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Weekly Market Update – December 23, 2016

The Dow was flat on Friday but up slightly on the week at 19,933. Markets were fairly quiet the week before the Christmas holiday. Financials continued to outperform, as they have since the election, amid optimism about rising interest rates. Healthcare equities retreated given ongoing concerns about political uncertainty and debates over drug pricing. The US Preferred Index is down 2.3% since the election. Our preferred strategy continue to outperform this index and the Barclay’s Aggregate Bond Index. Our preferreds are up so far in December.

The week brought another round of important national and international political headlines. Investors continued to applaud the deregulatory initiatives of the new administration, though some balked at perceived anti-trade policies. In its quarterly meeting Tuesday, the Bank of Japan opted not to raise interest rates but expressed optimism about the world’s third-largest economy for 2017. BoJ chief Haruhiko Kuroda argued that a number of factors, including a weaker yen and improving industrial production, could push GDP growth up to 1.5% in the coming year (from 1.3% in 2016). Elsewhere, Deutsche Bank and Credit Suisse both announced settlements with the Department of Justice in lawsuits related to the subprime crisis. Deutsche Bank’s $7.2B fine was better than investors expected, pushing shares up 0.5%; Credit Suisse’s $5.3B levy was worse than expected, forcing the stock down 0.5%. Additionally, Italy announced that it would bail out its third-largest bank, Monti dei Paschi di Siena.

Economic data on the week were largely mixed. Third-quarter GDP figures were revised up to 3.5% (ahead of the expected 3.2%) on the strength of growing imports and private inventories. Income growth was flat in November – analysts were looking for an uptick of 0.3% – while personal spending climbed 0.2%. It climbed 0.4% in October. Initial jobless claims were up to 275,000. This was well ahead of the consensus estimate of 255,000, and marks the largest weekly increase since April of 2014. In other macroeconomic news, weakness in transportation weighed on otherwise positive durable goods numbers. Orders dropped 4.6% in November, worse than the Street’s estimate of 4.1%. Existing home sales were a bright spot. They climbed 0.7 % from the previous month (15.4% from a year ago), the fastest rate of expansion since the financial crisis. According to the National Association of Realtors, a strong jobs market and the anticipated rise in interest rates drove the surge. Inventories have now fallen for eighteen consecutive months, a trend predicted to intensify through 2017.

Crude oil showed slight gains on the week. The WTI index increased 2.2% to $53.06 a barrel. Prices retreated early in the week following an unexpected increase in domestic crude inventories. Investors were also concerned about a report that thirteen new domestic rigs came on-line in the past week – an indicator of continued recovery in US shale – as well as an announcement by Libya’s National Oil Corporation that it had reopened a major pipeline that had been closed due to the country’s ongoing civil war. Prices ultimately recovered, buoyed by optimism about last week’s deal between OPEC, Russia, and other major producers to cut crude output. Nevertheless, uncertainty remains high. Analysts expect crude to continue trading in a relatively narrow range until early next year, when investors have a chance to assess whether or not oil-producing countries are sticking to the terms of the production-cut agreement.

Highlights from next week’s economic calendar include revised consumer confidence (Dec. 27), initial jobless claims (Dec. 29), and natural gas inventories (Dec. 29). Trading will be lighter this week between Christmas and the New Year’s 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