Weekly Update Archives

by Jim Ulland

The 30 yr. mortgage just hit 6.7%. The Federal Reserve can now claim the success of crushing the housing market. Fear that the Fed will cause a serious recession pushed crude oil down 5% on Friday. The S&P 500 logged four weekly drops of more than 3% over the past five weeks. The Fed can claim that victory too. Ironically, the Fed was one of the primary causes of the current inflation which it achieved by keeping interest rates near zero for years. Now, we are supposed to have confidence in them to fix the problem by triggering a recession. To be fair, some of the blame for today’s plight lies with Congress’s over-spending on Covid relief and stimulus, supply chain problems, and the war.

A recession historically has been good news for fixed income securities, and we expect that result for our Intelligent Fixed Income (IFI) strategy. Although the income in our IFI strategy does not change (+6%) whether the security prices go up or down, recession causes fixed income security prices to rise. This happens because as interest rates fall, securities with higher yields are more in demand and their prices rise. At current interest rates, CDs, money market funds, US Treasuries, corporate bonds, and preferred stocks have become more attractive. At long last, savers are being rewarded. The trick will be to lock in these higher interest rates for the long term. Our view is that investors should lock rates over the next six months. The Fed says they will raise rates more and then leave them at high levels until inflation is subdued. This should give a substantial amount of time to lock in high rates.

Other recessionary indicators include the fact that many countries are raising interest rates. This week, rate increase announcements came from the UK, Norway, Sweden, South Africa, Indonesia, Philippines, Taiwan, Switzerland, and Vietnam. That is one reason the FedEx CEO said last week that there might be a worldwide recession. This week he announced workforce layoffs and 7% price increases.

The Fed does not meet in October. Therefore, there will be time for inflation data to be analyzed. The market fears the Fed will raise rates too high because the data they see is backward looking. At the same time, the impact of an interest rate rise is delayed perhaps by as much as six months as the cost of higher rates works its way into the economy, making rate decision mistakes easy.

Corporate earnings also will see the impact of higher interest. Earnings per share of the S&P 500 are forecast to be down 6% in Q3. Downward revisions of earnings in Q4 and for 2023 will be coming. This will result in more headwinds for stocks. It is hard to see a quick way out of this mess. A steep decline in inflation would be one cure, but this is not likely. A change in leadership in Russia could be a game changer. But the most likely return to normal will be a long slog.

This week the S&P 500 was down -4.65% while the Nasdaq lost -5.07%. The 10-yr Treasury was higher by 24bps to 3.69%. Monday the S&P 500 was up +0.69%, Tuesday -1.13%, Wednesday -1.71%, Thursday -0.84% and Friday -1.72%.

The market is likely to continue to digest the events of this week next week. Eyes will be focused on any downturn in inflation. With the fall in crude oil today, gasoline should be cheaper next week. Fill up while it lasts.

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

The CEO of FedEx said this week that he expected a worldwide recession and reduced his company’s earnings and revenue forecast. If this broad recession occurs, the major causes are known – too much government stimulus and quasi-stimulus spending, the Federal Reserve’s zeal to raise interest rates, the war, continuing supply chain disruptions, and the persistently high level of inflation. Although the yearly rate of inflation seems to have peaked in June at 9.1%, the flat monthly price change seen in July was followed by a slight increase in August. The market tanked the day this news was released because it had hoped for a small August decrease in the rate of inflation. The downward trend of inflation, hoped for in August numbers, did not materialize. Gasoline, many commodities, and used car prices were down, but food, rent, and a lot of other prices went higher. Wages are fuel under the fire of inflation as the tentative railroad contract agreement showed annual increases of 5% for the next five years. It is hard to get down to the Fed’s target of 2% inflation if wages are going up 5% a year.

We must wait a month before the September CPI report can reestablish a downward inflation trend. Unfortunately, before that report, the Fed will meet on September 20 and 21 to raise interest rates again. This time an increase of 0.75% is expected.

China provided a little positive news by lifting some lockdowns. They also are talking to Moderna about buying vaccines, something they should have done a year ago. The sweeping lockdowns have not had the desired impact of eradicating Covid. Another positive note came from the NY Fed which surveys consumers on their expectations for future inflation. Historically, consumer expectations have been a good indicator of future inflation. This survey showed that consumers expect an inflation rate of 2.8% in three years. The Producer Price Index was released the day after the CPI and did decline slightly from the prior month.

The interest rate increases have had the beneficial result of increasing yields in fixed income. 90-day US Treasuries pay over 3%. New money in our Intelligent Fixed Income strategy pays over 6% on floating rate securities. These provide substantial protection as the Fed raises rates. Newly issued preferred stock offers 6.5-7% yields, something unheard of in the last ten years.

It probably is too soon to add more money to equities. Inflation really must turn down before stock prices improve. Until that happens, other CEOs will send the same message as FedEx did. “Earnings will be weak and revenue growth will be below expectations.” Continue to watch the monthly CPI report and the trend in wages. They will signal when the time is near to add funds to equities.

This week the S&P 500 was down -5.15% while the Nasdaq lost -5.97%. The 10-yr Treasury was higher by 14bps to 3.45%. Monday the S&P 500 was up +1.06%, Tuesday -4.32%, Wednesday +0.34%, Thursday -1.13% and Friday -0.72%.

Next week will focus on the two-day Fed meeting which concludes with the interest rate increase to be announced on Wednesday 9/21 at about 1:15 PM CDT. Any figure other than a 0.75% increase will be a big surprise to the market, and the market does not like surprises.

