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Weekly Market Update for July 29, 2022

by Jim Ulland

Despite the second consecutive quarter of GDP contraction, Big Tech and energy stocks decided to power the market higher this week. Stocks have become quite cheap in relation to their 2021 highs. Investors couldn’t resist putting cash into the market as 70% of the corporate Q2 earnings reports so far beat expectations. The market historically has looked six months ahead to determine a direction. Six months from now, we think the Fed will have finished its rate-raising work, followed by a pause, and a series of rate cuts later in 2023. In the meantime, the Fed will have triggered a recession. The recession should be mild since there are still a lot of unfilled jobs, although mostly in the service sector. Inventories, a frequent cause of past recessions, are not excessive. Consumer spending, which drives two-thirds of economic growth, still has some strength. Thus, the market seems to be looking through a mild recession to a recovery in 2023.

Inflation must moderate for all of this to work. If the Fed does not see a decline in the rate of inflation, it will keep raising interest rates. Many think the rate of inflation peaked in June, and that July will show a modest reduction, with more reductions throughout the rest of the year. Price reductions can be seen in housing with material costs down and mortgage applications falling 20% from last year. Business spending has contracted, and layoffs are not far behind. Consumer durable purchases like cars and appliances also have contracted. On the other hand, energy is not expected to be of any more help. Crude oil fell from $120/bl to $100, but there are supply constraints partially aggravated by the war which will make it difficult for crude to fall more. Natural gas is climbing in price as Russia cuts off its gas supply to Europe. Energy stocks have been some of the best performers so far this year as a result.

The prospect of the Fed ending rate hikes by the end of this year has caused a big recovery in fixed income prices. Our fixed income strategy, Intelligent Fixed Income (IFI), was up about 6% this month. The equity market had its best month of the year. Those investors in cash should start thinking more creatively.

For the remainder of the year, we feel inflation will stay high but declining. The slowing economy will be reflected in lower corporate earnings and reduced consumer spending. This week, Best Buy shared its concern for softness in the consumer electronics sector. Walmart reduced its forecast as well. The path through the next six months will be volatile as the markets work their way from the present to the future.

The S&P 500 finished this week up +4.26% while the Nasdaq rose +4.70%. The 10-yr Treasury rate fell another 14 basis points to 2.65%. Monday the S&P 500 was +0.13%, Tuesday -1.15%, Wednesday +2.62%, Thursday +1.21% and Friday +1.42%.

Next week, corporate Q2 reports continue with Starbucks, Caterpillar, Uber, CVS, Electronic Arts and mid-sized oil and gas companies like EOG among a lot of others. Friday will bring the most sensitive news as the number of new jobs created is announced. The average monthly job growth for Q2 was 375,000. The Fed will be looking for a much lower number this Friday. The market will be sensitive to other data related to prices and inflation. For instance, the jobs report also will show the change in hourly earnings, an indicator of wage inflation. The normally sleepy August won’t be quite so sleepy this year.

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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Ulland Investment Advisors

4550 IDS Center · Eighty South Eighth Street · Minneapolis MN 55402 · Telephone: 612-312-1400 · Facsimile: 612-204-3464