Stock markets didn’t move much this week, with the S&P 500 Index hovering around the 6,000 level. Friday brought some “risk off” trading. Participants chose to take a few chips off the table heading into the weekend following Israel’s air strikes on Iranian nuclear and military facilities. Oil prices spiked higher by $5 a barrel on the news, fearing the conflict could widen. We are likely in store for higher prices at the gas pump next week. The S&P 500 finished the week down -0.4%, while the Nasdaq fell -0.6%. The 10-Year Treasury yield, an interest rate indicator, closed at 4.41%, down -10 bps from last week. Softer inflation readings, as well as successful 10- and 30-Year Treasury bond sales, precipitated the rate move.

Trade negotiations between China and the US yielded a framework for implementing last month’s “de-escalation” in Geneva. The US should get some relief on importing rare earth minerals – including those used in automobiles – for six months in exchange for dialing back some technology export restrictions. On the US political front, substantive progress on a reconciliation bill proved elusive, and it seems less likely that a bill may make it over the finish line before Senate Republican’s July 4^th goal.

Both hard and soft economic data came in better this week. CPI and PPI inflation measures came in lighter than expected, with May headline inflation growing in the 2.5% range and Core inflation (ex-food/energy) growing a little under 3.0%. The NFIB Small Business Optimism Index ticked up, snapping four months of decline. Consumer surveys from both the NY Fed and the University of Michigan also showed an uptick, with sentiment rising as inflation expectations retreated.

Looking ahead, the Fed’s FOMC meeting on Wednesday will headline a busy, holiday-shortened market week. Chair Powell is expected to reiterate a stable labor market with better inflation trends, but ongoing fiscal and trade uncertainty. The group will update their quarterly Summary of Economic Projections, in which 2025 GDP may be lowered while inflation gets marked up. The next rate cut is not expected until September or later, with two cuts by the end of the year. Slated economic releases include May’s retail sales, housing starts, building permits, industrial production, and the Philly Fed’s leading indicators.

Our office, and the major exchanges, will be closed on Thursday next week for the Juneteenth National Independence Day holiday. We will be open again on Friday.

Jim Ulland’s Memorial Service will be held Saturday, June 21, 2025, from 1PM-2PM at Lakewood Cemetery in Minneapolis, MN. There will also be a reception from 2PM-4PM held at the Garden Mausoleum. For those readers that will not make it to Jim’s memorial service on the 21^st but would like to watch it digitally, a link to the livestream is below.

Jim Ulland Memorial Service: Livestream

Major equity indices rose this week, with the S&P 500 Index crossing back above 6,000. In lieu of our normal weekly newsletter, we are attaching a copy of our May market update sent to clients this past week. Please take note of the date for Jim Ulland’s memorial service in June. Have a great weekend!

Jim Ulland Memorial Service

Jim Ulland’s Memorial Service will be held Saturday, June 21, 2025, from 1PM-2PM at Lakewood Cemetery in Minneapolis, MN. There will also be a reception from 2PM-4PM held at the Garden Mausoleum. Please contact our office for additional information. We look forward to seeing many of you and celebrating Jim’s extraordinary life.

Market Update

Entering this year, we noted that the economy and consumers remained in good shape, but that risks were present, including inflation and elevated equity valuations. We anticipated a return to a more “normal” market environment. A more normal stock market being one that doesn’t go straight up, but one that has drawdowns, upswings, and periods where it just struggles to find direction. One where 5% and 10% equity pullbacks occur and are viewed as a burden to bear for investors targeting long-term returns.

As we reflect on both Q1 and early Q2, risks came to the forefront – most strikingly by way of tariffs – and challenged market participants’ emotions. Similar to the 2020 Covid pandemic, we’ve already seen >5% moves in a single day and >10% moves in a week this year. In fact, from the February high to the April low, the S&P 500 declined more than 20%, the mark of a bear market. Economic and inflation outlooks are not only intertwined with tariff developments, but are dynamic, changing on a weekly or even daily basis. During earnings season, companies voiced the complexity of the current situation, noting the multitude of moving variables. But the worst days often lead to some of the best days and opportunities.

Despite the dramatic moves, for those investors that checked their emotions at the door the major stock indices ended the month of April roughly where they had begun. And, as this letter goes to print, the indices are roughly flat on the year. Fortunately, the economy started from a place of strength. Market strategists have revised forecasts lower, but are still calling for 1-2% GDP growth, 3% inflation, and earnings growth of 5-10% in 2025. April fears of an impending recession faded in May.

Given the heightened market volatility and unknown outcomes of tariff and fiscal policy, we noted last quarter that our Intelligent Blend and Defensive Growth portfolios have been incorporating some hedged equity ETFs like JEPI and JEPQ. These exchange-traded funds (ETFs) offer a compelling way to maintain equity market exposure with reduced volatility by owning the underlying securities but selling covered call options on their respective indices (S&P 500 for JEPI, Nadsaq-100 for JEPQ). The option overlays in the ETFs generate consistent monthly income, providing a cushion during market downturns by helping offset potential losses.

While these securities may limit upside in strong bull markets, we think the income generated (7-11% annualized yields) can lead to relative outperformance in flat or sideways markets. Additionally, the attractive monthly distributions tend to increase as market volatility rises. We think the combination of equity participation and income generation makes these securities attractive in 2025.

Our Intelligent Fixed Income strategy (IFI), which uses predominantly preferred stock, ended the quarter virtually flat. With the equity market down over 4%, we saw preferred stock share

prices follow the move directionally, although to a lesser degree. We continue to rotate aggressively into deeply discounted fixed-rate preferreds, issued by the mega-cap banks. In this type of security, we can find +6% current yields, trading below 80 cents on the dollar. We still expect the 10 Year Treasury to end the year near 4.25%, which should boost the security prices of our fixed-rate preferreds.

The trend should be our friend over the next 12-36 months as the Fed continues to cut interest rates. Although recent tariff news may cause a slight pause from the Fed, the market is pricing in a 90% probability of at least one Fed cut by year end. Looking at the most recent Fed dot plot (see Figure 2 at left), the Fed’s official projection of its federal funds rate, the Fed expects 3-5 more rate cuts over the next 24 months.

Intelligent Fixed Income GOV remains an attractive choice for clients with idle cash. This strategy uses primarily 3–12-month U.S. Treasuries to generate a meaningful return with minimal volatility. We are targeting a 4% return in this strategy and, as a reminder, the income is exempt from state income tax. We have seen strong interest from investors looking for higher returns than found in low-yielding bank choices and better state income tax treatment than CDs. Our AUM in this strategy is over $25 million.

As always, please reach out with any questions you may have.