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Weekly Market Update for May 18, 2018

by JM Hanley

The Dow was flat on Friday, rising a point to close at 24,715. For the week, the Dow fell 0.5% (SP500 -0.5%) and year-to-date is now flat (SP500 +1.5%). The yield on the 10-year Treasury (an important interest-rate indicator) rose nine basis points and closed at 3.06%.

The Administration is still re-negotiating the terms of the nation’s trade agreements with its North American neighbors and China. Progress is slow on both fronts. An American proposal to permit domestic firms to supply Chinese telecom giant ZTE – in exchange for China’s rolling back restrictions on US agricultural imports – fell through. Members of Congress had raised concerns about intellectual property theft. On fundamental issues like auto tariffs and financial services barriers, the Administration remains unsatisfied with China’s offers. This side of the Pacific, NAFTA negotiators missed a self-imposed deadline to have the agreement reworked by Thursday.

The Federal Reserve was unusually vocal this week. Deficit-financed tax cuts and higher federal outlays have accelerated economic growth (and inflation), but pushed up Treasury yields. Fed members disagree about their next steps. More hawkish members want to raise interest rates three more times this year. They believe the Fed’s 2% inflation target is unrealistically high, and worry that the yield curve may invert. That occurs when shorter-dated bonds pay more than longer-dated. Doves think concern about the economy overheating isn’t borne out by tepid wage growth. They are wary of prematurely snuffing out a long-awaited expansion.

Economic data this week were mostly positive. An economy accelerating after nine years of expansion makes for a strong housing market. The record-high price of lumber has made it harder for developers to turn a profit. Some first-time homebuyers have consequently been priced out of the market. Elsewhere, America’s industrial economy is booming at last. New orders and shipments were both up last month. Producers are struggling to keep pace with demand.

The price of crude oil rose 1% this week to $71 a barrel – up 18% YTD. US crude stockpiles showed an in-line draw this week, of 2.9m barrels, and product inventories of gasoline (-3.8m bls) and diesel (-0.1m bls) both fell. In addition to the favorable inventory report, oil benefitted from a stability-rocking election result in Iraq last weekend.

Venezuela, another major oil producer rocked by tumult, will vote on Sunday. Victory for the ruling party is all but assured. Reaction by the US, which threatened additional sanctions if Venezuela held elections, could further darken the geopolitical outlook. With investor sentiment in the energy space picking up pace, producers’ stock prices outperformed the commodity this week, rising 5%, and are now just 2% behind the rise in oil YTD.

Shares of Chinese tech conglomerate Tencent rose four percent after the firm reported revenues far higher than Wall Street’s expectations. Cloud computing, payments, and online gaming proved particularly lucrative businesses for the firm. Nutanix, 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

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