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Weekly Market Update for November 16, 2018

by JM Hanley

The Dow was up on Friday, rising 124 points to close at 25,413. For the week, the Dow was down 2.2% (S&P 500 -1.6%) and year-to-date is now up 2.8% (S&P 500 +2.3%). The yield on the 10-year Treasury (an important interest-rate indicator) fell twelve basis points, closing at 3.07%.

After last week’s midterms, international politics took center stage. Italy’s government refused to accede to the EU’s request that it cut its deficit. A response, possibly sanctions, will now grind its way slowly through the gears of Brussels bureaucracy. The problem could continue to flare up over the next few months, with implications (not necessarily negative) for US Treasury yields. Washington and Beijing’s on-again-off-again approach to trade talks also continues to preoccupy markets. The latest chatter has it that the US might agree to a détente at the upcoming G20 summit. Maybe, but a comprehensive deal probably won’t come until the end of next year or the following, when the upcoming US presidential election will focus minds.

Inflation rose a little over two percent last month. Higher gas prices were the culprit, though tariffs didn’t help. Tariffs’ effect on inflation will worsen next year, probably peaking at around two-tenths of a percent. Rising wages should also keep inflation up in 2019, more than offsetting steady gas prices and a strong dollar. Maybe it was unsurprising, then, that Fed chairman Jerome Powell didn’t suggest a milder approach to raising rates in a public appearance Wednesday. Investors had hoped that stock market turmoil would prompt him to reconsider choking off the supply of cheap money.

The price of crude oil fell 6% this week to $57 a barrel – down 6% YTD. Weak macro indicators of China economic health, a stronger US dollar, and continued China-US trade tensions have led to slowing global growth and, consequently, the potential for lower demand for fuel. On top of that, Iraq, Libya, and Saudi Arabia have increased production substantially in recent months. As a result, OPEC is now considering a production cut as high as 1.4 million barrels per day to support global prices. A decision could come as early as OPEC’s December 6th meeting.

Natural gas, which we’ve rarely talked about over the past year whilst the commodity was stuck in a rut, is finally benefitting from forecasts of a cold winter. The price was up 17% this week, providing some offset to our domestic producers from the weakening oil price. As a result, share prices of domestic energy producers fell less than the slide in oil prices this week.

Last month’s turbulence in equities drifted to credit markets this week. General Electric felt some of the worst pain. Despite its high debt levels, the industrial conglomerate has steady earnings and a sizable portfolio of businesses it can sell to raise cash. Baker Hughes, an oil field supplier in which GE has a large ownership stake, was first on the list. Pacific Gas and Electric, which owned equipment that started the Camp fire in California, also had a bad week.

*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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