Market Share Newsletter Vol 2 Issue 7

 

March 24, 2020

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Extraordinary efforts are witnessed daily in this challenging situation. We appreciate everyone on the front lines fighting COVID-19—our healthcare professionals, first responders, government officials willing to make tough decisions, and to all of you patiently abiding by the order to shelter-at-home.
 
1st Source Bank and the services we provide are considered essential and we continue to work daily for our clients. We are committed to providing The Market Share to keep you informed about the changing economic conditions. Over the last several weeks, our Wealth Advisory Services team has been working with clients over the phone, via Skype or Zoom, by email and text to answer their questions. Most discussions have centered around the unprecedented shutdown of the global economy and how it is impacting the investment markets and the economy.
 
The global governments are not only focused on fighting COVID-19, but also responding to the coming recession to lessen the impact the shutdown will have on their respective economies. The number of those contracting COVID-19 will increase for several weeks, even with the current steps in place to slow the spread. The economic data will also steadily get worse and day-to-day volatility will continue in both equity and fixed income markets.
 
This week began with the Federal Reserve’s continued efforts to provide support for the economy, especially for the bond markets. They announced additional purchases of government bonds and new programs related to municipal and corporate debt. These added steps were not used in 2008-09 despite other central banks around the world having already implemented similar programs. The size of the global shutdown will need even more than these extraordinary efforts by central banks.
 
The global economy will need extraordinary fiscal policy. The U.S. government is working on a stimulus package almost equal to 10% of the gross domestic product (GDP). The package would include direct payments to households and an increase in unemployment benefits. Particularly hard-hit industries are expected to receive special assistance. Other countries are taking similar action.
 
“We are all in this together“ truly means all of us. We will shelter-in-place, and when appropriate, the economy will “re-open” again, yet the timing is still unknown. Re-openings are happening in China, Hasbro commented yesterday about the large demand for toys and how China can produce them. History shows that in times like this, the stock market leads us in and out of the crises. That seems likely this time as well. In 2009, the term “green shoots” became popular to explain positive economic data. The market will be looking for “green shoots” on the slowing spread of COVID-19 or signs of economic improvement as reasons to rise, well before we see widespread recovery. While seeing green shoots is a reason for optimism, we know that the biggest “up days” in stocks historically occur during the worst times (not the best). While a single large “up day” in stocks will feel good, it is seldom a green shoot.
 
The extraordinary efforts put forth by everyone in this country and the world will get us through this extraordinary time in our history. Thank you for looking to us to help keep you informed.
 
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

  • The U.S. government continues to haggle over fiscal policy as both parties disagree over the best policies going forward and the key drivers in a stimulus package. Whether the package includes one-time checks or a more universal income disbursement, the package will likely add up to trillions of dollars over the coming year—and that does not include the Federal Reserve’s major stimulus via monetary policy.
  • Preliminary results for this month’s rating from the University of Michigan Consumer Sentiment (a consumer confidence index) only dropped to its lowest level since October 2019, despite the effects of the coronavirus on the U.S. economy beginning to take place. The index should trend lower from this point as markets have declined, job losses have increased, and business expectations will likely drop.
  • Based on data from the Bureau of Labor Statistics, there are approximately 32 million workers in the restaurant, retail, and hospitality industries that will likely be impacted by the coronavirus. Piper Sandler is forecasting an unemployment rate of 20% within the leisure and hospitality sector.
  • There has been positive news in the labor market as major announcements have been made from corporations that are ready and wanting to hire: Amazon plans to hire 100,000 warehouse and delivery workers, Walmart wants to add 150,000 employees across the company, Instacart plans to add 300,000 workers as the demand for grocery store deliveries increases, and CVS is looking to hire 50,000 new individuals and will reach out directly to their clients like Marriot and Hilton to find those employees.
  • The 2020 Olympics in Tokyo, Japan have been delayed for one year.
Economic Data: Recent
  Actual Survey Prior
Durable Goods Orders
-0.2% -0.2% -0.2%
New Home Sales 765k 750k 764k
Markit US Services PMI 39.1 42.0 49.4
CPI Ex Food & Energy MoM  0.2% 0.2% 0.2%
Economic Data: Upcoming
    Survey Prior
Initial Jobless Claims   1,500k 281k
University of Michigan Sentiment   90.0 95.9
MNI Chicago PMI 44.0 49.0
Dallas Fed Manufacturing Activity   -7.0 1.2

