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Weekly Market Update for June 17, 2022

by Jim Ulland

Our view is that the Fed is going to have its way and raise interest rates until it kills inflation.  Causing a recession is likely to be the collateral damage. Part of the problem is the Fed’s unrealistic goal of returning inflation to 2%.  In this fast-moving economy, the Fed is using backward-looking data upon which to make decisions.  June economic indicators are terrible.  New Home Construction, buffeted by the current 6% 30-year fixed rate mortgages, is down 14%.  Target Corp and others announced excess inventory.  Layoffs and hiring freezes are in the daily news whether from Tesla, Meta, or Ford.  CEO sentiment is negative and historically coincides with corporate profit declines. Government spending continues unabated with another $1B going to the Ukraine this week.  The US total to this conflict is now about $40B whereas Russia’s entire defense budget in 2021 was $65B.

All the news is not gloomy.  Unemployment has not jumped.  Consumer spending has held up although much of the spending is funded by credit card debt. The market is oversold.  The Producer Price Index was up less than expected although high. Natural gas prices fell as the result of a fire in a major export terminal and crude oil followed gas down with fears of recession. The market viewed the Fed’s .75% rate hike on Wednesday as necessary to fight inflation, but there is a big worry about a “policy mistake,” meaning the Fed will raise rates too much.

Somewhat ironically, fixed income and our Intelligent Fixed Income strategy will benefit from an economic slowdown.  When the recession comes, inflation will fall and then interest rates.  This will restore much of the price decline on preferred stock.  Fortunately, the credit quality of the strategy is quite high (money center and regional banks).  The core benefit of the IFI strategy is that the income is constant.  If preferred prices go up or down, the income is the same. The current yield is about 6.5%.

Both the SP 500 and the NASDAQ dropped further into Bear Market territory this week.  The SP 500 lost -6.15% and the NASDAQ -4.9%.  The last 13 Bear Markets have lasted anywhere from 3 months to 69 months.  Don’t expect the V shaped recovery we had after the Covid outbreak in 2020.  We think holding position through this trauma is the best strategy.  Naturally, tactical moves can help performance.  This week on Monday the SP 500 was -3.88%, Tuesday -0.38%, Wednesday +1.46%, Thursday -3.25%. and Friday +0.22%.

Next week our office is closed Monday for the holiday.  Fed Chair Powell will be on Capitol Hill for remarks to Congress, which will be newsworthy.  The other major news of the week will be on Friday from the University of Michigan Consumer Sentiment Report.  Since 65% of the US economy is based on the consumer, this report will be market moving.  Expect a bad number.  But that is next week, enjoy your three-day weekend until then.

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