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Weekly Market Update – June 23, 2017

The Dow finished down on Friday, falling 1 point to close at 21,396. For the week, the Dow rose 0.1% (S&P 500 +0.2%) and year-to-date is now up 8.3% (S&P 500 +8.9%). The market struggled for direction this week, while ripples continued through the consumer space driven by Amazon encroachment concerns.  The yield on the 10-year Treasury finished flat on Friday at 2.14%, down 1 bp for the week.

US economic data were mostly neutral this week. Housing data for existing and new homes came in better than expected after housing starts disappointed last week. Initial jobless claims were as expected. Preliminary US manufacturing PMI disappointed at 52.1 versus the 53.0 consensus; this indicator of manufacturing growth has been in decline since January, although new orders were robust.

The flattening yield curve (i.e. short-term rates rising while long-term rates are stable or declining) is somewhat confounding markets. Some interpret this as a signal of weaker growth and higher risks ahead (note: recession risk is still very low though according to a number of prognosticators), at the same time that the Federal Reserve is showing more resolve to continue raising short-term rates. However, some argue that low rates here are a result of low rates everywhere. As global rates remain low, there has been a “reach for yield” movement into investment-grade, high-yield, and emerging-market debt securities. As spreads of these securities have been narrowing over Treasuries (the spread essentially being your return for higher risk), we continue to like the niche we have carved out in the Preferreds market, with its excellent yield and only modest risk.

The Fed released results of the Dodd-Frank stress tests (DFAST) this week and showed that all 34 of the largest US banks met the minimal capital requirements required to absorb losses and support operations during an economic downturn. The “severely adverse” scenario included a 10% unemployment assumption and a 35% drop in the commercial real estate market. As we have pointed out, the large banks are in much, much better positions today than they were before the 2008 credit crisis or during the following recession; hence, we feel comfortable with an overweight position in the group.

The price of crude oil fell 4% this week to $43 a barrel – down 20% YTD. Crude stockpiles showed a larger-than-expected draw – of 2.4m barrels – and product inventory of gasoline fell (-0.5m bls) while diesel rose (+1.1m bls) again. This report was more neutral after negative surprises the past two weeks.

Next week’s economic calendar highlights will include preliminary durable goods and capital goods orders on 6/26, consumer confidence on 6/27, pending home sales on 6/28, another Q1 GDP revision on 6/29, and May personal income and spending on 6/30. Goods orders are expected to tick up versus last month; consumer confidence is expected to tick down along with personal spending and income; while pending home sales should improve and GDP should be unchanged versus the prior reading.

*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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Ulland Investment Advisors

4550 IDS Center · Eighty South Eighth Street · Minneapolis MN 55402 · Telephone: 612-312-1400 · Facsimile: 612-204-3464