Receive Weekly Market Updates via Email

shadow

Archive for December, 2022

Weekly Market Update for December 30, 2022

by Jim Ulland

The best thing about this week is that it marks the end of a terrible year in financial markets, in which the S&P 500 was down 19.4% and the NASDAQ was down 33.1%. Fixed income got pounded as well. Only energy stocks battled this trend. If you take a longer-term perspective, one can be somewhat forgiving for 2022. Over the last ten years, the S&P 500 was up 174% and the NASDAQ was up 253%, both including 2022.

The villains of the 2022 drama are well known. There is Covid, which triggered massive government over-spending that resulted in inflation. The Fed kept interest rates too low and generated additional inflation. When the Fed realized its mistake, it raised interest rates rapidly, which became a huge headwind for markets and the economy. The Ukraine war added to inflation with supply chain disruptions, as well as the human tragedy. China was a factor due to its size as the world’s second largest economy. Their Covid response of locking down the country caused supply chain disruption and reduced growth. Now they have reopened to relatively low vaccination/booster rates and a Covid outbreak.

2023 is setting up to be a lot better than 2022. We still may have to work through a recession or, at least, an economic slowdown. However, inflation is trending down, and this will allow the Fed to pause its rate-raising frenzy. Stocks are cheaper, a lot cheaper, than at the start of 2022. For instance, Pfizer trades at a price/earnings ratio of eight and has a dividend of 3.2%, with Covid vaccination and boosters probably becoming an annual preventative.

Fixed income is positioned to rally. Tax-loss selling hit the fixed income market this month. Prices are now at a point where it is relatively easy to put together a portfolio paying 7%, unheard of at the start of 2022. As the Fed lowers rates, possibly by the end of 2023, these securities could bounce sharply higher. While waiting, you can enjoy the 7%.

The war in Ukraine is likely to end in 2023 as well. Both sides talk of peace, although with conditions unacceptable to the other. Yet, peace will come at some point. International trade should return to pre-war levels, with the exception that Europe must replace Russia as a crude oil and natural gas supplier. China is reopening. Their manufacturing capacity will help supply chains. Their economic activity will boost worldwide growth. Covid will become manageable.

2023 will require patience. We profoundly appreciate the patience our clients have shown in 2022. We feel this patience will be rewarded in 2023. Thank you.

For the week, the 10-yr Treasury was up +13bps to 3.88%. Monday was a holiday. The S&P 500 was down Tuesday -0.40%, Wednesday -1.20%, Thursday +1.75%, and Friday -0.25%. For the week, the SP 500 was –0.14% and the NASDAQ -0.30%.

Wall Street will start the year with a four-day week. We too will be closed on Monday. The news next week will be on Friday with the December Jobs Report. The consensus is that job increases for December will be fewer than November, reflecting the Fed’s higher interest rate drag on the economy. With tax-loss selling at an end, look for a rebound in the markets.

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 December 23, 2022

by Jim Ulland

Even the new Avatar movie underperformed during its opening last weekend. As they say, “Join the Club.” Everything, except for energy, has underperformed in 2022. To show you how tough the market has been, one only needs to look at Amazon (which is down 48%) and Google (37%). The Fed has crushed both the equity and fixed income markets, but it has yet to crush the economy. The Fed wants the economy to slow, probably causing a recession, so inflation will decline to about 2%. The annualized GDP for Q3 didn’t cooperate and was revised up to an annualized 3.2% after two negative quarters to start the year. The market feared the GDP news would compel the Fed to raise interest rates even more than already expected.

It is lucky we are not homebuilders. Their confidence index is down for the twelfth straight month. Current home sales are near pandemic lows. Although Tesla announced layoffs, the labor market continues to be tight as shown in the weekly initial jobless claims, which have remained relatively flat since October. The Fed wants unemployment filings to increase, so that the upward pressure on wages is diminished. This is traditional economic theory until one of those laid off is a family member or neighbor.

The mess we are in can be rightly blamed on the Fed (for keeping interest rates too low for too long, which over-stimulated the economy), on Congress (for its historically huge spending, which was blissfully increased this week, putting more fuel on the inflation fire), and on the Russian invasion of Ukraine (which has dislocated the world energy market and disrupted international trade, forcing prices higher).

Our guidance to investors has not changed. We feel cash should go to fixed income. Here there are two good choices. We just launched a US Treasury strategy (IFI GOV), which invests in US government bonds with maturities of three years or less. This pays about 4% and is exempt from state and local taxes. Most consider US Treasuries almost risk-free. For those willing to tolerate more volatility, the potential reward is greater. Our Intelligent Fixed Income strategy (IFI) has a current yield of about 7%. The core security in this strategy is preferred stock. The primary issuers are the banks. In this strategy, you can lock in almost a 7% yield for a long time. Whether the preferred prices rise or fall, the dividends will remain constant, thus locking in today’s high yields. There is also the potential for substantial appreciation when the Fed starts lowering rates.

We advise waiting before adding to equity positions. Equities will have headwinds until the Fed starts lowering interest rates. The Fed suggests this will not happen in 2023, although others feel that a recession may force them to lower rates sooner.

For the week, the 10-yr Treasury was up +26 bps to 3.75%. On Monday the S&P 500 was -0.90%, on Tuesday +0.10%, Wednesday +1.49%, Thursday -1.45%, and Friday 0.59%. For the week, the S&P 500 was –0.20% and the NASDAQ -1.94%.

Wall Street activity will be very slow next week. The markets (and our office) will be closed on Monday. Perhaps we can take Col. Quaritch’s remarks from the 2009 Avatar as hope for 2023. He says to wheelchair-bound, former Marine Jake at the outpost Pandora, “By the way, you’re going to get your legs back”.

