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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.

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