by Vinicius d’Avila, Research Associate

Markets this week were largely anticipating Federal Reserve Chairman Powell’s speech at the Jackson Hole symposium Friday. Powell reaffirmed the Fed’s position to bring down inflation on higher interest rates, conceding that the American economy may see below-trend economic growth and a softer labor market as a result.

This week saw some scrutiny of Consumer Spending resiliency, as reports by Macy’s and Dick’s Sporting Goods maintained a more cautious outlook. Consumer spending represents around 70% of all economic activity in the U.S. Interest payments are taking up a larger chunk of the household budget, a trend that should continue as student loan repayments resume in October. Mortgage rates hit 7.23% this week, the highest since 2001, and home purchase applications are at the lowest levels in 28 years. As usual, we keep an eye out for interest rate projections and expectations, especially for their dynamics with securities pricing. Bond pricing dynamics support price appreciation of bonds and preferred stocks as treasury yields come down, and we expect Federal Reserve interest rate cuts to occur sometime in the next 12 months.

Though the U.S. economy and labor market have shown some resiliency during the rate-hiking cycle, the U.S. Labor Department reported on Wednesday that the American economy may have added fewer jobs than previously indicated. More specifically, the Labor Department says there were around 306,000 fewer jobs created in the year through March 2023. The revision (of around 0.2% of total employment) is part of the annual benchmarking process, when the Department revises data from its monthly reports – which are more timely, but less accurate. The revision is in line with historical results, and helps bring a clearer picture of the American job market, which might be just a couple of degrees cooler than previously believed. Still, the labor market had 2.8 million more jobs in March 2023 than prior to the Covid pandemic, with another estimated 870,000 jobs added in the months since.

Chipmaker NVIDIA reported impressive growth in the last quarter, helping to carry markets to a slight weekly gain. The S&P 500 rose by +0.82%, with the Nasdaq doing a bit better at +2.26%. The 10-year Treasury rate decreased a mere .01% to 4.24%, with the 6-month Treasury at 5.57%. Looking ahead, next week will be quite data-heavy, with readings on Consumer Confidence and Job Openings on Tuesday, the Personal Consumption Expenditures Price Index on Thursday, and finishing with the Jobs Report on Friday.

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

Historically, August has not been a strong month for the market. That has been true so far this month. The S&P 500 is down -4.78% and the Nasdaq is down -7.36%. Included in those numbers is this week, with the S&P 500 down -2.11% and the Nasdaq down -2.59%. Over the last 33 years, August has been negative about 50% of the time. Unfortunately, September is about the same. December, on the other hand, has been positive 76% of the time. This is one of the few reasons to hope for winter!

The market was also influenced by the thinking that good news is bad. This argument suggests that relatively solid retail sales from Walmart, Target, and Home Depot, as well as stronger Q3 GDP estimates, may “force” the Fed to resume increasing interest rates. The next Fed meeting is September 19-20. The market felt the July rate increase of 0.25% was the last. Should the Fed raise rates again, the notion that inflation was coming under control would be brought into doubt.

US Treasury yields are at a 16-year high. This is good news for those who want a safe income of 5% (we have a strategy to do this). Yet not all is rosy in the US economy. The higher Treasury yields are putting pressure on housing, pushing mortgage interest rates to 7%. China, one of our largest trading partners, is experiencing very slow growth and the bankruptcy of a large real estate developer. There also is a potential for a strike of the auto workers. Payments are set to resume on student loans, which will reduce discretionary spending. Profits will be squeezed at banks as they pay more for deposits. This is likely to result in credit quality downgrades by the rating agencies, another drag on the market and the economy.

We think there will be plenty of volatility in the next few months. Locking in these high interest rates now will generate higher income over the next decade so timing does not have to be precise. When the economy slows, the Fed is highly likely to reduce interest rates and the income opportunity will diminish.

Besides the attractive short-term rate on US Treasuries of over 5%, preferred stock pays dividends from 6.5%-8% with the potential for appreciation. Although the prices of these securities fluctuate, the dividends are highly predictable and drive meaningful income. During the past decade, there have only been rare times when you could lock in this level of income.

During this second quiet summer week, the S&P 500 was up on Monday by +0.58%, Tuesday -1.16%, Wednesday -0.76%, Thursday -0.77%, and Friday -0.01%. The 10-Yr Treasury was up +9 bps to 4.25%, whereas the 6-month Treasury closed the week at 5.40%.

Next week there is an economic conclave at Jackson Hole. Fed Chairman Powell will speak, but little new policy is expected. The market news will come from Nvidia on Wednesday. They are expected to say their production is sold-out until early next year. Their chips are the most popular for AI performance. The stock should be active on the news.

