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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.

Weekly Market Update for May 29, 2020

by Jim Ulland

Some startling research came out from Marco Kolanovic, PhD researcher at JP Morgan entitled Market and Volatility Commentary subtitled “Political risks of pandemic, data favors further reopening.”  Although very counter-intuitive, Kolanovic says, “Despite the condition for re-opening being mostly met across the US, it is not yet happening in the largest economic regions (e.g. CA, NY, etc.) and worrying populism related to the virus is putting at risk global cooperation and trade….While we often hear that lockdowns are driven by scientific models, and that there is an exact relationship between the level of economic activity and spread of virus – this is not supported by the data…Indeed, virtually everywhere, infection rates have declined after reopening even after allowing for an appropriate measurement lag.” The important take-away is that there has been no spike in hospitalizations/spread with reopening, thus, we can proceed faster than we thought.  Since we have innumerable businesses on the verge of bankruptcy, this is good news.  (Please let me know if you want a link to this research.)

The economic devastation from the virus continued this week with over 2 million more people filing for unemployment.  The modest reopening that did occur resulted in 3.9 million people coming off of unemployment and going back to work.   April’s unemployment rate was 14.7% and headed higher in May. Other economic news showed the index of pending home sales dropping 22% in April and durable goods orders fell 17%.  Corporate profits in Q1 dropped the most since 2008, 14%.

The stock market is clearly looking past this economic crisis partially buoyed by additional trials for Covid 19 treatments and vaccines.  One or both of these seem necessary to give consumers comfort that they can return to stores and restaurants without unacceptable risks.  The S&P 500 was up 3.0% for the week.  The NASDAQ was slightly worse with a 1.8% weekly gain.  The most beaten down sectors like banks and retail did have a small recovery mid-week. Preferred stock, which is the dominant security in our fixed income strategy, was up for the week.  We feel portfolios of 100% preferreds will turn positive for the year sometime this summer.   Our equity portfolios out-pace their comparative index once again.

The week’s trading continued the trend of declining volatility, which was down 2.3% for the week. Low volatility is bringing idle cash back into both fixed income and stocks.  There is about $5 trillion of cash “on the sidelines.”  The S&P 500 reflected the decline in volatility as it moved in a relatively narrow upward range of 1.23% on Tuesday, 1.48% on Wednesday, -0.21% on Thursday and, and 0.48%% on Friday.

Our fixed income strategy using preferred stock had a week of further gains. The returns on 10 Year Treasuries ended the week at 0.65%, near where it started.  The relatively high yield on preferreds will drive more investors to them as a source of income.  This directional flow is helped by the fact that other investments used for income are now of higher risk including REITs and pipeline MLPs.

Next week will contain headlines on the debate to reopen more of the economy. Cities are being hurt by the reduction in sales tax and lodging tax revenues as well as higher costs to manage the virus.  Also the dispute with China may fester with a negative impact on the market. The jobs lost in May will be dominant news on Friday.  Hopefully, this news will be off-set by more progress on vaccines and treatments along with favorable news on reopenings.

Jim Ulland

*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 May 22, 2020

by Jim Ulland

Missed in all of the Covid 19 news this year has been an important change in the Required Minimum Distribution (RMD) from retirement accounts. Because of the Covid financial stress, you are not required to take a distribution from your retirement account. After this year’s pause in the RMD, another legislative change allowed those who have not reached 70.5 years by 12/31/19 to wait until they are 72 years old. In other words, the new required age for an RMD is 72.These distributions are taxable, so unless you need that RMD income, we advise against taking the distribution in 2020. 

This week also restored some of your Covid-depressed portfolio values. The SP 500, which represents large companies, was up 3.2% for the week. The NASDAQ was even more robust, gaining 6% this week and turning green for the year. Small and mid-sized companies did better than large, making up some of their lost ground. Small companies are down about -18% whereas the SP 500 is down -9% since January 1st. Preferred stock, which is the dominant security in our fixed income strategy, was up about 1% for the week, a big move in the fixed income world. 

The economic news was very bad, although somewhat better than expected. Unemployment claims rose by 4.6 million to a total of 22 million, less of an increase than last week. In April, total net jobs lost were 20.5 million creating a 14.7% unemployment rate. Neiman Marcus did the expected and filed for bankruptcy. Labor costs per unit rose as employers kept paying some workers, with help from the federal government, even though they are not working.

