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Weekly Market Update for November 9, 2018

by JM Hanley

The Dow was down on Friday, falling 202 points to close at 25,989. For the week, the Dow was up 2.8% (S&P 500 +2.1%) and year-to-date is now up 5.1% (S&P 500 +4.0%). The yield on the 10-year Treasury (an important interest-rate indicator) fell three basis points, closing at 3.19%.

Midterm voters delivered control of the House of Representatives to Democrats, but Republicans kept charge of the Senate.  Divided government is set to return. Investors had expected this outcome, but indexes still rallied midweek in relief. Further fiscal stimulus in the form of additional tax cuts, increased government spending, an infrastructure package, or other major legislation now looks unlikely given the divides separating the two parties. That means the Fed (probably) won’t have to raise interest rates aggressively to offset additional government spending and keep inflation under control. Treasury yields fell as a result. Drug price reform, for which the White House and Congressional Democrats may share similar goals, could prove the lone area of cooperation.

The price of crude oil fell 5% this week to $60 a barrel – flat YTD. US crude stockpiles showed a greater-than-expected build – of 5.8m barrels – while product inventories of gasoline rose (+1.8m bls) and diesel fell (-3.4m bls). Prices declined steadily (again) throughout the week despite re-imposed Iranian sanctions, which have led to collapsing exports from that country. The price weakness was likely driven by rising US production and inventories. Share prices of domestic oil producers bucked the commodity move (again), however, rising 1% this week, possibly due to surprising strength in natural gas as well as a failed ballot measure (i.e. regulation) in Colorado. Favorable earnings reports by two equity portfolio names, Callon Petroleum and Devon Energy, demonstrated upside to cash flow expectations.

Corporate earnings outdid political headlines for excitement this week. Axon Enterprises (the maker of Taser) did better than anticipated on the top and bottom lines, but didn’t increase its estimate of full-year profits. Its executives said they were just being cautious. A planned transition in their contract with the New York Police Department could bring higher expenses. Trucker Daseke also failed to raise its full-year earnings estimate despite a good quarter.

News was better at CVS, which out did analysts’ forecasts and said its purchase of Aetna will be completed by Thanksgiving. Its share price rebounded on the news. Subscriptions for software from Hortonworks were a bit low, and its senior management didn’t provide an update on the merger with competitor Cloudera.  Playa Resorts also had a good quarter financially, though its room occupancy ticked down.  Shares of Air Lease rose after it reported higher profit margins and a growing fleet of aircraft. Shares of Granite Construction also rose after California voters chose not to repeal a gas tax hike, which will fund road and bridge construction.

*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 November 2, 2018

by JM Hanley

The Dow was down on Friday, falling 110 points to close at 25,271. For the week, the Dow was up 2.4% (S&P 500 +2.4%) and year-to-date is now up 2.2% (S&P 500 +1.9%). The yield on the 10-year Treasury (an important interest-rate indicator) rose fourteen basis points, closing at 3.22%.

After a very negative October, stocks recaptured some lost ground. There was no reason for them not to. Corporate earnings forecasts have held steady through this year’s bouts of volatility. These have furnished both a floor and a ceiling for equity indexes thus far. Investors also got more optimistic about a trade deal with China. The situation changes from minute to minute, but both countries’ politicians seem eager to avert further economic pain. Today’s jobs report also was positive. Labor force participation, and wages, rose meaningfully.

American voters will head to the polls this Tuesday. Polls indicate that Democrats are likely to recapture the House of Representatives while Republicans will keep control of the Senate and add one or two seats. Under such a scenario, federal policy probably wouldn’t change much. The parties’ Congressional leadership shares some priorities, like lowering drug prices and spending to repair national infrastructure. But even then, disagreement about how to accomplish those goals would likely impede bipartisan legislation.

The price of crude oil fell 6% this week to $63 a barrel – up 5% YTD. US crude stockpiles showed an “as-expected” build – of 3.2m barrels – while product inventories of gasoline (-3.1m bls) and diesel (-4.1m bls) both fell. Prices declined steadily throughout the week despite the well-known energy sanctions to be re-imposed by the US on Iran this Sunday. The price weakness was likely driven by reports that the US has granted waivers to eight large countries that import Iranian oil. Share prices of domestic oil producers bucked the commodity move, however, rising 1% this week. Perhaps, investors are willing to look past these “temporary” waivers as quarterly earnings reports have largely come in favorably for the group.

General Electric had another difficult quarter. The power business, which continues to drag down the rest of the firm, is to be reorganized. The company all but eliminated its common stock dividend, which is good news for fixed income holders. News was better at Facebook. The social network has had a year of bad headlines and rising spending on oversight. This quarter, it recorded strong profit margins and impressive user growth. Alibaba cut its 2019 sales forecast modestly. Otherwise, its report was not as bad as feared and showed revenues up 48% over last year.

Earnings reports will continue at a fast clip next week. Ebix, Hortonworks, CVS, Worldpay, Axon Enterprises, Devon Energy, and Playa Resorts are all scheduled to report.

