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Weekly Market Update for March 8, 2019

by JM Hanley

The Dow was down on Friday, falling 23 points to close at 25,450. For the week, the Dow was down 2.2% (SP500 -2.2%) and year-to-date is now up 9.1% (SP500 +9.4%). The yield on the 10-year Treasury (an important interest-rate indicator) fell thirteen basis points, closing at 2.63%.

After a red-hot start to the year, the major indexes turned cool in these first days of March. Upward progress had stalled anyway, since investors already have assumed an optimal outcome from trade negotiations and the Fed’s interest-rate rethink. Additionally, trade data released Friday exacerbated fears about slowing economic growth in China. Chinese exports fell 21% in February, and imports also dropped.  Even after accounting for the Chinese New Year, trade has slowed significantly since 2018. Chinese Premier Li announced substantial tax cuts intended to stimulate the economy on Tuesday. This may not do the trick. The government still has plans to cut spending, and households have gotten more frugal over the past two years. A rash of municipal infrastructure projects coming later this year is expected to provide growth.

The Eurozone faces similar troubles, but has fewer tools at hand. Industrial production has followed the rest of the continent’s economic indicators downwards. Data for January, released this week, actually showed modest improvement in the typically troublesome trio of France, Spain, and Italy. The good news was more than negated by weakness in Germany, the engine of the European economy. Orders from outside the EU were particularly weak. China’s ailment may be catching.

Yesterday, the European Central Bank announced its first slate of policies to address the slowdown but managed to disappoint almost everyone. Frankfurt now thinks Europe will grow just over a percent this year, with inflation about the same. Both are much lower than earlier estimates, though the problems are mostly in the near term. To spur growth and inflation, the ECB plans to lend cheap money to banks so they can provide inexpensive consumer credit. Investors found this limited course small consolation for the major cut to growth estimates.

Back in the States, the pace of job creation fell sharply last month. Vicious winter weather took a toll in industries like construction, leisure and retail. But even accounting for that, job growth has slowed. Unemployment and underemployment still went down, and wages improved more than forecast. All are signs the US could be approaching full employment at last. The weak report helpfully restrained appreciation of the dollar’s exchange rate with the Euro after the ECB’s bad economic news Thursday. An “expensive” dollar hurts the earnings of firms that do business in foreign currencies.

News from GE was also a source of concern. CEO Larry Culp said he expects the industrial conglomerate’s cash earnings to be negative this year. The power and renewable energy generation businesses are to blame. Cash profits should be back in black by next year. Culp and other executives will provide more information next Thursday at their annual presentation to investors.

The price of crude oil was unchanged this week at $56 a barrel – up 23% YTD. US crude stockpiles showed a greater-than-expected build – of 7.1m barrels – while product inventories of gasoline (-4.2m bls) and diesel (-2.4m bls) both fell. Demand fears driven by softer global economic data points, along with robust supply growth outlined by large integrated oil companies, were headwinds to oil prices. On the other hand, imports continue to track below trend. Shares of US domestic producers were pressured on Friday following news that Norway’s sovereign wealth fund would be selling its public energy holdings.

Next week, the UK Parliament is scheduled to vote on the Prime Minister’s proposal to exit the European Union. US inflation for February will be released.  So will data on consumer credit in China.

*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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