So, why did the market go up in the face of some of the worst economic news since the Depression? Historically, the market looks six months ahead to determine what to pay for stocks and fixed income today. What the market sees is Apple reopening its stores, Disney reopening in China, Starbucks now has 85% of its stores open, 16 states are reducing “stay-at-home” restrictions and allowing more businesses to reopen next week, more people are driving, and Uber has more passengers. Although the Covid 19 problem will be with us, there is progress on a vaccine as Moderna gets approval for Phase 2 trials on its leading candidate. No vaccine will be generally available until next year at the earliest, but mass trials will give indications of efficacy this year. Looking six months ahead, investors do not want to miss the market recovery which they feel is coming. Thus, cash is flowing into the market.

The week’s trading continued the trend of declining volatility, which was down 11% on Friday and 30% for the week. Low volatility brings idle cash back into both fixed income and stocks. The SP 500 reflected the decline in volatility as it moved in a relatively narrow upward range of +0.4% on Monday, +0.9% on Tuesday, -0.7% on Wednesday, +1.2% on Thursday, and +1.7% on Friday. 

Our fixed income strategy using preferred stock had a week of further gains. The returns on 10 Year Treasuries ended the week at 0.68% and increase from 0.62%. This rate is exceedingly low compared to the 5.5-6% annual yield on preferreds. Cash is headed to these higher preferred yields. 

Next week will mark the end of most of the Q1 earnings reports. The news focus will be increasingly on business reopenings and less on Covid 19 hospitalizations and deaths. Even the weather will help in that most viruses do poorly as the summer heat returns. 

Both our equity and fixed income portfolios had a great April followed by this impressive start to May. We send all the best this Memorial Day weekend.

*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 May 15, 2020

by Jim Ulland

Sometimes it is more helpful to think of the “stock market” as a “market of stocks.”  This is important when there is wide divergence between sectors of the market or markedly different performance between stocks. Such was the market this week, the worst since early April. For instance the small pharmaceutical company Sorrento announced it had a cure for Covid 19 and the stock went up 170% on Friday. Human trials have not been conducted. The Healthcare ETF (XLV) was up 1% for the week and is flat so far this year. On the other hand, Wells Fargo was down 8.5% this week, about the same as the bank ETF (KBR). So far this year Wells Fargo is down 56% and the bank index is down 38%.  This is a market where you have to be in the right sector and the right stocks in the sector.  

The SP 500 was down 2.3% for the week and 11.3% for the year. The NASDAQ (QQQ) continued its out-performance and was down 1%, staying green for the year at +5%.  Small companies were down 6.5% for the week and 24% so far this year.    

The economic news continued to be dismal.  Unemployment claims rose by 3 million to a total of 25 million, less of an increase than last week. Retails sales in April fell 16% with the worst areas being clothing, gasoline, and bar/restaurants. Groceries was the only category showing an increase. JC Penny filed for bankruptcy.  Increased trade tensions with China also dampened market enthusiasm.

Yet, the news was not all gloomy.  States continued to allow workers to return to work and you can now have your elective surgery.  Consumer confidence was up. Crude oil got back close to $30/bl which will prevent some energy company bankruptcies. Covid 19 tests are more available and employers are incorporating health checks on workers returning.

The week’s trading continued the trend of declining volatility. The SP 500 had two bad days, one of which was Tuesday when Fed Chair Powell raised concerns about the economy, while insisting the Fed would do what is needed: +0.02% on Monday, -2.05% on Tuesday, -1.75% on Wednesday, +1.15% on Thursday, and +0.46% on Friday. 

Our fixed income strategy performance was about a -2%. Bank common stocks were very weak and since banks issue most of the preferreds, this negative sentiment dragged down the preferreds as well.  The returns on 10 Year Treasuries ended the week at 0.64% an increase from 0.62%.  Low rates are expected to continue although the Fed Chairman said negative rates, like in Europe, are unlikely.

Next week the news will focus on business re-openings and any up-tick in Covid 19 spread.

*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

4550 IDS Center · Eighty South Eighth Street · Minneapolis MN 55402 · Telephone: 612-312-1400 · Facsimile: 612-204-3464