Market Share Newsletter Vol 2 Issue 8

 

March 31, 2020

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Your 1st Source for market information
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Our day-to-day lives have changed both dramatically and temporarily. Just five weeks ago, we were writing about record highs in the stock market and the continued historic expansion of the U.S. economy. And today, many of us have new “colleagues” while working from home (kids, spouse, family pet) while some are unable to see their colleagues as they are moved to other locations as a precaution. Some of us may be isolated. The change may mean that we are not allowed to visit with new grandchildren or an ill loved-one in the hospital.
 
The change in the investment markets means more volatility in bonds and stocks, unfavorable economic data, and your investment team receiving more emails from research firms than ever before. The investment research firms are working to estimate how bad the economic data will be, as if to provide some certainty or to make the biggest headline. The economic data, for the near term, will be historic—historically bad. The first evidence arrived this week with 3.28 million Americans filing for unemployment. That is almost five times the previous high reported in 1982 and just one reason for an economic stimulus package.
 
The passage of the largest economic stimulus bill in history (in dollar terms) helped the U.S. equity markets experience their best week since 2008. The passage of the stimulus bill will help 175 million Americans, according to Larry Kudlow, the National Economic Council Director, and provide an additional $350 billion for small businesses. It will help soften some of the financial pain our nation is currently experiencing.
 
The market can now focus more on the news related to the coronavirus and how it is impacting society, the economy, and companies. Corporations will begin to report their earnings in early April and will continue for two months following. That will reveal if the market has discounted the pending drop in earnings enough. The intraday and daily swings have been measured in 4-12% ranges–not normal volatility. In late 2016 and through the early part of 2018, we went 70+ weeks without as much as a 5% drop, let alone a drop like that in one day. Such swings have happened several times in the last month.
 
Over the past couple of weeks, you have seen 1st Source’s Chairman, Chris Murphy share videos and emails regarding COVID-19 and our bank’s response as well as our commitment to the communities we serve. The Wealth Advisory Services team is a microcosm of that commitment. We have helped clients manage through world wars, depressions, recessions, pandemics, and bull markets. And, we will continue to be here for you through these turbulent times—strong, stable, local and personal.
 
Thank you for your continued partnership. We will weather this storm together.
 
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 passed a $2.2 trillion stimulus bill. The key elements are:
    • Payments to individuals (plus additional amounts for each child) with phase-out limits based on income to be mailed out or direct deposited into bank accounts. The Projected start date is April 6.
    • Increased individual unemployment benefits for up to four months
    • $350 billion in small business loans with a portion that would be forgiven
    • $500 billion in loans to struggling industries, states, and cities
    • $150 billion dispersed to state and local governments
    • Direct aid provided to airlines
    • $100 billion allocated to hospitals to fight the coronavirus
     
  • Japan is planning a stimulus package for approximately $550 billion. The package will include fiscal spending, monetary policy and direct spending. Japan is the world’s third largest economy.
  • Initial jobless claims for the week ending March 21 rose to a record high of 3.28 million, which is almost five times the previous record high of 695,000 in October 1982. A few other weak reports have also been announced—the Dallas Fed Manufacturing survey fell to a record low and consumer confidence fell to its lowest level since October 2016.
  • The Manufacturing PMI from China increased to 52.0 in March after dropping to 35.7 in February. Though China’s data is not always reliable, it was a very good (and surprising) result, as an index above 50 signals growth. China’s non-manufacturing PMI, which includes hotels, catering, tourism, and entertainment, also rose above 50.
Economic Data: Recent
  Actual Survey Prior
Initial Jobless Claims
3283k 1700k 281k
University of Michigan Sentiment 89.1 90.0 95.9
MNI Chicago PMI 47.8 40.0 49.0
Dallas Fed Manufacturing Activity  -70.0 -10.0 1.2
Economic Data: Upcoming
    Survey Prior
Change in Nonfarm Payrolls   -100k 273k
Initial Jobless Claims   3500k 3283k
Markit US Manufacturing PMI 48.0 49.2
Trade Balance   -$40.0b -$45.3b

Equities

  • First quarter earnings for S&P 500 companies started March 31. McCormick, the spice company, missed sales projections attributable to the virus outbreak in China, but beat earnings forecasts. Conagra Brands slightly missed sales and profit estimates but gave strong guidance for 2020 as they noted “significantly increased demand in its retail businesses, associated with the COVID-19 pandemic.”
  • Walgreens will release their quarterly results this Thursday and Constellation Brands will report on Friday. Quarterly earnings reports ramp up the week starting April 13 as 39 companies, including Delta Airlines, JPMorgan Chase, UnitedHealth, Pepsi, and Honeywell, report their results.
  • Multiple brick-and-mortar retailers, such as Macy’s, Gap, and Kohl’s, have announced over the past two days that they will furlough their store employees and a large portion of their corporate employees. This follows a similar decision made by Hilton, Marriott, and Hyatt hotel chains.
  • The overall markets felt some reprieve last week as the S&P 500 was up 10.28%.
Equity Index Values and Total Returns
  Value YTD 1-Year
S&P 500 2,626.7 -18.30% -5.24%
Dow Jones Industrial Average 22,327.5 -21.29% -11.46%
NASDAQ Composite 7,774.2 -13.09% 2.80%
Russell 2000 (small-cap index) 1,158.3 -30.32% -23.33%
MSCI EAFE (developed intl.) 1,558.5 -22.77% -13.97%
MSCI Emerging Markets 395.2 -25.09% -19.29%
Federal Reserve's Inflation Target
Source: Bloomberg

Fixed Income

  • Corporate bonds have performed very well over the past week as the Bloomberg Barclays U.S. Corporate Bond Index returned 6.50% while the overall bond market only returned 2.20%. Corporate bonds will likely continue to outperform the rest of the bond market as the Federal Reserve has stepped in with drastic monetary policy to provide liquidity in the bond markets and financing for corporations.
  • The pressing issues of liquidity and credit risk have overwhelmed fixed income over the past few weeks and the decline in interest rates has become an afterthought. The 10-year U.S. Treasury has declined from the start of the year at 1.94% to less than 0.70% and the 30-year has moved from 2.41% to approximately 1.35%. Given the tremendous amount of global monetary policy going forward, we believe that Treasury yields will remain very low and will ultimately compress other investment grade, fixed income security yields close to all-time low levels.
Fixed Income Index Yields & Total Returns
  Yield YTD 1-Year
B’berg Barclays Inter Govt./Credit 1.32% 2.22% 6.70%
B’berg Barclays US Aggregate Bond 1.50% 3.25% 9.04%
B’berg Barclays US Corp.High Yield 9.67% -13.24% -7.53%
B’berg Barclays Municipal Bond 1.93% -0.19% 4.31%
Key Interest Rates
  3/30/20 12/31/19 4/2/15
Federal Funds Target Rate 0-0.25% 1.5-1.75% 0-0.25%
3-Month LIBOR 1.45% 1.91% 0.28%
2-Year U.S. Treasury Note 0.23% 1.57% 0.56%
10-Year U.S. Treasury Note 0.73% 1.92%
1.92%
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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  • 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.