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Weekly Market Update for September 16, 2022

by Jim Ulland

The CEO of FedEx said this week that he expected a worldwide recession and reduced his company’s earnings and revenue forecast. If this broad recession occurs, the major causes are known – too much government stimulus and quasi-stimulus spending, the Federal Reserve’s zeal to raise interest rates, the war, continuing supply chain disruptions, and the persistently high level of inflation. Although the yearly rate of inflation seems to have peaked in June at 9.1%, the flat monthly price change seen in July was followed by a slight increase in August. The market tanked the day this news was released because it had hoped for a small August decrease in the rate of inflation. The downward trend of inflation, hoped for in August numbers, did not materialize. Gasoline, many commodities, and used car prices were down, but food, rent, and a lot of other prices went higher. Wages are fuel under the fire of inflation as the tentative railroad contract agreement showed annual increases of 5% for the next five years. It is hard to get down to the Fed’s target of 2% inflation if wages are going up 5% a year.

We must wait a month before the September CPI report can reestablish a downward inflation trend. Unfortunately, before that report, the Fed will meet on September 20 and 21 to raise interest rates again. This time an increase of 0.75% is expected.

China provided a little positive news by lifting some lockdowns. They also are talking to Moderna about buying vaccines, something they should have done a year ago. The sweeping lockdowns have not had the desired impact of eradicating Covid. Another positive note came from the NY Fed which surveys consumers on their expectations for future inflation. Historically, consumer expectations have been a good indicator of future inflation. This survey showed that consumers expect an inflation rate of 2.8% in three years. The Producer Price Index was released the day after the CPI and did decline slightly from the prior month.

The interest rate increases have had the beneficial result of increasing yields in fixed income. 90-day US Treasuries pay over 3%. New money in our Intelligent Fixed Income strategy pays over 6% on floating rate securities. These provide substantial protection as the Fed raises rates. Newly issued preferred stock offers 6.5-7% yields, something unheard of in the last ten years.

It probably is too soon to add more money to equities. Inflation really must turn down before stock prices improve. Until that happens, other CEOs will send the same message as FedEx did. “Earnings will be weak and revenue growth will be below expectations.” Continue to watch the monthly CPI report and the trend in wages. They will signal when the time is near to add funds to equities.

This week the S&P 500 was down -5.15% while the Nasdaq lost -5.97%. The 10-yr Treasury was higher by 14bps to 3.45%. Monday the S&P 500 was up +1.06%, Tuesday -4.32%, Wednesday +0.34%, Thursday -1.13% and Friday -0.72%.

Next week will focus on the two-day Fed meeting which concludes with the interest rate increase to be announced on Wednesday 9/21 at about 1:15 PM CDT. Any figure other than a 0.75% increase will be a big surprise to the market, and the market does not like surprises.

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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