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Weekly Market Update for December 7, 2018

by JM Hanley

The Dow was down on Friday, falling 559 points to close at 24,389. For the week, the Dow was down 4.5% (S&P 500 -4.6%) and year-to-date is now down 1.3% (S&P 500 -1.5%). The yield on the 10-year Treasury (an important interest-rate indicator) fell thirteen basis points, closing at 2.86%.

After the President met with Chinese president Xi last Saturday, the Administration agreed to delay a planned increase in the tariff rate for three months. Markets initially celebrated this as a sign that Washington and Beijing were ready to reconcile their differences. As has so often been the case in the trade war, however, this breakthrough was overtaken by later events. America’s arrest of the CFO of Chinese telecom giant Huawei cast a new pall of uncertainty over these signs of progress. The market also refocused on the possibility of slower growth.

The economy added somewhat fewer jobs than expected last month, and the totals for prior months were revised down a bit. Wages grew more slowly as a result. What new jobs there were came in just a few fields: total employment was up in less than 60% of industries. The report more or less hit the market’s sweet spot (though it didn’t provide much support to a determinedly pessimistic trend). If the jobs number had been much lower, it would have exacerbated fears that the economy was slowing. Had it been much higher, the Fed would have had a pretext to continue raising interest rates aggressively.  Investors wouldn’t like that either. Tighter financial conditions may now pressure the Fed to dial back its plans for raising rates in 2019.

The most prominent headache this week instead appeared in the form of an inverted yield curve. The curve inverts when shorter-dated Treasury bonds trade at a lower price than those that mature in the more distant future. This occurrence has historically borne some correlation with a future recession. This week’s pessimism may be overdoing it, though. The time between an inversion and a recession varies considerably.  A decade ago, the yield curve inverted in 2005, but a downturn only came in late 2008. Market economists only put the odds of a recession next year at 14%, a small fraction of where they’ve been before prior downturns. And beyond twelve months their predictions haven’t been very accurate.

The price of crude oil rose 4% this week to ~$53 a barrel – down 13% YTD. US crude stockpiles showed a greater-than-expected draw – of 7.3m barrels – while product inventories of gasoline (+1.7m bls) and diesel (+3.8m bls), both rose. Prices were flat early in the weak before jumping around Thursday and Friday as OPEC members convened in Vienna. On Friday, the group reached an agreement to cut 1.2 million barrels per day, with non-member Russia onboard, and oil prices rose.  Share prices of domestic producers, however, diverged from the commodity this week, falling 3%.

*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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