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Weekly Market Update for September 15, 2017

by JM Hanley

The Dow finished up on Friday, rising 65 points to close at 22,268. For the week, the Dow rose 2.2% (S&P 500 +1.6%) and year-to-date is now up 12.6% (S&P 500 +11.7%). Relief after Hurricane Irma spared Florida the worst helped push the major indices to record highs.  Rising crude oil prices and strengthening bond yields also gave energy and financial stocks a boost.  The yield on the 10-year Treasury rose fifteen basis points this week, closing at 2.20%, on Thursday’s report of higher-than-expected inflation.

Hurricane Irma’s late pivot towards the Gulf Coast of Florida meant that its impact on the densely populated area near Miami was not as bad as feared.  Damage estimates dropped from $172B to $49B after the storm passed.  JP Morgan still projects that Irma will prove to have been one of the five-costliest hurricanes recorded.  Elsewhere, there was little news from Washington this week.  Negotiations continue on tax reform.

Economic data reported this week were mixed.  Retail sales fell 0.2% from July, the worst report in six months.  Economists surveyed had expected an increase.  Weak auto sales weighed on the index.  August industrial production also fell, by 0.9%. Hurricane Harvey bears part of the blame for both.

Markets were most interested in August’s inflation data released Thursday.  Despite plenty of commentary about sluggish inflation, prices increased at a faster overall rate than anticipated. Excluding food and energy costs, the “core” rate was 1.7% – the pace it’s held for the past four months.  Housing and gasoline expenses accounted for most of the increase.  The in-line report increased the chances of a December rate hike by the Federal Reserve, which investors now consider more likely than not.   The Fed has long flagged slow inflation as a development that could force it to postpone its rate-hike schedule.

The price of crude oil rose 5% this week, to nearly $50 a barrel – down 7% YTD. US crude stockpiles showed a smaller-than-expected build – of 4.2m barrels – while product inventories of gasoline (-8.4m bls) and diesel (-3.2m bls) declined significantly. Refinery utilization remained below 80%, which drove the drawdown in refined products and build in crude, but utilization should rebound sharply the next couple weeks.  Also aiding oil prices this week were upward revisions to global demand estimates by the IEA, as well as positive communication out of OPEC regarding potential agreement extensions and compliance monitoring.

Highlights on next week’s economic calendar include housing starts on 09/19, existing home sales on 09/20, and Markit’s US manufacturing and services PMI on 09/22.

 *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).

 

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