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Weekly Market Update – June 16, 2017

The Dow finished up on Friday, rising 24 points to close at 21,384. For the week, the Dow rose 0.5% (S&P 500 +0.1%) and year-to-date is now up 8.2% (S&P 500 +8.7%). The yield on the 10-year Treasury rose 3 bps on Friday to 2.15%, after falling 9 bps on Thursday – our year-end expectation remains 2.75%.

US economic data were mostly negative this week. Retail sales, capacity utilization, housing starts, consumer sentiment, and industrial production all came in weaker than expected.  The NFIB Small Business Optimism Index and the Federal Reserve rate decision were as expected, while inflation measures were mixed (PPI better, CPI worse). With inflation continuing to run below 2%, the Fed decided to lower its Core PCE inflation projections to 1.7% in 2017 from 1.9% previously.

Wednesday, the Fed raised the Federal Funds Rate for financial institutions to a range of 1.00-1.25% from 0.75-1.00% previously, as expected. They also announced plans to allow maturities from assets held on their $4.5tn balance sheet to begin “rolling off” instead of being reinvested – gradually increasing the rate of roll offs from $10bn monthly to $50bn monthly – although no precise timing of when this process would start was given. This is another tool the Fed can use to tighten monetary policy. We expect one more rate hike this year, while the market places a 43% probability today (most likely in Q4).

As we noted last week, leadership from the mega-cap technology companies (e.g. AAPL, GOOGL, FB) has begun to slow or stall. We have become concerned in recent weeks that the technology space was becoming a bit “crowded” amongst investors and have thus been strategically trimming positions on the equity side and redeploying into Industrials and Financials companies where sentiment is more subdued today. I say “strategically,” meaning we are not touching our expected long-term secular winners like Amazon or Alibaba, but instead trimming names where the competitive advantage may be less defensible. Of note today, Amazon announced a $13.7bn purchase of Whole Foods Markets at a 27% premium and yet Amazon shares rose 2.5% on the news, a sign of approval by investors.

The price of crude oil fell 2% this week and is now under $45 a barrel – down 15% YTD. Crude stockpiles showed a smaller-than-expected draw – of 2.1m barrels – and product inventory of gasoline (+2.1m bls) and diesel (+0.3m bls) rose again. We have seen two consecutive negative reports; however, global inventories are still declining and we remain positive. Skepticism regarding OPEC’s ability to right-size global inventories remains an overhang on crude prices. OPEC believes their current production cut is enough to correct inventories, but may consider adjustments to the cut if it is insufficient.

Next week’s economic calendar highlights will include existing home sales on 6/20, initial jobless claims on 6/22, Markit US PMI on 6/23, and new home sales on 6/23.  The housing data is expected flat-to-slightly better than last month, while preliminary manufacturing activity is expected to tick up.

*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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