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 December 16, 2022

by Jim Ulland

Just as the inflation numbers on Tuesday pointed to a downward trend, the market changed its focus to the possibility of a recession. This is a market where all news is viewed as bad news. The market has been so focused on the Fed and its interest rate increases that less attention was placed on the impact higher interest rates would have on the economy. Stocks have historically been valued based on earnings. During recessions, earnings go down, thus it is no surprise that stocks are weak with a lot of recession talk in the air. Naturally, the Fed, interest rates, and recession are all part of the same witches’ brew. Let’s hope the brew doesn’t kill us.

On Tuesday, the Consumer Price Index (CPI) was released. The inflation rate in November was down from October and lower than expected. That good feeling lasted all of one day. On Wednesday the Fed announced its latest interest rate increase. Although this increase was less than that of the prior Fed meeting, it was surrounded with language on how tough the Fed was going to be with more increases and leaving this high rate in the market, or in Fed speak, “Higher-for-longer.” The Fed concedes that it will cause layoffs. It even virtually dismissed any rate cuts in 2023. Goldman Sachs didn’t take long to get the message and announced the layoff of 4,000 employees two days later. The New York and Philadelphia Fed manufacturing indices were down in sympathy. November retail sales contracted more than expected. One of the few counter-trends was found in unemployment filings. These were down, showing more workers staying at their jobs. One suspects that workers may be trying to build a cushion of savings, preparing for a recession.

With equities expected to have headwinds until the Fed starts lowering interest rates, investor attention is turning to fixed income. This month we launched a US Treasury strategy (IFI Gov) that has a target yield of 4% after fees. The great thing about Treasuries is that they have exceedingly low risk (the US has never defaulted) and they now pay a meaningful return for short maturities. Our new strategy focuses on Treasuries with maturities of less than 36 months. Interest income on Treasuries is exempt from state taxes. Investors also can withdraw some or all funds at any time without penalty, although securities sold before maturity will be sold at market prices. These separate accounts have a $250,000 minimum and a fee of 0.25%.

Our other fixed income strategy, Intelligent Fixed Income (IFI), has a current yield near 7%. In 2023, the total return will be the 7% income plus the change in price of the securities. We look for appreciation to be between 5-10% depending on when the Fed starts reducing interest rates. This means the potential for double-digit returns in 2023, in our view.

For the week, the 10-yr Treasury was down -10bps to 3.49%. On Monday the SP 500 was +1.43%, on Tuesday +0.73%, Wednesday -0.61%, Thursday -2.49% and Friday -1.12%. For the week, the SP 500 was –2.09% and the NASDAQ -2.72%.

Wall Street activity will be slowed by the Holiday next week. We have high hopes for a fixed income recovery early in 2023 and an equity recovery later in the year. Onward and upward.

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 December 9, 2022

by Jim Ulland

China and the Fed were the only news topics of interest to the market this week. China is the simpler of the two. During the week, China began lifting Covid restrictions and reducing testing requirements. The government seems willing to tolerate higher Covid levels to get people back to work. The lock-down policy had crippled their economy causing outbreaks of worker unrest. In the short term, crude oil prices strengthened with demand from China expected to return to the market. A reopened China will help the world’s supply chains and reduce some shortages as well as the resultant pricing pressure.

The Fed’s role in this week’s market was more complex. Monday through Wednesday, stocks fell as investors focused on a possible recession caused by the Fed as it continues to raise interest rates. Although recessions are generally good for fixed income, the same is not true for stocks. Ironically, data early in the week was relatively positive for the labor market and the service sector. Job numbers were still growing, primarily in services and healthcare, even as headlines announced layoff after layoff. The market fears that the Fed will raise rates too high in its efforts to slow job growth. Raising rates too high could cause a more serious recession than expected.

Next week there is a double-barreled set of data releases. One set being released Tuesday is the November Consumer Price Index (CPI). The CPI is viewed as the leading indicator of inflation. The Fed’s number one goal is to reduce inflation. So, if the CPI continues its recent downward trend, the market will have a short celebration, since the Fed will have less need to raise rates. On Wednesday, the Fed meets once again. A rate increase of 0.50% is expected. If the Fed says anything meaningful about future interest rate increases, it will have a big market impact. Language like, “We may continue to slow the rate of increase in interest rates” would signal to the market that the Fed is almost done with this punitive cycle. The immediate beneficiary would be fixed income securities, whose prices are likely to spike higher.

The market will get a substantial benefit if future monthly CPI releases show a downward trend. However, the CPI will have to overcome headwinds from higher wages and above-average consumer savings. Wages are a problem in the fight to control inflation. The Delta pilots settled for an average 8%, Railroad workers 5%, nurses are coming in at 6%, all annual average increases. Wage costs flow into prices of goods, making inflation control challenging. A second headwind is from consumer spending. Consumers came out of the pandemic with a lot of savings. They are now spending that surplus. Savings will stay above historical averages until next summer. Both wage increases and consumer spending suggest inflation will come down more slowly than hoped. But the trend is our friend, no matter how slow.

For the week, the 10-yr Treasury was up +10bps to 3.59%. On Monday the S&P 500 was -1.79%, on Tuesday -1.44%, Wednesday -0.19%, Thursday +0.75% and Friday -0.73%. For the week, the S&P 500 was -3.37% and the NASDAQ -3.99%.

Next week, Tuesday’s November CPI number and Wednesday’s Fed meeting will consume the market. Buckle up.

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