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Weekly Market Update for October 16, 2020

by Jim Ulland

This week there were four major recurring themes that influenced the market: the election, the stimulus, Covid-19, and the economy. Taking them in order, it was hard to avoid the election. Few voters are undecided. One pollster said the undecided voters were trying to resolve their dislike for Trump’s personality and their fear of Biden’s policy proposals. We will know how they decide soon. Historically, the market has performed better with divided government. Thus, there will be as much focus on the outcome in the U.S. Senate as in the Presidency.

There is a general rule that it is almost impossible to pass anything controversial just before an election. The latest stimulus package is controversial. The issues include cost, targeting, programs that are in, programs that are not in, and who gets credit. Agreement seems unlikely before the election.

Covid-19 demonstrated that it is not to be underestimated. All regions of the country showed increases in hospitalizations except the Southeast. Google the “University of MN Carlson School Covid tracking.” The Carlson School does daily tracking by state for Covid hospitalizations. CA and TX were exceptions to the spike during the last two weeks. Europe too is showing increases and considering more lockdowns. The march to a vaccine continues and perhaps only a successful vaccine will enable the country to reopen and start a path back to normal.

The economy continued its rebound despite all the political and pandemic headwinds. Retail sales were surprisingly strong in September. Manufacturing continued its robust recovery and new orders rose. Unemployment filings were higher than the prior week but those on unemployment already declined more than expected. Banks did not add to their loan loss reserves, a signal that they feel future losses are contained. Bank earnings exceeded expectations. The biggest economic news will come October 29 when Q3 GDP is announced. Historically, an annualized 3% growth in GDP is considered good. Q3 2020 is expected to be almost a 30% annualized growth rate, ten times the historic average.

Banks said that deposits were up substantially. This surplus of cash in banks results in low interest rates. Consumers earn almost nothing on CDs and borrowers pay little for funds. Low interest rates make our fixed income strategy, IFI, even more attractive when compared to other options in fixed income. We are seeing a strong flow of new business and additional funds from current clients. Our target net yield on our Intelligent Fixed Income strategy is 5%, although we have already exceeded that this year.

With the uncertainty provided by the election, the stimulus package, and Covid imperfectly balanced by relatively good economic news, it was not surprising to have a flat market. The Nasdaq was up +0.79%. The SP 500 was up +0.19%. Monday the SP 500 was +1.64%, Tuesday -0.63%, Wednesday -0.66%, Thursday -0.15%, Friday +0.01%. Our equity strategies continued strong YTD performance.

Besides bank earnings this week, United Health Group announced another great quarter from its strong team. Next week there will be more bank earnings and the airlines will announce their dramatic losses. A flood of other announcements will come including market movers Netflix and Chipotle.

*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/prospective clients are strongly urged to consult with their tax advisors regarding any potential investment. Performance quoted is past performance. Past performance is not indicative of future performance. There is always a possibility of loss. Current performance may be lower or higher than performance shown. Differences in performance versus the indices/funds may be attributable, in part, to differences in the asset make-up of the strategies vs. the indices/funds. Performance calculations are based on the reinvestment of dividends and gains unless these amounts were paid out to the client. Performance is subject to revision.