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Archive for October, 2020

Weekly Market Update for October 30, 2020

by Jim Ulland

Do not blame the economy for this week’s sharp decline in the stock market. The annualized rate of GDP growth, announced this week for Q3, was 33.1%, about ten times the average rate. The economy now has recovered about 75% of the drop in the first half of the year. Unemployment filings were positive as well and lower than forecasts. Unemployment filings had been flat for several weeks and have now broken lower. Those already on unemployment fell by 700,000. Reopening the economy has been the key to job restoration.

The major cause of the market’s weakness was the fear of Lockdown 2.0. Many countries in Europe have closed or reduced the hours of their bars, restaurants, sporting and entertainment events, and gatherings in general. The lodging and travel industry is in shambles. Many businesses did not survive the first lockdown. With savings exhausted, a large number are not expected to survive the second. This week, US investors focused on Europe and feared their experience would become ours.

Maybe not. Hidden away in the Covid hospitalization numbers are some interesting trends. For instance, only the Midwest states exceeded the average peak hospitalizations of late spring and summer. The Western states touched the summer averages. But the NE, SE, and SW were below the summer peaks and some states were way below. Also, the ICU patients per 100,000 population were flat. This implies that treatments are more effective and perhaps the people getting the virus are younger and recover without a serious hospital stay. Additional positive notes in this news include a very mild to non-existent flu season in Australia. Hand washing, mask wearing, and social distancing seem to have controlled the flu during winter there. Hopefully, our experience will be similar.

A second lockdown in the US would blunt the rapid recovery in corporate earnings. The fear was so intense on Friday that even the great earnings and revenue growth released by Apple, Google, Facebook, and Amazon could not keep the market positive. The US was not alone in that all major global stock markets ended the week down.

Our fixed income strategy, IFI, was down, but modestly. The normal relationship between our fixed income performance and stocks is for every 5% decline in stocks, our fixed income strategy goes down 1% and so it was this week, at least approximately. The month of October is over, and we expect to retain our spot as the top performing fixed income preferred stock strategy among ETFs and mutual funds with similar strategies. See disclaimers below in how we define the peer group.

How bad was the market? Bad! The Nasdaq was down -5.51%. The SP 500 was down -5.64%. Monday the SP 500 was -1.86%, Tuesday -0.30%, Wednesday -3.53%, Thursday +1.19%, Friday -1.21%.

Next week will be dominated by the election. We have done some offensive repositioning, adding to Alibaba (BABA), the Amazon of China, and adding to Tencent (TCEHY), the Facebook of China. China may be a relative winner in the election. Although we are not fans of the product, cannabis could be an election winner as several states have ballot provisions to allow both medical and/or recreational use. There is a new ETF that focuses on US cannabis producers (MSOS) that we like.

*Publicly Traded Peer Group Requirements: Minimum $150 million in ETF/Fund; Excludes low-duration funds; Excludes closed-end funds; Includes share class with largest AUMs; Excludes real estate preferred funds; Minimum 3-year track record

*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/prospective clients are strongly urged to consult with their tax advisors regarding any potential investment. Performance quoted is past performance. Past performance is not indicative of future performance. There is always a possibility of loss. Current performance may be lower or higher than performance shown. Differences in performance versus the indices/funds may be attributable, in part, to differences in the asset make-up of the strategies vs. the indices/funds. Performance calculations are based on the reinvestment of dividends and gains unless these amounts were paid out to the client. Performance is subject to revision. See www.ullandinvestment.com for important strategy disclosures.

Weekly Market Update for October 23, 2020

by Jim Ulland

The major market themes were realigned this week. Now, few, if any, expect an additional stimulus package before the election. After the election, it will not be all that easy either. One side or the other in this political battle will be mad, making compromise difficult. A second major market concern, the election itself, stayed at the top of the news. The last Presidential debate is over, but, even before the debate, over a third of the electorate already had voted. The undecided voters did get exposed to sharply contrasting views, which should crystalize opinions. The real market impact will be after Election Night since the policies and positions of the two candidates are markedly different. The third major market-moving variable is the economy as reflected in Q3 corporate earnings announcements. Earnings are exceeding forecasts. Tesla, Netflix, AutoNation (the nation’s largest auto retailer), and Chipotle, for example, showed strong revenue and earnings growth. Snap, the company that owns Snapchat (the fastest way to share a moment), reported robust internet advertising sales boosting the stock prices of Facebook and Google which also rely on advertising sales.

