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Market Commentary Archives

Weekly Market Update for December 7, 2018

by JM Hanley

The Dow was down on Friday, falling 559 points to close at 24,389. For the week, the Dow was down 4.5% (S&P 500 -4.6%) and year-to-date is now down 1.3% (S&P 500 -1.5%). The yield on the 10-year Treasury (an important interest-rate indicator) fell thirteen basis points, closing at 2.86%.

After the President met with Chinese president Xi last Saturday, the Administration agreed to delay a planned increase in the tariff rate for three months. Markets initially celebrated this as a sign that Washington and Beijing were ready to reconcile their differences. As has so often been the case in the trade war, however, this breakthrough was overtaken by later events. America’s arrest of the CFO of Chinese telecom giant Huawei cast a new pall of uncertainty over these signs of progress. The market also refocused on the possibility of slower growth.

The economy added somewhat fewer jobs than expected last month, and the totals for prior months were revised down a bit. Wages grew more slowly as a result. What new jobs there were came in just a few fields: total employment was up in less than 60% of industries. The report more or less hit the market’s sweet spot (though it didn’t provide much support to a determinedly pessimistic trend). If the jobs number had been much lower, it would have exacerbated fears that the economy was slowing. Had it been much higher, the Fed would have had a pretext to continue raising interest rates aggressively.  Investors wouldn’t like that either. Tighter financial conditions may now pressure the Fed to dial back its plans for raising rates in 2019.

The most prominent headache this week instead appeared in the form of an inverted yield curve. The curve inverts when shorter-dated Treasury bonds trade at a lower price than those that mature in the more distant future. This occurrence has historically borne some correlation with a future recession. This week’s pessimism may be overdoing it, though. The time between an inversion and a recession varies considerably.  A decade ago, the yield curve inverted in 2005, but a downturn only came in late 2008. Market economists only put the odds of a recession next year at 14%, a small fraction of where they’ve been before prior downturns. And beyond twelve months their predictions haven’t been very accurate.

The price of crude oil rose 4% this week to ~$53 a barrel – down 13% YTD. US crude stockpiles showed a greater-than-expected draw – of 7.3m barrels – while product inventories of gasoline (+1.7m bls) and diesel (+3.8m bls), both rose. Prices were flat early in the weak before jumping around Thursday and Friday as OPEC members convened in Vienna. On Friday, the group reached an agreement to cut 1.2 million barrels per day, with non-member Russia onboard, and oil prices rose.  Share prices of domestic producers, however, diverged from the commodity this week, falling 3%.

*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 November 30, 2018

by JM Hanley

The Dow was up on Friday, rising 200 points to close at 25,538. For the week, the Dow was up 5.2% (S&P 500 +4.9%) and year-to-date is now up 3.3% (S&P 500 +3.2%). The yield on the 10-year Treasury (an important interest-rate indicator) fell eight basis points, closing at 2.99%.

Equity holders got an early Christmas present from Jerome Powell this week. The Fed chairman said that interest rates were “just a bit below…neutral,” which many took as a hint that the Fed might ease the rate-hike regimen planned for 2019. Investors often dislike higher rates, since firms must pay more to service their debt, future earnings are worth less in present terms, and economic growth can slow. Powell’s comment came after two rough months for stocks, driven in part by his earlier comment which seemed to suggest that rates ought to be raised substantially. Judging by the minutes of its recent meeting, the Fed does appear to have grown a bit more cautious. But equities’ dramatic fall and rise probably marked an overreaction. Growth is healthy but not extraordinary, and inflation and the labor market are near the Fed’s targets. If these trends continue, so should the gradual pace of rate hikes.

The President and Chinese premier Xi will meet tomorrow evening at the G20 summit in Buenos Aires. Hopes have risen that the two will agree to a détente on trade. This optimism was fueled by a news item from Wednesday which suggested that officials from both countries wanted to delay higher tariff rates until spring. That’s a distinct possibility, though little groundwork for such a deal has been laid. More importantly, the aggressive stance on Chinese trade remains useful as a political issue. It enjoys popular support and approval from leaders of both parties.

The same can’t be said in China (though its unelected leaders can afford to take a longer-term view). A November survey of the private sector showed sentiment had reached the lowest level since July of 2016. New orders were particularly weak, suggesting the slowing of the Chinese economy will persist. Beijing will probably cut taxes and interest rates next year to stimulate growth.

After a big drop last Friday, oil prices vacillated around $51 a barrel this week – down 16% YTD. Next Thursday, Dec. 6, OPEC along with their partners will meet to decide their continued strategy, and consequently the direction of oil in the near term.  The WSJ has reported that “OPEC+” is likely willing to rebuff the President’s call for greater output, which would result in higher gas and oil prices; however, investors are concerned there will be no agreement, leaving the market oversupplied due to declining demand forecasts.  OPEC has hinted a cut of as much as 1.4m barrels per day could be in order, but a cut in the 0.5-1.0m range seems more likely, if at all. Share prices of domestic producers moved in line with the commodity this week.

