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Weekly Market Update for May 20, 2022

by Jim Ulland

Often the market direction is a battle between the Bulls and the Bears, the optimists and the pessimists. This month is better characterized as a battle between the Brown Bears and the Grizzlies.  The Brown Bears are those who think we will get through the Fed’s effort to control inflation with only an economic slowdown. The Grizzlies think the Fed will drive the economy into recession. For the past seven weeks the Grizzlies have been winning. The S&P 500 went down each of those weeks bouncing on the edge of a Bear Market (a Bear Market being defined as a market down 20% from its high). A recession will slow inflation. A recession also will force interest rates down and allow a strong recovery in fixed income securities. Our view is that interest rates will start coming down sometime during the next six to eighteen months, depending on the sharpness of the slowdown/recession. We expect a dramatic surge in preferred shares, the primary security in our Intelligent Fixed Income Strategy now paying 6%.

Equities have fallen 20-25%. The equity market expects a recession and there is supporting data. Inflation is pushing up all prices, as we see. Companies have been unable or unwilling to push prices of goods and services up as fast as wages, transportation costs, and wholesale prices. The result is that corporate profit margins are squeezed, and profits are falling. This is exactly the situation Walmart and Target announced earlier in the week. Sales were up modestly, and profits were down sharply – as were the stock prices of each company. Consumer confidence just hit an all-time low. Home construction is slowing with mortgage interest rates up from 3% a year ago to 5.25%. Corporate spending on technology is weak as shown in Cisco’s quarterly report. Although unemployment filings have stayed historically low, Amazon and Facebook say they have over-hired. CNN and Netflix have announced layoffs. This should reduce the current level of wage inflation, but there still are ten million unfilled jobs. The Grizzlies think the number of job openings will be reduced rather quickly.

China’s economic growth has slowed. Part of this is a result of their zero-tolerance Covid policy where entire cities were locked down. Although these lockdowns are being lifted, normal production will not return until June. Besides the growth slowdown, the lockdowns have exacerbated the global supply chain bottlenecks, one of the causes of inflation. Our trading partners too are experiencing inflation. UK inflation hit a forty-year high in April. Expect the UK to slow their economy too.

The Fed has “promised” to raise interest rates until it has inflation under control. We hope the Fed doesn’t follow its first mistake of letting inflation get out of control with a second mistake of crushing the economy. This is the market’s biggest fear.

For the week, the S&P 500 was down -3.05% and the NASDAQ -3.82%. Monday the S&P 500 was down -0.39%, Tuesday +2.02%, Wednesday -4.04%, Thursday -0.58%, and Friday +0.01%.

Next week, Costco reports earnings and hopes to avoid the dramatic stock price decline of Walmart and Target. Nvidia and Medtronic also report. Economic news will come from Durable Goods Orders and Weekly Mortgage Applications. Oil and gas stocks have been one of the few positive sectors in the market. Natural gas inventories are announced each Thursday morning. Note that Russia cut off the sale of natural gas to Finland starting tomorrow. In the future, we expect the US to provide a lot of the replacement natural gas to Europe as they move away from Russian gas, now an undependable supplier.

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 May 13, 2022

by Jim Ulland

Even with a strong market on Friday, the S&P 500 recorded its sixth-straight weekly loss. This is the longest period of decline since 2011. Why is the market so terrible? There are eleven million open jobs, corporate profits from Q1 were up 10%, unemployment filings were near historic lows, and it looks unlikely that Europe and the US will be drawn into a conflict with Russia via Ukraine. However, the fear of recession over-shadows everything.

The Fed Governors seem to want to “scare us straight.” Perhaps instead of scaring the market, they could scare Congress into more budget discipline. Strong demand for goods and services pushes prices higher, especially where there are Covid or supply chain related shortages. As an example of Congress’s lack of help in getting demand/inflation under control, next week $40B of military and humanitarian aid is going to the Ukraine. All are sympathetic to Ukraine, however, $40B is about half of what Russia spends in its defense budget annually. Congress is unrestrained in its willingness to help anything but inflation.

Some argue that the CPI report this week, which showed a slight reduction in the rate of inflation, may signal a peak. If so, it will be a peak at a very elevated level. Consumers see inflation daily with food prices up 11% in the last twelve months and gasoline over $4. The consumer sentiment report from the University of Michigan hit a low not seen since 2011. 70% of the economy is consumer related so a negative view by consumers can slow an economy quickly.

China has added to the inflation problems by going to a zero-tolerance policy on Covid. Their lockdowns of entire cities have disrupted supply chains just as the damage of Covid disruptions was being repaired. Fortunately, China’s disruption will be resolved soon.

What could change the market sentiment? First, if May’s CPI report shows a meaningful decline in the rate of inflation from April, the market will adopt the view that the rate of inflation has peaked. If that occurs, the Fed will have less reason to raise rates even higher than the planned 0.50% hikes in June and July followed by a series of 0.25% ones. Second, if China lifts its Covid restrictions, some supply disruptions will be resolved, reducing inflationary pressure on many products. Third, should there be peace talks in the Russian/Ukrainian conflict, a flood of optimism will be created. Finally, if the series of weekly declines of the SP500 ends, the market, which historically has looked six months ahead, may signal that we only need six more months of patience to get through this decline.

For the week, the S&P 500 was down -2.41% and the NASDAQ -2.80%. Monday the S&P 500 was down -3.20%, Tuesday +0.25%, Wednesday -1.65%, Thursday -0.13%, and Friday +2.39%.

