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Weekly Market Update – August 18, 2017

The Dow finished down on Friday, falling 76 points to close at 21,675. For the week, the Dow fell 0.8% (S&P 500 -0.6%) and year-to-date is now up 9.7% (S&P 500 +8.3%). Geopolitical risks weighed on the market for a second straight week. U.S. and world leaders dialed back the North Korea tensions which troubled the market last week. However, concerns about the future of a pro-growth domestic policy agenda, especially tax reform, flared again. The yield on the 10-year Treasury was unchanged on the week, closing at 2.19%.

US economic data were mixed. July retail sales topped forecasts, climbing by 0.6%. That was twice as fast as they grew in June. In a similar vein, the University of Michigan’s consumer sentiment index also outperformed in preliminary August estimates. July factory capacity utilization met forecasts. The Conference Board’s LEI index, a business-cycle indicator, was likewise right on target at 0.3%. However, July seasonally-adjusted housing starts tumbled, missing Wall Street’s expectations.

Elsewhere, the world economy is enjoying a synchronized upswing. It is now forecast to grow 3.4% this year and 3.5% in 2018, a nice pick-up from 3.1% growth seen last year. Japan and the Eurozone, whose sluggish pace has long held back global growth, appear finally to have turned a corner. The IMF also revised its estimates of Chinese growth upwards. GDP is now expected to increase at an average yearly pace of 6.4% between 2018 and 2020. However, the same report advised caution on Chinese debt levels.

The week also saw increased commentary from the Federal Reserve regarding unexpectedly sluggish inflation. In the minutes of the Fed Open Market Committee’s July meeting, participants said that inflation had “declined” and “was running below 2%.” The probability of a third interest-rate hike at the Fed’s September meeting has fallen to 42% from 54% a month ago, according to futures markets. A hike is still expected in December.

The Fed is slated to begin its balance-sheet normalization in September. Markets expect its initial move to be limited. The process will be a lengthy and complicated one. The six largest central banks – the Fed, the European Central Bank, the Bank of Japan, the Bank of England, and the Swiss and Swedish central banks – now own $15 trillion of assets, more than one-fifth of their governments’ total debt. Each must work these holdings down.

The price of crude oil was essentially flat this week, remaining below $49 a barrel – down 9% YTD. US crude stockpiles showed a larger-than-expected draw of 8.9m barrels, while product inventories of gasoline were unchanged. Diesel inventories climbed 0.7m barrels.

Next week’s economic calendar is busy, including Markit’s US manufacturing PMI on 08/23, July existing home sales 08/24, initial jobless claims on 08/24, and durable goods orders on 08/25.

*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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