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Weekly Market Update for October 12, 2018

by JM Hanley

The Dow was up on Friday, rising 287 points to close at 25,340. For the week, the Dow was down 4.2% (SP500 -4.1%; NASDAQ -3.7) and year-to-date is now up 2.5% (SP500 +3.5%; Nasdaq +8.6%). The yield on the 10-year Treasury (an important interest-rate indicator) fell nine basis points, closing at 3.14%.

Higher yields on US Treasuries triggered the correction in the equity markets, which had returned to the peak reached in January. A few other trends suggested a reassessment might be in order. As firms prepare to report their third-quarter earnings, Wall Street’s estimates imply that the second quarter (which ended in July) will have marked the high point of profit growth.  Profit margins have returned to a crest last seen before 2008. A strengthening dollar will hurt firms that earn revenues in foreign currencies, and the tight jobs market means that labor costs have gone up.  Major indexes historically have experienced (temporary) turbulence as investors adjust to a new normal of higher interest rates and a stronger dollar.

On top of these factors, midterm voters will head to the polls in three and a half weeks. The prospect of a shift in the political terrain, and the attendant policy uncertainty, typically causes markets to underperform in midterm years. The indexes’ upward trajectory prior to this week’s correction had been exactly the opposite.

The price of crude oil fell 4% this week to $71 a barrel – up 18% YTD. US crude stockpiles showed a greater-than-expected build – of 6.0m barrels – while product inventories of gasoline rose (+1.0m bls) and diesel fell (-2.7m bls). The bearish DoE inventory report coupled with the pullback in US equities dragged oil lower mid-week despite favorable DoT data. The DoT data showed that mileage driven by US vehicles was up nearly 1% y/y in August, twice the YTD growth trend. Share prices of domestic oil producers fell harder than the commodity, down 6% this week.

Three of the big banks reported earnings today, signaling the unofficial start of third-quarter earnings season. JP Morgan’s profits were modestly better than estimates, driven by a high-quality portfolio of loans. Wells Fargo accelerated loan growth and reported favorable earnings on customers’ deposits.

In other corporate news, the Department of Justice agreed to let CVS buy Aetna. Aetna will merely need to sell a portion of its Medicare business to satisfy the DOJ’s anti-trust requirement. An agreement with a buyer is in place. Shares of both firms were nonetheless lower after the CFO of Aetna announced he would retire upon the merger’s completion.  United Health, Bank of America, and Goldman Sachs, among others, will report earnings next 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.

Weekly Market Update for October 5, 2018

by JM Hanley

The Dow was down on Friday, falling 180 points to close at 26,447. For the week, the Dow was essentially unchanged (SP500 -1.0%) and year-to-date is now up 7.0% (SP500 +7.9%).

The Administration struck a trade deal to replace NAFTA with Canada after months of negotiation. The details are largely immaterial from the market’s perspective. Since a deal with Mexico had been agreed upon earlier, this means that North America will remain a free trade zone. The Administration simultaneously intensified non-economic pressure on China. The state of play on both sides of the Pacific seems to change from one minute to the next, but Washington continues to work for a comprehensive restructuring of their trading relationship.

Payrolls increased a bit more slowly than anticipated last month. A rough hurricane season didn’t help. However, the figures for July and August were revised up substantially. Unemployment fell to 3.7%, its lowest level since December of 1969 (though labor force participation is lower). Wage growth remained stubbornly slow despite further tightening in the labor market. Paychecks increased 2.8% (annualized).

The yield on the 10-year Treasury (an important interest-rate indicator) rose 16 basis points, closing at 3.23%. This marks its highest level since 2011. The jobs report revealed that the labor market remains quite healthy, so the Federal Reserve might raise rates more than anticipated next year.  Higher rates would make the return on Treasuries, along with all other existing fixed-rate securities, less attractive. Lending some credence to this view, Fed Chairman Jerome Powell said interest rates remained low despite several hikes this year. But plenty of factors converged to make this the perfect storm. Deficit spending has increased. The government must issue more debt to pay the bills, so the new supply of Treasuries is growing. The Federal Reserve is also selling the Treasuries it bought during the financial crisis, adding even more supply. When supply goes up and demand doesn’t change, prices fall and yields rise.

The rapid increase in yields dragged down the technology sector and other high-growth equities. Companies that are growing quickly are valued based on the earnings they will produce many years in the future. Investors compare this future stream of earnings with the compounding value of what they can earn in low-risk options, like Treasuries. If the return on Treasuries increases, tech companies’ future earnings look less attractive than before, and valuations fall.

The price of crude oil rose 1% this week to $74 a barrel – up 23% YTD. US crude stockpiles showed a greater-than-expected build – of 8.0m barrels – while product inventories of gasoline (-0.5m bls) and diesel (-1.8m bls) both fell. Oil prices continued climbing early in the week, but reversed course following the inventory report and amidst a falling equity market. There was also chatter that Saudi Arabia and Russia may have secretly agreed upon an in their production rates. Share prices of domestic oil producers followed the commodity this week and provided an offset to the broader equity market weakness.