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

Q2 earnings season is coming to an end, and results were better than expected. One of our favorite companies, AXON, which makes police body cameras and squad car cameras as well as the less-lethal Taser weapon, had “blowout” revenues and profits. This triggered a 14% rise in the stock price the next day. Most companies seem to have managed around higher interest rates. One factor helping the economy stay positive has been consumer spending. It held up better than expected. A portion of the spending wound up on credit cards, which is not ideal since credit card debt topped $1 trillion for the first time in history. Credit card interest rates are high and painful, so this source of spending is hard to sustain.

Inflation continues to trend down as evidenced by the CPI report on 8/10/23. July prices were up from June by only 0.2%, (as expected). This represents a 3.2% increase over the last twelve months. Airline fares dropped 8.1%. Used car prices fell 1.6% for the month and 11.6% since last year. There is a price war among Electric Vehicle (EV) manufacturers, which is having a favorable price impact.

The inflation fight is not over, however. Several Fed Governors said during the week that they feel the Fed can pause its interest rate increases to see the impact from higher rates.

Under the current set of circumstances, we feel investors should redeploy cash in one or more ways. US Treasuries still pay over 5% and we have a strategy to capture that. Preferred stock pays a dividend from 6.5%-8% with the potential for appreciation. Although the prices of these securities fluctuate, the dividends are highly predictable and drive meaningful income. We capture this income in our IFI strategy. Finally, stocks have had a solid recovery, but more is expected. We favor large companies over small companies since large companies have more products, sell in more geographies, and have better access to credit, which generally means lower risk.

Important problems persist. Crude oil prices and gasoline are up, fueling inflation but boosting energy stocks. Mortgages are near 7%, which continues to restrain housing. There is the war, rising government debt, souring relations with China, and the possible return of Covid. We try to stay flexible, positive, creative, and analytical during these complicated times.

During this quiet summer week, the S&P 500 was down -0.31% and the Nasdaq -1.90%. Monday the S&P 500 was +0.90%. Tuesday -0.42%, Wednesday -0.70%, Thursday +0.03%, and Friday -0.11%. The 10-Yr Treasury was up +10 bps to 4.16%, whereas the 6-month Treasury closed the week at 5.48%.

Next week, look for earnings from Target, Walmart, and Home Depot. Lowes will be in the following 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

Since 84% of the S&P 500 companies have now reported Q2 earnings, the remaining earnings will be from mid-sized and small companies. Expect higher volatility. 79% of the S&P 500 companies had earnings that exceeded expectations. This drove the Nasdaq and the S&P 500 to a fifth straight monthly gain. Smaller companies are unlikely to do as well.

Amazon and Apple earnings closed out the week. Amazon did very well, but Apple was more mixed. Amazon’s e-commerce revenue was up 9% over last year and its cloud business was up 12%. Amazon also is becoming an important advertising platform rivaling Meta (Facebook) and Alphabet (Google). Apple’s sales were more muted, up only 1%. Although consumers are still spending, they are trading down to less expensive products and delaying purchases of high-end items. Apple’s service and advertising revenues were bright spots. At the close, Amazon’s stock was up +8.3% for the day and Apple was down -4.8%.

The positive tone of earnings was offset by an unexpected downgrade of US government debt by Fitch, one of the three major credit rating agencies. The last time this happened, in August of 2011, the S&P 500 was down 5.5% for August (2011) and down 7% more that September. If inflation indicators continue to show declining prices, we think this will blunt the impact of the rating’s downgrade.

Job growth is an inflation indicator since it influences wage growth. Job growth for July was below expectations and the lowest since December 2020. Wage inflation is still an issue as evidenced by the UAW contract demand of 20% wage increases immediately followed by 5% increases each year for the next four. The next CPI reading is Thursday, August 10. This is followed by the Producer Price Index (wholesale/component prices) on Friday. These releases will have a market-moving impact.

The banking sector continues to heal, boosting preferred stock. A non-bank preferred from Telephone and Data Systems and its subsidiary US Cellular rocketed higher by 18.3% and 8.7%, respectively, as the controlling family explores putting the company up for sale.

During this downgrade-impacted week, the S&P 500 was down -2.27% and the Nasdaq -2.85%. Monday the S&P 500 was +0.15%. Tuesday -0.27%, Wednesday -1.38%, Thursday -0.25%, and Friday -0.53%. The 10-Yr Treasury was up +9 bps to 4.05%, whereas the 6-month Treasury closed the week at 5.47%.

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