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Weekly Market Update for July 1, 2022

by Jim Ulland

The equity and fixed income markets had their worst first half of a year in over fifty years. The shock to the market was broad based with virtually every sector down substantially except for crude oil/natural gas and utilities. Cash provided some protection but, with high inflation, purchasing power was lost there as well.

Much of the pressure on the market comes from inflation. Ironically, the market is also worried that the Fed will be too zealous in its efforts to control inflation by raising interest rates that it will cause more than a mild recession. The May Consumer Price Index (CPI) was higher than expected at 8.6% y/y.

Early signs of the Fed’s impact from raising interest rates are shown in slightly higher unemployment filings, real personal spending below estimates, consumer confidence falling, new orders lower (Richmond Fed), and the fear that corporate earnings estimates will be reduced as Q2 earnings reports come out. Nike, which does not report on a calendar year, reported a weak forecast earlier in the week. The most likely Fed action at their July meeting is to raise rates another 0.75%. The Fed also is having an impact on other central banks which have been announcing rate increases.

Some feel that inflation is peaking. Although there is not much to back up this view, there are some scraps of data that support it. China reported no new cases of Covid in either Shanghai or Beijing. China has been a big bottle neck on the supply of goods since their remedy for Covid was to quarantine much of their population. Fewer bottle necks will help modify prices. OPEC is pumping a little more oil, but they are near capacity. Commodity prices like those of copper, energy, and grains have weakened.  Home price gains too have softened. The importance of inflation reaching a peak is that the Fed will have less reason to raise rates further.

Bearish sentiment in the market persists. After a spirited recovery last week, the SP500 was down -2.21% this week and the NASDAQ was -4.13%. Corporate earnings will start to be released in two weeks.  Although Q2 may be solid, most fear the forecasts CEOs will make. They too look at the Fed’s efforts to slow the economy, the lingering supply chain issues, and the impact of the Russian invasion of Ukraine.  Forecasts are likely to be disappointing.

During the week, market interest rates did come down. The market smells a recession. Q1 GDP already showed a decline. Economists define a recession as two quarters of negative GDP growth. We already may be there. But this isn’t entirely bad, as falling interest rates and a mild recession could prove beneficial to fixed income securities in our Intelligent Fixed Income strategy.

This week the SP 500 was down -0.30% on Monday, -2.01% Tuesday, -0.07% Wednesday, -0.88% Thursday, and Friday +1.06%. Next week Friday’s report on unemployment filings and the amount of job growth in June will dominate the news. Both will fuel concerns of recession. That said, enjoy the long weekend. These problems will still be around Tuesday. By forgetting about them, you won’t miss anything.

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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Ulland Investment Advisors

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