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Weekly Market Update for December 21, 2018

by JM Hanley

The Dow was down on Friday, falling 414 points to close at 22,445. For the week, the Dow was down 6.9% (SP500 -7.1%) and year-to-date is now down 9.2% (SP500 -9.6%). The yield on the 10-year Treasury (an important interest-rate indicator) fell eleven basis points, closing at 2.79%.

The second-to-last week of the year was another awful one for equity markets. The SP500 has fallen 17% in the fourth quarter. American politics didn’t help matters this week. During a partial government shutdown, essential services continue and the government can honor its debts. Investors thus typically treat them as a non-event. But markets are now more fragile than they have been in some time. This dispute, and policy changes and staff turnover in the executive branch, have underscored the possibility of more unsettled conditions. These could encompass weightier issues like raising the federal debt ceiling in May.

Unelected policymakers didn’t do much better. The tone of the Fed’s Open Market Committee’s quarterly meeting was “dovish,” or suggestive of more neutral interest rates. The FOMC did raise rates by a quarter of a percentage point. But now they forecast they will raise rates just once or twice next year, lower than before. Investors expected as much. They anticipate one hike or none at all. However, the Fed demurred at more dramatic action. Suggesting there’d be no hike in March could have put some strength into stocks.

The price of crude oil fell under $50 a barrel this week – down 24% YTD. US crude stockpiles showed a smaller-than-expected draw – of 0.5m barrels – while product inventories of gasoline rose (+1.8m bls) and diesel fell (-4.2m bls). Despite rising strain within OPEC and a number of US producers cutting production growth plans, prices fell steadily throughout the week. The decline in crude oil paralleled the decline in equity markets, largely reflecting concerns of decelerating global growth and its impact on crude oil demand.

“Sentiment,” or the market’s mood, is particularly gloomy. The current level of the SP500 implies that its component firms would see zero growth, on average, in business next year. That’s hard to reconcile with the reality of a growing economy and confident consumers. Making matters worse, trading volumes have been light in these weeks before Christmas, and there’s been little news of consequence. Plenty of investors are selling positions to establish tax losses on their 2018 return. Would-be bulls are waiting for the New Year, and a fresh slate for fund performance. Strong data on the economy’s December performance, reassurance from firms’ management about 2019 growth, and progress on a trade deal with China could buoy stocks in the first weeks of the New Year.

*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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