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Archive for January, 2022

Weekly Market Update for January 28, 2022

by Jim Ulland

The NASDAQ and the SP 500 barely escaped a fourth negative week in a row. The NASDAQ was up +0.01% and the SP 500 was up +0.78%. The market has been searching for a bottom and perhaps this is it. Three factors caused this correction: Covid and its family of variants; Inflation and the fear of higher inflation; and the Fed raising interest rates. Here are a few observations about each.

Covid’s child variant Omicron emerged just as most thought we had reached the end of Covid and life was returning to normal. Instead, Omicron caused governments to reimposed restrictions on consumers, with business dampening results. Some schools went back to remote “learning” causing parents to miss work. Others hesitated to go to work because they might get infected. This phenomenon was not limited to the US. China locked-in entire cities. Bottlenecks in the worldwide supply chain got worse. Former FDA Commissioner Scott Gotlieb said today that Omicron will be over in weeks. Cases are falling as quickly as they rose. This will be a big relief to hospitals, businesses short of workers, adults missing work, and kids who invariably find it difficult to learn from a computer monitor.

The second factor, inflation, and the fear of higher inflation, unsettled the January market. A Covid-impacted work force was unable to produce enough goods and services to meet demand. Sometimes the lack of computer chips shut down an entire auto assembly line. New and used car prices shot up. The shortage of workers forced employers to raise wages to attract workers from other employers or incentivize those not working to return. Higher wages increase inflation. If the Omicron variant drops as quickly here as it has in England and South Africa, more workers will be available, reducing the inflationary pressures. The additional workers will help unclog the supply chain. This too will help.

Lower inflation is likely to moderate the Fed’s pace of interest rate increases. The Fed hinted that the first raise of 0.25% will be in March. Even if the Fed raises rates four times in this amount, it will only have raised interest rates one percent. We still will be at historically low interest rates. Perhaps today, the market started to figure this out. Yes, mortgage rates will go up a little and the marginal buyer will have trouble buying a home. But a one percentage point increase in rates does not seem to be an earth-shaking event.

Although the 10 Yr Treasury rate was flat this week, the fixed income market also felt pressure. In our Intelligent Fixed Income (IFI) strategy, we now can buy securities paying 5% at a Qualified Dividend tax rate. In addition to this relatively high yield, there is plenty of price dislocation in the fixed income market allowing for future appreciation. We expect a quick snap-back in both the fixed income and equity markets. Investors should review their cash positions and see if a 5% current yield can replace zero yielding cash or low yielding bonds. Remember, if inflation is 3% and you are in cash, your purchasing power declines 3% per year.

Economic news this week was highlighted by Q4 GDP which rose at an annualized rate of 6.9%. The market could discover this figure next week.

Monday the SP 500 was up +0.28%, Tuesday -1.22%, Wednesday -0.15%, Thursday -0.54%, and Friday +2.43%.

Corporate Q4 earnings next week include Amazon, Google, Facebook, and Boston Scientific among many others. Earnings will be good. Let’s hope they get a warm reception.

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 21, 2022

by Jim Ulland

Ouch! The NASDAQ corrected more than 10% in what felt like ten minutes. The NASDAQ is down about 12% since Christmas and concluded its worst week in the past twelve months. It is cold comfort that the NASDAQ is still up 10% during the last twelve months and that corrections are normal. The NASDAQ has corrected more than 10% sixty-six times in the last fifty years. The SP 500 has averaged a 10% correction about every eighteen months.

Although convenient to do so, we can’t blame rising interest rates for the bad week. They went down. However, the fear of higher interest rates persists and has put a cloud over the market. With inflation staying high, the fear is that the Fed will raise interest rates rapidly, starting in March. Covid, another culprit, has made it difficult for some to return to work. A shortage of workers has forced wages higher. The shortage also has exacerbated the supply chain issues. Fewer workers means less people making goods and fewer drivers getting them to market. The result is higher prices.

An end to the Omicron infections would do a lot for allowing workers to return to work, improve the supply chain, and reduce inflationary pressures. If these things happen, the Fed will not have as much urgency to raise interest rates as they have now. Former FDA Commissioner Dr. Scott Gotlieb said this morning that the peak in Omicron infections has occurred on the East and West Coasts and will do so in the next two to four weeks in the Midwest. If so, that could be just in the nick of time to save more market damage.

Economic news this week was mixed. December housing starts and building permits were better than expected while unemployment filings were worse than last week, although still at a low level. The Philadelphia manufacturing index was better than expected while the New York manufacturing index was substantially worse.

Corporate earnings too were mixed. Bank of America and Morgan Stanley had very strong earnings. But Netflix was a big disappointment. Its stock got crushed along with Peloton, which announced it was reducing production to adjust inventories. In both cases, the return to working in an office rather than from home was noted. A wider variety of earnings will be released next week. Expect the market to be skeptical. There will be margin pressures from higher wage costs. Continuing supply shortages reducing planned production will commonly be mentioned. We hope the market sees a bottom next week and begins a slow crawl back.

For the week the SP 500 was down -5.7%, the NASDAQ was at -7.6%. Monday the market was closed for MLK Day, Tuesday the SP 500 -1.84%, Wednesday -0.97%, Thursday -1.10%, and Friday -1.9%.

Hundreds of companies report Q4 earnings next week. Among the big names are Halliburton, Tesla, Intel, Boeing, and Apple. We hope they strike a positive tone.

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 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