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Weekly Market Update for September 13, 2019

by JM Hanley

The Dow was up on Friday, rising 37 points to close at 27,220. For the week, the Dow was up 1.6% (SP500 +1.0%) and year-to-date is now up 16.7% (SP500 +20.0%). The yield on the 10-year Treasury (an important interest-rate indicator) rose thirty-five basis points, closing at 1.90%. The price of crude oil fell 4% this week to $55 a barrel – up 21% YTD

The much-anticipated European Central Bank interest rate decision came Thursday. The reduction in interest rates, by one tenth of one percent, was less than expected. But the committee’s commentary about future interest rate cuts was more accommodative, emphasizing low inflation. Most dovish of all was the new policy for purchasing sovereign bonds (or “quantitative easing”). This policy, debuted after the financial crisis, has the effect of holding down interest rates and encouraging lending. Most QE programs specify a total amount of purchases at the outset, but Frankfurt announced this one would continue indefinitely (until inflation improves). Persistently slow growth in Europe suggests that could take a while.

Just as central bankers have come around to the view that inflation is chronically low, it is showing signs of accelerating. Consumer prices increased 2.4% last month, a recent high. Healthcare costs increased considerably, and the impact of tariffs is now being felt in prices. Used car prices and the cost of public transport also accelerated. Some common consumer areas, like car parts, furniture, and clothing, weren’t as bad. The news raises the odds that the Fed will cut interest rates by a quarter point at its meeting next week. Another sign that a dramatic downturn may not be imminent is strong consumer sentiment, which has rebounded this month. With industrial production slowing worldwide, confident consumers are the most important engine of the economy.

Signs the economy may be better than feared precipitated a noticeable rotation in equity markets. Last month, nervous investors sold stocks of so-called cyclicals, whose profits are reliant on economic growth. They rotated into companies that have done well recently, or are at least perceived as stable: software companies, utilities, service firms, and the like. These names became “crowded,” or overbought, to an extent not seen in ten years. Price-to-earnings multiples rose accordingly, while cyclicals got much cheaper.  Easing trade tensions and signs the jobs market remains robust prompted investors to reassess. In the first two weeks of the month, they’ve hurried back into cyclicals. Next week may bring more news on trade talks with China. Anything positive will give stocks a boost.

*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 6, 2019

by JM Hanley

The Dow was up on Friday, rising 26 points to close at 26,797. For the week, the Dow was up 1.5% (SP500 +1.8%) and year-to-date is now up 14.9% (SP500 +18.8%). The yield on the 10-year Treasury (an important interest-rate indicator) rose six basis points, closing at 1.55%. The price of crude oil rose 3% this week to $57 a barrel – up 25% YTD

After the escalation of the trade war two weeks ago, and the détente last week, investors find themselves in a familiar realm of uncertainty.  America’s and China’s lead negotiators spoke in person on Wednesday for the first time since mid-August.  Beijing’s withdrawal of the controversial Hong Kong extradition bill could also be interpreted as a peace offering. In return, they probably expect the October 1st increase in the US tariff rate will be suspended. Markets largely assume the October and December tariffs will be cancelled. For its part, the PBOC (the Chinese central bank) cut interest rates, as expected.

In the US, the health of the industrial economy and the service sector continue to diverge. The ISM’s survey of the former showed it slipped (slightly) into contraction. But the health of the latter, reflected in today’s jobs report, remains good enough to compensate. The number of new jobs, though fewer than expected, was enough to keep the unemployment rate at its current (record) low.  Hourly earnings and labor force participation also improved. Chinese data was muddled. There were some indications the industrial sector could likewise be slowing, but exports (and the service sector) remain healthy. The news was less ambiguous in Germany, where global manufacturing headwinds aren’t offset by the service sector. Most assume Europe’s largest economy is in recession.

The European slowdown has trained attention on the ECB’s meeting next Thursday. Expectations for monetary stimulus, in the form of lower rates and sovereign bond purchases, are high. But the belief that extraordinarily accommodative monetary policy is the new normal has distorted the yield curve. A corrective from Frankfurt could stabilize bond markets, which would soothe equity investors. It’s a delicate needle to thread. Finally, a decision on Brexit will now likely be delayed until mid-winter. Despite the heavy volume of headlines it inspires, the terms of the UK’s departure may have little impact on American equity markets.

