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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.