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Weekly Market Update for February 15, 2019

by JM Hanley

The Dow was up on Friday, rising 340 points to close at 25,883. For the week, the Dow was up 3.1% (SP500 +2.5%) and year-to-date is now up 11% (SP500 +10.7%). The yield on the 10-year Treasury (an important interest-rate indicator) rose three basis points, closing at 2.66%.

For the better part of a year, interest rates and the US’s trading relationship with China have arguably influenced the market more than anything else. The outlook for the former improved again this week. Governor Lael Brainard said the Fed might stop reducing its holdings of Treasury bonds by the end of this year. That’s good news, since these reductions have resulted in higher borrowing costs and subsequently slowing economic growth. Wall Street didn’t think they’d turn the taps back on until the middle of next year.

News on the latter was more opaque. Slowing growth in China and the slide in the American equity market late last year has left both Beijing and Washington looking for a way out. Bilateral talks are underway, and news reports indicate the American and Chinese envoys are making progress. But a deal probably won’t be done before March 1st, when new tariffs are scheduled to kick in. Reports suggest that deadline may be moved back by two months for the negotiators to finish their work. Anything longer would make investors wary.

Concerns about growth outside of the US may be second only to trade and interest rates on investors’ list of worries. Weak international growth hurts firms that do lots of business abroad for obvious reasons. Additionally, because growth in the US is strong, weak non-US growth has made the dollar more expensive relative to other currencies. American firms that make money in foreign issue see their profits go down automatically when they convert to dollars. Fortunately, export data from China this week was good – a sign the situation there may be better than feared.

The only bad news this week was an unexpectedly sharp drop in retail sales in December. There were some extenuating circumstances. Thanksgiving, and the holiday shopping afterwards, came early. The stock market dropped and the government shutdown began. But the report looks bad even still, so analysts hope December was simply an outlier. Data on consumer spending in January has been good so far.

The price of crude oil rose 5% this week to $55 a barrel – up 22% YTD. US crude stockpiles showed a greater-than-expected build – of 3.6m barrels – while product inventories of gasoline (+0.4m bls) and diesel (+1.2m bls) both rose. Crude prices rose steadily throughout the week, benefitting from rising equity markets along with some commodity-specific items. OPEC looks to be cutting deeper than expected, with Saudi Arabia signaling a sharp fall in exports by March. Commodity traders, meanwhile, are taking increasingly bullish positions via crude futures. US imports from Venezuela have not yet fallen post-sanctions, but imports from Canada are falling as high rail transport costs crimp outbound shipments. Shares of US domestic producers rose 9% this week, outpacing the move in oil.

*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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