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Weekly Market Update for February 2, 2018

by JM Hanley

The Dow was down on Friday, falling 665 points to close at 25,521. For the week, the Dow fell 4.1% (SP500 -4.0%) and year-to-date is now up 3.2% (SP500 +3.3%).

Today’s jobs report revealed that the economy added 200,000 jobs in January.  The unemployment rate remained 4.1%.  Average wages increased almost 3% from a year ago.  Unemployment has been falling for years, yet pay had remained unusually stagnant.  The wage growth seen last month indicates that trend finally might be changing.

The interest rate, or yield, paid on US Treasury bonds rose sharply this week.  The yield on the 10-year Treasury rose twenty-two basis points, closing at 2.84%.  Investors have grown wary of the wage rises detailed in the jobs report. Americans are also taking home more pay even if they didn’t get a raise, since the income tax cuts Congress passed late last year took effect on the first of this month.  When pay increases, consumers have more cash in their pocket.  Inflation is feared. 

To tame inflation, the Federal Reserve usually increases interest rates. The Fed announced late last year that it would raise interest rates three times in 2018.  Investors doubted that they’d go through with it.  Yet meeting minutes released this week reveal that the Fed is sticking to its target.  The interest to be paid on bonds is partly determined by this rate set by the Fed.  If the Fed raises rates, newly-released fixed-income offers a higher return than securities already on the market.  The price of old issues (including Treasuries and corporate debt) almost automatically goes down. 

We have positioned most of our portfolios to defend against the threat of higher interest rates.  Floating rate and fixed-to-float securities pay an interest rate that rises automatically along with interest rates.  These securities have largely held their ground as traditional fixed income has retreated.

The price of crude oil fell 1% this week to $65 a barrel – up 8% YTD. US crude stockpiles showed a larger-than-expected build this week – of 7.0m barrels – while product inventories of gasoline (-2.0m bls) and diesel (-1.9m bls) both fell. So far, E&P management teams have stayed disciplined in their spending outlooks for 2018; however, only the large, global, integrated companies have reported thus far. Small- and mid-sized company reports won’t come until later this month.

Many of the largest technology firms reported their fourth-quarter earnings this week.  Alibaba, the Chinese equivalent of Amazon, saw its sales and earnings grow rapidly once again.  The company also noted that it would take a large share in its e-payments affiliate.  Confusion over the deal pressured its stock downward.  Amazon had no such problems. It had an outstanding holiday retail season, and its cloud computing segment continues to return high profits. Apple also reported.  Rumors had spread that sales of its new iPhone X were quite slow.  Yet its numbers proved better than feared. SoftBank, General Motors, and Anadarko Petroleum, among others, will report next week.

*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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Ulland Investment Advisors

4550 IDS Center · Eighty South Eighth Street · Minneapolis MN 55402 · Telephone: 612-312-1400 · Facsimile: 612-204-3464