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Archive for July, 2022

Weekly Market Update for July 29, 2022

by Jim Ulland

Despite the second consecutive quarter of GDP contraction, Big Tech and energy stocks decided to power the market higher this week. Stocks have become quite cheap in relation to their 2021 highs. Investors couldn’t resist putting cash into the market as 70% of the corporate Q2 earnings reports so far beat expectations. The market historically has looked six months ahead to determine a direction. Six months from now, we think the Fed will have finished its rate-raising work, followed by a pause, and a series of rate cuts later in 2023. In the meantime, the Fed will have triggered a recession. The recession should be mild since there are still a lot of unfilled jobs, although mostly in the service sector. Inventories, a frequent cause of past recessions, are not excessive. Consumer spending, which drives two-thirds of economic growth, still has some strength. Thus, the market seems to be looking through a mild recession to a recovery in 2023.

Inflation must moderate for all of this to work. If the Fed does not see a decline in the rate of inflation, it will keep raising interest rates. Many think the rate of inflation peaked in June, and that July will show a modest reduction, with more reductions throughout the rest of the year. Price reductions can be seen in housing with material costs down and mortgage applications falling 20% from last year. Business spending has contracted, and layoffs are not far behind. Consumer durable purchases like cars and appliances also have contracted. On the other hand, energy is not expected to be of any more help. Crude oil fell from $120/bl to $100, but there are supply constraints partially aggravated by the war which will make it difficult for crude to fall more. Natural gas is climbing in price as Russia cuts off its gas supply to Europe. Energy stocks have been some of the best performers so far this year as a result.

The prospect of the Fed ending rate hikes by the end of this year has caused a big recovery in fixed income prices. Our fixed income strategy, Intelligent Fixed Income (IFI), was up about 6% this month. The equity market had its best month of the year. Those investors in cash should start thinking more creatively.

For the remainder of the year, we feel inflation will stay high but declining. The slowing economy will be reflected in lower corporate earnings and reduced consumer spending. This week, Best Buy shared its concern for softness in the consumer electronics sector. Walmart reduced its forecast as well. The path through the next six months will be volatile as the markets work their way from the present to the future.

The S&P 500 finished this week up +4.26% while the Nasdaq rose +4.70%. The 10-yr Treasury rate fell another 14 basis points to 2.65%. Monday the S&P 500 was +0.13%, Tuesday -1.15%, Wednesday +2.62%, Thursday +1.21% and Friday +1.42%.

Next week, corporate Q2 reports continue with Starbucks, Caterpillar, Uber, CVS, Electronic Arts and mid-sized oil and gas companies like EOG among a lot of others. Friday will bring the most sensitive news as the number of new jobs created is announced. The average monthly job growth for Q2 was 375,000. The Fed will be looking for a much lower number this Friday. The market will be sensitive to other data related to prices and inflation. For instance, the jobs report also will show the change in hourly earnings, an indicator of wage inflation. The normally sleepy August won’t be quite so sleepy this year.

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 July 22, 2022

by Jim Ulland

The market is searching for a direction and “Up” might be it. The primary reason is that inflation is likely to have peaked in June. Evidence of this is the meaningful decline in crude oil and gasoline. Other commodity prices are down as well. Russia and Ukraine came to an agreement that allows Ukrainian-stored grain to be shipped. This will take some pressure off grain prices since both countries are very large producers. Russia also resumed some natural gas deliveries.

If inflation has peaked, the Fed will not have to be as aggressive in raising interest rates. We still expect a 0.75% raise on Wednesday (7/28) and two or three smaller raises before year end. By 2023, the Fed may be lowering rates to stimulate the economy. Although our fixed income strategy, Intelligent Fixed Income (IFI), continues to generate consistent and stable income, the price of the preferred stock securities has declined. As the market comes to believe the Fed will stop raising rates and then actually cut them, these prices should snap back sharply. IFI portfolios are already up over 5% since the beginning of the month.

Besides a probable peak in inflation, the Fed sees a slowing economy. First-quarter GDP was negative by an annualized 1.6%. The second quarter is forecast to be negative by a similar amount, a figure that will be released Thursday. Initial jobless claims were the highest since last November. Firms are announcing hiring freezes. All housing statistics are lower and mortgage applications are at a 22-year low. Corporate profits are lower. These factors point toward a slowdown at best, but, more likely, a recession. Either of these situations is favorable for fixed income in that market interest rates should decline, and the Fed will likely end its rate-hiking cycle by the end of the year.

What is good for fixed income is not necessarily good for stocks in the near term. Next week a flood of companies will report Q2 earnings. They will be mixed and probably disappointing. Snap, the parent of Snapchat, announced slower ad sales than expected on Thursday. When the market opened on Friday, Meta (Facebook) and Alphabet (Google) were down 5-7% since the major source of their revenue also is advertising. Major Tech names will report next week, including Google and Facebook. Also reporting are Amazon, Intel, Microsoft, and Apple. Pfizer reports and will give a look into Covid suppliers. Qualcomm reports and will indicate the health of the chip and semiconductor companies.

