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Weekly Market Update for April 3, 2020

by Jim Ulland

What will be the sign that the market has ended its sharp decline and started a recovery?  The market’s drop is virtually 100% attributed to Covid 19.  So what should we watch as a signal for the recovery?

The first sign will be a decline in the death rate.  This should happen in the later part of April in New York, the US epicenter.  A slightly earlier signal may come from the relationship between those admitted to hospitals and those released as recovered. Having more released than admitted will reduce the  reported deaths and free up hospital beds.  The rapid decline of the flu also is making beds available.  As a side note, through April 1st, there have been 18 deaths in Minnesota, eleven of which were in assisted care facilities and similar residences for seniors.

The second sign to watch is successful trials of vaccines and treatments.  The malaria and antirheumatics drug, hydroxychloroquine, has had small but relatively positive trials for Covid 19.  The advantage of this drug is that it has been used for 70 years for malaria prevention, so side effects and dosages are known.  Production could be ramped quickly.  We hope larger trials are positive. New drugs trials take longer to determine harmful side effects.  Ramping production also is more challenging.

Securities trading has improved a little this week.  The market publishes a volatility index.  It was lower at the end of the week than the beginning. Why is this important?  During high volatility, buyers often stop buying.  At the same time, sellers increase sales.  For instance, if an investors sells shares in a mutual fund or an ETF, the fund must sell the under lying securities almost immediately.  With few buyers and a lot of sellers, prices can fall a lot and in ways that don’t reflect the value of the security being sold. Imbalances between buyers (few) and sellers (many) are called periods of low liquidity.  Low liquidity is one of the causes of high volatility.  High volatility results in investors reacting to fear rather than value.  A continued decline in volatility, like this week, will help the market recover.

Here is the pattern for the S&P 500 this week: Monday +3.3%, Tuesday -1.6%, Wednesday -4.4%, Thursday +2.3%, and Friday -1.5%. The weakest sectors this week were financials, real estate, utilities, and retail. The concern in real estate and utilities was the new fear that consumers might not be able to pay their rent or utility bills.  Hopefully, the massive government rescue package will provide some replacement income. In Minnesota the Governor estimated that 78% of the state’s jobs can be performed at home or are in essential industries.  If a worker is in an essential industry and can work at home, they must. With 78% of workers still working, the economy in MN should recover more quickly than if a larger number were out of work.  Naturally, the balance between working and isolating is key.

Our team has made an orderly transition to working remotely although we have lost a little efficiency.   Calls to the office are automatically routed to our remote phones.  Emails are available as normal.

In portfolios, our strategy of reducing equity exposure and leaving the cash generated in cash or moving it to fixed income continues. We are waiting for the signals in paragraph one to reinvest.  Fixed income in preferred stock held on to most of last week’s gains. However, European banks did eliminated their common stock dividend, which caused a down day in US preferreds.  We own no European banks and we expect all US bank and utility company preferred dividends to be paid. Preferred dividends are paid prior to common stock dividends. Yet, it was a market concern. The returns on 10 Year Treasuries fell to 0.61% whereas the 6-7% yield on preferreds is ten times higher and increasingly compelling. Time is our friend.  Contact us as you have questions.

*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.

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Ulland Investment Advisors

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