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Weekly Market Update – May 29, 2015

Friday’s second estimate for the United States’ first quarter GDP showed a contraction of 0.7% propelling the market indices lower on the day.  This was a downward revision from the first estimate on April 29th of a less than stellar though still positive 0.2%.  A stronger than expected consumer sentiment reading did little to quell the markets with the S&P 500 and Dow finishing down 0.63% and 0.64% for the day and down 0.88% and 1.21%, respectively, for the short week.

There doesn’t appear to be a consistent narrative driving the increased market volatility this week.  Investor complacency and the concern that there hasn’t been a 10% market correction since August 2011 isn’t comforting.  However, that theme is not new to this week and would have resulted in serious remorse given the stock market returns over the last couple of years.  Another suggestion is the lack of progress between European Union Officials and Greek authorities.  Greece is one week closer to being unable to manage its impending debt obligations.  Again, this is not new and unlike the situation in 2011, European Officials believe that Greece’s liabilities are ring-fenced and will not cause material harm to the European banking system.  The EU’s peripheral members are now on much sounder financial footing and European Officials are content to exert this leverage.  As such, it is unlikely that Greece is the primary driver behind this volatility.

The most plausible culprit for the increased volatility is the Fed and the speculation about the future of interest rates.  While the story isn’t new, it follows that as the Fed begins to normalize interest rates, one would expect volatility to normalize as well.  The Fed, through its quantitative easing programs, has been suppressing volatility for so long that even minor market swings has investors questioning what is going wrong.  Though higher volatility in the equity markets may be an unfortunate consequence of normalized interest rates, it will provide the Fed with more policy tools in its arsenal in the event of a future recession.  Ultimately, a small price to pay for more effective monetary policy from the US Fed.

Crude oil was up nearly 4.5% to $60.51 per barrel on Friday, owing to a drop in the Baker Hughes rig count.  The oil and gas rig count dropped by 10 to 875 – the lowest number since January 2003 and more than 50% off its 2014 peak.  This is the latest signal that the oil supply demand imbalance is correcting itself, which should benefit oil and gas securities. 

Important economic indicators released next week include April’s Personal Income and Spending numbers on Monday, the Fed’s Beige Book for June on Wednesday, and Nonfarm payrolls for the month of May on Friday.

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Ulland Investment Advisors

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