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Weekly Market Update – December 16, 2016

The Dow was down slightly on Friday, flat on the week at 19,843.41. The post-election rally lost some steam following the Federal Reserve’s announcement Wednesday that it intended to raise rates three times in 2017. Bond yields, and the dollar, also climbed on the news from the Fed. The US Preferred Index is down 4% since the election. Our preferred continue to outperform this index and the Barclay’s Aggregate Bond Index. Our preferreds are up so far in December.

The Federal Reserve announced Wednesday that, as widely expected, it would raise rates by a quarter percent. More surprising was the board’s guidance for three quarter-percent rate hikes in 2017. Wall Street had predicted two. Chairwoman Janet Yellen said that inflation and employment levels have made substantial progress towards the Fed’s targets. However, both remain low and the macroeconomic outlook is still uncertain – justifying continued caution in monetary policy. Yellen avoided comment on Trump’s proposed infrastructure plan, saying only that the economy could likely reach full employment without fiscal stimulus.

Domestic economic indicators this week were mostly positive. The Small Business Optimism Index rose to 98.4 in November, up thirty-five basis points since October. The index increased sharply after the election, as business owners anticipate lower taxes, less regulation, and savings from an Obamacare overhaul. A net 23% of respondents now report plans for new hiring, up from 9% before Trump’s victory. Elsewhere, retail sales rose only 0.1% in November, falling short of the consensus estimate of 0.3% growth. Particularly weak auto sales – down 0.5% to their worst level since March – bore most of the blame. Department store sales fell 0.2% heading into the holiday shopping season. Persistent weakness in this sector will likely amplify concerns about shopping-mall traffic as ecommerce continues to gain ground. The producer price index (PPI) climbed 0.4%, well ahead of expectations of 0.1%, driven mostly by higher prices for services. The consumer price index (CPI) was up only 0.2%, about in line with expectations. Weekly initial jobless claims stayed low, tumbling 4,000 to 254,000.

Crude oil showed slight gains on the week. The WTI index increased 1% to $52 a barrel. Prices surged early in the week after OPEC struck a production cut deal with major producers outside the cartel. These non-OPEC members (dominated by Russia) agreed to cut production by 558,00 barrels per day. Though this was a smaller cut than the industry wanted, it nonetheless marked the first instance of cooperation between OPEC and non-OPEC producers since 2001. Investors, however, soon grew more bearish amid concerns that a surging dollar and rising US interest rates could lead to weak demand for crude in the upcoming year. Prices recovered somewhat on Friday as the dollar’s climb petered out and OPEC member-states signaled their determination to follow through with production cuts. The very cold weather is expected to cut into inventories of heating fuel and natural gas.

Highlights from next week’s economic calendar include revised third-quarter GDP figures (Dec. 22), initial jobless claims (Dec. 22), personal income (Dec. 22), and new home sales (Dec. 23). Volumes may be lighter as investors head home for the Christmas holiday.

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Ulland Investment Advisors

4550 IDS Center · Eighty South Eighth Street · Minneapolis MN 55402 · Telephone: 612-312-1400 · Facsimile: 612-204-3464