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Weekly Market Update for July 16, 2021

by Jim Ulland

Sometimes weeks like this past one happen during quarterly earnings reports. Banks were the first to report Q2 earnings, all of which were strong and beat expectations. Yet, all bank stocks went down. In fact, the whole market went down. There is a general fear that the inflation we are seeing may not be “transitory” as the Fed terms it. The CPI had the fastest monthly increase since 2008. The Producer Price Index (PPI) rose 7.3% over last year, the largest advance since twelve-month figures were first calculated in 2010. Hotter inflation could bring higher interest rates. Higher interest rates normally slow economic growth. Thus, the twin concerns of inflation and slower growth overshadowed positive earnings.

Congress dumped more fuel on inflation fears as two infrastructure bills were set for a vote next week. One of the bills is a true infrastructure bill of about $1B for roads, bridges, etc. The other is a vast list of new social programs that have little to do with the historic definition of infrastructure. Many argue that with the shortages of parts and labor and with the widespread price increases already emerging, now is not the time for a large amount of additional government deficit spending. Thus, the market spent more of the week worrying about excessive spending and inflation than it did about strong Q2 earnings.

Other market fears came from the Covid Delta variant, which is spreading. Unfortunately, J&J’s vaccine was beset by a serious side effect. Although this affected significantly less than 1% of those who had taken the vaccine, it added to the hesitancy of many who had not been vaccinated. Low vaccination rates will enable the spread of the Delta variant. A second cloud over the market was taxes. Increased government spending, if enacted, will have to be paid for.  Higher income taxes, capital gains taxes, estate taxes, and corporate taxes are in most proposals. This would be in addition to the new US and European minimum tax on multi-national companies.

The continuation of strong Q2 earnings for the rest of July and into August could replace the concern of inflation and slower growth with the expectation that the economy and the market will power through these headwinds. During the week, unemployment filings were reported at the lowest level since mid-March in 2020. June retail sales increased and were 18% over June of 2020. The Fed is still forecasting over 6% GDP growth in 2021 and 4% in 2022. We think equity investors can stay fully invested for now. Conservative investors might look to our Intelligent Fixed Income strategy as a place to park cash balances, which earn nothing in CDs or money market funds.

Both the SP500 and the Nasdaq set records on Tuesday before closing lower Friday. For the week, the Nasdaq lost -1.87%. The SP 500 fell -0.97%. Monday SP 500 was +0.35, Tuesday -0.35%, Wednesday +0.12%, Thursday -0.33%, and Friday -0.75%.

Next week look for earnings from the airlines, Netflix, Chipotle, Verizon, Twitter, Texas Instruments, and Intel. Each will provide insight into their sector.

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.

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