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Weekly Market Update – January 20, 2017

The Dow was up 95 points on Friday as Wall Street assessed the likely direction of policy under the new Trump administration. For the week the Dow was down 0.3%. Year-to-date the Dow is up 0.33%.

The consumer price index (a measure of inflation) rose 0.3% in December, a rate that slightly outpaced November’s 0.2%. Housing and gasoline costs drove the spike. CPI was up 2.1% from the previous December, its fastest rate of increase since July 2014. Industrial production rose 0.8% in December – analysts expected a 0.6% increase – thanks to outperformance in utilities. Initial jobless claims came in at 234,000, better than the 254,000 consensus estimate. This marks their lowest level since November of 1973. December new-housing starts also outperformed, rising 11.3% to a 1.226m seasonally-adjusted rate. Wall Street expected only 1.187m.

Commentary from the Federal Reserve was muted this week. In a speech Wednesday, Fed chairwoman Janet Yellen said that the economy was approaching the Fed’s twin objectives of full employment and price stability. Yellen noted that it takes some time for interest rate hikes to work their way through the economy. If the Fed were to delay rate hikes for too long, she said, it would risk a “nasty surprise.” Our preferreds continue to outperform the Barclay’s Aggregate Bond Index, and continue to do well in the new year.

The price of crude oil was flat on the week, closing Friday at $55.45 a barrel. Oil fell during the first half of the week over concerns about a resurgence in US shale production. Prices then regained ground Thursday and Friday amid a weakening US dollar as well as signs that OPEC nations were serious about implementing production cuts.

Highlights on next week’s economic calendar include initial jobless claims (Jan. 26), existing home sales (Jan. 24), new home sales (Jan. 26), quarterly GDP numbers (Jan. 27), and durable goods orders (Jan. 27).  Fourth quarter corporate earnings releases will continue.

Have a great weekend.

Weekly Market Update – January 13, 2017

The Dow was flat Friday. Solid fourth quarter earnings reports from big banks offset falling oil prices and soft holiday sales numbers in retail. For the week, the index was up 0.4%; year-to-date it’s up 0.6%. Our preferreds continue to outperform the Barclay’s Aggregate Bond Index, and are off to a good start in 2017.

It was a quiet week for domestic economic headlines. The NFIB small business optimism index saw its largest monthly gain on record, rising to 105.8 last month from 98.4 in November. The sharp increase was linked to the outcome of the election. Heightened expectations drove the surge. 50% of small business owners expected the economy to do better, and 31% expected sales to increase. Elsewhere, December retail sales rose 0.6% from the previous month, slightly disappointing analysts who had expected a 0.7% increase. The National Retail Sales Federation announced that holiday sales rose 4.3%. This outpaced the expected 3.6% increase. Online sales, which increased 12.6%, were particularly strong. The producer price index (PPI) rose 0.3% in December after an increase of 0.4% in November. PPI’s annualized 1.6% surge in December is the fastest in three months, and underscores the likelihood that higher inflation could be on the horizon.

Several of the nation’s largest banks reported fourth-quarter results Friday, marking the unofficial start to earnings season. Results were generally positive. J.P. Morgan outperformed. It posted earnings of $1.71 a share, about 20% better than Wall Street had forecast. Bank of America also beat expectations, as lower expenses offset a slight decline in revenue. Wells Fargo offered a mixed bag. While revenue missed estimates, its net interest margin – the income earned from its deposits – outperformed, making investors optimistic given rising interest rates. Shares had climbed 1.5% by the end of the day.

The price of crude oil (Brent) closed at $55.61 a barrel on Friday, down 2.6% on the week. This marked the largest weekly drop since early November. Prices have risen steadily since major oil exporters signed on to a production cut agreement in December. Investors, however, remain wary that exporters won’t comply with the deal’s caps on production. Higher-than-expected buildup of U.S. oil and fuel inventories also weighed on prices.

Highlights on next week’s economic calendar include the consumer price index (Jan. 18), initial jobless claims (Jan. 19), housing starts (Jan. 19) and the Philadelphia Fed’s manufacturing index (Jan. 19). Fourth-quarter corporate earnings releases will continue next week.

Weekly Market Update – December 2, 2016

The Dow was down 21 points on Wednesday, though it finished the week up 18 points at 19,170. The index’s flat performance, coming a week after it surpassed 19,000 for the first time ever, masked a wide differential in performance between sectors. Financials have surged since the election as investors wager that reduced regulation and new tax cuts from a Republican-controlled government will increase GDP growth and inflation. On the other hand, technology stocks have suffered over concerns about the strong dollar and the Trump administration’s approach to trade. The US Preferred Index is down 2.8% since the election. Our preferred continue to outperform this index and the Barclay’s Aggregate Bond Index, although all fixed income is down since the election.

