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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.

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