Equities

  • Many companies have announced plans to cut or eliminate their share buyback plans in order to increase liquidity. This decision crosses all sectors as Intel, Chevron, Bank of America, AT&T, Nordstrom, McDonald’s, Boeing, and HCA Healthcare have all stopped their share buyback programs.
  • As stated in the opening commentary, Hasbro announced very positive news yesterday as they do not plan to have layoffs, sales in the first quarter have been “quite good,” stated supply chains are back up and running in China and they believe that by April their production will be entirely caught up.
  • The S&P 500 was down 30.4% year-to-date through Monday, but far from the worst globally as Italy was down 35.5%, Spain -34.5%, and the United Kingdom is down 33.6%. Despite the coronavirus originating and growing in Asia, the Chinese stock market was only down 14.5% through the same time frame, Hong Kong -23.1%, and Japan was down 27.2%.
Equity Index Values and Total Returns
  Value YTD 1-Year
S&P 500 2,237.4 -30.43% -12.98%
Dow Jones Industrial Average 18,591.9 -34.46% -19.58%
NASDAQ Composite 6,860.7 -23.31% -3.64%
Russell 2000 (small-cap index) 1,002.4 -39.74% -28.59%
MSCI EAFE (developed intl.) 1,354.3 -33.14% -25.52%
MSCI Emerging Markets 359.8 -31.80% -26.57%
Federal Reserve's Inflation Target
Source: Bloomberg

Fixed Income

  • Fixed income is experiencing challenging times as individuals are getting more conservative, seeking more liquidity, and the coronavirus has increased the fears of default in both municipalities and corporations. At this point, we believe defaults will remain low with both the Federal Reserve and fiscal policy aimed at keeping large corporations and municipalities out of default, still operating, and ready to return to business.
  • The Federal Reserve announced policies termed “The Primary Market Corporate Credit Facility” and “The Secondary Market Corporate Credit Facility” that were created to support the investment grade corporate bond sector and allow companies access to credit. Companies that borrow via the Primary Facility may even be allowed to defer interest and principal payments during the first six months of the loan, and the Secondary Facility will purchase both investment grade bonds and U.S. listed exchange-traded funds (ETFs) to increase liquidity.
  • According to The Bond Buyer, “municipal money market funds can now rely on the Federal Reserve as a buyer of last resort.” This move has restored some stability to the municipal bond market.
  • Though we do not have an allocation to emerging market bonds, this past week they suffered their largest weekly decline since the worst part of the U.S. financial crisis. Based on Lipper Fund Flows, emerging market fund outflows totaled $4.6 billion for the week ending March 20.
Fixed Income Index Yields & Total Returns
  Yield YTD 1-Year
B’berg Barclays Inter Govt./Credit 1.66% 0.78% 5.40%
B’berg Barclays US Aggregate Bond 1.95% 1.04% 7.06%
B’berg Barclays US Corp.High Yield 11.69% -19.78% -14.21%
B’berg Barclays Municipal Bond 3.52% -7.62% -3.06%
Key Interest Rates
  3/23/20 12/31/19 3/26/15
Federal Funds Target Rate 0-0.25% 1.5-1.75% 0-0.25%
3-Month LIBOR 1.2% 1.91% 0.27%
2-Year U.S. Treasury Note 0.31% 1.57% 0.56%
10-Year U.S. Treasury Note 0.79% 1.92%
1.87%
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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  • 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.