by Jim Ulland

The Fed raised interest rates by 0.25% last Wednesday. The more important news came from the comments by Chr. Powell, who said that the bank turmoil had “done some of the Fed’s work for it.” He meant that the slowing economy should lessen the need to raise rates further. We agree with Goldman Sachs that the Fed should pause its rate-raising at the current level. This will help return stability to the financial sector. Lower rates will also help reverse losses in banks’ investment portfolios, a problem spread across most banks and one of the causes of the Silicon Valley Bank failure. The Fed language implies that it may pause additional increases to await the delayed impact of the raises already in place. If this language is signaling a potential pause, it will help prices of bank and non-bank preferred shares recover.

We feel that in May, the Fed will officially halt its rate increases. We expect sharp gains in fixed income portfolios. When the Fed starts reducing rates, an additional recovery in prices should occur. Some forecast a rate reduction as early as late summer. Already, there has been a dramatic drop in the yields on US Treasuries, a sign that the market expects the Fed to reduce rates. The 10 Yr Treasury fell from its 2023 peak of 4.09% on March 1st to 3.38% today, a decline of 71 basis points. We now seem to be entering the favorable part of the interest rate cycle, when rates are declining, which should help restore prices. In the first part of the cycle during 2022, rate increases depressed fixed income prices.

The continuation of the downward trend in inflation is a necessary factor for this forecast to become a reality. Crude oil is helping – it is down 10% so far this year. Home prices declined for the first time in eleven years. Mortgage rates are down from their high and are set to fall even more. Eggs are down 49% from their December peak, although general food prices have not cracked. The labor market remains tight, with weekly unemployment filings flat – even with Facebook announcing another 10,000-employee layoff. It may take another month for the March turmoil to become visible in higher unemployment filings to be reported in April.

At the end of the week, there were a few signs that the fear in the market was diminishing. Equities on Friday closed higher, just as the day ended. Bank stocks were flat to lower, but not gapping down like earlier in the week. Generally, if investors fear unknown events occurring over the weekend, the market would sell off on a Friday.

Next week, all we hope to see are calm markets. If so, security prices will take care of themselves and continue a gradual rebound. Another bank failure would be very disruptive. Even with all the trauma in the financial services sector, equities were up this week: S&P 500 +1.39% and NASDAQ +1.66%. Monday the S&P 500 was +0.89%, Tuesday +1.30%, Wednesday -1.65%, Thursday +0.30%, and Friday +0.56%

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 was the week from Hell in the banking sector. As an example of the damage, US Bank is one of the more conservative banks in the US and the fifth largest. Today its stock was down about 9%. Year-to-date the stock is down about 25%. The stock dividend is 5.25% and the forward price/earnings ratio is seven, about half the average ratio of the S&P 500. US Bank is enveloped in contagion, the fear that banks are not as sound as previously believed.

Triggering the uncertainty in banks and their securities was the failure of two banks a week ago – Silicon Valley and Signature. Both banks are being auctioned off with bids due today. If the banks are not sold, they will be broken up and sold in pieces. A successful sale will help bring back some stability to the market. The Fed did provide bridge loans to all banks, allowing them to borrow money to pay deposit withdrawals without having to sell securities at a loss. The rapid pace of interest rate increases, mandated by the Fed, has caused large losses in banks’ investment portfolios. If the banks can hold their portfolios to maturity, they get their money back without loss. However, if a bank faces a deposit run, it is forced to sell securities – often at a loss. This is where the Fed bridge loan facility will help.

Next week is all about the Fed. On Wednesday, it will announce any interest rate change. Many think that the best way for the Fed to calm the markets is not to raise rates. Higher rates mean more losses in bank portfolios, as well as other fixed income portfolios – including those of our clients. If the Fed does raise rates by 0.25%, they could say this is the last raise and then wait to see the impact of twelve months of steep increases. Economists say that the full impact of an interest rate increase is not felt for six months. Logically, the Fed could pause and see the economic result of what they have done.

A rate pause could be followed by a rate decrease this fall, triggering a strong rally in both fixed income and equities. Market analysts suggest that rates could come down both at the end of 2023 and the start of 2024. This is the way the year could play out if the Fed takes a leadership role. A downward trend in inflation is an essential part of this mix. Rates will come down at some point and securities values will be restored. The Fed controls the timing.

