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Weekly Market Update for March 6, 2020

by JM Hanley

After the biggest decline in more than a decade in the prior week, the market swung back and forth and ended relatively unchanged this week. Investors weighed fears about a worldwide spread of the coronavirus against an otherwise favorable backdrop. Wall Street is watching day-to-day developments like the rest of the public. In the US, test kits to quickly diagnose new cases appear to have been in short supply, which has raised fears that the highly contagious disease could have spread. The effect on the US economy thus far is noticeable, if muted. Hotel bookings and box office receipts, among other items, seem to have ticked downward slightly. Air traffic is off more sharply.

Updates from China, which has been hardest hit by the outbreak, present a mixed picture – and a possible harbinger of developments in the rest of the world. The number of new cases of the virus has dropped dramatically over the last week and a half. While official economic data won’t come until March 16, “high-frequency” indicators of economic activity provide some reasons for hope. Consumption of coal, used to generate electricity, is far below last year’s pace, but has begun to increase at an accelerating rate. Traffic congestion has also increased, albeit mostly on weekdays. Discretionary travel on weekends still seems sharply curtailed.

The Federal Reserve attempted to do its part for the economy with an interest-rate cut of half a percent. This marked the Fed’s first emergency rate cut since the financial crisis of 2008-2009. Markets expected a cut, but half a percent was higher than most predicted. Fixed-income securities outperformed accordingly. Attention now turns to the Fed’s meeting in two weeks, when the FOMC is expected to cut rates again. With the target interest rate now at just a percent, some think they could simply opt to cut to 0%. Much will depend on how far the virus spreads in the US.

If they cut rates to zero, Fed’s tools for further monetary stimulus would be limited. Fed members seem unenthusiastic about negative interest rates. They may resort to purchasing US Treasury bills, as they did as the economy recovered from the last recession. This would inject cash into the economy, but many think stability rather than cash to be what is needed.

News beyond the coronavirus was mostly positive. Joe Biden’s success on Super Tuesday makes him the front-runner for the Democratic nomination; health insurance stocks rallied in relief. The economy added significantly more jobs than expected last month, although (as ever) wage growth was sluggish. Energy was a rare weak spot. Members of OPEC and Russia failed to agree on cuts to production in the face of lower demand precipitated by the outbreak. The price of oil fell 9% as a result. Bank stocks were also weak as the prospect for earning meaningful returns on cash deposits evaporated with the fall in interest rates.

Expect next week to be dominated by coronavirus headlines. An interesting and overlooked fact is that this year 18,000 people in the US have died of the flu and only 15 from the coronavirus. The best estimates put the mortality rate near one percent. That is somewhat higher than the flu but a fraction of (admittedly less contagious) recent outbreaks like SARS and MERS.

*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.

Weekly Market Update for February 28, 2020

by JM Hanley

The Dow was down on Friday, falling 357 points to close at 25,409. For the week, the Dow was down 12.4% (SP500 -11.5%) and year-to-date is now down 11.0% (SP500 -8.6%). The yield on the 10-year Treasury (an important interest-rate indicator) fell thirty-one basis points, closing at 1.16%. Our fixed income strategy held up well – down between one and two percent – as equity markets were pressured. The price of crude oil was down 15% this week to $46 a barrel – down 25% YTD.

Fears about coronavirus precipitated a very bad week for the market. While the orderly selloff was dramatic, it should be acknowledged that investors had gotten perhaps unduly optimistic. Markets rose 16% between the first of October and last Friday.  Uncertainty surrounding the spread of the virus has contributed to market volatility.  The most tangible economic concerns relate to the disruption of supply chains with links in China, lower demand for US exports, and an overall slowdown in US and world economic activity. Data tracking Chinese industrial activity has begun to tick up, albeit sluggishly.  Goldman Sachs reduced its estimates of earnings growth across the market this year by 5%.

Offsetting this, the Federal Reserve and other central banks are widely expected to cut interest rates to support the economy.  China also has planned a robust agenda of fiscal stimulus.

Amidst this backdrop, the best-performing companies are likely to be those in the service sector, growing faster than the overall economy, and with minimal foreign exposure. A decrease in travel and international trade notwithstanding, low unemployment and consumer debt, and high consumer confidence, make the US the healthiest of the world’s major economies.  Our overweight allocation to larger technology firms reflects these conditions.

A few more portfolio companies reported earnings this week.  Sales were weaker than expected at Lowe’s, but the chain’s growth is still impressive for a brick-and-mortar retailer. Under the leadership of CEO Marvin Ellison, the firm will undertake a number of new initiatives to catch up with Home Depot. Axon Enterprises, best known as the maker of Taser, had an impressive quarter, although the firm’s outlook for profitability this year was lower than expected.  But its new products, like a new Taser and a new cellular body camera, have been received well by customers. Investors seem willing to forego short-term earnings in the hopes that future profits will be even higher.

Besides coronavirus, moves in next week’s market may reflect the results of Super Tuesday.

*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.

 

Weekly Market Update for February 21, 2020

by JM Hanley

The Dow was down on Friday, falling 223 points to close at 28,992. For the week, the Dow was down 1.4% (SP500 -1.3%) and year-to-date is now up 1.6% (SP500 +3.3%). The yield on the 10-year Treasury (an important interest-rate indicator) fell twelve basis points, closing at 1.47%. The price of crude oil was up 3% this week to $54 a barrel – down 12% YTD.

