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Weekly Market Update for July 9, 2021

by Jim Ulland

The market surprise this week was the decline in interest rates as reflected in the 10yr Treasury. The decline was attributed to several factors. Foreign buying of US Government securities was strong. US rates are higher than those in most parts of the developed world and provide better credit quality as well. The concern that growth might be lower that the high forecasts also weighed on interest rates. This argument was supported by the cuts in auto production due to chip shortages. Labor is tight and there are general parts shortages crimping production in many other industries. The Covid drag hit the headlines with the rapidly emerging Delta variant. Although most are vaccinated, the Delta variant could have a noticeable impact on growth and thus interest rates. Lower interest rates are favorable for our preferred fixed income strategy, Intelligent Fixed Income (IFI).

Not all the factors influencing interest rates were negative. Stimulus spending continues. Job openings rose to a record high. The percentage of those vaccinated is rising, although now slowly. Cash is flowing into the stock market from more confident investors. Companies are buying back stock. And, Q2 earning are on the way starting next week. Earnings are expected to be good to excellent. There is nothing better than robust earnings to reduce the fear of slower growth.

Our view is that the interest rate decline is temporary. Thus, we are taking some profits in fixed income securities. Inflation looks real to us, although some price pressure is transitory as the Fed suggests. Labor costs are higher. Lumber costs have declined but new and existing home prices have spiked higher. Oil is higher and OPEC did not agree to raise production. Natural gas is higher. Food costs and menu prices are higher. As CEOs explain last quarter during their coming earnings conference calls, they will comment on the current conditions. Many will cite rising costs. This is likely to turn the direction of interest rates upward.

Both the SP500 and the Nasdaq set records on Wednesday, fell hard on Thursday, and recovered on Friday. For the week, the Nasdaq rose +0.43%. The SP 500 was up +0.40%. Monday SP 500 was celebrating the Fourth, Tuesday -0.20%, Wednesday +0.34%, Thursday -0.86%, and Friday +1.13%.

Next Tuesday, the Consumer Price Index for June will be released and will gauge inflation. Also on Tuesday, Small Business Optimism will be released and reflect the strength of the recovery. Thursday China will report its Q2 GDP. Chinese stocks got hit last week as regulators put more restrictions on the tech sector. This story will continue to play out in Q3. The big news for the next three weeks will be earnings reports for Q2. Goldman Sachs, JP Morgan, Wells Fargo, Morgan Stanley, United Health, Delta, Coinbase (the digital currency exchange), and Charles Schwab will lead off. Expect a lot of upside surprises. We think the market can continue to move higher.

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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Ulland Investment Advisors

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