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Weekly Market Update – December 2, 2016

The Dow was down 21 points on Wednesday, though it finished the week up 18 points at 19,170. The index’s flat performance, coming a week after it surpassed 19,000 for the first time ever, masked a wide differential in performance between sectors. Financials have surged since the election as investors wager that reduced regulation and new tax cuts from a Republican-controlled government will increase GDP growth and inflation. On the other hand, technology stocks have suffered over concerns about the strong dollar and the Trump administration’s approach to trade. The US Preferred Index is down 2.8% since the election. Our preferred continue to outperform this index and the Barclay’s Aggregate Bond Index, although all fixed income is down since the election.

Domestic economic data on the week were generally positive. In the jobs report released Friday, nonfarm payrolls climbed 178,000, as unemployment fell to 4.6%. This marks its lowest reading since August of 2007, before the financial crisis. Economists expected more jobs (180,000) but higher unemployment (4.8%). To that point, workforce participation edged lower, to 62.7%, remaining near a four-decade low. Meanwhile, third quarter GDP growth was revised up to 3.2%, its highest point in five years. Higher-than-expected consumption drove the beat, as the consumer confidence index surged to 107.1 from its 98.6 position in October.

Elsewhere, the ISM manufacturing index climbed to 53.2 from its 51.9 level in November, coming in above expectations of 52.5 and reaching its highest point in five months. Respondents noted higher demand and tightening labor markets. The impact of the election appeared negligible.

The price of crude oil climbed 12% on the week following OPEC’s announcement Wednesday that it had agreed to a production-cut deal after months of negotiation. The agreement, in which production would be cut by 1.173m barrels per day, would begin in January and would last for six months. Success came after Saudi Arabia and Iran agreed to accept steeper cuts. Libya and Nigeria were granted exemptions in light of ongoing domestic conflicts in their countries, though Iraq’s bid for an exemption was denied. Russia agreed to trim output by 300m barrels per day, about half of the total OPEC members had sought from non-OPEC members. A number of final details remain to be worked out at a December 9 meeting of OPEC representatives and non-OPEC producers.

Bank stocks also surged on the spike in crude. Higher oil prices decreased the likelihood that troubled energy loans on banks’ balance sheets would sour. Markets anticipated that banks would release reserves they’d held to cover those losses, which would boost their earnings.

Highlights from next week’s economic calendar include crude inventories (Dec. 7), initial jobless claims (Dec. 8), and natural gas inventories (Dec. 9). Markets will also be watching the outcome of Italy’s constitutional referendum on Sunday the 4th. Italy’s prime minister has pledged to resign if the measure fails. Such an outcome could decrease the likelihood of a solution to Italy’s banking crisis and increase instability in the Eurozone.

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Ulland Investment Advisors

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