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Weekly Market Update for June 21, 2019

by JM Hanley

The Dow was up on Friday, falling 34 points to close at 26,719. For the week, the Dow was up 2.4% (SP500 +0.5%) and year-to-date is now up 14.5% (SP500 +17.7%). The yield on the 10-year Treasury (an important interest-rate indicator) fell two basis points at 2.06%.

Investors spent the first half of the week anxiously gaming out the Federal Reserve’s decision on interest rates and the accompanying press conference. The Fed left rates unchanged but strongly hinted they would cut them at the end of next month. More members than expected (though not a majority) voted to cut rates this year. The Fed also suggested it would conclude its balance sheet reduction at the July meeting, two months earlier than expected. Cutting balance sheet holdings reduces the money supply and thus dampens growth and inflation.

In his press conference, Chairman Powell noted that the generally positive outlook for economic growth and a healthy labor market hadn’t changed much. Slow inflation has gotten more concerning. The performance seemed calculated to placate a jittery market. Equity indexes surged afterwards, even though most had already forecast a July cut. Now Wall Street wants to know if the Fed will cut rates by 25 basis points (the usual increment) or 50.

The day before, Powell’s European counterpart Mario Draghi delivered a similarly dovish message. Draghi expects European rates to stay where they are through the middle of 2020. But he said the ECB stood ready to cut rates and purchase assets if conditions change. Frankfurt’s challenge is more daunting than the Fed’s. Growth and inflation are lower in Europe, and with a benchmark rate already at zero, the ECB has limited room for maneuver.

The price of crude oil rose 11% this week to $58 a barrel – up 27% YTD. US crude stockpiles showed a surprisingly large drop of 3.1 million barrels; product inventories of gasoline and diesel had been expected to grow but fell instead.  The surprising draw, and a fire at a refinery near Philadelphia this morning, helped drive pricing. But the most important contributor was a dramatic escalation in Washington’s standoff with Iran (war in the Middle East would obviously bring significant supply disruption). In fact, given the scale of the escalation, analysts’ consider crude’s reaction to have been relatively muted. The crude market’s apparent conviction that war is unlikely reassured equity markets more broadly.

The next major event on the market’s calendar is a meeting between US and Chinese leadership on the sidelines of the G20 summit next week. A comprehensive deal that ends the trade war is unlikely. Cautious optimists hope that a short-term postponement of an increase in the tariff rate can be agreed upon.

*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 June 14, 2019

by JM Hanley

The Dow was down on Friday, falling 17 points to close at 26,089. For the week, the Dow was up 0.4% (SP500 +0.5%) and year-to-date is now up 11.8% (SP500 +15.2%). The yield on the 10-year Treasury (an important interest-rate indicator) was unchanged, closing at 2.08%.

Economic data this week was mixed. US Industrial production and retail sales, two metrics tied to growth, increased more than than expected last month. These were offset by decelerating inflation. Medical service costs are still increasing quickly, but rent and housing costs declined again. Expectations of future inflation – which can determine how much employers raise wages, for instance – missed forecasts by even more. These signs of slowing growth, accompanied by the downbeat comments from Broadcom, has investors wondering how much the Fed will cut rates. Chairman Powell’s commentary last week, to the effect that the Fed needs to leave itself room for maneuver during the next crisis, suggests investors had best keep their hopes in check.

News was no better across the Pacific. Industrial production, investment, yuan-denominated lending, and (unsurprisingly) imports were all worse than expected. China watchers had thought they were in the clear after economic performance seemed to improve in March and April. The government announced new stimulus measures, but these more or less sustain fiscal and monetary support at the level it’s been.

Trade remains the elephant in the room. Mexico staved off tariffs after reaching a deal with the US last week. But what worries investors about the incident is that tariffs were used to achieve a political objective that wasn’t linked to trade (as has been the case for Europe and China, for example). This presumably expands the realm of situations in which they can be used.  Regarding China, the hope is that the US and China can agree to postpone the new tariff schedule at the G20 summit at the end of this month. But the two sides remain far apart. The outlook for trading relationships with Japan and Europe is slightly better.

The price of crude oil fell 3% this week to $52 a barrel – up 16% YTD. US crude stockpiles showed a surprise build – of 2.2m barrels – while product inventories of gasoline rose (+0.8m bls) and diesel fell (-1.0m bls). Oil prices moved lower to begin the week, driven by yet another weak inventory report leading to further supply-and-demand imbalance concerns. But oil rebounded to end the week following attacks on two transport tankers in the Gulf of Oman. OPEC-member Iran is thought to be the culprit of the attacks, but some question that conclusion given it could also hinder their strategic efforts. Energy equities tracked the commodity, with domestic producers falling 3% and service providers by 5%.

In corporate happenings, semiconductor and infrastructure giant Broadcom noted that the uncertainty surrounding the US-China trade relationship had resulted in gloomy sentiment and sluggish investment. Broadcom’s scale and line of work often make it a barometer of corporate earnings and macroeconomic conditions broadly. This could augur poorly for second quarter earnings reports next month.

*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.

The Risks of Passive Investing – Trouble Ahead for PFF?

Much has been written about the benefits of investing in passive exchange-traded funds (ETFs), namely market returns with a low management fee. However, investors need to consider the unique risks that arise when an ETF begins to dominate a niche space such as the preferred market.

In this article we will evaluate the largest ETF in the U.S. preferred stock market, the iShares U.S. Preferred Stock ETF (Ticker: PFF), which currently holds nearly $17 billion in assets. As an active preferred stock manager, Ulland Investment Advisors manages just over $225 million in the preferred space. We can offer a unique insight into the hidden risks associated with the PFF ETF, specifically focusing on market size risk, liquidity (or lack thereof) and interest rate risk (duration).

 

Ulland Investment Advisors

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