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|10-Yr Treasury yield was 0.65% at the end of May and 0.66% at the end of June|
A healthy dose of caution returned to the stock market in June. As you know, Wall Street has done a good job during the coronavirus crisis of staying laser-focused on good news while shrugging off bad news. For much of last month, that pattern continued. When the labor department reported that the unemployment rate decreased slightly in May rather than increased as most analysts predicted, the Dow shot up 800 points.* Never mind that the real unemployment rate for the country still stands at close to 19%. Then the Dow shot up again when the commerce department reported that retail sales rose by a record 18% in May.** Never mind that sales had shrunk by a record 16.5% in April, or that second quarter GDP shrinkage is now expected to exceed 50%.*** In both cases, Wall Street focused only on the good news and ignored the bad.
The pattern changed mid-month following a Federal Reserve meeting in which Fed Chairman Jerome Powell said some things that were already obvious to most economists, namely that economic recovery from the coronavirus crisis is likely to be slow, and that unemployment may still stand at between 8 and 10% by the end of the year. With that, the Dow dropped 1,800 points, its biggest drop since March.**** Ultimately, I believe this was a good thing because brought caution and skepticism back to the market. There was little of that in April or May, and the lack of it may have put some investors at risk of falling prey to the psychological trap of “FOMO” (fear of missing out) and buying back in at a dangerous time.
I believe we will see more dramatic up-and-down weeks like we saw in mid-June. As a result, the market should continue to trade in a fairly narrow range. Where it goes once it breaks out of that range will depend on how the pandemic plays out in the coming months. If a lot of things go right (the outbreaks subside, we get a vaccine, etc.) it could go up. If just one thing goes wrong, however, it could go down again significantly. As I
pointed out last month, the next downturn may not be as precipitous as the first one in March, but I believe it will return the market to bear territory and possibly test its low point from March. With that in mind, income-based investors should continue to keep things in the right perspective, stay focused on asset protection, and be aware of the potential dangers of “FOMO” whenever Wall Street is irrationally celebrating a bit of good news while ignoring economic fundamentals.
When managing your portfolio at SIS, we look for one of four possible “enhancement” trades while reviewing securities and possible transactions. Income generation is our primary goal for our clients, and we consider the following four portfolio enhancements before transacting: current yield, yield to worst (minimum projected annualized total return), interest rate risk, and default risk. The intents of these transactions are categorized as follows:
- Pay Me Now – Enhancing current yield
- Pay Me Later – Enhancing yield to worst
- Cover My Assets I. – Managing interest rate risk
- Cover My Assets II. – Managing default risk
We evaluate the transactions by determining whether they meet one, two, three, or all four enhancements. A baseball analogy for this: SINGLES, DOUBLES, TRIPLES, and HOME RUNS.
Credit upgrade Trade:
Selling Diversified Healthcare Preferred Securities- DHC 6.25% 2/1/46 @ 8.1% (Ba2/BB/BB)
Buying US Bancorp Preferred Securities- USB 5.5% perp @ 5.2% (A3/BBB/BBB+)
We are currently in the process of other SWAP trades, but will not complete until later this week and will print them on the August newsletter.
*“May Sees Biggest Jobs Increase Ever of 2.5 Million,” CNBC, June 5, 2020
**“US Retail Sales Rose Record 18% in May,” Wall Street Journal, June 16, 2020
***“GDP is Now Projected to Fall Nearly 53% in the Second Quarter,” CNBC, June 3, 2020
****“US Stocks End Sharply Lower as Coronavirus Worries Return,” Wall Street Journal, June 11, 2020
Note: The above trades were recent block trades and do not reflect all trades done on an individual specific basis. Sound Income Strategies, LLC is a registered investment advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Past performance is not an indication of future results. Be sure to first consult with a qualified financial advisor or tax professional about your specific financial situation before implementing any strategy discussed herein.
You are advised to give independent consideration to, and conduct independent investigation with regards to the information above in accordance with your individual investment objectives. Use of the Information is at the reader’s risk, is strictly intended for informational purposes in conjunction with the recipient’s due diligence, and should not be construed as a solicitation by Sound Income Strategies, LLC. Past performance will never indicate or guarantee future behavior. Sound Income Strategies, LLC does not represent or warrant that the contents of the document are suitable for you from compliance, regulatory, legal, or any other perspective. We shall have no responsibility or liability for your use or non-use of the document or any portion thereof.
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