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Weekly Market Update for October 12, 2018

by JM Hanley

The Dow was up on Friday, rising 287 points to close at 25,340. For the week, the Dow was down 4.2% (SP500 -4.1%; NASDAQ -3.7) and year-to-date is now up 2.5% (SP500 +3.5%; Nasdaq +8.6%). The yield on the 10-year Treasury (an important interest-rate indicator) fell nine basis points, closing at 3.14%.

Higher yields on US Treasuries triggered the correction in the equity markets, which had returned to the peak reached in January. A few other trends suggested a reassessment might be in order. As firms prepare to report their third-quarter earnings, Wall Street’s estimates imply that the second quarter (which ended in July) will have marked the high point of profit growth.  Profit margins have returned to a crest last seen before 2008. A strengthening dollar will hurt firms that earn revenues in foreign currencies, and the tight jobs market means that labor costs have gone up.  Major indexes historically have experienced (temporary) turbulence as investors adjust to a new normal of higher interest rates and a stronger dollar.

On top of these factors, midterm voters will head to the polls in three and a half weeks. The prospect of a shift in the political terrain, and the attendant policy uncertainty, typically causes markets to underperform in midterm years. The indexes’ upward trajectory prior to this week’s correction had been exactly the opposite.

The price of crude oil fell 4% this week to $71 a barrel – up 18% YTD. US crude stockpiles showed a greater-than-expected build – of 6.0m barrels – while product inventories of gasoline rose (+1.0m bls) and diesel fell (-2.7m bls). The bearish DoE inventory report coupled with the pullback in US equities dragged oil lower mid-week despite favorable DoT data. The DoT data showed that mileage driven by US vehicles was up nearly 1% y/y in August, twice the YTD growth trend. Share prices of domestic oil producers fell harder than the commodity, down 6% this week.

Three of the big banks reported earnings today, signaling the unofficial start of third-quarter earnings season. JP Morgan’s profits were modestly better than estimates, driven by a high-quality portfolio of loans. Wells Fargo accelerated loan growth and reported favorable earnings on customers’ deposits.

In other corporate news, the Department of Justice agreed to let CVS buy Aetna. Aetna will merely need to sell a portion of its Medicare business to satisfy the DOJ’s anti-trust requirement. An agreement with a buyer is in place. Shares of both firms were nonetheless lower after the CFO of Aetna announced he would retire upon the merger’s completion.  United Health, Bank of America, and Goldman Sachs, among others, will report earnings next 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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