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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.