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Archive for June, 2020

Weekly Market Update for June 26, 2020

by Jim Ulland

The results of the Federal Reserve’s “stress test” for banks were released Thursday after the market closed. The banks passed the test! The highlights included a cap on common stock dividends at no more than what is currently paid. These payments in the future will be capped as a percent of profits. No bank dividends are likely to be reduced with the exception of Wells Fargo’s. Share repurchases by banks are also prohibited; however, this was already in place by agreement among the banks. Fed Vice Chair for Supervision Quarles noted the “banking system has served as a source of strength, not strain, in the current crisis.”

Other than the news from the banks, Covid-19 had the most influence on this week’s market. By mid-week the virus was spiking in some of the states that had reopened. Although a higher transmission rate was expected than during the lockdowns, the amount of new spreading surprised most, including the market. The biggest market impact was on Wednesday, when the SP fell 2.6%. Investors had hoped reopenings would continue the brisk pace of the prior week, allowing many in the service industry to return to work. Now the pace of reopening is in doubt. The week also did not have any significant news from the vaccine or treatment trials, which always has the ability to move markets higher.

The week produced mixed economic data. Unemployment claims dropped less than expected. Yet worked still on unemployment dropped by about 767,000. Unfortunately, 19.5 million still remain on unemployment. Inflation stayed low at 1%, but existing home sales declined sharply even with low mortgage interest rates. Durable goods and capital goods orders rose more than expected but consumer sentiment declined, suggesting that consumer spending may slow.

The SP 500 was down 2.9% for the week and stocks seemed more fully valued as rapid reopening prospects dimmed. The NASDAQ had better performance, as has been the pattern, down 1.9%. Preferred stocks, which are the dominant security in our fixed income strategy, were soft as the weaker economic news forced some investors back to cash. The 10 Yr Treasury yield declined from 0.69% to 0.64%, making it even less attractive except as a safe haven.

Volatility for the week played less of a role than previously.

Next week will be a big week for economic news. The jobs report for June will be released Thursday morning at 8:30 CDT, a day early since Friday is a holiday. The amount of new jobs definitely will move the market. The ADP Employment Report will come out the day before, often a signal for what the change will be in the Thursday announcement. Weekly unemployment filings and Continuing Claims (those still on unemployment) will be important. Market sentiment will improve if unemployment filings come in closer to one million, down from 1.5 million this week. It would also be positive if those on unemployment dropped by a million to 18.5 million. On 6/30 the Conference Board will publish the Consumer Sentiment Index, an index of expected consumer purchasing behavior. 70% of US economic growth is generated by consumer spending, so this number will be important. Second quarter earnings reports start in two weeks.

*The information contained in this commentary is not investment advice for any person. It is presented only for informational purposes to assist in explaining factors that may have had an impact in the past or may have an impact in the future on client portfolios or composites. All expressions of opinion reflect the judgment of the firm on this date and are subject to change. Included information has been obtained from sources considered reliable, but we do not guarantee that the foregoing materials are accurate or complete. Clients or prospective clients should contact Ulland Investment Advisors for individualized information prior to deciding to participate in any portfolio or making any investment decision. Ulland Investment Advisors does not provide tax advice. All clients are strongly urged to consult with their tax advisors regarding any potential investment. Past performance does not guarantee future results; there is always a possibility of loss.

 

Weekly Market Update for June 19, 2020

by Jim Ulland

The battle continues between the stock market valuation, which is on the high side, and the Federal Reserve, which has vowed to keep interest rates low while continuing to stimulate the economy with the help of Congress.  There is an old phase, “Don’t fight the Fed.”  The thinking goes that the Fed is so big and has so many resources that it can determine the direction of the economy.  Therefore, if this is correct once again, don’t shelter in cash, but stay invested.  We feel the battle between these two forces will swing back and forth with the market going sideways from here until a treatment or vaccine for Covid-19 is announced.  Then it will take another leg up.

The week showed a continuation of reopening announcements along with somewhat higher numbers of Covid cases in the states with the fastest reopening schedules.  The fact is that cities are running low on funds with diminished sales and lodging tax revenues.  Big cities and most states cannot withstand a continuation of the lockdown policy as revenues drop and expenses to fight the virus stay high.  Therefore, reopening is gaining support.

