1.46% 1.91% 0.26%
2-Year U.S. Treasury Note 0.9% 1.57% 0.68%
10-Year U.S. Treasury Note 1.16% 1.92%
2.12%
Prime Rate 4.75% 4.75% 3.25%
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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.