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Weekly Market Update for May 24, 2019

by JM Hanley

The Dow was up on Friday, rising 95 points to close at 25,586. For the week, the Dow was down 0.7% (SP500 -1.2%) and year-to-date is now up 9.7% (SP500 +12.7%). The yield on the 10-year Treasury (an important interest-rate indicator) fell seven basis points, closing at 2.32%.

A “tech war” with China has broken out after negotiations in the adjacent trade war reached a standstill last week. Washington’s decision to ban exports to China’s largest telecom operator, Huawei, marked a serious escalation. The Administration recognizes this as additional leverage, but the move probably makes a deal less likely in the near term. If a postponement of some tariffs and the strictures on Huawei can be agreed at the G20 summit at the end of June, markets would be happy.

Trade war rumors come and go, but a slowdown in two important indicators of domestic growth was more troubling. A survey of business leaders reported the slowest expansion of business activity since May of 2016. Demand has softened, and as a result, businesses have decreased their pace of hiring. It’s just one survey, and there is some indication fresh uncertainty in trade contributed. But this morning data released on durable goods showed a substantial drop in businesses’ purchases of equipment, or capital expenditures. This additional indicator of corporate caution prompted a number of Wall Street economists to cut their forecast of second quarter GDP growth to about one percent.

Predictably, it also inspired another round of speculation about a rate cut by the Fed. Minutes of the Fed’s last meeting gave little reason for such a change. Most members concurred with the Chairman’s view that sluggish inflation will prove temporary, and that the best approach is to wait and see. But the Fed could change their tune quickly if the bad economic news continues. A drop in economic growth is more tangible than slow inflation in a tight labor market.

The price of crude oil slid 7% this week to $58 a barrel – up 29% YTD. US crude stockpiles showed a greater-than-expected build – of 4.8m barrels – driven by a decline in refinery utilization. Product inventories of gasoline (+3.7m bls) and diesel (+0.8m bls) both rose as well. Oil prices fell sharply on Wednesday and Thursday as it became evident that the two sides in the US-China trade negotiations were drifting further apart, stoking oil demand fears. Energy equities followed oil lower, with domestic producers down 8%.

Further developments in trade negotiations (unpredictable as ever) will probably take center stage again next week. Inflation data and an update on first quarter US GDP will come towards the end of the week. Consumer confidence reports and manufacturing surveys on Tuesday and Wednesday also will be important.

*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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