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Weekly Market Update for February 28, 2020

by JM Hanley

The Dow was down on Friday, falling 357 points to close at 25,409. For the week, the Dow was down 12.4% (SP500 -11.5%) and year-to-date is now down 11.0% (SP500 -8.6%). The yield on the 10-year Treasury (an important interest-rate indicator) fell thirty-one basis points, closing at 1.16%. Our fixed income strategy held up well – down between one and two percent – as equity markets were pressured. The price of crude oil was down 15% this week to $46 a barrel – down 25% YTD.

Fears about coronavirus precipitated a very bad week for the market. While the orderly selloff was dramatic, it should be acknowledged that investors had gotten perhaps unduly optimistic. Markets rose 16% between the first of October and last Friday.  Uncertainty surrounding the spread of the virus has contributed to market volatility.  The most tangible economic concerns relate to the disruption of supply chains with links in China, lower demand for US exports, and an overall slowdown in US and world economic activity. Data tracking Chinese industrial activity has begun to tick up, albeit sluggishly.  Goldman Sachs reduced its estimates of earnings growth across the market this year by 5%.

Offsetting this, the Federal Reserve and other central banks are widely expected to cut interest rates to support the economy.  China also has planned a robust agenda of fiscal stimulus.

Amidst this backdrop, the best-performing companies are likely to be those in the service sector, growing faster than the overall economy, and with minimal foreign exposure. A decrease in travel and international trade notwithstanding, low unemployment and consumer debt, and high consumer confidence, make the US the healthiest of the world’s major economies.  Our overweight allocation to larger technology firms reflects these conditions.

A few more portfolio companies reported earnings this week.  Sales were weaker than expected at Lowe’s, but the chain’s growth is still impressive for a brick-and-mortar retailer. Under the leadership of CEO Marvin Ellison, the firm will undertake a number of new initiatives to catch up with Home Depot. Axon Enterprises, best known as the maker of Taser, had an impressive quarter, although the firm’s outlook for profitability this year was lower than expected.  But its new products, like a new Taser and a new cellular body camera, have been received well by customers. Investors seem willing to forego short-term earnings in the hopes that future profits will be even higher.

Besides coronavirus, moves in next week’s market may reflect the results of Super Tuesday.

*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. Clients or prospective clients 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 clients are strongly urged to consult with their tax advisors regarding any potential investment. Past performance does not guarantee future results; there is always a possibility of loss.