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Weekly Market Update for August 26, 2022

by Jim Ulland

This week, the news was all about the Fed: How high will interest rate hikes be? How long will high rates continue? How deep a recession is expected? When will the Fed lower rates? What data does the Fed look at when making rate decisions? And, finally, what will Chairman Powell say in the economic conclave at Jackson Hole today?

Only one of the questions listed above is answered. Today, Powell said, “While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will bring some pain to households and businesses.” Of course, everyone knows this since there is plenty of economic pain being felt. The index of service providers hit its lowest level since May 2020. The manufacturing index was the lowest since July 2020. Both lows occurred during the depths of Covid. New home sales hit the lowest level since July 2016. Gas and food prices are high. Layoffs have been selective, but that will increase soon. All financial markets are down significantly. Yes, “We feel your pain.”

Another question partially answered was what data the Fed will consider when making the next rate-raising decision on September 21. Powell said he will look at the August new jobs report released on September 2. A very low figure would indicate that higher interest rates are slowing the economy. Also, he will look at the August CPI report released on September 13. The hope is that the inflation rate will be slightly lower than the previous month, implying a downward trend.

Powell said rates will remain high, “Until the job is done.” That probably means rates will stay high until someone in your neighborhood gets laid off. When layoffs have reached the headlines, and when inflation is trending down for several months, Powell may think his job is done. However, the economy may be sitting in the middle of a worldwide recession.

Even for Econ majors, talking about the Fed is a little boring. Yet, the Fed is the main influencer of market performance currently. Sometime before the Fed starts lowering interest rates, the markets will begin a recovery. That part of Powell’s pain will end. The recovery from a recession may be protracted.

For investors, the optimal strategy is to wait it out. Interest rates will go up some more, pause, and then come down. Stocks will start to recover when they sense the Fed has concluded its hiking but has yet to reduce rates. Our Intelligent Fixed Income strategy pays investors a 6% yield while they wait. In stocks, natural gas companies continue to outperform. For those who want to stay out of the market, we can put cash in 3.2% yielding six-month government notes. Let us know how we can help.

This week the S&P 500 was down -3.28% while the Nasdaq fell -3.05%. The 10-yr Treasury was higher by 5bp to 3.05%. Monday the S&P 500 was -2.14%, Tuesday -0.22%, Wednesday +0.29%, Thursday +1.41% and Friday -3.37%.

Next week is likely to be quiet as families rush off early for the Labor Day Weekend. Some news may come from the Iranian nuclear deal negotiations, the results of which Israel and others fear. The market-moving jobs report and unemployment rate will be released Friday. A series of other reports will give an economic snapshot. That said, don’t forget to enjoy these waning days of summer.

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 www.ullandinvestment.com 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

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