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Weekly Market Update for June 24, 2022

by Jim Ulland

Citibank said that there is 50% chance of a recession. This view was echoed by a host of economists. Even Fed Reserve Chairman Powell said that a recession may result from the Fed raising interest rates, although this is not the Fed’s goal.

Bearish sentiment in the market just hit a seven-week high. This is confirmed by the previous two weeks, each of which showed a 5% decline in the S&P 500. Back-to-back declines of this magnitude have occurred only seven times since WWII. The market has been even worse than the news, a condition often called being “over-sold.” Often when markets get “over-sold,” stocks become cheap enough to attract buyers.  That is the most credible explanation for this week’s bounce. Historically, markets bottom when the Fed changes from raising interest rates to lowering them.

The next shoe to drop may be corporate earnings. Already analysts are reducing earnings’ forecasts incorporating the impact of higher interest rates, tapped out consumers, and a slowing economy. Early signs of slowing are in housing. Mortgage rates have almost doubled. Homes are on the market longer before being sold. There are more price drops by sellers than any time since 2015. The result is what the Fed hopes to see in the entire economy: lumber prices have fallen in half since March and copper is down 25%. Unemployment filings are rising slightly, which eventually will reduce wage pressures.

The San Francisco Fed reported this week that bottlenecks in the supply chain and other supply issues account for about half of the current inflation. One third is attributed to excess demand. Therefore, if we get demand reduced with higher interest rates, we also may get more supply as bottlenecks are resolved. China is still a big bottleneck in that it is using lock-downs as a tool to control the spread of Covid. Why not just call Pfizer, one could ask? China will come back on-line soon if for no other reason than their controlled economy cannot stand big job losses. As China returns to production, the recent downward drift in gasoline prices may end. China uses a lot of energy. When this demand returns, prices of crude oil will firm. Natural gas too is headed back up in ninety days as the Freeport facility, which had a fire, returns to the export market. This facility shipped 17% of US LNG exports.

Most think the market downturn is not finished, since the Fed has promised more rate hikes. Yet, the market is thinking that once we get through the coming slowdown, interest rates will be reduced, benefiting both fixed income securities and stocks. An important consideration is how quickly a slowdown will happen and how soon inflation will abate. The University of Michigan surveys consumers to gauge their expectations on inflation. Consumers’ five-year expectation for inflation just declined. This is good news. Historically, if consumers expect inflation, they accelerate purchases and cause more inflation. Consumers are being patient and we would recommend that same attitude for investors.

Both the S&P 500 (+6.45%) and the NASDAQ (+7.49%) rebounded this week. The S&P 500 was up +2.45% on Tuesday, -0.13% Wednesday, +.95% Thursday, and Friday +3.06%. Next week some big-name consumer companies will report: Bed, Bath, & Beyond and Nike. This will give more data on consumer spending. In two weeks, corporate earnings for Q2 will start to be reported. If CEOs give weak forecasts, the Fed will notice.

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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