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Weekly Market Update for January 4, 2019

by JM Hanley

The Dow was up on Friday, rising 747 points to close at 23,433. For the week, the Dow was up 1.6% (SP500 +1.9%) and year-to-date is now up 0.5% (SP500 +1.0%). The yield on the 10-year Treasury (an important interest-rate indicator) fell five basis points, closing at 2.67%.

Domestic economic data presented a mixed picture. The outlook seemed bleak Thursday after the ISM’s survey of manufacturers reported its biggest decline in ten years last month. The report is still consistent with growth in the sector, but new orders were particularly weak. The news exacerbated fears that the economy is slowing. But the mood turned quickly after the release of the December jobs report Friday. The economy added 70% more jobs than Wall Street had expected, in part due to the mild winter. Wage gains were also impressive. The unemployment rate actually went up, because abundant openings and better pay have coaxed some Americans to start looking for work.

Investors’ sense of relief may have been overdone. Of the two surveys, ISM’s is probably more important. The jobs market usually deteriorates only after other economic indicators are flashing red.  Additionally, rising wage expense could hurt profitability in the manufacturing sector.

Storm clouds are also gathering across the Pacific. The trade war, combined with macroeconomic problems, have begun to weigh upon China’s own manufacturing industries (though the service sector remains strong). In response, the Chinese central bank said it would permit financial institutions to lend more money to stimulate economic growth. Investors had anticipated the move, though it was still reassuring. Negotiations on the tariff dispute resume next week.

Fed chair Jerome Powell partially redeemed himself Friday after a few rocky months. He reiterated his confidence in the economy’s growth. But he added that quiescent inflation means that the Fed can afford a patient approach to raising rates – and that they can reverse course swiftly if warranted. Powell even suggested that the Fed could slow the pace at which it’s selling the Treasury bonds it holds. Compared to his December remarks, the shift was more rhetorical than substantive, but soothing nonetheless.

The price of crude oil rose 6% this week to $48 a barrel – down 21% in the last twelve months. US crude stockpiles were roughly flat this week, while product inventories of gasoline (+6.9m bls) and diesel (+9.5m bls) both rose. Oil prices rose on hopes of US-China trade progress along with reduced exports out of Saudi Arabia and OPEC.  Libya, plagued by civil unrest, has also been temporarily closing production fields and suspending crude exports.

In a surprise announcement Thursday, Apple said that its fourth quarter revenues would suffer from China’s deteriorating economy. This rattled an already anxious market, but some preemptive blame-shifting may be underway. Chinese consumers aren’t as loyal to the Apple brand as the rest of the world.  Recent hikes in iPhone prices of nearly 20% may have driven them to other products.

Fourth quarter earnings reports will start the week after next. Investors will be watching closely for executives’ commentary about the economy.

*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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