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Weekly Market Update for February 22, 2019

by JM Hanley

The Dow was up on Friday, rising 181 points to close at 26,032. For the week, the Dow was up 0.6% (SP500 +0.6%) and year-to-date is now up 11.6% (SP500 +11.3%). The yield on the 10-year Treasury (an important interest-rate indicator) fell one basis points, closing at 2.65%. A flat interest rate environment is ideal for preferreds.

Domestic economic data this week didn’t offer a clear picture. The Philadelphia Fed’s survey of manufacturers was poor, as were December orders of durable and capital goods. The latter two encompass businesses’ purchases of supplies and operating equipment, and for that reason are important indicators of economic health.

However, members of the Federal Reserve continued to advertise their caution on raising interest rates. Two even suggested that a globalized economy and an aging workforce may have permanently hamstrung inflation. Their implication was that interest rate policy needn’t be so concerned with taming it. This academic discussion aside, stock prices already account for the Fed’s change of heart. The next important news item will be forthcoming detail on the Fed’s decision to slow its sales of Treasury bonds. Those sales contributed to the decline in equity markets late last year.

The market’s steady upward trajectory since Christmas Eve may soon flatten. At the market’s current level, investors have assumed that all of their concerns will be resolved amicably. Such a scenario is not certain. The trade dispute with China may not escalate, but it may not be resolved for some time. Another confrontation with Europe over its trade policy may materialize. Minutes of the Fed’s most recent meeting didn’t preclude an interest rate increase later this year. And economic growth will slow in the US and Europe.

Additionally, fourth quarter earnings season has all but concluded. Seventy-one percent of US companies reported better-than-expected profits, and sixty percent reported better-than-expected revenues. The steady stream of good news (when investors feared the worst) has helped fuel the market upwards.

CVS Health was among the large firms reporting this week. Integrating its purchase of health insurer Aetna has proved more difficult than anticipated, and tough times in the prescription drug industry may make 2019 a lean year.

The price of crude oil rose 3% this week to $57 a barrel – up 26% YTD. US crude stockpiles were neutral. Crude prices jumped predominantly on Wednesday after Nigerian President Muhammadu Buhari suggested cooperation with OPEC goals of cutting production to help boost prices. Nigerian presidential elections were postponed one week (to this weekend) and some fear potential violence will accompany the contentious event. Oil also benefited from rising metals prices following better credit data in China.  Shares of Devon Energy saw a positive bounce this week after the company announced intentions to unlock shareholder value by splitting off its beleaguered Canadian oil sands assets, thereby becoming a focused US-producer with stronger growth potential.

Next week will be a busy one. Friday will mark an important deadline in trade negotiations with China. The British Parliament will vote on the Prime Minister’s plan for Brexit, which is fast approaching. Stateside, Jerome Powell will testify before Congress. US GDP and inflation will be released, as will manufacturing data from Europe and China. And the next jobs report for February will be released Friday, March 8th.

*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. Clients or prospective clients 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 clients are strongly urged to consult with their tax advisors regarding any potential investment. Past performance does not guarantee future results; there is always a possibility of loss.

Weekly Market Update for February 15, 2019

by JM Hanley

The Dow was up on Friday, rising 340 points to close at 25,883. For the week, the Dow was up 3.1% (SP500 +2.5%) and year-to-date is now up 11% (SP500 +10.7%). The yield on the 10-year Treasury (an important interest-rate indicator) rose three basis points, closing at 2.66%.

For the better part of a year, interest rates and the US’s trading relationship with China have arguably influenced the market more than anything else. The outlook for the former improved again this week. Governor Lael Brainard said the Fed might stop reducing its holdings of Treasury bonds by the end of this year. That’s good news, since these reductions have resulted in higher borrowing costs and subsequently slowing economic growth. Wall Street didn’t think they’d turn the taps back on until the middle of next year.

