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Weekly Market Update for June 3, 2022

by Jim Ulland

The market is hoping for an economic slowdown as a way to control inflation. There are two significant ways to create a slowdown. The first would be for fiscal restraint, generally defined as less government spending. From what we have seen during the pandemic, there is no spending restraint. The second way is for the Federal Reserve to raise interest rates enough that consumers reduce expenditures and businesses slow both hiring and investment.

Jamie Dimon, CEO of J.P. Morgan, the country’s largest bank, termed our current economic situation as a “Hurricane…coming our way.” Tesla’s CEO, Elon Musk, said he had a “super bad feeling” about the economy and announced a 10% staff reduction, plus a hiring freeze. They think the Fed will create a recession. The stock market, too, has had a “super bad feeling” since the start of the year.

Since Washington is unwilling to reduce spending, all the work to control inflation falls to the Federal Reserve. The Fed kept interest rates too low for too long, missing the early chance to temper the strong spending spurred by government stimulus. This happened during a time when the supply of goods was reduced by supply chain bottlenecks and workers who would not return to work for a variety of reasons including Covid. Wages rose and prices skyrocketed. As an example of how wage pressures are created, Waste Management announced it would no longer pick up yard waste with trash since it did not have enough drivers. They said the lack of drivers was partially caused by high consumer spending. Many of those additional packages created by the spending are delivered by Amazon drivers hired away from Waste Management.

The job market is tight. New jobs are still increasing. The 6/3/22 Jobs Report said that May produced 390,000 net new jobs. This was the slowest growth this year but above estimates.

One big economic indicator is housing. Home prices were up 21% in the last twelve months. Mortgage rates are up about 60%. Fewer buyers can afford higher monthly payments. A home construction decline is upon us. Lumber prices have fallen in half from their peak.

The market sees the signs of a slowdown and it fears the Fed will go too far in its efforts to control inflation, turning what could be a slowdown into a recession. When the economy inevitably slows, interest rates will come down and fixed income securities, such as those used in our IFI strategy, should turn sharply higher. Stocks too are expected to react favorably like they did a week ago. Ironically, in today’s economy, good news is bad for the market and bad news is good. The market wants a modest slowdown to dampen inflation and to keep the Fed from crushing the economy with interest rate hikes.

For the week, the S&P 500 was down -1.20% and the NASDAQ -0.98%. Monday the market was closed for Labor Day. Tuesday the S&P 500 was -0.63%, Wednesday -0.75%, Thursday +1.84%, and Friday -1.63%.

Next week, the big news will be Friday when the May CPI is announced. We expect a peak in inflation sometime this summer. The sooner the better.

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 for important strategy disclosures.

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