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Weekly Market Update for February 22, 2019

by JM Hanley

The Dow was up on Friday, rising 181 points to close at 26,032. For the week, the Dow was up 0.6% (SP500 +0.6%) and year-to-date is now up 11.6% (SP500 +11.3%). The yield on the 10-year Treasury (an important interest-rate indicator) fell one basis points, closing at 2.65%. A flat interest rate environment is ideal for preferreds.

Domestic economic data this week didn’t offer a clear picture. The Philadelphia Fed’s survey of manufacturers was poor, as were December orders of durable and capital goods. The latter two encompass businesses’ purchases of supplies and operating equipment, and for that reason are important indicators of economic health.

However, members of the Federal Reserve continued to advertise their caution on raising interest rates. Two even suggested that a globalized economy and an aging workforce may have permanently hamstrung inflation. Their implication was that interest rate policy needn’t be so concerned with taming it. This academic discussion aside, stock prices already account for the Fed’s change of heart. The next important news item will be forthcoming detail on the Fed’s decision to slow its sales of Treasury bonds. Those sales contributed to the decline in equity markets late last year.

The market’s steady upward trajectory since Christmas Eve may soon flatten. At the market’s current level, investors have assumed that all of their concerns will be resolved amicably. Such a scenario is not certain. The trade dispute with China may not escalate, but it may not be resolved for some time. Another confrontation with Europe over its trade policy may materialize. Minutes of the Fed’s most recent meeting didn’t preclude an interest rate increase later this year. And economic growth will slow in the US and Europe.

Additionally, fourth quarter earnings season has all but concluded. Seventy-one percent of US companies reported better-than-expected profits, and sixty percent reported better-than-expected revenues. The steady stream of good news (when investors feared the worst) has helped fuel the market upwards.

CVS Health was among the large firms reporting this week. Integrating its purchase of health insurer Aetna has proved more difficult than anticipated, and tough times in the prescription drug industry may make 2019 a lean year.

The price of crude oil rose 3% this week to $57 a barrel – up 26% YTD. US crude stockpiles were neutral. Crude prices jumped predominantly on Wednesday after Nigerian President Muhammadu Buhari suggested cooperation with OPEC goals of cutting production to help boost prices. Nigerian presidential elections were postponed one week (to this weekend) and some fear potential violence will accompany the contentious event. Oil also benefited from rising metals prices following better credit data in China.  Shares of Devon Energy saw a positive bounce this week after the company announced intentions to unlock shareholder value by splitting off its beleaguered Canadian oil sands assets, thereby becoming a focused US-producer with stronger growth potential.

Next week will be a busy one. Friday will mark an important deadline in trade negotiations with China. The British Parliament will vote on the Prime Minister’s plan for Brexit, which is fast approaching. Stateside, Jerome Powell will testify before Congress. US GDP and inflation will be released, as will manufacturing data from Europe and China. And the next jobs report for February will be released Friday, March 8th.

*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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