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Weekly Market Update – August 18, 2017

The Dow finished down on Friday, falling 76 points to close at 21,675. For the week, the Dow fell 0.8% (S&P 500 -0.6%) and year-to-date is now up 9.7% (S&P 500 +8.3%). Geopolitical risks weighed on the market for a second straight week. U.S. and world leaders dialed back the North Korea tensions which troubled the market last week. However, concerns about the future of a pro-growth domestic policy agenda, especially tax reform, flared again. The yield on the 10-year Treasury was unchanged on the week, closing at 2.19%.

US economic data were mixed. July retail sales topped forecasts, climbing by 0.6%. That was twice as fast as they grew in June. In a similar vein, the University of Michigan’s consumer sentiment index also outperformed in preliminary August estimates. July factory capacity utilization met forecasts. The Conference Board’s LEI index, a business-cycle indicator, was likewise right on target at 0.3%. However, July seasonally-adjusted housing starts tumbled, missing Wall Street’s expectations.

Elsewhere, the world economy is enjoying a synchronized upswing. It is now forecast to grow 3.4% this year and 3.5% in 2018, a nice pick-up from 3.1% growth seen last year. Japan and the Eurozone, whose sluggish pace has long held back global growth, appear finally to have turned a corner. The IMF also revised its estimates of Chinese growth upwards. GDP is now expected to increase at an average yearly pace of 6.4% between 2018 and 2020. However, the same report advised caution on Chinese debt levels.

The week also saw increased commentary from the Federal Reserve regarding unexpectedly sluggish inflation. In the minutes of the Fed Open Market Committee’s July meeting, participants said that inflation had “declined” and “was running below 2%.” The probability of a third interest-rate hike at the Fed’s September meeting has fallen to 42% from 54% a month ago, according to futures markets. A hike is still expected in December.

The Fed is slated to begin its balance-sheet normalization in September. Markets expect its initial move to be limited. The process will be a lengthy and complicated one. The six largest central banks – the Fed, the European Central Bank, the Bank of Japan, the Bank of England, and the Swiss and Swedish central banks – now own $15 trillion of assets, more than one-fifth of their governments’ total debt. Each must work these holdings down.

The price of crude oil was essentially flat this week, remaining below $49 a barrel – down 9% YTD. US crude stockpiles showed a larger-than-expected draw of 8.9m barrels, while product inventories of gasoline were unchanged. Diesel inventories climbed 0.7m barrels.

Next week’s economic calendar is busy, including Markit’s US manufacturing PMI on 08/23, July existing home sales 08/24, initial jobless claims on 08/24, and durable goods orders on 08/25.

*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 – August 11, 2017

The Dow finished up on Friday, rising 14 points to close at 21,858. For the week, the Dow fell 1.1% (S&P 500 -1.1%) and year-to-date is now up 10.6% (S&P 500 +9.0%). After persistently shrugging off political and geopolitical discord for months – and in the meantime setting records for low volatility – the market indices finally showed signs their thick skins were not impenetrable. The S&P 500 dropped 1.7% from its Monday high through Thursday before Friday’s small bounce. The yield on the 10-year Treasury fell 6 bps Friday to 2.19%, down 3 bps for the week.

US economic data were mixed again this week. The NFIB Small Business Optimism Index improved further to 105.2 and June’s JOLTS nonfarm job openings data reached the highest level in its history (back to 2000), far outpacing forecasts. Inflation, however, continues to run below economists’ expectations for the 5th consecutive month. The soft inflation trend (1.7-1.8%) remains the primary obstacle to a third potential Fed rate hike later this year.

The war of words between North Korea and the US is largely being blamed for the “risk-off” sentiment seen mid-week. The ramp in nuclear rhetoric comes after Pyongyang conducted a series of missile tests (including 2 ICBM’s in July) and the UN responded with tougher sanctions this past weekend. This type of nuclear rhetoric has been ongoing for decades; however, intelligence officials have recently concluded that North Korea has produced a miniaturized nuclear warhead that can fit inside its missiles. While US stocks have a good track record of successfully rebounding following geopolitical events – and we are optimistic the current recovery still has further upside – some investors are concerned this event could bleed over into debt ceiling headwinds in Congress this fall and thus are taking some equity chips off the table.

The price of crude oil fell 1% this week to below $49 a barrel – down 9% YTD. US crude stockpiles showed a larger-than-expected draw – of 6.5m barrels – and product inventories of gasoline rose (+3.4m bls) while diesel fell (-1.7m bls). Crude oil was doing well for most of the week driven by continued inventory draws – surpassing the $50 a barrel line – before monthly reports from OPEC and the IEA showed unfavorable revisions to the supply-demand picture late in the week.

Next week’s economic calendar highlights will include July advance retail sales on 8/15, housing starts on 8/16, capacity utilization and leading economic indicators on 8/17, and consumer sentiment on 8/18. Retail sales are expected to show improvement after a disappointing June report, with a consumer sentiment pickup as well. Housing and capacity utilization are expected to run similar to prior months,  while the leading economic indicators are expected to show some slowing from June.

