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Weekly Market Update for November 4, 2022

by Jim Ulland

The Fed raised interest rates by 0.75% as expected for the fourth straight meeting on Wednesday. Initially, the market took the news in stride. But, by the close on Wednesday, the market was down substantially. While high interest rates slow economic activity, there was little evidence that high rates were slowing inflation here or in the EU, where inflation surged to a record high of 10.7% for October. The Fed hinted that it was going to incorporate the lag effect that high interest rates have on the next twelve months. This is the time it takes for the full impact of higher interest rates to be reflected in slower economic activity. The Fed did imply that we are unlikely to see another 0.75% hike in December, perhaps 0.50%.

Corporate Q3 earnings news has been relatively positive, but forecasts for Q4 and 2023 are not. CEOs spoke of continued supply chain problems, and macro uncertainty (Ukraine, North Korea, the diesel shortage in the US, inflation and wage pressure, the lack of pricing power in some sectors, and oil and gas shortages triggered by Russia). The US manufacturing index was down (as was the new orders index), supporting some of this negative news.

Although Twitter laid off up to half of its workforce today, the number of jobs that are open increased by 437,000 in October. Initial jobless claims were lower than expected. And, on Friday, US non-farm payrolls increased more than expected – although below the September increase. The Fed would like to see fewer jobs created so wage pressures decrease. The unemployment rate did kick up to 3.7%, trending more in sympathy with the Fed’s goal.

The October CPI will be released next week, and it will give us the latest reading on inflation. The Fed must see a drop in this index before it pauses interest rate increases. Don’t look for any help from crude oil or gasoline, which have recovered some during the week and spiked on Friday with the possibility of China reopening its economy.

We feel it is still too early to add equities, except for oil and gas companies. Equities need the Fed to be near a pause in interest rate hikes before a recovery in stocks starts. Fixed Income and our Intelligent Fixed Income strategy is another story. Investors can lock in 7% current yields permanently. Some remember the Jimmy Carter Presidency, when rates hit the low teens and investors could lock in rates over 10%. This is a similar time. Rates may go a little higher, but investors will be pretty pleased a year from now having locked in rates at 7% this quarter.

For the week, the 10-yr Treasury was up by 17bps to 4.17%. Monday the S&P 500 was -0.75%, Tuesday -0.41%, Wednesday -2.50%, Thursday -1.06% and Friday +1.36%. For the week, the Fed managed to destroy some buying power by causing the weekly decline in the S&P 500 of -3.35% and-5.65% for the NASDAQ.

Next week, besides the CPI number on Thursday, all eyes will be focused on Tuesday’s election results. Many results will not be known until late in the evening, especially with Alaska going to ranked-choice voting. In Georgia, the winning candidate must get 50% of the vote. If not, a runoff election will be held on December 1st. We wish all winners a good-spirited 2023.

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