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Weekly Market Update for January 19, 2018

by JM Hanley

The Dow was up on Friday, rising 54 points to close at 26,071. For the week, the Dow rose 1.04% (SP500 +0.9%) and year-to-date is now up 5.5% (SP500 +5.1%).  Tech, healthcare, and retail firms performed well. Telecom companies were weaker.

The yield on the 10-year Treasury, an important interest-rate indicator, rose eight basis points, closing at 2.61%. Economic growth, and a quickened pace of inflation, continue to push yields higher.  Commentary from the Federal Reserve hasn’t had as much of an impact.

It remains unclear if Congress will pass a temporary funding bill by the end of the day.  Some departments of the federal government will shut down if it does not.  We expect either result will have a limited long-term impact on financial markets. Unlike a failure to raise the debt ceiling, a shutdown would not lead the US to default on its obligations to Treasury bondholders. Large portions of the federal bureaucracy responsible for essential functions actually remain open during a “shutdown.”  And shutdowns are normally short, since they become a political embarrassment which party leaders have an incentive to resolve.

The price of crude oil fell 1% this week to $63 a barrel – up 5% YTD. US crude stockpiles showed a larger-than-expected draw this week – of 6.4m barrels – while product inventories of gasoline rose (+3.6m bls) and diesel fell (-3.9m bls). Crude inventories in Cushing, OK continue to decline, now filling just 53% of available storage capacity versus 83% at this time a year ago. Lower storage utilization implies a much tighter market, helping to push oil prices higher. We believe a “catch up” trade for exploration and production companies is still in order given these equities have lagged the move higher in oil over the past six months. While oil fundamentals remain constructive, we will be watching to see the magnitude of the production response in the US amidst these much more economical prices for drilling wells.

More companies reported their earnings for the fourth quarter this week.  United Health Group’s consulting business had more sales and higher profits than forecast.  More importantly, its management said it anticipated profits would be 20% higher this year thanks to the corporate tax cut.  Its stock rose on the news. Bank of America’s earnings were good, but other news was not as positive.  The company must pay a one-time assessment of three billion dollars due to technical adjustments in the tax cut bill.  Goldman Sachs also reported.  Strong numbers from its investment banking and lending departments largely made up for weak performance in its fixed-income and stock-trading operations.  Alibaba, General Electric, and 3M, 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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