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Weekly Market Update for February 1, 2019

by JM Hanley

The Dow was up on Friday, rising 64 points to close at 25,064. For the week, the Dow was up 1.3% (SP500 +1.6%) and year-to-date is now up 7.4% (SP500 +8.0%). The yield on the 10-year Treasury (an important interest-rate indicator) fell eight basis points, closing at 2.68%.

Jerome Powell and Wall Street are officially back on track. The Fed Chair said he’d pivoted from a predisposition to raise rates to a wait-and-see approach. Powell relented in the face of slowing growth abroad, some economic storm clouds at home, and more challenged financial (lending) conditions. He added that sluggish inflation, not weak growth, gave him the leeway to pivot. In terms of rhetoric, the Fed couldn’t have done much more to assuage investor concerns. Markets reacted accordingly. A flat interest rate environment is ideal for our fixed income strategy.

Good news from the Fed was followed by another strong jobs report Friday. The mild weather in early January helped, and job creation in prior months was revised down, but the trend still looks steady. Wages didn’t change much, and neither did the rates of unemployment and underemployment. But labor force participation – the percent of adults working or looking for a job – went up again. This is a pattern that’s distinguished this economic expansion. Historically, when unemployment was low, employers would raise pay to get the workers they needed. Now they’re finding plenty of potential workers on the sidelines waiting for the right opening. This dynamic largely explains the slow rate of inflation.

Additional good news Friday came in the ISM’s survey of manufacturers, which improved unexpectedly. New orders, production, and inventories (all previously weak spots) rose.

The price of crude oil rose 3% this week to $55 a barrel – up 22% YTD – and capped off the best January for crude ever. US crude stockpiles showed a smaller-than-expected build – of 0.9m barrels – while product inventories of gasoline (-2.2m bls) and diesel (-1.1m bls) both fell. We were not surprised to see the US slap energy sanctions on Venezuela (state-owned PDVSA) this Monday. The sanctions effectively cease crude exports to the US and require most other countries to wind down their purchases as well. Venezuela can attempt to redirect these barrels elsewhere, but this takes time and there are few alternative buyers. Roughly 40% of Venezuelan crude exports currently flow to the US. The bulk of remaining exports go to China and Russia, not for cash, but to reduce debts owed. Considering that 90% of government revenue comes from oil exports, the country is in a cash squeeze and oil markets are increasingly “tight.”

Corporate earnings this week were trouble-free if not stellar. Visa’s results, a good proxy for consumer spending, were about as expected. The company blamed uncertainty related to Brexit and the US shutdown for a decline in transactions by international travelers. Amazon had a good holiday season, but warned expenses may increase this year to prepare for more growth in cloud computing and ecommerce. China’s macroeconomic troubles don’t seem to have weighed up on Amazon’s Chinese counterpart Alibaba. However, the firm also said it plans to spend more to sustain growth. Facebook’s results reminded everyone that its advertising business still makes plenty of money. Improvements on data privacy and corporate culture remain to be done. Those are problems General Electric would like to have, though investors did breathe a tentative sigh of relief after the fallen industrial titan reported passable earnings.

*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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