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Weekly Market Update – May 5, 2017

The Dow finished up on Friday, rising 55 points to close at 21,006. For the week, the Dow rose 0.3% (S&P 500 +0.6%) and year-to-date is now up 6.3% (S&P 500 +7.2%). The yield on the 10-year Treasury was up 3 bps Friday to 2.35%, ending the week up 6 bps. As expected, the Fed’s FOMC left rates unchanged at its meeting this week but is still expected to hike two more times this year.

US economic data began the week negative, but ended on a positive note. The April ISM Manufacturing Index at 54.8 missed expectations for 56.5 and declined from 57.2 in March. Automotive sales posted a 16.8m seasonally-adjusted annual rate, below expectations of 17.1m despite ticking up from 16.5m in March. Preliminary Q1 nonfarm productivity declined 0.6% quarter over quarter, more than expected but similar to last year.  Then on Friday, the April jobs report showed strong improvement, with 211,000 jobs added versus an expectation of 190,000.  Unemployment ticked down to 4.4% from 4.5% in March.  Underemployment ticked down to 8.6% from 8.9% in March.  Wages, however, were a little light rising 2.5% year over year.

After a last minute scramble to bring a vote on an ACA replacement, the US House narrowly passed a replacement bill this week.  The focus now shifts to the US Senate, whom will likely craft their own bill and may have a hard time passing given Senate rules.  Our largest equity exposure to changes in the ACA is UnitedHealth Group, which could be hurt if there were declines in coverage but would be a beneficiary of potential reform on health plan taxes (removal of the health insurer fee).

The price of crude oil fell 6% this week to slightly above $46 a barrel – now down 14% YTD. The EIA reported that crude stockpiles declined this week – by 2.4m barrels – and also that product inventories of gasoline (+0.2m bls) and diesel (-0.5m bls) did not move much. A lack of bigger US inventory draws has called into question whether the OPEC production cut will be sufficient to offset the ramp in output from US shale companies.  Many investors now expect OPEC to extend their cuts an additional six months when they meet on May 25th, but some are arguing that deeper reductions are now needed.  Additionally, China appears to be toughening its regulatory and supervisory standards, particularly regarding credit and wealth management products.  This is encouraging deleveraging, security selling, and also contributing to the wider weakness in commodities.

Next week’s economic calendar highlights will include the April NFIB Small Business Optimism Index (5/9), April inflation data (5/11 & 5/12), April advance retail sales (5/12), and the University of Michigan Consumer Sentiment Index (5/12).  Small business optimism and consumer sentiment is expected to remain high, while inflation data should continue in the 1.5-2.0% range year over year. Retail sales may come in light given slowing growth amongst domestic consumers.

Have a great weekend!

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Ulland Investment Advisors

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