The coronavirus has effectively replaced trade as a source of investor concern, and by extension day-to-day volatility. Apple’s warning that the outbreak would substantially impair first -quarter profits – China is where most iPhones are made, and the second-largest country for sales – weighed upon the market early in the week. Commentary from Hong-Kong based HSBC was similarly discouraging. Stocks rallied mid-week as the details of Beijing’s stimulus plan to combat the economic fallout proved more favorable than expected. But equities fell again later in the week as the “case count” of those infected in China climbed dramatically. The numbers of those with the virus outside of China rose as well. Some high frequency data indicate factory activity in major Chinese cities began to reaccelerate mid-week – a possible sign the worst has passed. But disruption to firms’ Chinese supply chains could cast a long shadow.

Economic data was disappointing in the US and good in Europe. A mid-month “temperature check” on economic activity in the US showed manufacturing dipping to levels last seen in August, while the reading for the service sector was the lowest in years. Coronavirus and other temporary factors are mostly to blame, but longer-term concerns about slowing growth and the presidential election are also present. Europe was a different story. An acceleration of German manufacturing output powered the eurozone upwards. Long shipment times mean the data mostly reflects orders before the coronavirus outbreak.  Domestic demand was apparently healthy. But European industry remains export-oriented, and China is their most important market.  Europe could deteriorate again in mid-March.

A number of energy firms reported fourth-quarter earnings this week. Results at Devon Energy were as expected, while the firm’s outlook for this coming year was good. New wells in Wyoming have proven very profitable, which has enabled the firm to increase its dividend.  Results at Parsley were about as expected. Solaris, which provides infrastructure to shale drillers, reported excellent results and a strong earnings forecast for this coming year. The company has been using cash to buy back shares and increase the dividend.

About 81% of SP500 companies have now reported quarterly results. 72% of firms have had better earnings than expected. Earnings have grown about six percent in aggregate since last year; they had been expected to grow just one percent. Lowe’s and Playa Resorts will report earnings next week.

*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.

Weekly Market Update for February 14, 2020

by JM Hanley

The Dow was down on Friday, falling 25 points to close at 29,398. For the week, the Dow was up 1.0% (SP500 +1.6%) and year-to-date is now up 3.0% (SP500 +4.6%). The yield on the 10-year Treasury (an important interest-rate indicator) rose one basis points, closing at 1.59%. Fixed income was strong. The price of crude oil was up 4% this week to $52 a barrel – down 15% YTD.

Weekly economic data presented a mixed picture. Inflation increased slightly faster than expected, driven by the cost of housing and healthcare. However, US retail sales declined last month when some volatile categories are excluded. A confident US consumer has at times been the sole engine of global growth in recent years. Fortunately, a widely-watched indicator of consumer confidence increased. Elsewhere, industrial production declined last month.

A number of payment firms reported earnings this week. Credit card and bank software provider Fidelity Information Services (FIS) reported slightly better than expected results. The firm’s integration of ecommerce payment processor WorldPay is going better than expected, and the firm’s management foresees abundant opportunity to sell WorldPay’s software to its existing clients. FIS will spend slightly more next year to take advantage of these opportunities.

FIS’s next-door neighbor Black Knight, which sells software to service mortgages, continues to prosper in this era of ultra-low mortgage rates. Interest in the firm’s new software for selling mortgages is apparently robust. Black Knight’s profit outlook for next year was about as expected. Euronet Worldwide, which runs ATMs and remittance terminals, was the unusual disappointment in the payments sector. Winter is the weakest season for the firm’s ATMs, which are targeted at tourists in Europe. Meanwhile, more stringent ID requirements in the US have put a temporary damper on the sending of remittances.

Elsewhere, CVS’s earnings were about as expected, as was its outlook for this year. New business is picking up at the firm’s drug plan management (PBM) business. The company has also remodeled some stores with a focus on health and beauty products, which earn higher profits than the merchandise they have replaced. Results at Chinese ecommerce giant Alibaba were better than expected for the period just before the coronavirus outbreak. Comments from the CFO indicate the outbreak’s impact upon the firm will likely be substantial. But since the outlook for future growth is otherwise healthy, Wall Street seemed inclined to give Alibaba a pass.

Air Lease, which rents aircraft to small airlines, is hoping for similar investor lenience. Asia comprises 40% of the firm’s business, and there travel has dropped precipitously. The firm has had to offer lease repayment deferrals and other accommodations to keep its customers solvent.

About 70% of SP500 companies have now reported quarterly results. About 74% of companies have had better earnings than expected. Earnings have grown about 2% in aggregate since last year; excluding the energy sector, they have grown 5%. Devon Energy, Parsley Energy, and Granite Construction, among others, will report earnings next week.

Our offices will be closed this coming Monday in observance of Presidents’ Day.

*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.

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Ulland Investment Advisors

4550 IDS Center · Eighty South Eighth Street · Minneapolis MN 55402 · Telephone: 612-312-1400 · Facsimile: 612-204-3464