For the week, the S&P 500 was up +1.43% and the NASDAQ +4.41%, reassuring during this period of financial market stress. Monday the S&P 500 was -0.15%, Tuesday +1.65%, Wednesday -0.70%, Thursday +1.76%, and Friday -1.10%.

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

One law that Washington frequently presents to the public is the law of unintended consequences. The Federal Reserve, in its zeal to control inflation, raised interest rates at the fastest speed in memory. They argued that higher rates would slow the economy and reduce inflation. We saw the unintended consequences at the end of this week at Silicon Valley Bank.

Silicon Valley Bank, the 16th largest in the US, was a California bank that served the Tech industry. The smaller technology companies and their venture capital partners held sizable deposits at the bank. The bank took the deposits and invested in US Treasuries and other highly secure securities. Unfortunately, when they invested, interest rates were low. As the Fed dramatically increased rates, the value of the low-rate securities fell. This would not have mattered much if the bank could have held the securities to maturity, since they would have gotten all their money back. However, the tech depositors got nervous this week and started pulling out their deposits rapidly. To pay the depositors, the bank had to sell it holdings of US Treasuries at depressed values and could no longer hold them to maturity. As a result of the substantial losses, the bank failed today.

The only good news on this Fed blunder and the unintended consequences, represented by the bank failure, is that the Fed is likely to do only modest increases in rates going forward. A rapid pace could destabilize more companies in the financial sector.

The Fed is still faced with controlling inflation. The next data point is the February Consumer Price Index (CPI) which will be released on March 14. The following week, the Fed meets for its latest interest rate action. The market hates the turmoil experienced this week. For the week the S&P 500 was down -4.55% and the NASDAQ -4.71%. Our fixed income strategy, IFI, was down hard as well, however, the current yield from the strategy is now over 7%.

Our US Treasury strategy is paying almost 5%. We are focusing on Treasuries with 12 months or shorter maturity. These trade very near full value even if sold prior to maturity.

Monday the S&P 500 was up +0.07%, Tuesday -1.53%, Wednesday +0.14%, Thursday -1.85%, and Friday -1.45%. Next week, the big news will be the Tuesday CPI Report.

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

You probably read Samuel Beckett’s “Waiting for Godot” somewhere along your academic journey. The market is relatively range bound as it waits for Godot. Godot, in this case, is a resumption of the decline in the Consumer Price Index (CPI). The February CPI report will come out in two weeks on March 14th. This will be preceded by the February Jobs Report. Remember, last month the report said that a ton of jobs had been created in January, and the market reacted very negatively. The market feared the Fed would raise rates even more than expected in an attempt to cool the economy and thus inflation. The same fears will be present for the February Jobs Report of next Friday. The market does not like uncertainty, so it went down for three weeks in a row in February before moving higher this week. At the close today, the S&P500 was up 1.90% for the week and the NASDAQ was up 2.58%. Economic data was mixed. For instance, pending home sales for January were up 8.1% (bad), but year-over-year sales home were down 24.1% (good). Consumer confidence was down, as were durable goods orders. Tech kept announcing layoffs while restaurants kept hiring. This mixed data will continue until a solid trend of declining CPI is established. US Treasuries are competing with stocks and traditional fixed income for dollars. Normally, investors would try to lock-in current yields as they hover around 6.5-7%. Some of this is happening, and we recommend a higher allocation to our IFI strategy. Yet, US Treasuries of six and twelve months pay over 5% and are exempt from state taxes. That is attractive. Our new IFI-GOV strategy using US Treasuries has seen an in-flow exceeding $20 million since 12/1/22, when it was launched. The next Fed interest rate announcement will be on March 22. Things will be volatile until the downward CPI trend is established. Buckle up. As you recall in “Waiting for Godot,” Godot never showed up. We hope for the arrival of a Fed interest rate pause by this summer. Monday the S&P500 was up +0.31%, Tuesday -0.30%, Wednesday -0.47%, Thursday +0.76%, and Friday +6.61%.  Next week, the big news will come on Friday with the February Jobs Report.

 

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