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Weekly Market Update for January 28, 2022

by Jim Ulland

The NASDAQ and the SP 500 barely escaped a fourth negative week in a row. The NASDAQ was up +0.01% and the SP 500 was up +0.78%. The market has been searching for a bottom and perhaps this is it. Three factors caused this correction: Covid and its family of variants; Inflation and the fear of higher inflation; and the Fed raising interest rates. Here are a few observations about each.

Covid’s child variant Omicron emerged just as most thought we had reached the end of Covid and life was returning to normal. Instead, Omicron caused governments to reimposed restrictions on consumers, with business dampening results. Some schools went back to remote “learning” causing parents to miss work. Others hesitated to go to work because they might get infected. This phenomenon was not limited to the US. China locked-in entire cities. Bottlenecks in the worldwide supply chain got worse. Former FDA Commissioner Scott Gotlieb said today that Omicron will be over in weeks. Cases are falling as quickly as they rose. This will be a big relief to hospitals, businesses short of workers, adults missing work, and kids who invariably find it difficult to learn from a computer monitor.

The second factor, inflation, and the fear of higher inflation, unsettled the January market. A Covid-impacted work force was unable to produce enough goods and services to meet demand. Sometimes the lack of computer chips shut down an entire auto assembly line. New and used car prices shot up. The shortage of workers forced employers to raise wages to attract workers from other employers or incentivize those not working to return. Higher wages increase inflation. If the Omicron variant drops as quickly here as it has in England and South Africa, more workers will be available, reducing the inflationary pressures. The additional workers will help unclog the supply chain. This too will help.

Lower inflation is likely to moderate the Fed’s pace of interest rate increases. The Fed hinted that the first raise of 0.25% will be in March. Even if the Fed raises rates four times in this amount, it will only have raised interest rates one percent. We still will be at historically low interest rates. Perhaps today, the market started to figure this out. Yes, mortgage rates will go up a little and the marginal buyer will have trouble buying a home. But a one percentage point increase in rates does not seem to be an earth-shaking event.

Although the 10 Yr Treasury rate was flat this week, the fixed income market also felt pressure. In our Intelligent Fixed Income (IFI) strategy, we now can buy securities paying 5% at a Qualified Dividend tax rate. In addition to this relatively high yield, there is plenty of price dislocation in the fixed income market allowing for future appreciation. We expect a quick snap-back in both the fixed income and equity markets. Investors should review their cash positions and see if a 5% current yield can replace zero yielding cash or low yielding bonds. Remember, if inflation is 3% and you are in cash, your purchasing power declines 3% per year.

Economic news this week was highlighted by Q4 GDP which rose at an annualized rate of 6.9%. The market could discover this figure next week.

Monday the SP 500 was up +0.28%, Tuesday -1.22%, Wednesday -0.15%, Thursday -0.54%, and Friday +2.43%.

Corporate Q4 earnings next week include Amazon, Google, Facebook, and Boston Scientific among many others. Earnings will be good. Let’s hope they get a warm reception.

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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