The economy showed signs of life with new and used car sales higher. Mortgage rates hit another record low helping home building and home sales. In addition, retail and manufacturing were higher in May and China agreed to buy more grain. Grain prices went up. Continuing claims for unemployment also improved; however, there are still 20 million on unemployment.

The SP 500 was up +1.6% for the week and the market was much calmer than the week before. The NASDAQ had better performance, as has been the pattern, up +3.7%. Preferred stock, which is the dominant security in our fixed income strategy, had solidly positive results as well.

The trend of declining volatility resurfaced this week as volatility decreased -5.1%.  The S&P 500 was +0.8% Monday, +1.9% on Tuesday, -0.4% on Wednesday, +0.1% on Thursday and, -0.8% on Friday.

Next week will provide a modest amount of economic news that could move the market. The one item we will be watching most closely is the release of the bank Stress Tests, evaluating how healthy the banks are during this challenging time. This release is 6/25 after the market closes.  Existing and new home sales will be released as will the number of mortgage applications.  All are expected to show strength.  The final reading on Q1 GDP will come out, as will personal spending for May.  Of course the weekly Jobless Claims report will be watched for improvement. The following week another critical Jobs Report will be released hopefully showing more returning to work in June.

Happy Fathers’ Day to all those Dads who wish they had some baseball to watch.

*The information contained in this commentary is not investment advice for any person. It is presented only for informational purposes to assist in explaining factors that may have had an impact in the past or may have an impact in the future on client portfolios or composites. All expressions of opinion reflect the judgment of the firm on this date and are subject to change. Included information has been obtained from sources considered reliable, but we do not guarantee that the foregoing materials are accurate or complete. Clients or prospective clients should contact Ulland Investment Advisors for individualized information prior to deciding to participate in any portfolio or making any investment decision. Ulland Investment Advisors does not provide tax advice. All clients are strongly urged to consult with their tax advisors regarding any potential investment. Past performance does not guarantee future results; there is always a possibility of loss.

Weekly Market Update for June 12, 2020

by Jim Ulland

Why did the market get hit so hard on Thursday, a loss of -5.9% for the SP 500? Or, you could ask, why did the market go up so much in June through Wednesday, a gain of 4.8%? The two questions are interrelated. The market rose in June as news of the reopening of the economy dominated the headlines. The market was looking six months ahead and felt by that time most would be back to work, a vaccine and treatment for Covid-19 would be announced, and the Minnesota Twins would be battling for a World Series slot. But, on Wednesday, Fed Chair Powell threw a little cold water on that rosy picture when he said that the depth of the downturn and the pace of the recovery remains “extraordinarily uncertain.”  The headlines too had a slight shift and featured stories where the virus spread actually had increased in some states that had opened faster than others. The market took a step back and thought maybe the economy would not return to health as quickly or fully as hoped.

The SP 500 was down -4.8% for the week. The NASDAQ had better performance with a modest decline of -2.3%. The most beaten down sectors lost some of their recent gains; thus, banks, retail, oil and gas, hotels, resorts, airlines, and casinos were down hard. Preferred stock, which is the dominant security in our fixed income strategy, fell as well. Normally, preferreds have about 25% of the change experienced by stocks, although this is only a rough measure and this week was a little weaker than what we would have expected.  Chairman Powell did say that interest rates would remain low through 2022, which is very favorable for preferreds that have a fixed payment.

The trend of declining volatility reversed this week and the volatility index increased 47%. High volatility generally means high uncertainty, which was clearly the case. Friday the market recovered about 1.3% after being higher earlier. The SP 500 was +1.2% Monday, -0.8% on Tuesday, -0.5% on Wednesday, -5.9% on Thursday and, +1.3% on Friday.

Next week will provide a lot of economic news that could restore the recovery story. Look for reports from manufacturing, retail, capacity utilization, mortgage applications, housing starts, and of course the weekly Jobless Claims report.