General Electric replaced its CEO, John Flannery, with Lawrence Culp, the former chief of fellow industrial conglomerate Danaher. The move followed GE’s announcement that its cash flows would weaken due to ongoing struggles in its power business. Flannery’s plans for restructuring GE were appropriately far-reaching, but his execution was slow. Culp’s success at turning around Danaher augurs well. GE’s stock rose 17% this 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.

Weekly Market Update for September 28, 2018

by JM Hanley

The Dow was up on Friday, rising 18 points to close at 26,458. For the week, the Dow fell 1.1% (SP500 -0.5%) and year-to-date is now up 7.0% (SP500 +9.0%). The yield on the 10-year Treasury (an important interest-rate indicator) was unchanged, closing at 3.07%.

Wednesday’s meeting of the Federal Reserve went according to script. The Fed raised interest rates by a quarter of a percentage point. They also removed the word “accommodative” from official guidance, a sign that the central bank has grown more concerned about inflation as the economy booms. But in a cautious bit of doublespeak, Chairman Powell said he still considers policy to be effectively accommodative. Fed governors now say the economy will grow faster than previously thought: 3.1% this year and 2.5% the next. They still anticipate they’ll raise rates once more this year, and three times in 2019.

Italy’s debt-ridden government, now controlled by a coalition of populist parties, will increase deficit spending to 2.4% of GDP. This marks the outer bound of what analysts believed sovereign bond markets would tolerate. Banks and other financial stocks suffered this week as a result.

Italy’s debts add up to an eye-watering 130% of GDP. Anemic employment and productivity growth means that ratio is hard for Rome to recalibrate on its own. But the scale of the problem – Italy has the world’s ninth-largest economy – makes it difficult for the European Union to bail it out, as occurred in Greece. The budget drafters still need Brussels’ seal of approval, which is unlikely to be forthcoming. There’s plenty of uncertainty to come.

The price of crude oil rose 3% this week to $73 a barrel – up 21% YTD. US crude stockpiles showed a surprise build – of 1.9m barrels – while product inventories of gasoline rose (+1.5m bls) and diesel fell (-2.2m bls). Despite the somewhat weak US inventory report, oil was boosted by reports that China is cutting back on Iranian imports while benchmark prices in Oman quickly climbed $10 higher. China is the largest buyer of Oman crude, representing over 70% of Omani barrels.

Back in the US, Energy Secretary Perry denied reports that the US planned to tap the strategic petroleum reserve (SPR) despite the President’s call for lower energy prices. The US issued additional sanctions against Venezuelan President Maduro’s regime whilst speculation is rising that a multilateral military coup could emerge in the not-to-distant future. We expect oil prices will continue grinding higher as we approach the Nov. 6th restart of US energy sanctions on Iran; their exports have already declined by over 800,000 barrels per day during the past two months, ahead of the restart and faster than many anticipated.

Today marks the last day of the third quarter. Firms will begin reporting their third-quarter earnings the week after next.

*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 September 21, 2018

by JM Hanley

The Dow was up on Friday, rising 87 points to close at 26,744. For the week, the Dow rose 2.3% (SP500 +0.9%) and year-to-date is now up 8.2% (SP500 +9.6%). The yield on the 10-year Treasury (an important interest-rate indicator) rose seven basis points, closing at 3.07%.

Trade-related news actually buoyed equity markets this week. The Administration announced on Monday that it would impose duties on an additional $200 billion in Chinese imports, as anticipated. However, the 10% tariff rate, which was lower than expected, represents a modest conciliatory gesture. Both Washington and Beijing have good reasons to get a deal done. Two other trends helped. The dollar has weakened, which aids emerging market economies. And China introduced new spending to stimulate its flagging economy. All of this news was enough to power emerging-markets funds upwards for the first time in a long time.

As investors’ appetite for emerging-market risk returned, they shifted funds from safe options including US Treasury bonds. Treasury yields rose for that reason and others. The Federal Reserve still seems more concerned with full employment than righting the interest rate curve (which would require raising rates more aggressively). The Fed also looks likely to sell a significant share of its own Treasury holdings at the end of October. Anticipation of this deluge has dragged prices down.

The price of crude oil rose 3% this week to $70 a barrel – up 17% YTD. US crude stockpiles showed an in-line draw – of 2.1m barrels – while product inventories of gasoline fell (-1.7m bls) and diesel rose (+0.8m bls). Oil prices moved steadily upwards throughout the week as we approach a joint OPEC-Russia oil strategy meeting this weekend. The market continues to tighten as production declines in Venezuela and exports in Iran begin rolling over due to sanctions, both reducing OPEC spare capacity.

The key question remains how much Saudi Arabia el al. are willing to offset these impacts. In the US, the President called for OPEC to raise production to lower crude, and consequently gasoline, prices. Through year end, supply risks seem higher than any potential demand reduction that may result from shakiness in emerging markets.

Highlights on next week’s economic calendar include consumer confidence on 9/25, new home sales on 9/26, the Fed’s interest-rate decision on 9/26, and the final estimate of second quarter GDP on 9/27.

*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.

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Ulland Investment Advisors

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