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by Jim Ulland

The Jobs Report this morning finally reflected a slowing pace of job growth and an increase in the unemployment rate. This isn’t meant to be unsympathetic to those getting laid off, but somewhat higher unemployment is what the Fed is seeking since this will dampen the impact of wage increases on the rate of inflation. The market viewed this news very favorably. For example, the yield on the 10-year Treasury, which is used as an indicator for the direction of interest rates, was 4.88% at the close on Monday 10/30. At today’s close the 10-year rate is 4.57%. Wage growth was up only 0.2% from September to October. Unemployment rose from 3.8% in September to 3.9% in October.

The Fed’s rapid interest rate increases have been a headwind for preferred stock prices and for most common stocks over the last 20 months. Now that we appear to have reached “peak rates,” the Fed is expected to pause. The Fed has not raised interest rates during its last two meetings, one of which was this week. In six months or so, the Fed is likely to start lowering rates. What had been a headwind for the markets should turn into a tailwind. What we like about our Intelligent Fixed Income (IFI) strategy is that even while preferred prices have been pressured, the income from the securities in these portfolios was unchanged and substantial. The current yield in this strategy is now about 8%. The yield on our US Treasury strategy is just below 5.4%. Remember, investors do not have to pay state taxes on income from Treasuries.

This week, the market’s worries have been less. The war between Israel and Hamas has not spread although that danger is still present. Crude oil prices retreated more than $5/bl since last Friday. The UAW and the auto firms have agreed on a contract. Eurozone inflation came in below 3% for the first time in more than two years. US Q3 productivity was up, another factor helping to contain inflation since it drives unit labor costs lower. Thirty-year fixed mortgage rates joined the party and fell below 8%.

Generally good corporate earnings continued, and the market was more appreciative. In fact, the S&P 500 and the Nasdaq were up every day this week. The S&P 500 ended up +5.85% and the Nasdaq +6.61%. On Monday the S&P 500 was +1.20%, Tuesday +0.65%, Wednesday +1.05%, Thursday +1.89%, and Friday +0.94%. The yield on the 6-month Treasury closed at 5.48%. The 10-year Treasury finished down -27bps to 4.57%.

Next week, there will be fewer significant economic reports. Geopolitical events could dominate the headlines. The next big economic news is 11/14 when the October CPI is released. The CPI is one of the commonly used inflation indicators. (As a side note, many of our clients and readers forward this Market Report to others. You are welcome to do so. Also, we are happy to add people you suggest to the distribution. Just provide us with the email).

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

by Jim Ulland

When is good news not good enough? Apparently, this week. For example, Meta (Facebook) announced Q3 earnings. Operating income was 20% higher than expected. Revenues were 23% higher than last year and above expectations. With all this good news, the stock went down 4% for the week. Alphabet (Google) was virtually the same story. Google’s ad business was up 11% in Q3 vs up 5% in Q2. The sale of advertising is 90% of the company’s revenue. The data storage “Cloud” business was up 22% over last year, but up less than the 28% increase of Q2. Thus, 90% of Google’s business was up more than expected and 10% of its business was up less than expected. The stock ended down 10% for the week. Not good enough.

The market has plenty to worry about, which is one reason for the tepid response to good news. The chief concern is that the Israel-Hamas war will draw Iran into the conflict. If Iran attacks Israel, the US is likely to attack Iran, which is thought to have nuclear weapons. Iran’s population is 88 million, whereas Israel’s is 9 million. A second big concern is that the US government deficit will keep inflation from trending down and thus force the Fed to raise interest rates further to slow the economy and inflation. This year’s deficit is the third largest in history. Funding the deficit is expensive. During the week, the 10-year Treasury yield hit 5%, the highest level since 2007. This has driven 30-year mortgages to as much as 8% and credit card interest to 22.8%. These high rates raise the fear that the economy will slow markedly in this quarter and further in 2024 as the full impact of the interest rate increases becomes clear.

The market’s nervousness clouded other generally good corporate earnings, which were running, on average, above last year. GDP in Q3 was up a remarkable 4.9%, the strongest since the end of 2021. Even the UAW provided good news with a tentative settlement with Ford, allowing the workers to return to work even before the vote on the new contract. On 11/1/23 there should be more good news as the Fed meets and is expected to leave interest rates unchanged. News that is less certain to be positive comes next Friday 11/3 when the number of new jobs created in October is announced. A large number of new jobs will keep the labor market “tight” and prevent wage increases from moderating. Wages are an important component of inflation.

Amidst all these cross-currents, this week the S&P 500 was down -2.53% and the NASDAQ -2.63%. On Monday the S&P 500 was -0.17%, Tuesday +0.73%, Wednesday -1.43%, Thursday -1.18%, and Friday -0.48%. The yield on the 6-month Treasury closed at 5.54%. The 10-year Treasury finished down -8bps to 4.84%.

Next week, the significant economic news will be the Jobs Report on Friday, assuming the Fed leaves interest rates unchanged on 11/1. Geopolitically, Israel may move troops into Gaza depending somewhat on hostage negotiations. Q3 corporate earnings will continue. All of this will be bathed in volatility. Fasten your seatbelt.