*The information contained in this commentary is not investment advice for any person. It is presented only for informational purposes to assist in explaining factors that may have had an impact in the past or may have an impact in the future on client portfolios or composites. All expressions of opinion reflect the judgment of the firm on this date and are subject to change. Included information has been obtained from sources considered reliable, but we do not guarantee that the foregoing materials are accurate or complete. Clients or prospective clients should contact Ulland Investment Advisors for individualized information prior to deciding to participate in any portfolio or making any investment decision. Ulland Investment Advisors does not provide tax advice. All clients are strongly urged to consult with their tax advisors regarding any potential investment. Past performance does not guarantee future results; there is always a possibility of loss.

 

Weekly Market Update for June 5, 2020

by Jim Ulland

Henry Wadsworth Longfellow wrote in A Psalm of Life, “Let us, then, be up and doing.” And so we were. The May “Jobs Report” showed that non-farm payrolls unexpectedly rose by 2.5 million whereas the forecast was for a decline of 7.5 million! The unemployment rate declined from 14.7% in April to 13.3% in May, another surprise – especially since the median forecast was for it to rise to 19%. No wonder the Dow raced up 829 points, 3.15%.

The pace of reopening the economy quickened. The feared spike in Covid 19 cases has not occurred. The Heller Hurwicz Economics Institute at the U of M suggested that good public policy would be for everyone under the age of 70 to go back to work because fatality rates for those younger than 70 are so low. Secondly, they suggested quarantine and testing for those with symptoms or who have been exposed. Gary Stern, the retired head of the 9th District Federal Reserve, called these suggestions “reasonable.”

The stock market is clearly looking past this economic crisis partially buoyed by more trials of a vaccine and treatment for Covid 19. Also, air travel is returning. American Air said April daily passengers were 32,000. By mid-May the count had risen to 78,000. At the end of May, daily passengers were 110,000. People are understanding that air in the plane’s cabin circulates 20 times each hour, half of which is fresh. This is about the quality in a hospital and much better than office buildings. Restaurants too are limping forward. They are allowed to use their outdoor seating in most states, but that might not be enough to stave off a lot more bankruptcies. New York City won’t even allow outdoor dining until mid-July.

The SP 500 was up 4.9% for the week. The NASDAQ lagged with a 3.4% weekly gain. The most beaten down sectors continued to have the best weekly performance: banks, retail, oil and gas, hotels, resorts, airlines, and casinos. Preferred stock, which is the dominant security in our fixed income strategy, was up smartly. We feel portfolios of 100% preferreds will turn positive for the year sometime this summer, maybe very soon. Our equity portfolios out-pace their comparative index once again.

The trend of declining volatility in the markets persisted. Volatility was down 11.5% for the week. Low volatility is making investors more comfortable that the market hit bottom in late March and has no intention of returning there any time soon. The $5 trillion of idle cash “on the sidelines” is rushing back into the market. Who wants to miss a rebound? The SP 500 reflected this enthusiasm as it completed a strong week which concluded with the favorable jobs news: The SP 500 was up +0.4% Monday, +0.8% on Tuesday, +1.5% on Wednesday, -0.3% on Thursday and, +2.6% on Friday.

Our fixed income strategy using preferred stock had a week of solid gains. Bank common stocks were one of the strongest sectors mirroring the rising confidence that bank loan losses will be less than expected. The returns on 10 Year Treasuries ended the week at 0.9%, up from 0.67%. The relatively high yield on preferreds intensified buying from those who need income.

Next week will feature news on further reopening of the economy. The Fed will have a press conference Wednesday after its meeting and one inflation index will be released, the Producer Price Index. More is likely in the dispute with China. And, of course, plenty of politics.

*The information contained in this commentary is not investment advice for any person. It is presented only for informational purposes to assist in explaining factors that may have had an impact in the past or may have an impact in the future on client portfolios or composites. All expressions of opinion reflect the judgment of the firm on this date and are subject to change. Included information has been obtained from sources considered reliable, but we do not guarantee that the foregoing materials are accurate or complete. Clients or prospective clients should contact Ulland Investment Advisors for individualized information prior to deciding to participate in any portfolio or making any investment decision. Ulland Investment Advisors does not provide tax advice. All clients are strongly urged to consult with their tax advisors regarding any potential investment. Past performance does not guarantee future results; there is always a possibility of loss.

 

Ulland Investment Advisors

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