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Archive for June, 2022

Weekly Market Update for June 24, 2022

by Jim Ulland

Citibank said that there is 50% chance of a recession. This view was echoed by a host of economists. Even Fed Reserve Chairman Powell said that a recession may result from the Fed raising interest rates, although this is not the Fed’s goal.

Bearish sentiment in the market just hit a seven-week high. This is confirmed by the previous two weeks, each of which showed a 5% decline in the S&P 500. Back-to-back declines of this magnitude have occurred only seven times since WWII. The market has been even worse than the news, a condition often called being “over-sold.” Often when markets get “over-sold,” stocks become cheap enough to attract buyers.  That is the most credible explanation for this week’s bounce. Historically, markets bottom when the Fed changes from raising interest rates to lowering them.

The next shoe to drop may be corporate earnings. Already analysts are reducing earnings’ forecasts incorporating the impact of higher interest rates, tapped out consumers, and a slowing economy. Early signs of slowing are in housing. Mortgage rates have almost doubled. Homes are on the market longer before being sold. There are more price drops by sellers than any time since 2015. The result is what the Fed hopes to see in the entire economy: lumber prices have fallen in half since March and copper is down 25%. Unemployment filings are rising slightly, which eventually will reduce wage pressures.

The San Francisco Fed reported this week that bottlenecks in the supply chain and other supply issues account for about half of the current inflation. One third is attributed to excess demand. Therefore, if we get demand reduced with higher interest rates, we also may get more supply as bottlenecks are resolved. China is still a big bottleneck in that it is using lock-downs as a tool to control the spread of Covid. Why not just call Pfizer, one could ask? China will come back on-line soon if for no other reason than their controlled economy cannot stand big job losses. As China returns to production, the recent downward drift in gasoline prices may end. China uses a lot of energy. When this demand returns, prices of crude oil will firm. Natural gas too is headed back up in ninety days as the Freeport facility, which had a fire, returns to the export market. This facility shipped 17% of US LNG exports.

Most think the market downturn is not finished, since the Fed has promised more rate hikes. Yet, the market is thinking that once we get through the coming slowdown, interest rates will be reduced, benefiting both fixed income securities and stocks. An important consideration is how quickly a slowdown will happen and how soon inflation will abate. The University of Michigan surveys consumers to gauge their expectations on inflation. Consumers’ five-year expectation for inflation just declined. This is good news. Historically, if consumers expect inflation, they accelerate purchases and cause more inflation. Consumers are being patient and we would recommend that same attitude for investors.

Both the S&P 500 (+6.45%) and the NASDAQ (+7.49%) rebounded this week. The S&P 500 was up +2.45% on Tuesday, -0.13% Wednesday, +.95% Thursday, and Friday +3.06%. Next week some big-name consumer companies will report: Bed, Bath, & Beyond and Nike. This will give more data on consumer spending. In two weeks, corporate earnings for Q2 will start to be reported. If CEOs give weak forecasts, the Fed will notice.

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

Weekly Market Update for June 17, 2022

by Jim Ulland

Our view is that the Fed is going to have its way and raise interest rates until it kills inflation.  Causing a recession is likely to be the collateral damage. Part of the problem is the Fed’s unrealistic goal of returning inflation to 2%.  In this fast-moving economy, the Fed is using backward-looking data upon which to make decisions.  June economic indicators are terrible.  New Home Construction, buffeted by the current 6% 30-year fixed rate mortgages, is down 14%.  Target Corp and others announced excess inventory.  Layoffs and hiring freezes are in the daily news whether from Tesla, Meta, or Ford.  CEO sentiment is negative and historically coincides with corporate profit declines. Government spending continues unabated with another $1B going to the Ukraine this week.  The US total to this conflict is now about $40B whereas Russia’s entire defense budget in 2021 was $65B.

All the news is not gloomy.  Unemployment has not jumped.  Consumer spending has held up although much of the spending is funded by credit card debt. The market is oversold.  The Producer Price Index was up less than expected although high. Natural gas prices fell as the result of a fire in a major export terminal and crude oil followed gas down with fears of recession. The market viewed the Fed’s .75% rate hike on Wednesday as necessary to fight inflation, but there is a big worry about a “policy mistake,” meaning the Fed will raise rates too much.

Somewhat ironically, fixed income and our Intelligent Fixed Income strategy will benefit from an economic slowdown.  When the recession comes, inflation will fall and then interest rates.  This will restore much of the price decline on preferred stock.  Fortunately, the credit quality of the strategy is quite high (money center and regional banks).  The core benefit of the IFI strategy is that the income is constant.  If preferred prices go up or down, the income is the same. The current yield is about 6.5%.

Both the SP 500 and the NASDAQ dropped further into Bear Market territory this week.  The SP 500 lost -6.15% and the NASDAQ -4.9%.  The last 13 Bear Markets have lasted anywhere from 3 months to 69 months.  Don’t expect the V shaped recovery we had after the Covid outbreak in 2020.  We think holding position through this trauma is the best strategy.  Naturally, tactical moves can help performance.  This week on Monday the SP 500 was -3.88%, Tuesday -0.38%, Wednesday +1.46%, Thursday -3.25%. and Friday +0.22%.

