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Weekly Market Update for January 7, 2022

by Jim Ulland

The market news this week revolved around twin peaks.  The first peak was the Omicron news.  Doctor and former FDA Commissioner Scott Gottlieb said Omicron infections will peak in about ten days and then rapidly decline.  New York is thought to be two weeks behind London and Gottlieb expects New York to follow London’s experience. Although we hope the infection rate drops as dramatically as it rose, there will be lingering employment issues from those deciding not to go back to work.  Lack of workers is already a problem, and this will slow the normalization of the supply chain.  A continued shortage of goods forces prices higher, typical of a demand/supply imbalance.  Fortunately, the market is not as stressed out by Omicron as it was three weeks ago.

The second and higher stress is from the spike in interest rates.  Interest rates, as represented by the 10Yr Treasury, rose from 1.51% to 1.76%.  This is a 16.5% increase in five days. Rates are still historically low, but the pace of change unsettled the market. The Fed has not raised the Fed Funds rate yet, but says it will do so by mid-year, if not sooner. Since the Fed got the whole inflation forecast wrong, there is less confidence that they will get the interest rate level right.  Higher rates slow growth.  This is clear for home buyers.  As rates go up, the cost of a mortgage increases and fewer people can afford homes.  The problem is not today’s rate, but where rates will peak and if that level is so high that the economy slows markedly.

The factor that could rescue the market’s mood is Q4 earnings reports.  They will start in earnest next Friday with the big banks.  Earnings will be good for the banks and most of those companies that report in the following weeks.  Many firms will show a 20% increase in earnings per share over what was achieved in Q4 2020.  Strong earnings will support stock prices.  Additional support can come from stock buybacks.  Covid has forced companies to streamline operations and reduce costs.  With strong demand, margins have expanded leading to greater profitability.  Companies that can raise prices will have the best results.  Companies with strong cash flow, low debt, a wide product spectrum, and pricing power will do the best.  Banks will benefit from higher rates as idle deposits are more profitably invested.

The only day the SP 500 rose was Monday. The NASDAQ had a loss every day. Europe reported its own bad news.  Inflation is not dead.  Prices for December were up 5% annualized.  The US unemployment rate declined to 3.9% in December which reflects the shortage of people willing to work.  A shortage of workers causes wages to go up.  If Omicron does peak in ten days and then steeply declines, many workers will return.  The US Supreme Court today is considering the vaccine mandate from OSHA on large employers.  The question is whether OSHA has the Congressionally given authority to impose the mandate.  If the mandate is suspended, additional workers will return, blunting the inflationary pressures of higher wages.

For the week, the SP 500 was down -1.87% and the NASDAQ -4.53%, the sharpest weekly drop since last winter. On Monday the S&P 500 was up +0.64%, Tuesday -0.06%, Wednesday -1.94%, Thursday -0.10%, and Friday -0.41%.

Even with rising interest rates in 2021, our Intelligent Fixed Income strategy, run by Nat Beebe, posted top tier returns of over 6% in what was a challenging year for most fixed income strategies.  Ranking with peers will be available soon.  We expect a continuation of this outstanding performance.

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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