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Weekly Market Update for January 14, 2022

by Jim Ulland

The first earnings of Q4 came on Friday from several of the big banks.  The story they told was one of wage inflation. Costs were up and the executives said they paid more to hire and retain employees.  Even if inflation goes down, it is very difficult for employers to reduce wages, a major driver of prices. Inflation didn’t go down last month, it continued higher, only at a slower rate.  Producer prices, which eventually show up in consumer prices, were up 9% over last year.  Consumer prices were up 7%.

Omicron put more heat under the inflation stew.  Although the variant is not life threatening, many schools have closed forcing parents to stay home rather than go to work.  Those not vaccinated might be prohibited from going to work or even fired as Citi Bank announced.  Put simply, fewer workers means less goods produced.  Fewer goods with the same consumer demand triggers higher prices. Oil is an example, government restrictions and Covid have retarded oil production.  Prices of gasoline and crude oil continue to rise.

This is not a good situation. A rapid decline in Omicron infections, as happened in London after its spike, will help the tight employment market. But normalizing after this pandemic will take time.  During this period, expect a lot of market volatility. One casualty is consumer sentiment, which declined in January.  Inflation concerns are blamed for most of the deterioration.

It was somewhat surprising to see interest rates, as represented by the 10-Yr Treasury, stay flat for the week.  You would think that real and feared inflation would drive rates higher as they did last week. The 30-Yr Treasury is an indicator of where longer-term interest rates are going.  The 30-Yr Treasury recently did not rise nearly as much as the 10-Yr Treasury.  This implies that the market thinks inflation will come down from current levels.  We hope inflation recedes because more goods have hit the shelves.  The alternative explanation is that the government’s mishandling of the economy will tip us into a recession.  Recessions normally force rates down because economic growth slows and the demand for money is less.

A flood of earnings will be reported in the next three weeks.  Many firms will report that margins have been squeezed by higher wages and component costs.  Part of this pressure on profits will be offset by strong demand.  How will the market react to earnings reports?  Bank earnings today were mixed.  The market could have been neutral, but instead bank stocks were punished.  If the market reacts negatively to mixed news, it will react very negatively to bad news and possibly neutral to good news.  The market’s attitude will be apparent soon.

For the week the SP 500 was down a modest -0.30%, the NASDAQ slightly less at -0.28%.  On Monday the SP 500 was down -0.14%, Tuesday +0.92%, Wednesday +0.28%, Thursday -1.42%, and Friday +0.08%.

The markets and our office will be closed Monday for Martin Luther King Day.  More banks will report next Tuesday, either confirming or breaking from today’s reports.  On Wednesday, United Health Group will be the first major health and insurance company to report and will give insight into that sector.  Technology companies will start to report in the following week.  Government news should be more muted now that the second major spending bill (BBB) is unlikely to pass.  We recommend that investors go on vacation, go skiing, go to Florida, and turn your phones off while doing so.  The next two weeks could be stressful.

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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