*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 – August 4, 2017

The Dow finished up on Friday, rising 66 points to close at 22,092. For the week, the Dow rose 1.2% (S&P 500 -0.2%) and year-to-date is now up 11.8% (S&P 500 +10.2%). Market indices have shown little concern regarding geopolitical tensions among North Korea, Russia, and the US; however recently, fund flows have shown dollars leaving US equities in favor of foreign markets and fixed income dollars flowing into US Treasuries and investment-grade bonds from high yield. The yield on the 10-year Treasury fell 5 bps Friday to 2.22%, down 7 bps for the week, proving to be another good week for preferreds.

US economic data were mixed this week. July automotive vehicle sales as well as the ISM manufacturing report were a little soft, while June pending home sales and the July employment report were stronger than expected. In July, non-farm payrolls increased 209,000, above the market estimate of 180,000, and June’s employment gains were revised higher (to 231,000, from 222,000). The unemployment rate ticked down to 4.3%, as expected, while average hourly earnings rose 2.5% y/y.

Debate continues on where corporate tax rates will ultimately shake out if congress is successful in passing tax reform. When legislators return from recess they will need to quickly work on a debt ceiling raise or face a similar debt cliff crisis like we saw in August 2011. Earnings season continues to hum along, with over 70% of S&P 500 companies beating revenue expectations and a similar number surpassing EPS forecasts. On average, companies have expanded revenues by 5% and earnings by 10% y/y – both solid numbers.

The price of crude oil was roughly unchanged this week in the $49-50 a barrel range – down 8% YTD. US crude stockpiles showed a smaller-than-expected draw – of 1.5m barrels – and product inventories of gasoline (-2.5m bls) and diesel (-0.2m bls) declined as well. In addition to the continued inventory draws, oil prices were helped this week by drilling spending cuts from some large US producers and the continued turmoil in Venezuela. On Monday, some members of OPEC/non-OPEC will meet in Abu Dhabi to discuss, once again, group compliance and to pressure non-compliant members into cooperation.

Next week’s economic calendar highlights will include the NFIB Small Business Optimism Index on 8/8, July PPI inflation on 8/10, and CPI inflation on 8/11. Business optimism is expected to remain near record highs, while both inflation measures are forecast to stay in that 1.7-2.0% range. Q2 earnings should mostly wrap up next week as well.

*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 – July 28, 2017

The Dow finished up on Friday, rising 33 points to close at 21,830. For the week, the Dow rose 1.2% (S&P 500 -0.0%) and year-to-date is now up 10.5% (S&P 500 +10.4%). The yield on the 10-year Treasury fell 2 bps Friday to 2.29%, up 5 bps for the week. The “repeal now, replace later” healthcare plan failed to pass this week, and now legislators are likely to shift to tax reform and the debt ceiling when they return from summer recess. Investors had already moved on from healthcare, and will be keenly watching developments on the corporate tax front come September.

US economic data were mostly positive this week. Consumer confidence, durable goods orders, and preliminary manufacturing activity were all better than expected. Existing home sales were light while US GDP was roughly in line. The first estimate of US Q2 GDP indicated that economic activity increased 2.6% y/y vs. 1.2% in Q1 (Q1 revised down from 1.4%). The Fed met this week and left rates unchanged, as expected, and noted that balance sheet normalization (i.e. reducing its bond portfolio) will start “relatively soon,” probably in September.

The International Monetary Fund (IMF) reduced their forecasts for US GDP growth to 2.1% in 2017 as well as 2.1% in 2018; however, they also revised estimates up for Europe and China. The Eurozone has been showing improvement this year, with manufacturing activity humming along, job creation strong, and improving sentiment. This week, Germany’s IFO index (measure of the business climate) surprised to the upside leading to the strongest inflow of investment funds into Europe in three months.

The price of crude oil rose 9% this week to nearly $50 a barrel – still down 7% YTD. US crude stockpiles showed a larger-than-expected draw – of 7.2m barrels – and product inventories of gasoline (-1.0m bls) and diesel (-1.8m bls) declined as well. In addition to large inventory draws the past four weeks, oil prices were supported by an OPEC technical meeting, oil pipeline attacks in Nigeria, rising US sanctions on Venezuela, and reports of slowing growth amongst US producers. OPEC reiterated their view that the drawdown in global oil stocks would accelerate over the next few quarters and roped Nigeria into the group agreement, setting a cap on their production (OPEC members Nigeria and Libya had previously been excluding from cuts). Additions to the US rig count have slowed to two per week from 10 during much of this year and some producers announced drilling capex cuts this week.

Next week’s economic calendar highlights will include June pending home sales on 7/31, the July ISM manufacturing index and automotive vehicle sales on 8/1, and the employment report on 8/4. Vehicle sales are expected to tick up but remain shy of a 17 million annualized rate. July job additions are expected near 180,000 vs. 222,000 in June. Unemployment is expected at 4.3% vs. 4.4% in June. Positive results would be supportive of the Fed’s balance sheet normalization strategy mentioned above.

*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