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Weekly Market Update – January 15, 2016

The Dow fell 391 points Friday, a loss of 2.4%. Through Thursday, the DOW was almost flat.

For the year this index is down 8.2%.  What a discouraging way to start the year.

Most economists think the market will have its pullback and then recover.  The economy continues to grow at 2%.  New jobs are being created at the rate of 200,000 per month.  Interest rates and unemployment are low. And, auto production and housing have been strong.

The reason the market is down is that it was pretty fully valued as last year ended. Of more immediate concern, China’s growth rate is slowing.  Yet, China, with 20% of the world’s population, still is growing three times as fast as the US.  Other negative factors are the strong US dollar which gives exporters problems and has caused a slow-down in manufacturing.  The fall in crude oil prices, which should help consumer spending, has not seemed to do so and, instead, there is a lot of adjustments in both US oil producing regions and oil exporting countries. These negatives are hurting corporate earnings, which are expected to be down in 2015 vs. 2014.  2016 looks weaker than 2015 as well, so there is unlikely to be a “V” recovery in the market. Fortunately, there are no big excesses with the exception of the amount of bad government loans in Chinese banks. So basically, I think we can wait this correction out.

Fixed income has fared much better than common stocks in the pullback.  Our fixed income strategy is down about 1% vs. the 8% drop in equities.  The economic environment of slow growth and low inflation is favorable for fixed income, which is not a bad place to park cash. Unsettled world conditions will make any rate increase by the Fed more gradual than expected.

Earnings for the 4th quarter have started to be released.  The big banks like Wells Fargo, US Bank, Citi, and JP Morgan did well by meeting or beating expectations.  Next week will feature a large number of company reports as will the following two weeks.  The view that CEOs give about 2016 could reassure investors.

Crude oil prices continued to fall.  The weakness this week is attributed to the pending implementation of the Iranian deal since one provision lifts the restriction on their sales of crude oil. The price of crude oil is not expected to turn up until late 2016.  A decline in the supply of crude should be triggered by the continued reduction in the number of rigs drilling for oil.  For instance, in North Dakota’s oil fields there are 77% fewer rigs drilling today than 18 months ago.  

Next week’s economic calendar highlights will be dominated by earnings releases. Politics will be in the air as well and probably not as a stabilizing force.  As the Iowa caucuses approach, candidates will become somewhat shriller trying to break into the headlines. Finally, the key element next week will be if the market continues to be super sensitive to China. Multi-national companies will talk about the health of their business in China during their conference calls. Their comments could be market moving.

We will be closed on Monday because of the Martin Luther King holiday.  With the market closed for three days in a row, at least it won’t be able to go down!


Ulland Investment Advisors

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