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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 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


Ulland Investment Advisors

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