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Weekly Market Update for February 11, 2022

by Jim Ulland

The market sure did not like that inflation report on Thursday. The expected annual inflation rate of 7.3% was exceeded when inflation was reported at 7.5% over the last twelve months. The worry is that the Fed will raise interest rates so high to control inflation that it will push the economy into a recession. The irony is that higher interest rates may not solve the inflation problem. If inflation is primarily from a shortage of goods because of Covid and supply chain bottlenecks, higher interest rates will do little to address those two problems.

Stocks fell on the fear of recession and the potential disruption of a conflict between Russia and Ukraine. When President Biden today insisted that US citizens leave Ukraine and that trouble was imminent, oil went up $3 per barrel, almost 4%. You will see that at the gas pump soon. This equity market decline came on the heels of continued strong corporate earnings. For the last four quarters, earnings have been up about 20% each quarter over the prior year. Corporate CEOs during their conference calls have been citing strong demand, a tight labor market, and continued supply chain bottlenecks.

The fixed income market was hit hard, not so much by the amount of increase in interest rates, but by the short timeframe over which this occurred. A more gradual increase in rates would have been accommodated by the market. However, the rapid rise triggered a lot of selling as a response. Fixed income markets are down almost as much as equity markets as a result. We expect both to snap back once the trading normalizes. If the 10 Yr Treasury stays around Thursday’s panic level of 2% for a couple of weeks, calm will return. It was surprising that the interest rate on the 10 Yr Treasury was flat for the week with the big rise Thursday offset by a sharp decline on Friday.

The week seemed more terrible than it was. The NASDAQ was down -2.18% and the SP 500 down -1.82%. Unemployment filings were low and less than expected. The waiting time for ships to unload in the ports of LA and Long Beach shortened. Mayors and Governors were rushing to announce reductions in Covid restrictions as the public seemed far more willing to live with low levels of infection as opposed to the negative impact restrictions have had on school children, small businesses, and the enjoyment of life. As one of the Canadian Provincial Premiers put it, the restrictions have become so divisive that they are causing more harm than good. It is better they be terminated. Many of the other Premiers did just that. Prime Minister Trudeau may grit his teeth and follow their lead.

Most economic news is good, except for inflation. Everything is up and the Fed is looking a little foolish for calling inflation “transitory.” It hurt the Fed’s credibility and now brings into question their management of interest rates. A couple of weeks of calm markets and flat interest rates will do a lot to address the financial pain of the year so far. We expect a snap back from oversold conditions. It would be nice to have it sooner rather than later.

Monday the SP 500 was down -0.37%, Tuesday +0.84%, Wednesday +1.45%, Thursday -1.81%, and Friday -1.90%.

Corporate Q4 earnings wind down next week with the most notable report coming from Walmart. Watch for more announcements from government officials that Covid restrictions are being lifted and a few whispers that “Covid is Over.”

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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