Domestic economic data on the week were generally positive. In the jobs report released Friday, nonfarm payrolls climbed 178,000, as unemployment fell to 4.6%. This marks its lowest reading since August of 2007, before the financial crisis. Economists expected more jobs (180,000) but higher unemployment (4.8%). To that point, workforce participation edged lower, to 62.7%, remaining near a four-decade low. Meanwhile, third quarter GDP growth was revised up to 3.2%, its highest point in five years. Higher-than-expected consumption drove the beat, as the consumer confidence index surged to 107.1 from its 98.6 position in October.

Elsewhere, the ISM manufacturing index climbed to 53.2 from its 51.9 level in November, coming in above expectations of 52.5 and reaching its highest point in five months. Respondents noted higher demand and tightening labor markets. The impact of the election appeared negligible.

The price of crude oil climbed 12% on the week following OPEC’s announcement Wednesday that it had agreed to a production-cut deal after months of negotiation. The agreement, in which production would be cut by 1.173m barrels per day, would begin in January and would last for six months. Success came after Saudi Arabia and Iran agreed to accept steeper cuts. Libya and Nigeria were granted exemptions in light of ongoing domestic conflicts in their countries, though Iraq’s bid for an exemption was denied. Russia agreed to trim output by 300m barrels per day, about half of the total OPEC members had sought from non-OPEC members. A number of final details remain to be worked out at a December 9 meeting of OPEC representatives and non-OPEC producers.

Bank stocks also surged on the spike in crude. Higher oil prices decreased the likelihood that troubled energy loans on banks’ balance sheets would sour. Markets anticipated that banks would release reserves they’d held to cover those losses, which would boost their earnings.

Highlights from next week’s economic calendar include crude inventories (Dec. 7), initial jobless claims (Dec. 8), and natural gas inventories (Dec. 9). Markets will also be watching the outcome of Italy’s constitutional referendum on Sunday the 4th. Italy’s prime minister has pledged to resign if the measure fails. Such an outcome could decrease the likelihood of a solution to Italy’s banking crisis and increase instability in the Eurozone.

Weekly Market Update – October 28, 2016

The Dow was down eight points on Friday as uncertainty about the upcoming presidential and congressional election continued to roil the market. It was flat on the week. Year-to-date the index is up 4.2%.

Economic data on the week were mixed. Numbers released Friday showed that GDP grow by an annualized 2.9% in the third quarter, ahead of expectations of 2.5%. This was a considerable acceleration from the 1.4% growth in the second quarter, and in fact marked the fastest quarterly growth rate in two years. New home sales in September rose to a seasonally-adjusted 593,000. Though this was below consensus estimates of 600,000, it was nevertheless an increase of 3.1% from August’s mediocre sales numbers. Durable goods orders disappointed, falling by 0.1% against expectations for a 0.1% increase. Meanwhile, the trade deficit fell 5% on the month to $56.1 billion. An uptick in exports (up 0.9%) and a fall in imports (down 1.1%) drove the decline in equal measure. Jobless claims came in at 258,000, in line with expectations. Consumer confidence was weaker than expected. The 98.6 index figure was down from 103.5 in September and below the consensus estimate of 101.2

The Federal Reserve offered little additional interest rate guidance this week but investors continue to believe a rate hike is likely at the Fed’s meeting in December. San Francisco Fed president John Williams reiterated the case for a hike at that point. While Williams emphasized that rate hikes were necessary if inflation and unemployment met the board’s targets, he noted that sluggish growth meant that the Fed would raise rates more slowly than it had in the past. The market puts the odds of a quarter-percent rate hike at the December meeting at over 70%. For the week, the US preferred index was up 0.35%. Our fixed-income strategy continues to outperform this index and the Barclay’s Bond Index.

Crude retreated a bit following its 15-month high of $51.78 last week. Doubts about OPEC’s promised production cuts, announced in late September, continued to percolate. Members continued to debate the terms of the agreement, while Iraq threatened to pull out and Russia tried to dodge cuts to output. Crude finished the week down $2.18 (4.2%), at $49.60.

The week’s corporate earnings announcements were a mixed bag. Google was up following strong revenues and earnings while Amazon reported disappointing earnings but solid revenue growth. Likewise, Apple’s reported $9 billion in net income marked its first revenue decline in 15 years, pushing the stock price down on the week.

Highlights in next week’s economic calendar include auto sales (Nov. 1), crude inventories (Nov. 2), and most importantly, nonfarm payrolls (Nov. 4). Additionally, fourth quarter earnings reports will continue. Facebook, UHaul/Amerco, and Callon Petroleum, among others, are scheduled to report.

Have a great weekend.

J.M. Hanley

 

Ulland Investment Advisors

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