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Weekly Market Update for September 9, 2022

by Jim Ulland

The rate of inflation seems to have peaked in June at 9.1%. July was 8.5%. On September 13, next Tuesday, the August inflation rate will be released. It is expected to be 8.1%. This is still high, but the trend is our friend. Don’t be surprised if this trend continues. Supporting data comes from the August wage growth, which slowed. Crude oil is down 30% from its March peak. Gasoline is down 25% from its peak on June 14th. Used car prices are down 10% from their high in January. The Services Price Index is down for the fourth straight month. And, this week, Apple kept its new iPhone prices flat whereas an increase was expected. The trend is important since the Fed’s goal is to reduce the rate of inflation by throttling the economy with higher interest rates. The sooner inflation comes down, the sooner the throttling stops.

Not only is the Fed going to continue raising rates at its next meeting on September 21, but the UK, EU, and other countries are doing so as well. The EU and the UK will have additional crippling impacts from energy shortages on their economies. A European recession seems almost inevitable. Consumer demand from the world’s most populous country, China, will be dampened as Covid lockdowns are reimposed each time new Covid cases are diagnosed. Slower economic growth means less demand, and this reduces pressure on prices, thus lower rates of inflation.

A question for investors to ask is where fixed income and stock prices will be next summer. The Fed has signaled to the market that it will raise rates until inflation is subdued. Counting September 21, the Fed has three meetings left this year and is expected to raise rates at all of them. If inflation trends down each month, the stock market is going to get excited at some point. The market could surge higher with each monthly CPI release starting Tuesday. Fixed income is likely to do the same. Although it is hard to precisely predict when the surge in stocks and fixed income will occur, it is coming. Each monthly CPI report could be the trigger to stair-step the markets higher. Naturally, if the downward trend in inflation is broken, the market will retreat, but not for long in our view.

Next week, the market will be very reactive to the CPI report on Tuesday. Low energy prices will continue to work their way into the economy and help reduce the price of other goods, services, and transportation. Naturally, winter may slow this beneficial impact especially if Russia refuses to fulfill its energy delivery contracts. Even if crude oil prices stay at these levels for the winter due to reduced economic activity, we think an exception to the downward trend will be natural gas. Russia is now considered an unreliable supplier, and it may take several years for this market to stabilize.

To get ahead of what the market will do, we suggest watching the CPI and the trend in wage growth. These are two of the important factors driving the Fed’s decisions on interest rates.

This week the S&P 500 was up +3.65 while the Nasdaq gained +4.14%, both more than reversing last week’s loss. The 10-yr Treasury was higher by 11bps to 3.31%. Monday was Labor Day, Tuesday the S&P 500 was -0.41%, Wednesday +1.83%, Thursday +0.66% and Friday +1.53%.

Next week is all about the CPI report on Tuesday. Buckle up.

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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