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Weekly Market Update for October 30, 2020

by Jim Ulland

Do not blame the economy for this week’s sharp decline in the stock market. The annualized rate of GDP growth, announced this week for Q3, was 33.1%, about ten times the average rate. The economy now has recovered about 75% of the drop in the first half of the year. Unemployment filings were positive as well and lower than forecasts. Unemployment filings had been flat for several weeks and have now broken lower. Those already on unemployment fell by 700,000. Reopening the economy has been the key to job restoration.

The major cause of the market’s weakness was the fear of Lockdown 2.0. Many countries in Europe have closed or reduced the hours of their bars, restaurants, sporting and entertainment events, and gatherings in general. The lodging and travel industry is in shambles. Many businesses did not survive the first lockdown. With savings exhausted, a large number are not expected to survive the second. This week, US investors focused on Europe and feared their experience would become ours.

Maybe not. Hidden away in the Covid hospitalization numbers are some interesting trends. For instance, only the Midwest states exceeded the average peak hospitalizations of late spring and summer. The Western states touched the summer averages. But the NE, SE, and SW were below the summer peaks and some states were way below. Also, the ICU patients per 100,000 population were flat. This implies that treatments are more effective and perhaps the people getting the virus are younger and recover without a serious hospital stay. Additional positive notes in this news include a very mild to non-existent flu season in Australia. Hand washing, mask wearing, and social distancing seem to have controlled the flu during winter there. Hopefully, our experience will be similar.

A second lockdown in the US would blunt the rapid recovery in corporate earnings. The fear was so intense on Friday that even the great earnings and revenue growth released by Apple, Google, Facebook, and Amazon could not keep the market positive. The US was not alone in that all major global stock markets ended the week down.

Our fixed income strategy, IFI, was down, but modestly. The normal relationship between our fixed income performance and stocks is for every 5% decline in stocks, our fixed income strategy goes down 1% and so it was this week, at least approximately. The month of October is over, and we expect to retain our spot as the top performing fixed income preferred stock strategy among ETFs and mutual funds with similar strategies. See disclaimers below in how we define the peer group.

How bad was the market? Bad! The Nasdaq was down -5.51%. The SP 500 was down -5.64%. Monday the SP 500 was -1.86%, Tuesday -0.30%, Wednesday -3.53%, Thursday +1.19%, Friday -1.21%.

Next week will be dominated by the election. We have done some offensive repositioning, adding to Alibaba (BABA), the Amazon of China, and adding to Tencent (TCEHY), the Facebook of China. China may be a relative winner in the election. Although we are not fans of the product, cannabis could be an election winner as several states have ballot provisions to allow both medical and/or recreational use. There is a new ETF that focuses on US cannabis producers (MSOS) that we like.

*Publicly Traded Peer Group Requirements: Minimum $150 million in ETF/Fund; Excludes low-duration funds; Excludes closed-end funds; Includes share class with largest AUMs; Excludes real estate preferred funds; Minimum 3-year track record

*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. See www.ullandinvestment.com for important strategy disclosures.