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

by Jim Ulland

Fed Chairman Powell implied on Thursday that the Fed is through raising interest rates. Other Regional Presidents have echoed the same message in their public remarks. Interest rates, as reflected in the commonly cited 10-year US Treasury yield, are at a 16-year high. 30-year mortgage rates are at a 23-year high.

Normally, the market would have seen Powell’s remarks as a reason to spike higher. That was not to be. The fear persists that the full impact of higher rates is not known and could push the surprisingly resilient economy into recession. The second major force preventing a market rally is the expansion of international conflict. The war in Ukraine continues for its second year. Also, an escalation in Israel’s reaction to Hamas’s brutal attack is expected. Both conflicts have unsettled the markets. For instance, Crude oil (WTI), is up 7.9% since Hamas attacked Israel. Iran is threatening to enter the conflict. Hezbollah, perched on Israel’s northern border, already has been skirmishing with Israeli forces. Higher oil prices give Iran more money to fund terrorist groups and Russia more money to buy weapons. International trade restrictions have resurfaced. The latest example is the US Government’s restriction on the export to China of some AI chips, including some from portfolio company NVIDIA. This stress on the world economy will not end soon.

Against this backdrop, stocks and fixed income prices have fallen. However, corporate earnings for Q3 have been surprisingly better than expected and up from a year ago on average. Large banks have put the interest rate trauma behind them, although the results are more mixed in regional banks. Unemployment filings have remained low. Retail sales in September were up a surprising 0.7% from August. Workers are returning to the office in increasing numbers. And GM is rumored to be near an agreement with the UAW.

Inflation continues to trend down, and that trend seems to be the pathway to a stronger fixed income and equity market. Core prices rose 3.7% in September from the prior year. In August the rise was 3.9%. At the end of last year prices were increasing at the rate of 4.9%. But to strengthen, the market also needs a reduction in global tension. Higher-than-average market volatility is likely as these two primary issues play out. Fortunately, our fixed income strategies continue to pay their expected distributions whether the price of those securities is up or down.

For the week, the S&P 500 was down -2.39% and the NASDAQ -3.16%. On Monday the S&P 500 was +1.06%, Tuesday -0.01%, Wednesday -1.34%, Thursday -0.85%, and Friday -1.26%. The yield on the 6-month Treasury closed at 5.54%. The 10-year Treasury was up +30bps to 4.92%.

Next week, the fear of Iran entering the Israel-Hamas war and progress on hostage negotiations will dominate headlines. Q3 corporate earnings will show the amount of resilience in tech stocks (Amazon, Meta (Facebook), Google and Microsoft) as well as many of the S&P 500 companies including GM, 3M, Visa, Boston Scientific, and Exxon. With the Fed highly unlikely to raise rates at its 11/1 meeting, the direction of interest rates during the week will move the market. Our hope is for a modest decline in rates after the sharp rise this week.

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

by Jim Ulland It is worth noting this week’s comments by Jamie Dimon, the CEO of JPMorgan, the largest bank in the country. Dimon cautions, “This may be the most dangerous time the world has seen in decades.” He goes on to cite the war in Ukraine, the unprecedented attack on Israel by Hamas, which he feels may have “far reaching impacts on energy and food markets, global trade, and geopolitical relationships.” He also noted extremely high US government debt and the uncertain results from the Fed’s swift increase in interest rates. Ironically, Dimon announced very strong earnings for Q3 at JPMorgan this morning. How concerned should we be? If Iran attacks Israel, global instability will ensue. Unfortunately, the US is not well positioned for such an event. Weapons stockpiles have been reduced to help Ukraine. The Strategic Petroleum Reserve has been drawn down to a low level by non-strategic actions. The US already is running a large budget deficit which leaves little room for crisis spending. Many sectors of the domestic economy will be hurt if either the Russian-Ukraine or the Israel-Hamas conflicts widen. Travel, lodging, airlines, and trade will see direct negative impacts. Emerging-market stocks are already at the lowest in decades and likely to go lower (we have no exposure). Crude oil, natural gas, and defense contractors will benefit. If these conflicts widen, it is likely to be known relatively soon. Market volatility may spike in the interim. Domestic economic news was mixed this week. A decline in consumer confidence was reported, which often indicates a future slowing in consumer spending. The CPI report showed continued downward trends in inflation, especially in the index that excludes the volatile components of food and energy. The Fed’s next meeting is 10/31 and 11/1. No change in rates is expected following the remarks of several Fed Governors this week. Many economists feel the Fed has finished raising interest rates, pausing to assess the impact. We agree. Locally, Hormel settled its pending strike. Unfortunately, the UAW and the auto companies seem far from doing so with 34,000 now on the picket lines. For the week, the S&P 500 was up +0.45% and the NASDAQ -0.18%. On Monday the S&P 500 was +0.63%, Tuesday +0.52%, Wednesday +0.43%, Thursday -0.62%, and Friday -0.50%. The yield on the 6-month Treasury closed at 5.55%. The 10Yr Treasury was down -17bps to 4.62%. Next week, the fear of an expanded conflict will dominate headlines and influence the market. Q3 corporate earnings will also have a market impact. Regional bank earnings will show how successfully these institutions have navigated higher interest rates. Positive bank earnings should boost our fixed income strategies which now yield from 7.5%-8%.

 

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