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Archive for April, 2021

Weekly Market Update for April 30, 2021

by Jim Ulland

Inflation chatter sent the market lower this week. During conference calls by CEOs to report Q1 earnings, there were numerous mentions of companies facing price increases from suppliers and shortages of critical parts like semiconductors in the auto industry. This was aggravated by a lack of workers in entry level jobs, some of whom have found it more profitable to stay home collecting an unemployment check and Covid bonus that exceeds their previous wages. The addition $300 per week of unemployment payments is on top of regular unemployment. The additional payment expires in September.

The fear of inflation also was fueled by huge spending programs that were proposed by the administration. The Federal Reserve left interest rates low and said it had less concern about inflation than the market and viewed the current uptick as temporary. The 10 Yr Treasury rate rose during the week and pressured our fixed income positions.

GDP growth for Q1 was remarkable at 6.4%, just below the Fed’s estimate for 2021 at 6.5%. Economic growth prior to the pandemic was 2-3%. Consumer confidence also moved higher and unemployment filings moved lower. Personal income soared 21% on the back of stimulus payments and the jobs created by reopening the economy.

The biggest economic news of the week was contained in corporate earnings reports. Facebook, Google (Alphabet), Amazon, Visa, Boston Scientific, and numerous others had explosive earnings. For instance, Google’s revenue was up 32% and earnings per share were up a startling 266%. Facebook’s earnings were up 93%. With over half of the largest 500 companies reporting, the average earnings per share growth rate was over 40%. To keep stock prices rising, the country will have to be fully reopened. New York City is doing just that as of July 1st. Schools also must be reopened for full in-person learning. This will be a big educational benefit besides allowing those parents forced into doing childcare to go back to work. Vaccination rates must get higher as well so the country can return to normal. In MN, 55% of adults have had at least one shot. We think all of this will happen by the fall.

The market may take a rest before moving higher. The SP500 set two records highs during the week but closed flat. Corporate share buybacks will provide some price support. For instance, Google increased its share buyback authorization by $50 billion! But the market may want assurance that inflation will be contained, and that supply chains and worker availability will return to normal conditions before moving much higher. A pause would be a good entry point for investors. For the week, the NASDAQ was down -0.39%. Monday the SP 500 was +0.18%, Tuesday -0.02%, Wednesday -0.08%, Thursday +0.68%, and Friday -0.72%.

Earnings releases will continue this coming week. The increasing level of vaccinations should start to reduce the infection rate and change the news narrative to one that is more positive.

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. Investors 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 investors 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 strategy 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.

This does not constitute a recommendation of any investment strategy or product for a particular investor. Investing involves risk; principal loss is possible. Investors should consider the investment objectives, risk, charges, and expenses of the strategy carefully before investing. This and other important information can be obtained by contacting Ulland Investment Advisors.

April 23, 2021

by JM Hanley

After two months on a nearly uninterrupted upward trajectory, equity markets experienced a modest decline this week. Value stocks outperformed growth, reversing another recent trend. The news was relatively quiet, and the market spent the week digesting first quarter earnings and plans for a potential increase in the capital gains tax.

Thus far, 9% of the S&P 500 has reported, and earnings have grown over 30% – much better than the expected 25%. Winners from the pandemic, like major builders and home appliance makers, have done particularly well. No portfolio companies reported this week. Johnson and Johnson did better than expected, and increased its outlook for full-year profit. So did Verizon, Coca Cola, and AT&T. The latter, which owns HBO, got a boost from strong streaming subscriptions. Intel, which finds itself in the middle of a computer chip shortage that has halted assembly lines worldwide, put up good numbers but otherwise failed to inspire confidence. Netflix also proved a disappointment. Subscriber growth seems likely to tail off as other entertainment options return.

Given the scale of the outperformance, share price reaction was generally lackluster. This has fed concerns that the price-to-earnings ratio of the market as a whole may be too high.  The “multiple” is correlated to bond yields and future earnings growth. Both are currently in an optimal range, perhaps unsustainably so. Consumer demand looks set to surge as reopening get underway. Those expectations inform estimates of rapid earnings growth. But with supply chains constrained, a surge in demand could accelerate inflation. That would drive up bond yields, which would pressure the multiple.

An increase in the corporate tax rate, meanwhile, would directly impact future earnings. The Administration’s current proposal would produce about a 5% headwind to SP 500 earnings, while a watered-down version would be about 3%. The proposed increase in the capital gains rate would affect individual investors; specifically, those with incomes over $1 million would see a combined rate of 43.6%. A current loophole that enables those who inherit securities to skirt capital gains taxes might also be closed. This could be a short-term headwind for the market as holders rush to sell before higher rates come into effect. In the longer term, lower after-tax returns could result in lower overall investment (liquidity) in equity markets. In both cases, the tax headwind would be somewhat offset by higher earnings from the economic stimulus of the infrastructure spending.

The Administration seems to be struggling to find consensus on a plan in Congress, where its majorities are narrow. Democrats may seem more eager to increase taxes, but history shows that both parties find it difficult to do so in practice. We are happy to discuss clients’ tax situation if desired.

Next week is “tech week” for corporate earnings. Visa, Google, Facebook, Apple, Boston Scientific, and Amazon, among others, are scheduled to report.

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. Investors 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 investors 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 strategy 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.

This does not constitute a recommendation of any investment strategy or product for a particular investor. Investing involves risk; principal loss is possible. Investors should consider the investment objectives, risk, charges, and expenses of the strategy carefully before investing. This and other important information can be obtained by contacting Ulland Investment Advisors.

