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Weekly Market Update for December 14, 2018

by JM Hanley

The Dow was down on Friday, falling 497 points to close at 24,101. For the week, the Dow was down 2.0% (S&P 500 -1.9%) and year-to-date is now down 2.5% (S&P 500 -2.8%). The yield on the 10-year Treasury (an important interest-rate indicator) rose four basis points, closing at 2.9%.

Politics provided no shortage of headlines this week. How much they mattered for the market is another question. Britain’s attempt to exit the European Union gets messier by the minute, but whatever the outcome, it won’t affect American firms much. The same could be said of Washington’s difficulties in funding the federal government. Italy’s deficit follies are another matter given its huge outstanding debts, but Rome and EU bureaucrats have apparently reached an agreement. And a week after the US delayed plans for a higher tariff rate on Chinese goods, Beijing reciprocated. China also resumed its purchases of American soybeans.

Investors were instead troubled by the prospect of slower growth worldwide. The bad news today was from China, where November retail sales and industrial production were particularly poor. A drop in exports was partially, though not entirely, to blame. Preliminary December data from Europe also looked weak, and disruptive protests in France didn’t help.

Slower global growth could add insult to injury for equity markets. Up to this point, stocks have dropped because the price-to-earnings ratio investors were willing to pay has fallen at the prospect of higher interest rates and a trade war. But the forecasts for earnings themselves held steady. If the economy’s growth now slows, so will earnings.

With investors facing a glum Christmas market, all eyes now turn to Jerome Powell. The Fed Chairman will speak after the Fed meets to raise interest rates next Wednesday. The hope is that he’ll offer reassurance about a strong American economy – but hint that there won’t be rate hikes (which normally accompany a strong economy) until the second half of next year. It will be a difficult needle to thread.

The price of crude oil fell 3% this week to ~$51 a barrel – down 15% YTD. US crude stockpiles showed a smaller-than-expected draw – of 1.2m barrels – while product inventories of gasoline rose (+2.0m bls) and diesel fell (-1.5m bls). Prices were volatile throughout the week as incoming global economic data points swung around demand forecasts, and systematic traders dramatically reduced long positions in the commodity following last week’s OPEC meeting. Benefitting domestic hub pricing, reports suggest Saudi Arabia may slash oil shipments to the US starting in January to help draw down inventories. Also, Libya is having trouble keeping production stable as local militias have seized various oil fields. Meanwhile, Russia has said that their contribution to the “OPEC+” production cut would come more gradually than expected, pressuring pricing.

*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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