by Jim Ulland

The market is hoping for an economic slowdown as a way to control inflation. There are two significant ways to create a slowdown. The first would be for fiscal restraint, generally defined as less government spending. From what we have seen during the pandemic, there is no spending restraint. The second way is for the Federal Reserve to raise interest rates enough that consumers reduce expenditures and businesses slow both hiring and investment.

Jamie Dimon, CEO of J.P. Morgan, the country’s largest bank, termed our current economic situation as a “Hurricane…coming our way.” Tesla’s CEO, Elon Musk, said he had a “super bad feeling” about the economy and announced a 10% staff reduction, plus a hiring freeze. They think the Fed will create a recession. The stock market, too, has had a “super bad feeling” since the start of the year.

Since Washington is unwilling to reduce spending, all the work to control inflation falls to the Federal Reserve. The Fed kept interest rates too low for too long, missing the early chance to temper the strong spending spurred by government stimulus. This happened during a time when the supply of goods was reduced by supply chain bottlenecks and workers who would not return to work for a variety of reasons including Covid. Wages rose and prices skyrocketed. As an example of how wage pressures are created, Waste Management announced it would no longer pick up yard waste with trash since it did not have enough drivers. They said the lack of drivers was partially caused by high consumer spending. Many of those additional packages created by the spending are delivered by Amazon drivers hired away from Waste Management.

The job market is tight. New jobs are still increasing. The 6/3/22 Jobs Report said that May produced 390,000 net new jobs. This was the slowest growth this year but above estimates.

One big economic indicator is housing. Home prices were up 21% in the last twelve months. Mortgage rates are up about 60%. Fewer buyers can afford higher monthly payments. A home construction decline is upon us. Lumber prices have fallen in half from their peak.

The market sees the signs of a slowdown and it fears the Fed will go too far in its efforts to control inflation, turning what could be a slowdown into a recession. When the economy inevitably slows, interest rates will come down and fixed income securities, such as those used in our IFI strategy, should turn sharply higher. Stocks too are expected to react favorably like they did a week ago. Ironically, in today’s economy, good news is bad for the market and bad news is good. The market wants a modest slowdown to dampen inflation and to keep the Fed from crushing the economy with interest rate hikes.

For the week, the S&P 500 was down -1.20% and the NASDAQ -0.98%. Monday the market was closed for Labor Day. Tuesday the S&P 500 was -0.63%, Wednesday -0.75%, Thursday +1.84%, and Friday -1.63%.

Next week, the big news will be Friday when the May CPI is announced. We expect a peak in inflation sometime this summer. The sooner the better.

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

After eight straight weeks of market decline and headlines heralding a possible recession, why did the market go up sharply this week? Data supporting forecasts of a significant slowdown in the economy were prevalent. For instance, high mortgage rates have slowed home construction and home sales dramatically. However, the belief is that the Fed will raise interest rates less aggressively than they have indicated if the economy is slowing. As this view became more widely held during the week, interest rates did go down. The 10-yr Treasury started the week at 2.79% and ended it at 2.74%. As we expected (and hoped), our fixed income strategy, IFI, exploded higher. Our equity strategies performed equally well.

Inflation is another factor that showed signs of peaking. The Fed’s major goal is to control inflation using the tool of increasing interest rates to slow the economy. The Fed’s favorite inflation indicator, the core personal consumption expenditure price index (PCE), dropped from 5.2% (year over year) in March to 4.9% in April. This rate is still very high, but directionally favorable and possibly a peak.

Other signs that inflation may have peaked include home sale prices which are being reduced more quickly than normal from their initial listing price. April new home sales dropped 17% from twelve months ago. Target, Best Buy, and Walmart are sitting with higher inventories than planned. Naturally, this provides some relief to supply chain pressures. Netflix, Twitter, Meta (Facebook), Amazon, Uber, Salesforce, Peloton, and Carvana announced hiring freezes. Amazon also said that it was building too many distribution centers and had leased some of them out to others. Hiring freezes take pressure off wage increases. Higher wages have been a significant driver of inflation.

China is the largest country by population and is the second largest economy after the U.S. What happens there has a significant impact on our economy. Their current lockdown for Covid has disrupted world supply chains just as they were improving. Shanghai officials have promised to end its lockdown next week. Schools, which have been closed for three months, are set to reopen.

Other geopolitical news was mixed. Ukraine President Zelenskyy said he wanted to recapture all the land taken by Russia this year as well as the Crimean Peninsula, which was lost eight years ago. Ukraine trying to recapture Crimea could draw the U.S. into war with Russia. Former Secretary of State Henry Kissinger suggested that Ukraine settle for the borders as they existed before the Russian invasion and begin peace talks. Peace would be an important factor in reducing inflation in agricultural commodities and energy, not to mention reducing the human cost of war.

For the week, the SP 500 was up +6.58% and the NASDAQ +6.84%. Monday the SP 500 was up +1.86%, Tuesday -0.81%, Wednesday +0.95%, Thursday +1.99%, and Friday +2.47%.

Next week, the big news will be Friday when the new jobs number and unemployment rate for May are reported. The new jobs number will be an indicator of how fast the economy is slowing. Because of the large number of unfilled jobs, the hiring freezes may not show in the new jobs number until this summer. The Case-Shiller Home Price Index comes out on Tuesday and is likely to confirm weakness in that sector. Consumer Confidence also is set to be released on Tuesday, likely to show a further drop. As you would expect, our office will be closed for Memorial Day, enjoy.

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

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

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