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Weekly Market Update for March 29, 2019

by JM Hanley

The Dow was up on Friday, rising 211 points to close at 25,929. For the week, the Dow was up 1.7% (SP500 +1.2%) and year-to-date is now up 11.2% (SP500 +13.1%). The yield on the 10-year Treasury (an important interest-rate indicator) fell three basis points, closing at 2.41%.

It was a busy week for domestic economic data, though the numbers didn’t much alter the consensus for slower but steady growth in the near term. “Starts” on the construction of new housing dropped last month. Single-family homes were particularly tepid. Pending home sales told a similar story. But in commentary released after the numbers, Lennar and KB homes sounded sanguine about the state of the housing market. That assuaged concerns.

The state of consumer confidence is similarly murky. A report out Monday posited a steep decline; one Friday showed sentiment still near post-recession highs. Finally, GDP growth in the fourth quarter was revised down slightly to 2.2%. Consumer spending turned out to have been a bit lighter than initially thought.

In the absence of more substantive news, investors continued to fret about the inversion of the Treasury yield curve. The yield curve inverts when Treasury bonds that come due in the near future trade at a lower price than those that mature at a more distant point. This is unusual, because it’s usually riskier to lend money for a long period of time than a short one. An inversion suggests high confidence that the future will bring low interest rates and more limited private sector investment opportunities. Such conditions are often the byproduct of a recession – and, in fact, an inversion has preceded each of the prior three recessions. This explains Wall Street’s anxiety.

Goldman Sachs believes these concerns are overwrought. The bank’s economists note numerous instances when the curve inverted but no recession followed. They think this may be one of those times. Prior inversions have been caused by concern that the Fed would raise interest rates too much in the immediate future. This time, it’s been driven by the opposite: an emerging consensus that the Fed won’t raise rates much in the long term. And even when an inversion has foreshadowed a downturn, a recession typically takes a year and half or two to arrive.

In corporate happenings, Medicaid manager WellCare (WCG) announced it will be acquired by larger peer Centene (CNC). Several regulatory hurdles remain, so the deal isn’t expected to close until next year. Elsewhere, woes at Boeing continue to mount after regulatory agencies worldwide grounded its latest model. The firm’s huge size means that its lightened book of orders could knock two-tenths of a percent off US economic growth next quarter. Growth should bounce back once the plane safely returns to the skies.

The most important event next week is the release of Chinese manufacturing data Sunday morning. Investors want to see signs that bad readouts two weeks ago were just a blip. This should set a low bar to clear. Manufacturing data from the US will follow on Monday; German factory orders are scheduled for Thursday. Friday’s jobs report may be least important since unemployment is already so low.

*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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