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Weekly Market Update for August 19, 2022

by Jim Ulland

The Fed says it will be “data-dependent” when making interest rate decisions. That sounds logical and to some extent, it is. The problem is that the available data always lags the current situation. It is a little bit like looking at August temperatures to decide what to wear in September. The market is worried that the Fed will raise interest rates even more sharply than it has because there has not been a big impact on inflation from rate increases instituted so far. Fed Chairman Powell also wants to show he means business and suggested he may do so by raising interest rates higher for longer than expected. We may see this stern tone next week as Powell speaks in Jackson Hole. This will be followed by the Fed meeting on September 21-22. The interest rate increase will be announced on 9/22. Expect either 0.5% or 0.75%.

The market is worried about the Fed. There has yet to be a meaningful deterioration in corporate earnings, but that is expected soon. Housing might be the leading edge of a slowdown in the economy. Housing starts are at their lowest point in 17 months. Manufacturing put up a red flag when the Empire (New York) manufacturing index dropped to the worst level since June of 2020. China reported very low growth as well, which is significant since China holds 20% of the world population. Non-US inflation data was also grim. In Germany, the Producer Price Index rose 37% when compared to a year ago. Inflation in the UK was not as high as in Germany, but was still higher than in the US.

Data on the jobs front has yet to crack. Unemployment filings were flat this week. Unfortunately, the tight labor market is showing up in wage inflation. Railroad workers, for instance, are seeking a 14% increase, and the contract for the workers in the Port of LA just expired. They will want a big number.

Stocks are not as cheap as they were in mid-June when the P/Es had fallen to 15. Now that ratio is back to 18, a more normal level for today’s interest rates. Investors will have to hold through a lot of turbulence while the market works its way to the other side of this slowdown/recession. The same is true for fixed-income investors. Fortunately, our Intelligent Fixed Income strategy locks in a 6% yield while we wait for a calmer environment.

The S&P 500 finished the week down -1.21% while the Nasdaq fell -2.62%. Because of the concern about the Fed, the 10-yr Treasury was higher by 12.6bp to 2.976%. Monday the S&P 500 was +0.40%, Tuesday +0.19%, Wednesday -0.72%, Thursday +0.23% and Friday -1.29%.

Next week, besides Chairman Powell’s potentially market-moving remarks in Jackson Hole, there will be some corporate earnings reports: Medtronic, St Jude, and Intuit among others. In the coming economic news, new home sales will be announced Tuesday, followed on Wednesday by mortgage applications, durable goods orders, and crude oil inventories. Expect more volatility.

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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