Next week will be busy.  There’s the OPEC meeting, and bilateral talks on trade. Jerome Powell will testify before Congress on Wednesday. But the most important item might be Friday’s jobs report. If the labor market tightens further, markets would revert to pessimism about higher interest rates.

Weekly Market Update for November 21, 2018

by JM Hanley

The Dow was unchanged today, closing at 24,465. For the first three days of the week, the Dow was down 3.7% (S&P 500 -3.1%) and year-to-date is now down 1.0% (S&P 500 -0.9%). The yield on the 10-year Treasury (an important interest-rate indicator) was unchanged, closing at 3.07%.

It was a mercifully holiday-shortened week on Wall Street. Large US tech firms came under especially acute pressure, but their problems reverberated through the whole market. Apple, which cut production of its profitable XR model, and Facebook, whose ham-handed response to the data privacy scandal came under further scrutiny, had a particularly bad time of it. For years, investors paid up to get in on Big Tech’s seemingly limitless potential for earnings growth. Now business has slowed a bit just as miscues are attracting the interest of regulators.

When equity markets first showed signs of trouble in October, plenty of investors were optimistic that the Fed would soften its rate hike schedule to cushion their fall. But with the economy close to full employment and inflation nearing the Fed’s target, Chairman Powell has other factors to consider. Recent Fed commentary to that effect explains why all sectors – not just tech – had a bad week.

The price of crude oil fell 4% this week to $54 a barrel – down 10% YTD. Prices largely fell during Tuesday trading, driven by continued demand concerns, trade war uncertainties, and rising production out of the US. Resolution of the US-China trade tension would be a key catalyst for crude oil, as would any production cut by OPEC on Dec. 6th or in early 2019. For now, share prices of domestic producers embed a low-$50 WTI outlook and remain attractively valued.

Our office will be closed tomorrow for Thanksgiving. We will be lightly staffed on Friday, when the market will close at noon.

*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 November 16, 2018

by JM Hanley

The Dow was up on Friday, rising 124 points to close at 25,413. For the week, the Dow was down 2.2% (S&P 500 -1.6%) and year-to-date is now up 2.8% (S&P 500 +2.3%). The yield on the 10-year Treasury (an important interest-rate indicator) fell twelve basis points, closing at 3.07%.

After last week’s midterms, international politics took center stage. Italy’s government refused to accede to the EU’s request that it cut its deficit. A response, possibly sanctions, will now grind its way slowly through the gears of Brussels bureaucracy. The problem could continue to flare up over the next few months, with implications (not necessarily negative) for US Treasury yields. Washington and Beijing’s on-again-off-again approach to trade talks also continues to preoccupy markets. The latest chatter has it that the US might agree to a détente at the upcoming G20 summit. Maybe, but a comprehensive deal probably won’t come until the end of next year or the following, when the upcoming US presidential election will focus minds.

Inflation rose a little over two percent last month. Higher gas prices were the culprit, though tariffs didn’t help. Tariffs’ effect on inflation will worsen next year, probably peaking at around two-tenths of a percent. Rising wages should also keep inflation up in 2019, more than offsetting steady gas prices and a strong dollar. Maybe it was unsurprising, then, that Fed chairman Jerome Powell didn’t suggest a milder approach to raising rates in a public appearance Wednesday. Investors had hoped that stock market turmoil would prompt him to reconsider choking off the supply of cheap money.

The price of crude oil fell 6% this week to $57 a barrel – down 6% YTD. Weak macro indicators of China economic health, a stronger US dollar, and continued China-US trade tensions have led to slowing global growth and, consequently, the potential for lower demand for fuel. On top of that, Iraq, Libya, and Saudi Arabia have increased production substantially in recent months. As a result, OPEC is now considering a production cut as high as 1.4 million barrels per day to support global prices. A decision could come as early as OPEC’s December 6th meeting.

Natural gas, which we’ve rarely talked about over the past year whilst the commodity was stuck in a rut, is finally benefitting from forecasts of a cold winter. The price was up 17% this week, providing some offset to our domestic producers from the weakening oil price. As a result, share prices of domestic energy producers fell less than the slide in oil prices this week.

Last month’s turbulence in equities drifted to credit markets this week. General Electric felt some of the worst pain. Despite its high debt levels, the industrial conglomerate has steady earnings and a sizable portfolio of businesses it can sell to raise cash. Baker Hughes, an oil field supplier in which GE has a large ownership stake, was first on the list. Pacific Gas and Electric, which owned equipment that started the Camp fire in California, also had a bad week.

*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

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