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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.

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