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Weekly Market Update for February 9, 2018

by JM Hanley

The Dow was up on Friday, rising 330 points to close at 24,190. For the week, the Dow fell 5.2% (SP500 -5.2%) and year-to-date is now off 2.1% (SP500 -2.0%). The yield on the 10-year Treasury, an important interest-rate indicator, rose two basis points, closing at 2.86%. The downturn this week proved to be the indexes’ worst in over two years. Yet it follows a 5.6% gain last month, the best January in decades. Equities now trade at the same level they did at the end of November.

In Washington, Congress approved a spending bill on Friday morning. The legislation funds the government through March 23rd and lifts the debt ceiling (authorizes the Treasury to borrow funds as needed) for two years. These measures should reassure investors.

The bill also increases total spending by $500 billion over the next two years. This, and the $1 trillion in tax cuts passed last year, amount to a major stimulus for the US economy. Yet the economy had already been growing at a healthy pace, and wages were rising. Investors have grown concerned that resulting inflation could force the Fed to raise interest rates quickly. For their part, Fed members insisted the downturn wouldn’t alter their interest-rate strategy. Bill Dudley, president of the New York Fed, said equities’ fall wasn’t deep enough to worry central bankers yet. Others noted the pullback wasn’t linked to weakness in the broader economy.

Economic data this week proved largely positive. ISM’s survey of non-manufacturing businesses noted a better-than expected outlook. New orders, prices, and employment were all up from December. The service sector proved the only weak spot. These trends are consistent with 4% GDP growth, but might not be sustainable. The cost of fuel and other raw materials rose, which could spur inflation higher.

The price of crude oil fell 10% this week to $59 a barrel – down 2% YTD. US crude stockpiles showed a larger-than-expected build this week – of 2.4m barrels – while product inventories of gasoline (+3.4m bls) and diesel (+3.9m bls) also rose. E&P management teams continue to express discipline; however, this week’s report also estimated that production surged higher in the US. The  new gov’t budget deal would also seek to reduce the Strategic Petroleum Reserve by 45% over the ensuing 10 years. Such an action adds incremental supply to a market which is still trying to rationalize excess inventories.

Companies continued to report their earnings for the fourth quarter this week. Anadarko Petroleum produced more oil and higher profits than anticipated. It also announced it would quadruple the dividend it paid shareholders. Granite Construction and Chimera Investments, among others, will report earnings 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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