Weekly Market Update for April 16, 2021

by JM Hanley

Equity markets ended another week “up and to the right.” This marks the SP500’s first four-week winning streak since late August. The major theme was falling interest rates. The yield on the 10 Year Treasury fell from 1.66% to 1.57%. Lower rates are particularly good for fixed income and growth-oriented stocks. As a result, growth stocks outperformed value, and our preferred strategy had a good week as well.

Why would interest rates go down as evidence of a “reopening” boom increases? Much of the reacceleration in economic growth was priced in earlier in the year, following good vaccine news. Furthermore, the initial Treasury auctions themselves have gone well of late. Japanese buyers who sat out winter auctions have begun buying again, and hedge funds who (successfully) sold Treasuries short earlier in the year have had to cover their position. This robust demand has kept prices up and yields under control. Additionally, news of adverse side effects from the Johnson and Johnson vaccine followed similar headlines regarding AstraZeneca’s last week. A slower rate of vaccination globally could put a damper on coordinated economic acceleration (and thus inflation).

The final factor suppressing rates is inflation itself. With interest rates low and stimulus checks landing in consumer bank accounts, investors have been closely watching inflation indicators. Data this week indicated that prices rose 1.65% last month, excluding food and energy. This was a little higher than expected, but not by much. The economy may have more time to run “hot” before the Fed is forced to raise rates.

Other economic data was positive, bolstering equity markets. Retail sales rose by much more than expected, aided by stimulus checks. So did two regional trackers of industrial production. Jobless claims fell. Consumer confidence rose, albeit less than anticipated. “Starts” on the construction of new housing have reached their highest level since 2006 as a commonly-watched survey of homebuilders climbed. The picture painted by the data is one of consumers flush with cash and ready to spend.

The stock market received a third tailwind from strong corporate earnings. Analysts now expect earnings for the SP 500 to grow 30% from last year, up from 25% at the beginning of the week. Many of the big banks reported this week. Most released reserves set aside to cover bad loans, originally for coronavirus losses that never materialized, which boosted earnings. Loan activity was weak, but should pick up this quarter with business reopenings and higher interest rates. Credit and debit card spending picked up at the end of the first quarter, along with other economic indicators.

Next week will bring earnings reports by airlines, consumer staples companies, and some regional banks. Updates from the former two could be a useful barometer of reopening as a whole.

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. Investors 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 investors 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 strategy 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.

This does not constitute a recommendation of any investment strategy or product for a particular investor. Investing involves risk; principal loss is possible. Investors should consider the investment objectives, risk, charges, and expenses of the strategy carefully before investing. This and other important information can be obtained by contacting Ulland Investment Advisors.

Weekly Market Update for April 9, 2021

by JM Hanley

Stocks enjoyed a strong week after an excellent jobs report last Friday, when the market was closed. The economy added 916,000 jobs last month, almost 40% higher than expected. Previous months were revised higher as well. New jobs were added across a broad array of economic sectors. In fact, employment in sectors hit hardest by the virus – like restaurants and hotels – still appears to have plenty of “room to run.” That suggests further job growth as those sectors reopen. Of those unemployed, more reported their condition to be temporary rather than permanent, another positive sign.

Other economic data was mixed. Initial jobless claims came in higher than expected. Claims have continued to be a fly in the ointment of an otherwise recovering labor market. Data from state labor bureaus suggests this could be something of a mirage, as increased unemployment benefits have encouraged those who probably wouldn’t qualify to apply anyway. Elsewhere, PPI – which measures inflation for firms, a favorite metric of the Fed – came in higher than expected. Fed Chair Powell nonetheless stuck to his guns in a speech at the IMF, insisting the economy had far to go before the Fed would consider raising rates.

The rise in stocks masked notable dispersion. Growth stocks (like tech companies) did better than value stocks (like most industrial and energy companies) for the second week in a row. Growth has gained back some of the ground it ceded in February, when vaccines and the stimulus bill precipitated a rise in interest rates and a rotation into value.

What are the causes for the recent rebalancing? The growth-value rotation may simply have run its course. Beyond that, bad news about the AstraZeneca vaccine continues. These concerns have slowed Europe’s vaccination efforts, and could slow vaccinations in the rest of the world. A slower pace of reopening might weaken the coming economic boom and inflation. That could keep interest rates lower for longer, which would favor growth stocks.

Additionally, prospects for the Administration’s infrastructure proposal have dimmed somewhat. As proposed, it would have spent three trillion dollars over ten years on roads, broadband, public housing, climate change, and job training, partially funded by raising the corporate tax rate. This would amount to additional stimulus that contributed to near-term growth and inflation. Moderate Democrats have resisted the tax increases, suggesting the size of the package could shrink.

First-quarter earnings begin next week with the big banks. Markets anticipate 25% growth market-wide, the highest rate since the third quarter of 2018. Analysts will be tuned in to management commentary on cost increases and supply chain problems, and whether these costs can be passed along to consumers. They’ll also want to hear whether or not consumer preferences have shifted permanently as a result of the pandemic.

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. Investors 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 investors 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 strategy 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.

This does not constitute a recommendation of any investment strategy or product for a particular investor. Investing involves risk; principal loss is possible. Investors should consider the investment objectives, risk, charges, and expenses of the strategy carefully before investing. This and other important information can be obtained by contacting Ulland Investment Advisors.

 

Ulland Investment Advisors

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