News on the latter was more opaque. Slowing growth in China and the slide in the American equity market late last year has left both Beijing and Washington looking for a way out. Bilateral talks are underway, and news reports indicate the American and Chinese envoys are making progress. But a deal probably won’t be done before March 1st, when new tariffs are scheduled to kick in. Reports suggest that deadline may be moved back by two months for the negotiators to finish their work. Anything longer would make investors wary.

Concerns about growth outside of the US may be second only to trade and interest rates on investors’ list of worries. Weak international growth hurts firms that do lots of business abroad for obvious reasons. Additionally, because growth in the US is strong, weak non-US growth has made the dollar more expensive relative to other currencies. American firms that make money in foreign issue see their profits go down automatically when they convert to dollars. Fortunately, export data from China this week was good – a sign the situation there may be better than feared.

The only bad news this week was an unexpectedly sharp drop in retail sales in December. There were some extenuating circumstances. Thanksgiving, and the holiday shopping afterwards, came early. The stock market dropped and the government shutdown began. But the report looks bad even still, so analysts hope December was simply an outlier. Data on consumer spending in January has been good so far.

The price of crude oil rose 5% this week to $55 a barrel – up 22% YTD. US crude stockpiles showed a greater-than-expected build – of 3.6m barrels – while product inventories of gasoline (+0.4m bls) and diesel (+1.2m bls) both rose. Crude prices rose steadily throughout the week, benefitting from rising equity markets along with some commodity-specific items. OPEC looks to be cutting deeper than expected, with Saudi Arabia signaling a sharp fall in exports by March. Commodity traders, meanwhile, are taking increasingly bullish positions via crude futures. US imports from Venezuela have not yet fallen post-sanctions, but imports from Canada are falling as high rail transport costs crimp outbound shipments. Shares of US domestic producers rose 9% this week, outpacing the move in oil.

*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. Clients or prospective clients 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 clients are strongly urged to consult with their tax advisors regarding any potential investment. Past performance does not guarantee future results; there is always a possibility of loss.

Weekly Market Update for February 8, 2019

by JM Hanley

The Dow was down on Friday, falling 63 points to close at 25,106. For the week, the Dow was up 0.2% (SP500 flat) and year-to-date is now up 7.6% (SP500 +8.0%). The yield on the 10-year Treasury (an important interest-rate indicator) fell five basis points, closing at 2.63%.

Markets went into a mid-week tailspin after an Administration official downplayed the likelihood of signing a trade agreement with China anytime soon. They later found their footing on reports that business leaders are exerting pressure on both sides to conclude a deal. The market has gotten sanguine about the trade dispute – possibly too much so. Their logic is that trade chaos is politically unpalatable at a time when growth seems fragile and elections are approaching in the US. A détente may be most likely, but it’s not certain, and there’s been little recent news one way or the other from those involved.

But just as American investors have reconciled themselves to trade uncertainty, trouble has sprung up across the other ocean. The EU as a whole has reduced its near-term forecast for economic growth. Manufacturing data from Germany, long the main engine of Eurozone growth, has lately been underwhelming. Italy, the EU’s problem child, has entered recession. That development could force Brussels and the populist government in Rome to reopen the matter of Italy’s budget deficit. The country’s huge debt load makes this risky terrain. And then there is the uncertainty of Brexit. This sudden squall has shortened the odds that the European Central Bank will take a more dovish tack on interest rates. Investors have piled into German bunds as a result; this has held in check US Treasury yields (which are similarly risk-free).

The price of crude oil fell 5% this week to $52 a barrel – up 16% YTD. US crude stockpiles showed a smaller-than-expected build – of 1.3m barrels – while product inventories of gasoline rose (+0.5m bls) and diesel fell (-2.3m bls). The drop in crude pricing was pretty steady throughout the week, driven by weaker economic data and unplanned refinery outages. We could see a bounce back next week if Libya infighting escalates (again) and the drop in Venezuela exports to the US shows itself in storage data.