Next week our office is closed Monday for the holiday.  Fed Chair Powell will be on Capitol Hill for remarks to Congress, which will be newsworthy.  The other major news of the week will be on Friday from the University of Michigan Consumer Sentiment Report.  Since 65% of the US economy is based on the consumer, this report will be market moving.  Expect a bad number.  But that is next week, enjoy your three-day weekend until then.

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

Weekly Market Update for June 10, 2022

by Jared Plotz, Director of Research

What began as a listless, uneventful week ended with a “hot” inflation reading and a “risk-off” market move (S&P 500 down 5.1%, NASDAQ down 5.6%) towards the March 19th lows. This now raises the attention on next week’s Federal Reserve meeting where they will almost certainly raise rates by 50 basis points (0.50%) but will also give updated indications for the rate of future hikes. The 10-year Treasury yield rose 21 basis points (bps) to 3.16% this week and thus fixed income markets were not spared either.

Most economic data were market-negative this week. Mortgage demand hit a 22-year low. Consumer confidence hit a record low. Weekly unemployment claims moved higher. The World Bank lowered their global growth forecast for 2022 from its 4.1% projection in January to a new 2.9% and noting a rising risk of “stagflation,” a scenario where economic growth stagnates amidst continued high inflation. But the most impactful data point was the consumer price index (CPI) for May on Friday, as this held implications for September’s rate hike debate.

Headline CPI for May rose 1.0% m/m and 8.58% y/y, a post-1981 high (March was +8.54%, April +8.26%). “Core” inflation (ex-food, energy) rose 0.6% m/m and 6.0% y/y. Both measures were above market expectations. What this reading did was put a dent in the “peak inflation” narrative that began after the small downtick in April as well as drove a re-pricing of rate expectations for September. Investors are now pulling forward an extra quarter-point hike out of 2023 into 2022, with that expected to come in September, a month which had been debated to be a 25bps or 50bps hike.

Since we own sizeable weights of Amazon in equity accounts, it is worth noting that the company split shares of the stock 20-for-1 this week. This means that you will now own 20x as many shares in your account, but the price became 1/20th of its prior level. While this change initially gave a boost to Amazon’s stock price on Monday, it eventually gave back the gains due to another guidance reduction on profit margins from competitor Target and the overall market weakness starting Thursday afternoon.

With sentiment swinging between fears of stagnation and peaking inflation/Fed hawkishness, all eyes and ears will be on the FOMC meeting Wednesday. Next week will also bring a second measure of inflation on Tuesday (PPI) and a string of May industrial readings. PPI could show a “less hot” inflation picture vs. the CPI, but if not, we are looking for a peak in inflation later this summer as higher-frequency indicators do point to a potential move lower.

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

Weekly Market Update for June 3, 2022

by Jim Ulland

The market is hoping for an economic slowdown as a way to control inflation. There are two significant ways to create a slowdown. The first would be for fiscal restraint, generally defined as less government spending. From what we have seen during the pandemic, there is no spending restraint. The second way is for the Federal Reserve to raise interest rates enough that consumers reduce expenditures and businesses slow both hiring and investment.

Jamie Dimon, CEO of J.P. Morgan, the country’s largest bank, termed our current economic situation as a “Hurricane…coming our way.” Tesla’s CEO, Elon Musk, said he had a “super bad feeling” about the economy and announced a 10% staff reduction, plus a hiring freeze. They think the Fed will create a recession. The stock market, too, has had a “super bad feeling” since the start of the year.

Since Washington is unwilling to reduce spending, all the work to control inflation falls to the Federal Reserve. The Fed kept interest rates too low for too long, missing the early chance to temper the strong spending spurred by government stimulus. This happened during a time when the supply of goods was reduced by supply chain bottlenecks and workers who would not return to work for a variety of reasons including Covid. Wages rose and prices skyrocketed. As an example of how wage pressures are created, Waste Management announced it would no longer pick up yard waste with trash since it did not have enough drivers. They said the lack of drivers was partially caused by high consumer spending. Many of those additional packages created by the spending are delivered by Amazon drivers hired away from Waste Management.

The job market is tight. New jobs are still increasing. The 6/3/22 Jobs Report said that May produced 390,000 net new jobs. This was the slowest growth this year but above estimates.

One big economic indicator is housing. Home prices were up 21% in the last twelve months. Mortgage rates are up about 60%. Fewer buyers can afford higher monthly payments. A home construction decline is upon us. Lumber prices have fallen in half from their peak.

The market sees the signs of a slowdown and it fears the Fed will go too far in its efforts to control inflation, turning what could be a slowdown into a recession. When the economy inevitably slows, interest rates will come down and fixed income securities, such as those used in our IFI strategy, should turn sharply higher. Stocks too are expected to react favorably like they did a week ago. Ironically, in today’s economy, good news is bad for the market and bad news is good. The market wants a modest slowdown to dampen inflation and to keep the Fed from crushing the economy with interest rate hikes.

For the week, the S&P 500 was down -1.20% and the NASDAQ -0.98%. Monday the market was closed for Labor Day. Tuesday the S&P 500 was -0.63%, Wednesday -0.75%, Thursday +1.84%, and Friday -1.63%.

Next week, the big news will be Friday when the May CPI is announced. We expect a peak in inflation sometime this summer. The sooner the better.

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

 

Ulland Investment Advisors

4550 IDS Center · Eighty South Eighth Street · Minneapolis MN 55402 · Telephone: 612-312-1400 · Facsimile: 612-204-3464