*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 August 30, 2019

by JM Hanley

The Dow was up on Friday, rising 367 points to close at 26,403. For the week, the Dow was up 3.0% (SP500 +2.8%) and year-to-date is now up 13.2% (SP500 +16.7%). The price of crude oil rose 2% this week to $54 a barrel – up 21% YTD.

Trade remains the most important topic on investors’ horizon. After back-and-forth reached a fever pitch last week, rhetoric cooled. China announced it hoped for a “calm” end to the trade war and wouldn’t retaliate for Washington’s escalation last Friday. The Administration reciprocated with constructive comments of its own. But little progress seems to have been made in negotiations; in fact, no substantive negotiations seem to be taking place.

Beijing may sense that things are shifting in its favor, and feel little pressure to compromise. Its unelected leaders have full control of fiscal and monetary policy and its economy has proven more resilient than thought. American officials enjoy no such ease of action. A breakthrough in the short term could thus prove elusive. As a result, the slate of tariffs scheduled for the first of September will very likely come into effect. The tranches scheduled for the first of October and for mid-December are less certain, and investors will watch closely.

Meanwhile, the trade policy outlook elsewhere has improved. Tariffs on imported European cars seem less likely, if US rhetoric after the G7 is anything to go by. And Japan and the US have purportedly reached a trade deal “in principle.”

The yield on the 10-year Treasury (an important interest-rate indicator) fell two basis points, and near a fresh low at 1.49%. The move anticipates a month of central bank interest-rate cuts. Chief among these will be the European Central Bank. Signals from Frankfurt, already dovish, have grown more pronounced as the German economy has continued to weaken. Investors expect the ECB to announce it will purchase about fifty billion euros’ worth of sovereign bonds. Additionally, political developments in debt-laden Italy means the country will likely avoid elections that could have brought a budget-busting populist party to power. The resulting rally in Italian bonds was felt throughout the market.

For its part, the Fed will probably cut rates a quarter point in mid-September. Whether or not the latest round of interest rate easing will have the intended effect of catalyzing growth is unclear. Rates were already low, and the inversion of the yield curve has lately been a headwind for stocks.

*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 August 23, 2019

by JM Hanley

The Dow was down on Friday, falling 623 points to close at 25,629. For the week, the Dow was down 1.0% (SP500 -1.4%) and year-to-date is now up 9.9% (SP500 +13.6%). The yield on the 10-year Treasury (an important interest-rate indicator) fell one basis point, closing at 1.53%.

With earnings season all but over, macroeconomic considerations took precedence.  The outlook continues to darken. Surveys of corporate management from Europe were about as expected – which is to say, they confirmed that growth on the continent is touch-and-go. More concerning was news from the US. The equivalent manufacturing survey showed production has fallen below levels consistent with a growing economy.

The deteriorating global outlook attached even more significance to Jerome Powell’s remarks at the Fed’s summer retreat in Jackson Hole.  The Fed chair acknowledged the bad news and scrapped an earlier reference to rate cuts as a “mid-cycle adjustment.” Markets now anticipate a quarter-point rate cut in September, and at least another quarter point later in the year. Monetary policy has grown extraordinarily accommodative in the US and around the world of late. But its efficacy faces the law of diminishing returns. Credit is already so cheap that lower rates won’t catalyze much more economic activity. Meanwhile, periodic inversions of the yield curve are making everybody nervous.

The most substantial burden on the global economy is America’s trade dispute with China. News from that front started the week passably and got worse. The US agreed to let tech companies supply Huawei for another three months, but not indefinitely. Then, on Friday morning, China confirmed a slate of retaliatory tariffs would go into effect on the first of September.  After the market closed, the White House announced that its own retaliatory tariffs would take effect – and that the rate of tariffs new and existing would be raised.

The trade war has disrupted global supply chains and induced caution in corporate planning. But consumer confidence has so far proven resilient. If the latest escalation rattles consumers, macroeconomic storm clouds could multiply.

The price of crude oil fell 1% this week to $54 a barrel – up 19% YTD. The oil inventory report did little to support the sector and investors’ heavy selling of cyclical industries, including commodities, was evident this week. Energy equities trailed the commodity, with domestic producers down 3% and service providers declining 4%.

*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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