The S&P 500 finished this week up +2.55% while the Nasdaq rose +3.33%. The 10-yr Treasury rate fell 16 basis points to 2.77%. In addition to the Tech reports and Fed meeting, next week will bring readings of consumer confidence, home sales, and the preliminary Q2 GDP (Thursday). Markets historically have looked six months ahead when forming a direction. We think that six months from now, both stocks and fixed income at today’s prices will look cheap.

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 July 15, 2022

by Jared Plotz

Amidst elevated risks to global growth, last week’s strong US jobs report and this week’s better-than-expected June retail sales highlight the lack of clear direction of the US economy. Are we headed for contraction or simply slower growth? What these recent data points do cement is at least a 75bps interest rate hike by the Federal Reserve when they meet in two weeks.

After Wednesday’s hotter-than-expected (June) CPI inflation report (headline +9.1% y/y and “core” +5.9%), bond markets were quick to price in a 100bps hike in July. But this probability fell after multiple Fed policymakers echoed the case for 75bps – not the bigger hike traders penciled in – and equity markets rallied from the Thursday morning low. As we noted last week, this may be the inflation peak.

With most investors preparing for an economic recession and sentiment very weak, if a recession does show its face investors will likely look past a mild or temporary slowdown. If economic disaster doesn’t materialize, we could see stocks and higher-yielding fixed income substantially recover YTD declines. Either way, much of the pain has already been felt after the markets saw their worst first-half start in over 50 years.

This week kicked off second-quarter earnings season, with JPMorgan and Wells Fargo reporting along with UnitedHealth Group. The banks are showing favorable margin improvement as interest rates have risen and overall loan growth remains good. Consumer and business credit remains healthy, but non-interest “fee” income is now a drag. Consumer demand for mortgages has dwindled and investment banks’ debt & equity underwriting is materially down. JPMorgan was forced to pause their common stock buybacks after Fed stress tests, during this period of greater global volatility, required them to raise their capital buffers.

The S&P 500 finished this week down -0.93% while the Nasdaq fell -1.57%. Next week will bring more earnings reports from Financial, Healthcare, Materials and Consumer sectors. We will also get a second June inflation reading (PMI) and housing data. The ECB will meet and possibly hike rates in Europe by 25bps.

Keep cool this weekend!

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 July 8, 2022

by Jim Ulland

Everything has seemed so “macro” this year. By this I mean everything is moving together in response to over-arching issues: inflation, interest rates, and the Fed. Inflation numbers have been “hot” and moved the market down. The Fed has been trying to catch up after leaving interest rates too low for too long. Their efforts to raise interest rates also have moved the markets lower.

There are many drivers for inflation. For example, half of the increase in crude oil and natural gas prices came before Russia invaded Ukraine, while world economies recovered from Covid. The other half of energy’s price rise came after the Russian invasion. Oversimplifying, the Fed’s low rates, Covid-related bottlenecks, and Washington’s excessive spending caused the first surge in inflation and the war caused the second. Wages are an additional inflation driver. Where did all those workers, who were at their jobs before the pandemic, go?

Many feel the Fed will put the country into a mild recession until inflation is brought under control. That should be good for fixed income strategies like our Intelligent Fixed Income (IFI), which now has a yield over 6%. A recession would reduce inflation and, shortly thereafter, the Fed could pause its interest rate hikes, causing almost an immediate rebound in fixed income and stocks. We think this is the most probable outcome to the current dilemma. Following a rate-hiking pause, the Fed could reduce rates to restore economic growth allowing a second surge in the market. The timing of these policy changes will depend on the pace of the decline in inflation and the severity of the recession.

The June Consumer Price Index (CPI) will be released next week. An inflation rate of almost 9% is expected. This could be a peak since there has been some softening in the price of airline tickets, gasoline, commodities, rent, and autos in July. This week showed a slight increase in unemployment filings and a modest drop in new jobs, both signals that the economy is slowing. There still are a lot of open jobs, but this number too is dropping.

The Fed is likely to raise interest rates by another 0.75% at its meeting on July 27. The market fears the Fed will overshoot while raising rates and turn a mild recession into a more serious one. Corporate earnings will start to be released next week, with many more in the following three weeks. These too will be a sign of how quickly the economy is slowing.

A negative sentiment in the market persists, although this week fought that trend. The SP 500 was up +1.94% and the NASDAQ was +4.56%. On Tuesday the SP 500 was +0.16%, Wednesday +0.36%, Thursday +1.50%, and Friday -0.08%. Next week, the major news will be the June CPI report on Wednesday. JPMorgan and Morgan Stanley lead off earnings reports on Thursday. Looks like another choppy week ahead.

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