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Weekly Market Update for September 23, 2022

by Jim Ulland

The 30 yr. mortgage just hit 6.7%. The Federal Reserve can now claim the success of crushing the housing market. Fear that the Fed will cause a serious recession pushed crude oil down 5% on Friday. The S&P 500 logged four weekly drops of more than 3% over the past five weeks. The Fed can claim that victory too. Ironically, the Fed was one of the primary causes of the current inflation which it achieved by keeping interest rates near zero for years. Now, we are supposed to have confidence in them to fix the problem by triggering a recession. To be fair, some of the blame for today’s plight lies with Congress’s over-spending on Covid relief and stimulus, supply chain problems, and the war.

A recession historically has been good news for fixed income securities, and we expect that result for our Intelligent Fixed Income (IFI) strategy. Although the income in our IFI strategy does not change (+6%) whether the security prices go up or down, recession causes fixed income security prices to rise. This happens because as interest rates fall, securities with higher yields are more in demand and their prices rise. At current interest rates, CDs, money market funds, US Treasuries, corporate bonds, and preferred stocks have become more attractive. At long last, savers are being rewarded. The trick will be to lock in these higher interest rates for the long term. Our view is that investors should lock rates over the next six months. The Fed says they will raise rates more and then leave them at high levels until inflation is subdued. This should give a substantial amount of time to lock in high rates.

Other recessionary indicators include the fact that many countries are raising interest rates. This week, rate increase announcements came from the UK, Norway, Sweden, South Africa, Indonesia, Philippines, Taiwan, Switzerland, and Vietnam. That is one reason the FedEx CEO said last week that there might be a worldwide recession. This week he announced workforce layoffs and 7% price increases.

The Fed does not meet in October. Therefore, there will be time for inflation data to be analyzed. The market fears the Fed will raise rates too high because the data they see is backward looking. At the same time, the impact of an interest rate rise is delayed perhaps by as much as six months as the cost of higher rates works its way into the economy, making rate decision mistakes easy.

Corporate earnings also will see the impact of higher interest. Earnings per share of the S&P 500 are forecast to be down 6% in Q3. Downward revisions of earnings in Q4 and for 2023 will be coming. This will result in more headwinds for stocks. It is hard to see a quick way out of this mess. A steep decline in inflation would be one cure, but this is not likely. A change in leadership in Russia could be a game changer. But the most likely return to normal will be a long slog.

This week the S&P 500 was down -4.65% while the Nasdaq lost -5.07%. The 10-yr Treasury was higher by 24bps to 3.69%. Monday the S&P 500 was up +0.69%, Tuesday -1.13%, Wednesday -1.71%, Thursday -0.84% and Friday -1.72%.

The market is likely to continue to digest the events of this week next week. Eyes will be focused on any downturn in inflation. With the fall in crude oil today, gasoline should be cheaper next week. Fill up while it lasts.

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