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Weekly Market Update for January 12, 2024

by Jim Ulland

The market is more focused on inflation than any other economic variable. This week, both the Consumer Price Index (CPI) and the wholesale price index (PPI) for December were released. The market reaction was slightly favorable. For instance, the PPI was up only 1% from a year ago. The Fed’s target inflation rate is 2%. The CPI was up a bit, but most attribute this to the lagging impact of the price of housing, which is lower today than the data used in the index. The downward trend in inflation is continuing, which is reflected in a current NY Fed survey on consumer expectations on inflation. Consumer expectation for inflation was the lowest in three years. This is very positive for both fixed income and stocks.

Geopolitical events could disrupt the downward trending inflation. Rebels in Yemen, who are shooting rockets at vessels going to the Suez Canal, have caused several shipping companies to reroute around Africa. This adds ten days’ sailing time to Europe and raises shipping costs. If the war in Gaza draws in Iran, crude oil supplies could be disrupted resulting in a price spike. China’s exports came in higher than expected putting further pressure on energy prices. Of course, there is the Russia-Ukraine war too. But geopolitical tensions are always with us. It will take a surprisingly large event to stop the downward drift of inflation, in our view.

Interest rates, as represented by the 10 yr Treasury, closed lower for the week and ended at 3.94%, a decline of 10bps. This decline gave fixed income an additional boost. Lower Treasury rates drove mortgage rates down, causing mortgage applications to jump 5.5% from the prior week. Retail sales numbers from December are forecast to be positive, suggesting that the consumer is still spending. In short, the economy is holding relatively steady through all the turmoil.

Our preferred stock fixed Income strategies continue to attract a lot of interest as investors try to lock in the high income from these securities (7-8% current yields). Over the next 24 months, as the Fed lowers interest rates, fixed income securities also should appreciate giving a compelling total return.

Corporate earnings will set the tone of next week’s market. A few of the big banks reported today with results that were generally expected and positive. During the next three weeks, many companies will report on Q4 and the CEOs will comment on expectations for 2024. A modest upbeat tone is likely.

Monday the S&P 500 was up +1.41%. Tuesday -0.15%, Wednesday +0.57%, Thursday -0.07%, and Friday +0.08%. The 6-month Treasury was up 7bps to 5.19%. Treasury income is taxed at a lower rate that income from Money Market funds or CDs.

Next week we and the markets will be closed on Monday in observance of MLK Day. Stay warm this weekend, it is going to be a cold one.

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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