Weekly Update Archives

by Jim Ulland

This week was a “heat check” in the market. Some sectors were thought to be running too hot and would cool off before attracting more investment dollars. Technology was one of those sectors, so the sector pulled back five percent by mid-week. The interesting thing is that Big Tech is hardly overvalued. Google, Facebook, and Apple have price-to-earnings ratios from 26 to 28. On next year’s earnings, all are two to four points lower. The growth rate of revenues and earnings in Big Tech is from 20-40%, although Apple’s revenue growth is lower. By the end of this week, Big Tech was back in favor.

Inflation fears also spooked the market in the first half of week. Both the Consumer Price Index (CPI) and the Producer Price Index (PPI) reported figures substantially above expectations. The biggest price increase were in used cars, gasoline, and airfares. The Fed implied that these increases were more of an adjustment to one0time events rather than the start of a spike. Used auto prices rose because the chip shortage reduced the production of new cars. Gasoline prices rose as new supply lagged demand. Airlines tickets rose, but only to the extent that the discounts to Covid travelers largely ended. It is hard to have a lot of inflation when ten million people are still unemployed. Those who find unemployment compensation too attractive to return to work will face the reality of bonus unemployment payments already ending in some states and in all states by September. Those working parents who have had had to homeschool will see in-person learning return no late than September. Workers afraid of Covid if returning to work will find most of their work colleagues vaccinated already or soon. This worker availability should blunt wage inflation.

Interest rates jumped at the start of the week, peaked on Wednesday, and fell to slightly above where the week started. This interest rate roller coaster provided opportunities for our fixed income strategy, Intelligent Fixed Income. The government could destabilize interest rates if spending is not restrained. Already the government has injected a trillion dollars more in transfer payments into the economy than were lost due to Covid.

The market will pause several times in 2021 since the return to normal will be uneven. However, the direction of the economy is clearly upward and robust. A gradual increase in interest rates is likely. Besides actions by our government, there are a lot of festering problems around the world that could disrupt the positive forecast. Being a boutique manager, we continue to respond to changing interest rate expectations.

The SP 500 fell 1.4% this week, not much off its all-time high. The Nasdaq did not recover all its weekly loss and closed down 2.3%. Monday the SP 500 was down -1.04%, Tuesday -0.87%, Wednesday -2.14%, Thursday +1.22%, and Friday +1.49%.

Earnings releases will conclude this coming week. If you are vaccinated, take off your mask and breathe a little fresh air. We made it.

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.

by JM Hanley

Markets spent another week fretting about reopening, inflation, and the effect of both on interest rates. Some (otherwise poor) manufacturing data early in the week emphasized higher commodity costs, a shortage of computer chips, and other covid-induced supply chain disruption. On Tuesday, Treasury Secretary Yellen (herself a former Fed chair) indicated that interest rates might need to rise to prevent the economy from overheating. These factors together exacerbated the market’s inflation and interest rate fears. The Fed reiterated that an increase in rates was a long way off, but the damage was done.

Markets were thus primed for a blockbuster new jobs number that would presage the Fed’s tapering its asset purchases and raising interest rates. But employers added only one quarter as many jobs as expected and previous months were revised down. The unemployment rate actually increased. However, average hourly pay and average hours worked went up, which is hardly consistent with a bad jobs market.

This seems to indicate that employers have plenty of jobs, and are having trouble filling them. Roughly half of workers are making more on unemployment than they would at work. Many are concerned about the health risks of returning to the workplace, and plenty more are supervising children learning remotely. But with vaccination ramping up, enhanced unemployment benefits scheduled to end this September, and students learning in-person next year, these problems should abate. Questions about a labor shortage and inflation will then resurface. In the meantime, with those out of the workforce collecting generous unemployment, the impact on consumer spending will be modest.

The SP 500 finished the week up 1.2%, while the Nasdaq was down 1.5%. Value stocks outperformed growth by a substantial margin. 10 Yr Treasury yields fell almost a tenth of a point, and our fixed income strategies benefitted accordingly.

Quarterly earnings continue to come in better than expected. In healthcare, analysts expected a surge in elective procedures as potential patients got vaccinated and emergency covid wards emptied out. But numbers have so far been lower than expected. That helped CVS’s insurance business (formerly Aetna), as it has other insurers. A booming housing market and a successful acquisition boosted Black Knight, the mortgage software company. The pandemic-driven shift to ecommerce continues to be a tailwind for FIS, a banking and credit card software firm.

Robust trends continued at public safety technology provider Axon this quarter. Revenues grew by a third from last year – with earnings rising more than 50% – driven by growing demand for TASER devices and software-heavy body camera bundles. Expansion into new markets, both geographically as well as adjacent customer sectors such as the Federal government and private security, also lifted results. Strength in their platform should continue as they roll out new technologies at a fast clip, while adding strategic partners including a Carleton-alum founded startup, RapidSOS. The company raised their full-year outlook and they could be a beneficiary of a government infrastructure bill, if passed.

Thus far, about three-fourths of the SP 500 has reported. A remarkable 88% have reported better-than-expected profits, by an average of 23%. Electronic Arts (better known as EA) is the only portfolio company scheduled to report earnings next week.

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.

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 1^st. 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.

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.