Next week, Housing Starts for April will be reported. The 30-year mortgage rate is now 5.5% which will slow housing at some point. Preliminary Q1 GDP in Europe will be released and may show a major slow-down. April Retail Sales in the US also will be reported. These too will slow soon.

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 May 6, 2022

by Jim Ulland

The Fed announced its interest rate increase on Wednesday and suggested it would make two more half percentage point increases before taking an assessment. Inflation is real and has had a big impact on the market. Inflation makes investors very nervous.  Some nervous investors simply go to cash and thereby put selling pressure on the market. Inflation often hurts profits, so this instinct is not illogical.  Some companies are unable to pass on cost increases to customers, so profits fall. If profits are down, or expected to go down, stocks often decline.

Wage increases have caused productivity to fall sharply, also squeezing profits. If wages go up 10% and workers produce the same amount of goods, productivity goes down 10%. The first quarter productivity declined 7.5%. There are 2.3 million fewer people in the labor force now than at the start of the pandemic, while, at the same time, there are eleven million open jobs. Thus, there is wage pressure when hiring. This will not be resolved quickly. Wages have a big impact on inflation. Consumer Price Index, which comes out May 11, will give another monthly reading. If inflation in April is less than March, that could signal a turn.

The supply of goods, commodities, and services is still constrained. Part of this can be blamed on the pandemic, which is largely over, but after-effects linger. The Russia-Ukraine war is causing shortages in wheat, corn, oil, natural gas, and other products. The price of wheat is up 100%, natural gas and oil only a little less. Once the Russian/Ukrainian war ends, some of the shortages will be resolved although there is a lot of damage to ports and bridges in Ukraine. China too has caused disruption in supply by closing entire cities to control Covid. China could lift restrictions soon.

Although the Fed increased interest rates Wednesday, market rates have risen dramatically more. This implies investors are expecting the Fed to be aggressive in controlling inflation. Raising interest rates is the primary tool they have. If they raise rates too high, the economy will slow and possibly go into a recession. Already the GDP of Q1 2022 was negative. For instance, mortgage interest rates now are 5.25% whereas they were at 2% last fall. Housing will slow.

Washington has not helped. The excessive aid that was provided during the pandemic increased consumer demand at the same time there was a shortage of goods to buy. This week, the Department of Education forgave student debt for over 100,000 government workers. Nice if you have one of those loans, but exactly the opposite of what the Fed wants done, which is to restrain demand.

By early next year, we could have a mild recession bringing inflation down. This would also turn interest rates first flat and then down. Lower interest rates would allow fixed income securities to recover. Equities too would be bolstered by lower inflation and reduced interest rates. This is what the Fed hopes will happen…so do we.

For the week, the SP 500 was down -0.21% and the NASDAQ -1.54%. Monday the SP 500 was up +0.57%, Tuesday +0.48%, Wednesday +2.99%, Thursday -3.56%, and Friday -0.58%.

Next week, the last of Q1 corporate earnings will be released. The big news will be the CPI report on May 11. This will be market moving as an indicator of the pace of inflation.

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 April 29, 2022

by Jared Plotz

It was a mixed week which ended down. A Monday rally as treasury yields pared back gave way to mid-week softness. Thursday showed reprieve on the back of strong reports by Facebook and Paypal, but markets ultimately succumbed to negative sentiment on Friday with Amazon’s disappointing earnings report. The S&P 500 ended the week down 3.3%, the Nasdaq down 3.9%, and the 10-Yr up one basis point.

Earnings reports have been broadly positive but not quite as strong as prior quarters. Visa reported a “beat and raise” as cross-border volumes recovered faster than expected and the company reported no major volume impacts from recent market headwinds (inflation, supply chain, Ukraine war). Google shares declined after showing softening growth at its YouTube property. Facebook revenue missed expectations, as did guidance for Q2; however, healthy engagement metrics, reduced operating expenses and a plan to improve profitability buoyed investors’ spirits. Amazon experienced its biggest one-day drop since 2006 after reporting weaker operating margins, soft Q2 revenue guidance, and a big impairment on its investment in electric-vehicle maker Rivian.

First quarter real (inflation-adjusted) GDP contracted at a 1.4% annualized pace, the first quarterly decline since Q2-2020. This does not, however, give an honest picture of the current economy. Foreign imports surged and businesses slowed inventory accumulation after building up in prior quarters. Combined these posed a four percentage-point headwind to growth. Add in a 3% decline in government spending, and the healthy 4% expansion in private domestic demand became overshadowed. Consumer spending grew over 4%, residential investment by 2%, and looking forward the economy is expected to rebound to over 3% growth in Q2 and Q3. A recession is unlikely in 2022.

Next week brings earnings reports from some leisure travel companies – one spot in the economy seeing particularly robust demand recently – as well as more financial technology companies (SQ, SHOP, FIS). On Wednesday, the Federal Reserve’s FOMC will meet to determine the size of a May rate hike. The most likely decision is to raise the Federal Funds rate by 50 basis points. Then we will wrap the week up on Friday with the April employment report. It is forecast that nearly 400,000 jobs were added during this past month.

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

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Ulland Investment Advisors

4550 IDS Center · Eighty South Eighth Street · Minneapolis MN 55402 · Telephone: 612-312-1400 · Facsimile: 612-204-3464