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Weekly Market Update for July 8, 2022

by Jim Ulland

Everything has seemed so “macro” this year. By this I mean everything is moving together in response to over-arching issues: inflation, interest rates, and the Fed. Inflation numbers have been “hot” and moved the market down. The Fed has been trying to catch up after leaving interest rates too low for too long. Their efforts to raise interest rates also have moved the markets lower.

There are many drivers for inflation. For example, half of the increase in crude oil and natural gas prices came before Russia invaded Ukraine, while world economies recovered from Covid. The other half of energy’s price rise came after the Russian invasion. Oversimplifying, the Fed’s low rates, Covid-related bottlenecks, and Washington’s excessive spending caused the first surge in inflation and the war caused the second. Wages are an additional inflation driver. Where did all those workers, who were at their jobs before the pandemic, go?

Many feel the Fed will put the country into a mild recession until inflation is brought under control. That should be good for fixed income strategies like our Intelligent Fixed Income (IFI), which now has a yield over 6%. A recession would reduce inflation and, shortly thereafter, the Fed could pause its interest rate hikes, causing almost an immediate rebound in fixed income and stocks. We think this is the most probable outcome to the current dilemma. Following a rate-hiking pause, the Fed could reduce rates to restore economic growth allowing a second surge in the market. The timing of these policy changes will depend on the pace of the decline in inflation and the severity of the recession.

The June Consumer Price Index (CPI) will be released next week. An inflation rate of almost 9% is expected. This could be a peak since there has been some softening in the price of airline tickets, gasoline, commodities, rent, and autos in July. This week showed a slight increase in unemployment filings and a modest drop in new jobs, both signals that the economy is slowing. There still are a lot of open jobs, but this number too is dropping.

The Fed is likely to raise interest rates by another 0.75% at its meeting on July 27. The market fears the Fed will overshoot while raising rates and turn a mild recession into a more serious one. Corporate earnings will start to be released next week, with many more in the following three weeks. These too will be a sign of how quickly the economy is slowing.

A negative sentiment in the market persists, although this week fought that trend. The SP 500 was up +1.94% and the NASDAQ was +4.56%. On Tuesday the SP 500 was +0.16%, Wednesday +0.36%, Thursday +1.50%, and Friday -0.08%. Next week, the major news will be the June CPI report on Wednesday. JPMorgan and Morgan Stanley lead off earnings reports on Thursday. Looks like another choppy week ahead.

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

4550 IDS Center · Eighty South Eighth Street · Minneapolis MN 55402 · Telephone: 612-312-1400 · Facsimile: 612-204-3464