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Weekly Market Update for November 18, 2022

by Jim Ulland

Last week’s news was dominated by the election, the October CPI data, and China. This week was Part 2 of each of those stories.

Last week we had the election. This week we have the results. It is a “divided government.” In this case, a divided government means the Republicans control the House of Representatives and the Democrats control the Senate and the Presidency. The reason the market likes a divided government is that major changes require the agreement of both parties. Although not much legislation will be passed, what does pass should look more centrist.

Last week the CPI showed a surprising reduction in the pace of inflation. The market rose dramatically. This week the Producer Price Index (PPI) was released. These numbers too were better than expected, although the market rallied only 1% that day vs. 5.5% following the prior week’s CPI announcement. The importance of the PPI is that it reports on the prices companies pay for input costs such as parts, materials, shipping, and all those factors needed to put a finished product on retail shelves. PPI tends to be an early indicator of future inflation trends. The PPI report triggered several Federal Reserve Board members to talk about a slower pace of interest rate increases than those of this summer and fall. The speakers implied a 0.50% increase in rates at the December Fed meeting. The first meetings in 2023 are on 2/1/23 and 3/22/23. A pause in the Fed’s rate increases could be signaled after the March meeting. Naturally, a decline in the inflation rate, as expressed in the CPI and PPI, is necessary for this result.

Part 2 of the China story (the world’s most populous country) was that China and the US engaged in civilized discussions at the G20 meeting. Our two countries are very interdependent as trading partners, so it is in both countries’ interest to behave like adults rather than using reckless language to inflame the other. Expect more signals that China will reopen from Covid soon, no later than spring.

Market movement will be influenced by the direction of the CPI. If the CPI continues to trend down, at some point the Fed will stop raising rates. Then it will pause, maybe for six months, before reducing rates. Between now and the pause, fixed income investors should lock in the attractive yields of today’s market. For instance, the current yield on our Intelligent Fixed Income strategy is nearly 7%. Stocks will also start their recovery, but the pace of this recovery may lag fixed income since corporate earnings must be rebuilt from the impact of the slowdown. For those who are in cash and waiting to reinvest, we offer a US Treasury strategy currently paying 4%.

For the week, the 10-yr Treasury was unchanged at 3.82%. Monday the S&P 500 was -0.89%, Tuesday +0.87%, Wednesday -0.83%, Thursday -0.31% and Friday +0.48%. For the week, the market was able to retain most of last week’s gain. The S&P 500 was down -0.69% on the week, with the NASDAQ down -1.56%.

Next week will be slow because of the Thanksgiving holiday. Remember, while gathering around the Thanksgiving table, that almost every subject is touchy these days. Tread carefully but enjoy.

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

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