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Weekly Market Update for June 26, 2020

by Jim Ulland

The results of the Federal Reserve’s “stress test” for banks were released Thursday after the market closed. The banks passed the test! The highlights included a cap on common stock dividends at no more than what is currently paid. These payments in the future will be capped as a percent of profits. No bank dividends are likely to be reduced with the exception of Wells Fargo’s. Share repurchases by banks are also prohibited; however, this was already in place by agreement among the banks. Fed Vice Chair for Supervision Quarles noted the “banking system has served as a source of strength, not strain, in the current crisis.”

Other than the news from the banks, Covid-19 had the most influence on this week’s market. By mid-week the virus was spiking in some of the states that had reopened. Although a higher transmission rate was expected than during the lockdowns, the amount of new spreading surprised most, including the market. The biggest market impact was on Wednesday, when the SP fell 2.6%. Investors had hoped reopenings would continue the brisk pace of the prior week, allowing many in the service industry to return to work. Now the pace of reopening is in doubt. The week also did not have any significant news from the vaccine or treatment trials, which always has the ability to move markets higher.

The week produced mixed economic data. Unemployment claims dropped less than expected. Yet worked still on unemployment dropped by about 767,000. Unfortunately, 19.5 million still remain on unemployment. Inflation stayed low at 1%, but existing home sales declined sharply even with low mortgage interest rates. Durable goods and capital goods orders rose more than expected but consumer sentiment declined, suggesting that consumer spending may slow.

The SP 500 was down 2.9% for the week and stocks seemed more fully valued as rapid reopening prospects dimmed. The NASDAQ had better performance, as has been the pattern, down 1.9%. Preferred stocks, which are the dominant security in our fixed income strategy, were soft as the weaker economic news forced some investors back to cash. The 10 Yr Treasury yield declined from 0.69% to 0.64%, making it even less attractive except as a safe haven.

Volatility for the week played less of a role than previously.

Next week will be a big week for economic news. The jobs report for June will be released Thursday morning at 8:30 CDT, a day early since Friday is a holiday. The amount of new jobs definitely will move the market. The ADP Employment Report will come out the day before, often a signal for what the change will be in the Thursday announcement. Weekly unemployment filings and Continuing Claims (those still on unemployment) will be important. Market sentiment will improve if unemployment filings come in closer to one million, down from 1.5 million this week. It would also be positive if those on unemployment dropped by a million to 18.5 million. On 6/30 the Conference Board will publish the Consumer Sentiment Index, an index of expected consumer purchasing behavior. 70% of US economic growth is generated by consumer spending, so this number will be important. Second quarter earnings reports start in two weeks.

*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.