Covid-19 was the fourth major variable driving the market. With the spike in cases, fears grew that businesses would be further restricted from reopening. Bankruptcies are now common. Restaurants soon will lose outdoor dining to winter weather and many will fail. The travel industry, including hotels and airlines, is desperate. Yet, even with all the mask wearing, hand washing, and social distancing, Covid continues to threaten the health of both the economy and the citizens. It is becoming increasingly clear that a vaccine is the only answer.

Farther in the background was the economic news. Housing sales hit a fourteen-year high. (Look for big earnings from Lowes and Home Depot). Initial unemployment claims fell by 55,000 and were the lowest since March. Those on unemployment (continuing claims) fell as well. Even with headlines telling of corporate layoffs, the number of people working is growing. Q3 GDP is set to be released next Thursday and it will show high growth. Interest rates did move up this week, maybe anticipating a lot of new deficit spending next year. Interest in our fixed income strategy, IFI, using preferreds, continued to be very strong because of its 5% return target.

With the uncertainty of both the election and the development of an effective vaccine, the market fell slightly. The Nasdaq was down -1.06% for the week. The SP 500 was down -0.53%. Monday the SP 500 was -1.63%, Tuesday +0.47%, Wednesday -0.22%, Thursday +0.52%, Friday +0.34%.

Next week tech earnings will be the biggest news makers. Big pharmaceutical companies start the week along with 3M, Visa, Microsoft, and on Thursday: Apple, Google, Facebook, and Amazon. Alibaba, the Amazon of China, ends the week on Friday with its earnings.

*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/prospective clients are strongly urged to consult with their tax advisors regarding any potential investment. Performance quoted is past performance. Past performance is not indicative of future performance. There is always a possibility of loss. Current performance may be lower or higher than performance shown. Differences in performance versus the indices/funds may be attributable, in part, to differences in the asset make-up of the strategies vs. the indices/funds. Performance calculations are based on the reinvestment of dividends and gains unless these amounts were paid out to the client. Performance is subject to revision.

Weekly Market Update for October 16, 2020

by Jim Ulland

This week there were four major recurring themes that influenced the market: the election, the stimulus, Covid-19, and the economy. Taking them in order, it was hard to avoid the election. Few voters are undecided. One pollster said the undecided voters were trying to resolve their dislike for Trump’s personality and their fear of Biden’s policy proposals. We will know how they decide soon. Historically, the market has performed better with divided government. Thus, there will be as much focus on the outcome in the U.S. Senate as in the Presidency.

There is a general rule that it is almost impossible to pass anything controversial just before an election. The latest stimulus package is controversial. The issues include cost, targeting, programs that are in, programs that are not in, and who gets credit. Agreement seems unlikely before the election.

Covid-19 demonstrated that it is not to be underestimated. All regions of the country showed increases in hospitalizations except the Southeast. Google the “University of MN Carlson School Covid tracking.” The Carlson School does daily tracking by state for Covid hospitalizations. CA and TX were exceptions to the spike during the last two weeks. Europe too is showing increases and considering more lockdowns. The march to a vaccine continues and perhaps only a successful vaccine will enable the country to reopen and start a path back to normal.

The economy continued its rebound despite all the political and pandemic headwinds. Retail sales were surprisingly strong in September. Manufacturing continued its robust recovery and new orders rose. Unemployment filings were higher than the prior week but those on unemployment already declined more than expected. Banks did not add to their loan loss reserves, a signal that they feel future losses are contained. Bank earnings exceeded expectations. The biggest economic news will come October 29 when Q3 GDP is announced. Historically, an annualized 3% growth in GDP is considered good. Q3 2020 is expected to be almost a 30% annualized growth rate, ten times the historic average.

Banks said that deposits were up substantially. This surplus of cash in banks results in low interest rates. Consumers earn almost nothing on CDs and borrowers pay little for funds. Low interest rates make our fixed income strategy, IFI, even more attractive when compared to other options in fixed income. We are seeing a strong flow of new business and additional funds from current clients. Our target net yield on our Intelligent Fixed Income strategy is 5%, although we have already exceeded that this year.

