Market Commentary Archives

by JM Hanley

Markets spent another week fretting about reopening, inflation, and the effect of both on interest rates. Some (otherwise poor) manufacturing data early in the week emphasized higher commodity costs, a shortage of computer chips, and other covid-induced supply chain disruption. On Tuesday, Treasury Secretary Yellen (herself a former Fed chair) indicated that interest rates might need to rise to prevent the economy from overheating. These factors together exacerbated the market’s inflation and interest rate fears. The Fed reiterated that an increase in rates was a long way off, but the damage was done.

Markets were thus primed for a blockbuster new jobs number that would presage the Fed’s tapering its asset purchases and raising interest rates. But employers added only one quarter as many jobs as expected and previous months were revised down. The unemployment rate actually increased. However, average hourly pay and average hours worked went up, which is hardly consistent with a bad jobs market.

This seems to indicate that employers have plenty of jobs, and are having trouble filling them. Roughly half of workers are making more on unemployment than they would at work. Many are concerned about the health risks of returning to the workplace, and plenty more are supervising children learning remotely. But with vaccination ramping up, enhanced unemployment benefits scheduled to end this September, and students learning in-person next year, these problems should abate. Questions about a labor shortage and inflation will then resurface. In the meantime, with those out of the workforce collecting generous unemployment, the impact on consumer spending will be modest.

The SP 500 finished the week up 1.2%, while the Nasdaq was down 1.5%. Value stocks outperformed growth by a substantial margin. 10 Yr Treasury yields fell almost a tenth of a point, and our fixed income strategies benefitted accordingly.

Quarterly earnings continue to come in better than expected. In healthcare, analysts expected a surge in elective procedures as potential patients got vaccinated and emergency covid wards emptied out. But numbers have so far been lower than expected. That helped CVS’s insurance business (formerly Aetna), as it has other insurers. A booming housing market and a successful acquisition boosted Black Knight, the mortgage software company. The pandemic-driven shift to ecommerce continues to be a tailwind for FIS, a banking and credit card software firm.

Robust trends continued at public safety technology provider Axon this quarter. Revenues grew by a third from last year – with earnings rising more than 50% – driven by growing demand for TASER devices and software-heavy body camera bundles. Expansion into new markets, both geographically as well as adjacent customer sectors such as the Federal government and private security, also lifted results. Strength in their platform should continue as they roll out new technologies at a fast clip, while adding strategic partners including a Carleton-alum founded startup, RapidSOS. The company raised their full-year outlook and they could be a beneficiary of a government infrastructure bill, if passed.

Thus far, about three-fourths of the SP 500 has reported. A remarkable 88% have reported better-than-expected profits, by an average of 23%. Electronic Arts (better known as EA) is the only portfolio company scheduled to report earnings next week.

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Lipper Q3 2020 U.S Fixed Income Rankings

Much has been written about the benefits of investing in passive exchange-traded funds (ETFs), namely market returns with a low management fee. However, investors need to consider the unique risks that arise when an ETF begins to dominate a niche space such as the preferred market.

In this article we will evaluate the largest ETF in the U.S. preferred stock market, the iShares U.S. Preferred Stock ETF (Ticker: PFF), which currently holds nearly $17 billion in assets. As an active preferred stock manager, Ulland Investment Advisors manages just over $225 million in the preferred space. We can offer a unique insight into the hidden risks associated with the PFF ETF, specifically focusing on market size risk, liquidity (or lack thereof) and interest rate risk (duration).