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Weekly Market Update – November 11, 2016

The presidential election has dominated the news and the market. Performance of equities diverged sharply from fixed income. Within equities, pharmaceuticals, financials, small caps, and infrastructure-related did well. Cash to buy these sectors came out of technology, gold, alternative energy, utilities among others. For the week the DOW was up 4.5%. Year-to-date it is up 7.84%. The broader S&P 500 for the week was up 3.6% to 2164. Year-to-date it is up 5.9%. The Nasdaq was up 3.6% to 5235 on the week; year-to-date it is up 4.59%.

What we are seeing in the market is a stronger concern that interest rates will rise. Trump’s infrastructure and tax proposals are viewed as potentially inflationary. The infrastructure proposal is similar to what Obama proposed, so it is more likely to be bipartisan. Trump also criticized the Fed for not raising rates. So, as a result of these factors, market interest rates have moved higher quickly, which depresses fixed income security prices. What does not change is the income generated by fixed income securities. If the value increases, the income stays the same. If the value goes down, the income stays the same. A second conservative factor is that some portfolio securities have dividends that start floating with interest rates after a certain period of time. These fixed-to-float securities are structured to defend against the impact of rising rates.

The Fed meets in December and is expected to raise rates one quarter of a percent. Most of that is now in the market. There might be one more raise or nothing in 2017. Once December passes, I expect the portfolio values to be less volatile than we are experiencing. If you keep your eye on the income from the portfolio, you will see a high level of stability. We expect a good dividend flow between now and the end of the year as well as some recovery in fixed income prices.

The decision to have Vice President-elect Pence head the transition team also should calm the markets. The more adults in the room, the better. The expectations are so low for Trump from the media that there is plenty of room to exceed them. A calming impact should take some of the heat out of interest rates.

Crude was down 2.1% to $43.97 Friday afternoon, off from a $44.07 close a week ago. Markets remained dubious about OPEC’s commitment to a production freeze in light of a record production surge and continued disagreement within the block. Corporate earnings for the week contained positive news for Priceline, Gap, and UPS. However, AMC Entertainment and CVS disappointed. This week marked the conclusion of the majority of Q3 earnings reports.

Highlights on next week’s economic calendar include retail sales (Nov. 15), the consumer price index (Nov. 17), and housing starts (Nov. 17). Continued market volatility stemming from the outcome of the election can also be expected.

Have a good weekend.

Jim Ulland


Ulland Investment Advisors

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