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Weekly Market Update for July 31, 2020

by Jim Ulland

The dominant headlines this week weren’t Covid-19 or the reopening of the economy, but rather, the Four Horsemen of the Digital Economy: Amazon, Facebook, Apple, and Google. The first three reported blow-out revenues and earnings in the midst of the pandemic. Google substantially beat analyst expectations, but revenues were down slightly from 2019. The change to a digital economy has been steady, but now it is at a gallop. We expect the out-performance of the digital economy stocks to continue. When a vaccine is approved, the rest of the market should rebound sharply, but that may not be until Q4. We may have a sideways market until then.

Our fixed income strategy, Intelligent Fixed Income (IFI), is run by Nat Beebe. Although the dust has not settled for July, IFI had great performance going into the last day of the month. We expect it to be #1 vs. the publicly traded preferred stock peer group (please see the disclaimers below). IFI’s current yield is 5+%, almost ten times that of the 10Yr Treasury. Preferreds had another great week, although this niche security doesn’t make headlines. Investors became more comfortable with national and regional banks, who are the main issuers of preferreds. With the exception of Wells Fargo, banks passed the annual Federal Reserve “Stress Test” and produced better than expected Q2 earnings. They will continue to be bolstered by the next phase of government stimulus, once Congress comes to agreement. More strength in preferred stock is expected.

Covid-19 and the reopening of the economy both shared headlines, but mostly negative ones. Dr. Fauci, who heads the National Institute of Allergy and Infectious Disease, threw a little cold water on the worst of Covid-19 fears when he said school districts “should try the best they can to reopen.” The CDC agreed. Both cautioned that there are Covid hot spots where more caution is warranted and, in all cases, guidelines must be followed. According to a U of MN tracking study, Covid spikes in several southern states and California started to decline in late July when measured by the number of hospitalizations and the number of hospital beds occupied.

Economic headlines anticipated a bad Q2 GDP number and it was terrible. Growth in Q2 was -32.9% annualized. Q3 and Q4 should show a strong snap-back. The increase in the infection rate slowed business reopening as reflected in an increase in Continuing Claims for Unemployment Insurance. Reimposing restrictions on bars and restaurants was a common reaction by governors. However, the Fed said it would maintain its stimulus until the economy has weathered the crisis. Of course, weathering the crisis means a vaccine has been approved. News on that front was positive, but nothing major is expected until October.

Tech stocks returned to market leadership this week increasing 3.69%. The SP 500 was up 1.73%. Monday was +0.74%, Tuesday -0.65%, Wednesday +1.24%, Thursday -0.38%, +0.77% Friday. The 10 Year Treasury yield drifted lower as the pace of reopening slowed. Volatility declined as well.

Next week expect earnings reports from CVS, mortgage software company Black Knight, pipeline company NuStar, police body camera company Axon, and credit card processor FIS. The market-moving economic news will come on Friday when the July new jobs figures are released.

*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