Receive Weekly Market Updates via Email

shadow

Archive for January, 2022

Weekly Market Update for January 14, 2022

by Jim Ulland

The first earnings of Q4 came on Friday from several of the big banks.  The story they told was one of wage inflation. Costs were up and the executives said they paid more to hire and retain employees.  Even if inflation goes down, it is very difficult for employers to reduce wages, a major driver of prices. Inflation didn’t go down last month, it continued higher, only at a slower rate.  Producer prices, which eventually show up in consumer prices, were up 9% over last year.  Consumer prices were up 7%.

Omicron put more heat under the inflation stew.  Although the variant is not life threatening, many schools have closed forcing parents to stay home rather than go to work.  Those not vaccinated might be prohibited from going to work or even fired as Citi Bank announced.  Put simply, fewer workers means less goods produced.  Fewer goods with the same consumer demand triggers higher prices. Oil is an example, government restrictions and Covid have retarded oil production.  Prices of gasoline and crude oil continue to rise.

This is not a good situation. A rapid decline in Omicron infections, as happened in London after its spike, will help the tight employment market. But normalizing after this pandemic will take time.  During this period, expect a lot of market volatility. One casualty is consumer sentiment, which declined in January.  Inflation concerns are blamed for most of the deterioration.

It was somewhat surprising to see interest rates, as represented by the 10-Yr Treasury, stay flat for the week.  You would think that real and feared inflation would drive rates higher as they did last week. The 30-Yr Treasury is an indicator of where longer-term interest rates are going.  The 30-Yr Treasury recently did not rise nearly as much as the 10-Yr Treasury.  This implies that the market thinks inflation will come down from current levels.  We hope inflation recedes because more goods have hit the shelves.  The alternative explanation is that the government’s mishandling of the economy will tip us into a recession.  Recessions normally force rates down because economic growth slows and the demand for money is less.

A flood of earnings will be reported in the next three weeks.  Many firms will report that margins have been squeezed by higher wages and component costs.  Part of this pressure on profits will be offset by strong demand.  How will the market react to earnings reports?  Bank earnings today were mixed.  The market could have been neutral, but instead bank stocks were punished.  If the market reacts negatively to mixed news, it will react very negatively to bad news and possibly neutral to good news.  The market’s attitude will be apparent soon.

For the week the SP 500 was down a modest -0.30%, the NASDAQ slightly less at -0.28%.  On Monday the SP 500 was down -0.14%, Tuesday +0.92%, Wednesday +0.28%, Thursday -1.42%, and Friday +0.08%.

The markets and our office will be closed Monday for Martin Luther King Day.  More banks will report next Tuesday, either confirming or breaking from today’s reports.  On Wednesday, United Health Group will be the first major health and insurance company to report and will give insight into that sector.  Technology companies will start to report in the following week.  Government news should be more muted now that the second major spending bill (BBB) is unlikely to pass.  We recommend that investors go on vacation, go skiing, go to Florida, and turn your phones off while doing so.  The next two weeks could be stressful.

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 January 7, 2022

by Jim Ulland

The market news this week revolved around twin peaks.  The first peak was the Omicron news.  Doctor and former FDA Commissioner Scott Gottlieb said Omicron infections will peak in about ten days and then rapidly decline.  New York is thought to be two weeks behind London and Gottlieb expects New York to follow London’s experience. Although we hope the infection rate drops as dramatically as it rose, there will be lingering employment issues from those deciding not to go back to work.  Lack of workers is already a problem, and this will slow the normalization of the supply chain.  A continued shortage of goods forces prices higher, typical of a demand/supply imbalance.  Fortunately, the market is not as stressed out by Omicron as it was three weeks ago.

The second and higher stress is from the spike in interest rates.  Interest rates, as represented by the 10Yr Treasury, rose from 1.51% to 1.76%.  This is a 16.5% increase in five days. Rates are still historically low, but the pace of change unsettled the market. The Fed has not raised the Fed Funds rate yet, but says it will do so by mid-year, if not sooner. Since the Fed got the whole inflation forecast wrong, there is less confidence that they will get the interest rate level right.  Higher rates slow growth.  This is clear for home buyers.  As rates go up, the cost of a mortgage increases and fewer people can afford homes.  The problem is not today’s rate, but where rates will peak and if that level is so high that the economy slows markedly.

The factor that could rescue the market’s mood is Q4 earnings reports.  They will start in earnest next Friday with the big banks.  Earnings will be good for the banks and most of those companies that report in the following weeks.  Many firms will show a 20% increase in earnings per share over what was achieved in Q4 2020.  Strong earnings will support stock prices.  Additional support can come from stock buybacks.  Covid has forced companies to streamline operations and reduce costs.  With strong demand, margins have expanded leading to greater profitability.  Companies that can raise prices will have the best results.  Companies with strong cash flow, low debt, a wide product spectrum, and pricing power will do the best.  Banks will benefit from higher rates as idle deposits are more profitably invested.

The only day the SP 500 rose was Monday. The NASDAQ had a loss every day. Europe reported its own bad news.  Inflation is not dead.  Prices for December were up 5% annualized.  The US unemployment rate declined to 3.9% in December which reflects the shortage of people willing to work.  A shortage of workers causes wages to go up.  If Omicron does peak in ten days and then steeply declines, many workers will return.  The US Supreme Court today is considering the vaccine mandate from OSHA on large employers.  The question is whether OSHA has the Congressionally given authority to impose the mandate.  If the mandate is suspended, additional workers will return, blunting the inflationary pressures of higher wages.

For the week, the SP 500 was down -1.87% and the NASDAQ -4.53%, the sharpest weekly drop since last winter. On Monday the S&P 500 was up +0.64%, Tuesday -0.06%, Wednesday -1.94%, Thursday -0.10%, and Friday -0.41%.

Even with rising interest rates in 2021, our Intelligent Fixed Income strategy, run by Nat Beebe, posted top tier returns of over 6% in what was a challenging year for most fixed income strategies.  Ranking with peers will be available soon.  We expect a continuation of this outstanding performance.

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