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Weekly Market Update for June 21, 2019

by JM Hanley

The Dow was up on Friday, falling 34 points to close at 26,719. For the week, the Dow was up 2.4% (SP500 +0.5%) and year-to-date is now up 14.5% (SP500 +17.7%). The yield on the 10-year Treasury (an important interest-rate indicator) fell two basis points at 2.06%.

Investors spent the first half of the week anxiously gaming out the Federal Reserve’s decision on interest rates and the accompanying press conference. The Fed left rates unchanged but strongly hinted they would cut them at the end of next month. More members than expected (though not a majority) voted to cut rates this year. The Fed also suggested it would conclude its balance sheet reduction at the July meeting, two months earlier than expected. Cutting balance sheet holdings reduces the money supply and thus dampens growth and inflation.

In his press conference, Chairman Powell noted that the generally positive outlook for economic growth and a healthy labor market hadn’t changed much. Slow inflation has gotten more concerning. The performance seemed calculated to placate a jittery market. Equity indexes surged afterwards, even though most had already forecast a July cut. Now Wall Street wants to know if the Fed will cut rates by 25 basis points (the usual increment) or 50.

The day before, Powell’s European counterpart Mario Draghi delivered a similarly dovish message. Draghi expects European rates to stay where they are through the middle of 2020. But he said the ECB stood ready to cut rates and purchase assets if conditions change. Frankfurt’s challenge is more daunting than the Fed’s. Growth and inflation are lower in Europe, and with a benchmark rate already at zero, the ECB has limited room for maneuver.

The price of crude oil rose 11% this week to $58 a barrel – up 27% YTD. US crude stockpiles showed a surprisingly large drop of 3.1 million barrels; product inventories of gasoline and diesel had been expected to grow but fell instead.  The surprising draw, and a fire at a refinery near Philadelphia this morning, helped drive pricing. But the most important contributor was a dramatic escalation in Washington’s standoff with Iran (war in the Middle East would obviously bring significant supply disruption). In fact, given the scale of the escalation, analysts’ consider crude’s reaction to have been relatively muted. The crude market’s apparent conviction that war is unlikely reassured equity markets more broadly.

The next major event on the market’s calendar is a meeting between US and Chinese leadership on the sidelines of the G20 summit next week. A comprehensive deal that ends the trade war is unlikely. Cautious optimists hope that a short-term postponement of an increase in the tariff rate can be agreed upon.

*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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