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Weekly Market Update for July 10, 2020

by Jim Ulland

Next week the big news will be second quarter earnings as they start to be release. Large banks will be among the first. Bank stocks have been one of the worst performing sectors this year. What the bank CEOs say about the rest of the year will move the market.  We expect bank earnings to be somewhat better than the low expectations that are in the news. Banks will show good fee growth from the Payroll Protection Plan loans/grants and from helping companies issue more debt. The most uncertain figures will be the amount of loan loss reserves the banks will book. This figure is like prepayment for loans that may go bad. If banks say that they do not expect loan loss reserves to increase significantly in the coming quarters, the market will react positively.

Battling for front page headlines will be Covid-19. The spike in cases may become old news quickly when the case curve turns down. Those infected last week were the young drinking and party set. Think college students and those in their twenties who are bored working at home. These cases are generally mild, although those infected can infect others with more serious results. Most do not think either government or the public is willing to “lock down” again. So managing the virus will be the emerging theme.

The government is trying to expedite the development of both a treatment and a vaccine. Novavax was given $1.6 billion to speed the processing and approval of its vaccine. The company hopes to have 100 million doses ready by late 2020…assuming a successful Phase III trial. Four other companies are at the same stage of development as Novavax. A successful vaccine will give the public confidence to return to a more normal life. Reopening of the economy will accelerate and the stock market will move higher. A lot of investment dollars have flown into the post Covid digital economy stocks. Health care also has seen big inflows of funds.

The SP 500 was up 1.76% for the week. Monday was up + 1.59%, Tuesday -1.08%, Wednesday +0.78%, Thursday -0.56%, +1.05% Friday. The NASDAQ continued its record breaking performance, up 4.01%. Preferred stocks, which are the dominant security in our fixed income strategy, were strong as a more positive tone settled over the banks. The 10 Year Treasury yield stayed in a relatively tight band from 0.60% to 0.67%, consistent with the Fed’s goal of keeping rates low. Preferreds with their 5.5% yield pay eight and a half time more than 10yr Treasuries.

Volatility for the week was relatively flat. But Q2 earning for the next three weeks will introduce plenty of volatility. The election is becoming a bigger part of the news and will increasingly affect the direction of the stock market. Calls to reverse the recently passed corporate and individual tax cuts will be a cloud over the market.

Next week, besides the start of Q2 earnings releases, there will be a modest amount of other economic news. The Small business Optimism Survey, CPI, Retail Sales, Housing Starts, and the U. of Michigan Consumer Sentiment Survey. Any of these could move the market.

*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.