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Weekly Market Update for May 21, 2021

by Jim Ulland

This week was dominated by inflation concerns even though the 10 Yr Treasury interest rate was flat. This security is a major indicator of the direction of interest rates. High-flying commodities like lumber, which is up 100% since January 20th, declined 13% in the last two weeks. Crude oil also fell this week by 2.5% but is still up 31% this year as oil producers hurry to raise supply. Many businesses are short of workers even with upwards of ten million unemployed. Weekly unemployment filings fell to the lowest level since Covid’s full emergence, showing the tightness in the labor market. Some factors are helping people get back to work. The teachers’ unions have agreed to reopen most schools for in-person learning, which will allow parents more freedom. The bonus unemployment checks have ended in several states and will end for all in September removing this economic disincentive. The increasing vaccination rate will also help workers return. These changes should cool the inflationary impact of worker shortages.

The economy is strong. Retail sales are one indicator. Sales at Target for Q1 were up 23% over last year. Home Depot was up 30%. Many manufacturers are seeing such a rapid increase in demand that they are concerned about supply shortages. For instance, auto production is constrained by a lack of semi-conductor chips. Parts shortages and general supply bottlenecks cause price increases and inefficiencies. The Fed says these constraints will be transitory, but there are a lot of price pressures in the economy today. The Fed is counting on the heat coming out of prices before the public starts expecting inflation. Once the public expects inflation, it is almost sure to arrive because behavior changes.  In this over-heated environment, the last thing the economy needs is more stimulus.

If we get persistent inflation, the Fed will move interest rates higher and slow the economy. Home construction is sensitive to higher rates as are consumers who finance purchases such as autos. Businesses that borrow will see costs rise and margins shrink. Stocks purchased for their dividends will be under pressure as the value of dividends is eroded. As a boutique manager we can respond more quickly to changing circumstances than large firms. Market volatility provides opportunities through dislocated values. Although we do not invest in it, an example of volatility this week was crypto currency, which fell 30% at one point before a partial recovery.

When investing in stocks today, valuation has become increasingly important. Selecting companies with solid growth prospects post-Covid, and avoiding companies sensitive to interest rate increases are prudent considerations. In fixed income, we select securities with a high coupon or a dividend that floats upward as rates rise. We are on high alert to changing conditions.

The SP500 fell -0.43% this week, not much off its all-time high. The Nasdaq closed +0.31% but had a lot of volatility. Monday the SP500 was -0.25%, Tuesday -0.85%, Wednesday -0.29%, Thursday +1.06%, and Friday -0.08%.

The robust economy continues to surge forward, fighting the headwinds of potentially higher taxes and excess stimulus. Hold on to your hats and apply that sunscreen. The weather is going to hot as well.

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 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

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