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Weekly Market Update for November 30, 2018

by JM Hanley

The Dow was up on Friday, rising 200 points to close at 25,538. For the week, the Dow was up 5.2% (S&P 500 +4.9%) and year-to-date is now up 3.3% (S&P 500 +3.2%). The yield on the 10-year Treasury (an important interest-rate indicator) fell eight basis points, closing at 2.99%.

Equity holders got an early Christmas present from Jerome Powell this week. The Fed chairman said that interest rates were “just a bit below…neutral,” which many took as a hint that the Fed might ease the rate-hike regimen planned for 2019. Investors often dislike higher rates, since firms must pay more to service their debt, future earnings are worth less in present terms, and economic growth can slow. Powell’s comment came after two rough months for stocks, driven in part by his earlier comment which seemed to suggest that rates ought to be raised substantially. Judging by the minutes of its recent meeting, the Fed does appear to have grown a bit more cautious. But equities’ dramatic fall and rise probably marked an overreaction. Growth is healthy but not extraordinary, and inflation and the labor market are near the Fed’s targets. If these trends continue, so should the gradual pace of rate hikes.

The President and Chinese premier Xi will meet tomorrow evening at the G20 summit in Buenos Aires. Hopes have risen that the two will agree to a détente on trade. This optimism was fueled by a news item from Wednesday which suggested that officials from both countries wanted to delay higher tariff rates until spring. That’s a distinct possibility, though little groundwork for such a deal has been laid. More importantly, the aggressive stance on Chinese trade remains useful as a political issue. It enjoys popular support and approval from leaders of both parties.

The same can’t be said in China (though its unelected leaders can afford to take a longer-term view). A November survey of the private sector showed sentiment had reached the lowest level since July of 2016. New orders were particularly weak, suggesting the slowing of the Chinese economy will persist. Beijing will probably cut taxes and interest rates next year to stimulate growth.

After a big drop last Friday, oil prices vacillated around $51 a barrel this week – down 16% YTD. Next Thursday, Dec. 6, OPEC along with their partners will meet to decide their continued strategy, and consequently the direction of oil in the near term.  The WSJ has reported that “OPEC+” is likely willing to rebuff the President’s call for greater output, which would result in higher gas and oil prices; however, investors are concerned there will be no agreement, leaving the market oversupplied due to declining demand forecasts.  OPEC has hinted a cut of as much as 1.4m barrels per day could be in order, but a cut in the 0.5-1.0m range seems more likely, if at all. Share prices of domestic producers moved in line with the commodity this week.

Next week will be busy.  There’s the OPEC meeting, and bilateral talks on trade. Jerome Powell will testify before Congress on Wednesday. But the most important item might be Friday’s jobs report. If the labor market tightens further, markets would revert to pessimism about higher interest rates.

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