*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 26, 2018

by JM Hanley

The Dow was down on Friday, falling 296 points to close at 24,688. For the week, the Dow was down 3.0% (SP500 -4.0%) and year-to-date is now down 0.1% (SP500 -0.6%). The yield on the 10-year Treasury (an important interest-rate indicator) fell twelve basis points, closing at 3.08%.

The improvement in the price of US Treasuries was modest considering the steep decline in equity markets. For one, the Federal Reserve remains intent on raising interest rates. The federal deficit is rising – and depending on the composition of Congress after the midterms, it could rise further still – so the supply of Treasuries is increasing. Finally, the strong dollar has diminished foreign Treasury buyers’ appetites.

The price of crude oil fell 2% this week to $67 a barrel – up 12% YTD. US crude stockpiles showed a greater-than-expected build – of 6.3m barrels – while product inventories of gasoline (-4.8m bls) and diesel (-2.3m bls) both fell. Prices fell through mid-day Tuesday after comments from the Saudi oil minister suggested higher future production, but then slowly climbed the rest of the week despite the pressure seen in equities. Share prices of domestic oil producers fell harder than the commodity, down 10% this week, with declines among highly-indebted companies even more pronounced.

Corporate earnings had previously been a constant bright spot, but this week a number of large firms disappointed Wall Street’s lofty estimates. Amazon’s third-quarter revenues were a bit low, but it did better than expected on the bottom line. The firm has sacrificed some near-term sales growth to shore up profitability. Instead, investors were concerned because the firm’s earnings estimates for the fourth quarter (which includes the Christmas season) were less than anticipated. A strong dollar, and higher wages for warehouse employees, may have taken a toll. But the ecommerce behemoth’s public numbers are typically conservative, and its senior management sounded optimistic about holiday sales.

The strong dollar also hurt Google. Excluding that, the quarter was good but unspectacular. The tech giant has rapidly taken a vast share of the domestic ad market over the past few years, and there’s simply limited room for further gains of that scale. Amazon and Google together make up 5% of the SP500. Their particularly steep decline amplified an already-poor day for the index.

Granite Construction proved a rare bright spot. The contractor continues to find operational efficiencies, and has held the line on pricing for project bids. Shares were up 12% in Friday trading.

Third quarter earnings season has been a disappointment so far. The new tariffs haven’t helped. But most of the damage has been done by more mundane suspects: higher wages, higher supply and transportation costs, and a strong dollar. Those are a product of America’s booming economy. Volatility on the stock market doesn’t mean a recession is near, and consumer confidence and corporate earnings growth remain strong by historic standards.

*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 19, 2018

by JM Hanley

The Dow was up on Friday, rising 65 points to close at 25,444. For the week, the Dow was up 0.4% (SP500 flat; NASDAQ -0.6) and year-to-date is now up 2.9% (SP500 +3.5%; Nasdaq +7.9%). The yield on the 10-year Treasury (an important interest-rate indicator) rose six basis points, closing at 3.20%.

US indexes swung back and forth dramatically but ended the week about where they started. Markets are digesting a mix of news. Strong corporate earnings have supported the market through previous bouts of macroeconomic worries this year. Third quarter earnings still look quite good by historic standards. But some of the big banks proved modestly disappointing, and rising supply, transport, and labor costs have begun to drag down industrial firms’ profit margins. Domestic data, including retail sales and industrial production, reflect an economy in excellent health – except for the housing market, where higher interest rates have begun to take a toll.

Trade talks with China are finally proving constructive, but now trouble is brewing on the Italian peninsula. The heavily-indebted national government wants to run higher deficits, to the chagrin of the rest of the European Union. Neither Rome nor Brussels seems willing to back down.

In the US, meeting minutes revealed that the Fed is intent on raising interest rates further. That would typically drag down the price of existing Treasury bond issues. But the Italian imbroglio has prompted investors to seek safety in German bunds, driving up their price. Falling yields on bunds have helped the support the price of US Treasuries, since both are similarly low-risk investments.

The price of crude oil fell 3% this week to $69 a barrel – up 14% YTD. US crude stockpiles showed a greater-than-expected build – of 6.4m barrels – while product inventories of gasoline (-2.0m bls) and diesel (-0.9m bls) both fell. Prices remained firm early in the weak as tensions flared between the US and Saudi Arabia regarding a missing Washington Post journalist. Then another bearish DoE inventory report Wednesday, a decline in US equities on Thursday, and easing Saudi/US tensions later in the week pushed prices lower. On Friday, the soft China GDP report stoked concerns on oil demand.

This week saw the first full docket of third-quarter earnings reports. United Health Group again beat analysts’ expectations for earnings thanks to an analytics platform that has had great success reducing the cost of medical care. Bank of America’s report was largely as expected. Income from interest earned on deposits was impressive. That success was largely offset by weakness in its capital markets business.  Down the street, Goldman Sachs did better than expected.  Strong results in investment banking offset light trading volumes.

Elsewhere in financial services, Euronet Worldwide shook off earlier torpor after its report noted higher profit margins driven by its remittance business in India. Next week will also be busy: Google, 3M, General Electric, Granite Construction, Visa, and Amazon are all scheduled to report.

*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

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