With the uncertainty provided by the election, the stimulus package, and Covid imperfectly balanced by relatively good economic news, it was not surprising to have a flat market. The Nasdaq was up +0.79%. The SP 500 was up +0.19%. Monday the SP 500 was +1.64%, Tuesday -0.63%, Wednesday -0.66%, Thursday -0.15%, Friday +0.01%. Our equity strategies continued strong YTD performance.

Besides bank earnings this week, United Health Group announced another great quarter from its strong team. Next week there will be more bank earnings and the airlines will announce their dramatic losses. A flood of other announcements will come including market movers Netflix and Chipotle.

*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/prospective clients are strongly urged to consult with their tax advisors regarding any potential investment. Performance quoted is past performance. Past performance is not indicative of future performance. There is always a possibility of loss. Current performance may be lower or higher than performance shown. Differences in performance versus the indices/funds may be attributable, in part, to differences in the asset make-up of the strategies vs. the indices/funds. Performance calculations are based on the reinvestment of dividends and gains unless these amounts were paid out to the client. Performance is subject to revision.

Weekly Market Update for October 9, 2020

by Jim Ulland

The week was dominated by the President’s apparent recovery from Covid-19 and the cat-with-nine-lives economic stimulus negotiations. The market was buoyed by the effectiveness of the treatment the President received. The treatment components are expected to be approved for “compassionate use” or “emergency use”, if needed, this month with production ramping quickly. Also expected soon will be the market-moving news on vaccines.

The drug treatment the President received had several components. The Regeneron treatment was antiviral and supported by only a small trial which had very good results. The Gilead antiviral, Remdesivir, has been in use for many weeks and reduces the length of hospital stays. In addition to these compounds was an anti-inflammatory steroid Dexamethasone, important to keep lungs functioning. A little zinc and vitamin D were added, although neither had been tested extensively for effectiveness against Covid. The market has been waiting for just such an effective “drug cocktail” so people will be less fearful about returning to more normal patterns of interaction, like getting on a plane. Reducing the fear response to Covid is necessary to get the economy back to normal.

The Fed waded into the very political stimulus discussion and said more stimulus is needed. Stimulus proposals on the amount of dollars, targeting only those in need, and the states to benefit are as much about politics as the economy. On Friday, the President raised the amount he was willing to put into a stimulus package to at least $1.8 trillion whereas Speaker Pelosi is asking $2.2T.

What does not make as much news, but is fundamental to the market, is the Federal Reserve’s position on interest rates. “Lower for longer” is the policy but it could be re-phrased as “low for a lot longer.” The Fed wants to keep rates low until 2023. After 2023, rates would depend on employment returning to pre-Covid levels and inflation reaching 2%. The September jobs report showed unemployment at 7.4% down from 14.7% in April, but still much higher than normal. Inflation for the last twelve months was a muted 1.3%. Low interest rates that stay relatively flat create an excellent environment for our fixed income strategy using preferred stock. Our target net yield to clients on our Intelligent Fixed Income strategy is 5%. The strategy is up 7% through 9/30.

With the good news from a Covid treatment, the President’s apparent recovery, hopes for another stimulus package, and continued low interest rates, it should not be a complete surprise that the market went up this week. The Nasdaq was up +4.56%. The S&P 500 was up +3.84%. Monday the S&P 500 was +1.80%, Tuesday -1.40%, Wednesday +1.74%, Thursday +0.80%, Friday +0.88%. Our equity strategies continued to out-perform too.

Corporate Q3 earnings start next week with JNJ, Citi Bank, JP Morgan, Bank of America, United Health, Goldman, Wells Fargo, and US Bank, among others. The major banks’ loan loss reserves will be an economic indicator to watch. Better than expected loan losses will indicate the strength of the economic recovery.

*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/prospective clients are strongly urged to consult with their tax advisors regarding any potential investment. Performance quoted is past performance. Past performance is not indicative of future performance. There is always a possibility of loss. Current performance may be lower or higher than performance shown. Differences in performance versus the indices/funds may be attributable, in part, to differences in the asset make-up of the strategies vs. the indices/funds. Performance calculations are based on the reinvestment of dividends and gains unless these amounts were paid out to the client. Performance is subject to revision.

 

Ulland Investment Advisors

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