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

The rate of inflation seems to have peaked in June at 9.1%. July was 8.5%. On September 13, next Tuesday, the August inflation rate will be released. It is expected to be 8.1%. This is still high, but the trend is our friend. Don’t be surprised if this trend continues. Supporting data comes from the August wage growth, which slowed. Crude oil is down 30% from its March peak. Gasoline is down 25% from its peak on June 14th. Used car prices are down 10% from their high in January. The Services Price Index is down for the fourth straight month. And, this week, Apple kept its new iPhone prices flat whereas an increase was expected. The trend is important since the Fed’s goal is to reduce the rate of inflation by throttling the economy with higher interest rates. The sooner inflation comes down, the sooner the throttling stops.

Not only is the Fed going to continue raising rates at its next meeting on September 21, but the UK, EU, and other countries are doing so as well. The EU and the UK will have additional crippling impacts from energy shortages on their economies. A European recession seems almost inevitable. Consumer demand from the world’s most populous country, China, will be dampened as Covid lockdowns are reimposed each time new Covid cases are diagnosed. Slower economic growth means less demand, and this reduces pressure on prices, thus lower rates of inflation.

A question for investors to ask is where fixed income and stock prices will be next summer. The Fed has signaled to the market that it will raise rates until inflation is subdued. Counting September 21, the Fed has three meetings left this year and is expected to raise rates at all of them. If inflation trends down each month, the stock market is going to get excited at some point. The market could surge higher with each monthly CPI release starting Tuesday. Fixed income is likely to do the same. Although it is hard to precisely predict when the surge in stocks and fixed income will occur, it is coming. Each monthly CPI report could be the trigger to stair-step the markets higher. Naturally, if the downward trend in inflation is broken, the market will retreat, but not for long in our view.

Next week, the market will be very reactive to the CPI report on Tuesday. Low energy prices will continue to work their way into the economy and help reduce the price of other goods, services, and transportation. Naturally, winter may slow this beneficial impact especially if Russia refuses to fulfill its energy delivery contracts. Even if crude oil prices stay at these levels for the winter due to reduced economic activity, we think an exception to the downward trend will be natural gas. Russia is now considered an unreliable supplier, and it may take several years for this market to stabilize.

To get ahead of what the market will do, we suggest watching the CPI and the trend in wage growth. These are two of the important factors driving the Fed’s decisions on interest rates.

This week the S&P 500 was up +3.65 while the Nasdaq gained +4.14%, both more than reversing last week’s loss. The 10-yr Treasury was higher by 11bps to 3.31%. Monday was Labor Day, Tuesday the S&P 500 was -0.41%, Wednesday +1.83%, Thursday +0.66% and Friday +1.53%.

Next week is all about the CPI report on Tuesday. 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

by Jim Ulland

This week, the Fed Regional Presidents were on the road chastising the market for going up and the public for not feeling enough pain while shopping for school supplies. Minneapolis Fed President Kashkari said, “I certainly was not excited to see the stock market rallying after our last Federal Open Market Committee meeting.” The market, like a reprimanded child, fell five out of the next six days. Kashkari said the Fed’s goal is to reduce inflation to 2%. “People now understand the seriousness of our commitment.” That 2% goal is a long way from where inflation is today. Kashkari neglected to mention that the Fed and Congress were largely responsible for the surge in inflation.

Our view and that of many economists had been that the Fed would raise interest rates until the end of 2022, pause for several months, and then lower interest rates because of a weakened economy. Now the Fed mantra is that they will raise interest rates into 2023 and hold them at that high level through 2023 or until we eat our spinach, whichever comes first.

There are some signs that the economy is already slowing. Mortgage applications are down 25% from a year ago. Wage growth has slowed. The unemployment rate has risen slightly from 3.5% to 3.7%. August produced the lowest monthly jobs growth since April 2021. Manufacturing in our largest trading partner China contracted for a second straight month. That slowdown was compounded by the lockdown of 24 million residents of Chengdu for Covid. Apple has noted there will be a shortage of new iPhones since you cannot make phones while working remotely. Gazprom, Russia’s big energy company, has shut off natural gas transmissions in the Nord Stream pipeline indefinitely due to “technical difficulties.” Last year, Gazprom provided about 40% of the EU’s natural gas. This will slow the EU economy. The EU is expected to slow its economy further by raising interest rates as it faces record inflation at 9.1%.

The next big piece of data for the Fed’s consideration will be the August CPI released on September 13^th. The decline in the price of gasoline and crude oil, in general, will dampen the inflation number some. If a downward price trend can emerge, everyone will feel a lot better.

This market is going to require a lot of patience from investors. The Fed will push interest rates up some more on September 21^st. The market is unlikely to have much momentum unless it gets a lower CPI number. Barring special investment situations, there is little reason to rush funds into equities until more clarity appears. Variable rate fixed income securities provide more protection and could be used as a haven. See our IFI strategy.

This week the S&P 500 was down -3.25% while the Nasdaq fell -3.25%, both in the same magnitude as last week. The 10-yr Treasury was higher by 15bp to 3.20%. Monday the S&P 500 was -0.67%, Tuesday -1.10%, Wednesday -0.78%, Thursday +0.30% and Friday -1.07%.

Next Monday is a holiday. The rest of the week will be characterized by some remote workers returning to their offices and dusting off the furniture. Parents will send their kids back to school. Election ads will start in earnest. And the NFL will provide a distraction from a troubled world. Go Vikings.

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