Fourth quarter earnings season has almost concluded. Advertising and cloud computing helped Google accelerate revenue growth. Some were unhappy to see higher-than-anticipated expenses, but investments in new projects and coding talent typically pay off in Mountain View. The stock of Euronet Worldwide, which operates ATMs for tourists, reacted positively Friday after the firm detailed its plans to take advantage of Visa’s new rules for surcharging. In other corporate happenings, BB&T announced Thursday that it would buy regional banking peer SunTrust. The news helped our holdings of SunTrust preferred shares.

*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. Clients or prospective clients 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 clients are strongly urged to consult with their tax advisors regarding any potential investment. Past performance does not guarantee future results; there is always a possibility of loss.

Weekly Market Update for February 1, 2019

by JM Hanley

The Dow was up on Friday, rising 64 points to close at 25,064. For the week, the Dow was up 1.3% (SP500 +1.6%) and year-to-date is now up 7.4% (SP500 +8.0%). The yield on the 10-year Treasury (an important interest-rate indicator) fell eight basis points, closing at 2.68%.

Jerome Powell and Wall Street are officially back on track. The Fed Chair said he’d pivoted from a predisposition to raise rates to a wait-and-see approach. Powell relented in the face of slowing growth abroad, some economic storm clouds at home, and more challenged financial (lending) conditions. He added that sluggish inflation, not weak growth, gave him the leeway to pivot. In terms of rhetoric, the Fed couldn’t have done much more to assuage investor concerns. Markets reacted accordingly. A flat interest rate environment is ideal for our fixed income strategy.

Good news from the Fed was followed by another strong jobs report Friday. The mild weather in early January helped, and job creation in prior months was revised down, but the trend still looks steady. Wages didn’t change much, and neither did the rates of unemployment and underemployment. But labor force participation – the percent of adults working or looking for a job – went up again. This is a pattern that’s distinguished this economic expansion. Historically, when unemployment was low, employers would raise pay to get the workers they needed. Now they’re finding plenty of potential workers on the sidelines waiting for the right opening. This dynamic largely explains the slow rate of inflation.

Additional good news Friday came in the ISM’s survey of manufacturers, which improved unexpectedly. New orders, production, and inventories (all previously weak spots) rose.

The price of crude oil rose 3% this week to $55 a barrel – up 22% YTD – and capped off the best January for crude ever. US crude stockpiles showed a smaller-than-expected build – of 0.9m barrels – while product inventories of gasoline (-2.2m bls) and diesel (-1.1m bls) both fell. We were not surprised to see the US slap energy sanctions on Venezuela (state-owned PDVSA) this Monday. The sanctions effectively cease crude exports to the US and require most other countries to wind down their purchases as well. Venezuela can attempt to redirect these barrels elsewhere, but this takes time and there are few alternative buyers. Roughly 40% of Venezuelan crude exports currently flow to the US. The bulk of remaining exports go to China and Russia, not for cash, but to reduce debts owed. Considering that 90% of government revenue comes from oil exports, the country is in a cash squeeze and oil markets are increasingly “tight.”

Corporate earnings this week were trouble-free if not stellar. Visa’s results, a good proxy for consumer spending, were about as expected. The company blamed uncertainty related to Brexit and the US shutdown for a decline in transactions by international travelers. Amazon had a good holiday season, but warned expenses may increase this year to prepare for more growth in cloud computing and ecommerce. China’s macroeconomic troubles don’t seem to have weighed up on Amazon’s Chinese counterpart Alibaba. However, the firm also said it plans to spend more to sustain growth. Facebook’s results reminded everyone that its advertising business still makes plenty of money. Improvements on data privacy and corporate culture remain to be done. Those are problems General Electric would like to have, though investors did breathe a tentative sigh of relief after the fallen industrial titan reported passable earnings.

*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. Clients or prospective clients 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 clients are strongly urged to consult with their tax advisors regarding any potential investment. Past performance does not guarantee future results; there is always a possibility of loss.

 

Ulland Investment Advisors

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