Market Share Newsletter Vol 2 Issue 6

 

March 17, 2020

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“Extraordinary” only begins to describe what the world is seeing as economic and investment market issues affect investors and the general public. The extreme moves in stock prices and even bond yields is a daily occurrence. We see daily moves that equal historical average annual returns. The chart below shows market volatility as measured by the VIX Index. The volatility is at the level of past crises, such as in 2008 and 2001. Previous spikes in volatility ebbed over a few weeks to months as economic fundamentals became clearer.
 
volatility chart
Source: Bloomberg
 
Economic activity in the U.S. and other parts of the world will shrink rather dramatically over the next few months. The large number of closings and restrictions are already having a negative impact at local and national levels. The estimated length of time of these closures and restrictions will last is two to six weeks. As an example of how this has transpired in China, Apple closed all stores in China for seven weeks, reopening this past week. On the same day as the reopening, they closed the remaining 450 stores outside of China. The fact that stores are reopening is the important message, it will happen.
 
Nationally, entire industries are being disrupted, the most directly impacted are entertainment and travel industries. Many are beginning to forecast a scenario for airlines worse than 9/11. European Airlines, Norwegian Air and Scandinavian Air laid off 50% and 90% of their staff, respectively (at least for a short period of time). President Trump stated on Monday “We’re going to back the airlines 100%–it’s not their fault”, as airlines were seeking $50 billion in loan guarantees and aid on the same day.
 
There have been few comparable times when entire industries, countries, and large portions of economies have shut down. The markets are being tested with a new uncertainty. Uncertainty of this scope creates day-to-day volatility that is rarely grounded in fact. One day the markets are up 9% because of an announced plan for managing COVID-19 and an economic stimulus plan; the next day the markets are down 12% after the Federal Reserve takes action to lower interest rates, make credit available, and provide liquidity to the markets. Both steps attempted to address the uncertainty but experienced very different results. However, both plans should provide confidence to the public and prove to be beneficial to the economy.
 
Historically, smaller pandemics have occurred and equity markets were higher after six to 12 months, depending on the severity of the illness. The current pain that the market is providing investors will have many taking a “wait-and-see” approach.
 
We understand that you may be feeling the stress of market news. Times like these are why you choose to work with 1st Source. We have the people and integrity to work with you through all of your personal situations. Strong, stable, local and personal—1st Source is here to listen and serve your needs.
 
Please contact us with questions, we are here to help!
 
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

  • Countries around the world have continued to shut down their borders either entirely or have implemented restrictions. International travel has nearly come to a grinding halt amidst the rapidly growing concern over the Coronavirus. Through March 16, there have been 182,400 confirmed cases and 7,100 deaths around the world from the virus.
  • The initial talks of a U.S. recession due to the Coronavirus; at one point, seemed possible but has now become inevitable. Economists, pundits, and professionals (including us) are now focusing on the depth and duration of the recession as uncertainties surrounding the virus surmount.
  • Recent economic data in the United States has started to show signs of the economy slowing and, hopefully only temporarily, shutting down. The Empire Manufacturing Index (a manufacturing index in New York) fell by a record amount in February and declined to its lowest level since March 2009.
  • Retail sales in February were expected to increase by 0.2% but declined by 0.5%. It did not come as a surprise, but the biggest detractor came from gasoline stations as their sales were down 2.8%.
  • China released its first round of economic data since the Coronavirus has had its full effect on their economy. Retail sales declined year-over-year by 20.5% in January and February and industrial output declined by 13.5%. The decline in industrial production was the largest on record and the unemployment rate increased to 6.3% in February from 5.2% in December.
Economic Data: Recent
  Actual Survey Prior
ADP Employment Change
183k 170k 291k
Change in Nonfarm Payrolls 273k 175k 225k
Trade Balance -$45.3b -$46.1b -$48.9b
Consumer Price Index MoM 0.1% 0.0% 0.1%
Economic Data: Upcoming
    Survey Prior
Durable Goods Orders   -0.8% -0.2%
New Home Sales   750k 764k
Markit US Services PMI 48.8 49.4
PCE Core Deflator MoM   0.2% 0.1%

Equities

  • The decline in the overall U.S. equity market has escalated in March as the S&P 500 was down over 19% through March 16. The developed international markets were down more than 21% as the growth and severity of the Coronavirus has escalated.
  • Consumer staples, health care, and technology have been the three best performing sectors year-to-date, while energy and financials have performed the worst. The energy sector, which is now only 2.7% of the S&P 500, has fallen 54% through March 16. The utilities and real estate sectors are now larger weightings within the S&P 500.
  • Small-cap stocks in the U.S., as measured by the Russell 2000, are now down almost 38% year-to-date. There has been an influx of very recent research stating that this could be a buying opportunity within small-cap stocks.
Equity Index Values and Total Returns
  Value YTD 1-Year
S&P 500 2,386.1 -25.83% -11.60%
Dow Jones Industrial Average 20,188.5 -28.84% -18.28%
NASDAQ Composite 6,904.6 -22.84% -6.63%
Russell 2000 (small-cap index) 1,037.4 -37.65% -32.25%
MSCI EAFE (developed intl.) 1,424.9 -29.72% -21.97%
MSCI Emerging Markets 395.1 -25.11% -19.18%
Federal Reserve's Inflation Target
Source: Bloomberg

Fixed Income

  • Since our last regular Market Share newsletter email on March 3, the Federal Reserve has made drastic moves by cutting their Target Rate by 150 basis points to a range of 0.00%-0.25%. On top of the 1.50 percentage point cut, they will also add an additional $700 billion of quantitative easing to the financial system by buying $500 billion of U.S. Treasuries and $200 billion of Agency Mortgage-Backed Securities.
  • The Federal Reserve, the European Central Bank, the Bank of Japan, the Bank of England, the Bank of Canada, and the Swiss National Bank cohesively announced action to provide liquidity to the markets. This was an unprecedented move as central banks around the world coordinated drastic monetary policy changes.
  • As the ten-year U.S. Treasury has plummeted to 0.80% (approximately 110 basis point decline since the beginning of the year), the spread between investment grade bonds and its comparable Treasury increased to its widest level since early 2016, as measured by Bloomberg Barclays indices. The spread is the difference in yield an investor receives relative to a U.S. Treasury with a comparable maturity.
Fixed Income Index Yields & Total Returns
  Yield YTD 1-Year
B’berg Barclays Inter Govt./Credit 1.32% 2.48% 7.80%
B’berg Barclays US Aggregate Bond 1.72% 3.25% 10.35%
B’berg Barclays US Corp.High Yield 9.06% -11.57% -5.16%
B’berg Barclays Municipal Bond 2.15% -1.32% 4.24%
Key Interest Rates
  3/16/20 12/31/19 3/19/15
Federal Funds Target Rate 0-0.25% 1.5-1.75% 0-0.25%
3-Month LIBOR 0.84% 1.91% 0.27%
2-Year U.S. Treasury Note 0.36% 1.57% 0.67%
10-Year U.S. Treasury Note 0.72% 1.92%
2.05%
Prime Rate 3.25% 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:
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1st Source Corporation Investment Advisors, Inc. is a wholly owned subsidiary of 1st Source Bank.