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Weekly Market Update for October 19, 2018

by JM Hanley

The Dow was up on Friday, rising 65 points to close at 25,444. For the week, the Dow was up 0.4% (SP500 flat; NASDAQ -0.6) and year-to-date is now up 2.9% (SP500 +3.5%; Nasdaq +7.9%). The yield on the 10-year Treasury (an important interest-rate indicator) rose six basis points, closing at 3.20%.

US indexes swung back and forth dramatically but ended the week about where they started. Markets are digesting a mix of news. Strong corporate earnings have supported the market through previous bouts of macroeconomic worries this year. Third quarter earnings still look quite good by historic standards. But some of the big banks proved modestly disappointing, and rising supply, transport, and labor costs have begun to drag down industrial firms’ profit margins. Domestic data, including retail sales and industrial production, reflect an economy in excellent health – except for the housing market, where higher interest rates have begun to take a toll.

Trade talks with China are finally proving constructive, but now trouble is brewing on the Italian peninsula. The heavily-indebted national government wants to run higher deficits, to the chagrin of the rest of the European Union. Neither Rome nor Brussels seems willing to back down.

In the US, meeting minutes revealed that the Fed is intent on raising interest rates further. That would typically drag down the price of existing Treasury bond issues. But the Italian imbroglio has prompted investors to seek safety in German bunds, driving up their price. Falling yields on bunds have helped the support the price of US Treasuries, since both are similarly low-risk investments.

The price of crude oil fell 3% this week to $69 a barrel – up 14% YTD. US crude stockpiles showed a greater-than-expected build – of 6.4m barrels – while product inventories of gasoline (-2.0m bls) and diesel (-0.9m bls) both fell. Prices remained firm early in the weak as tensions flared between the US and Saudi Arabia regarding a missing Washington Post journalist. Then another bearish DoE inventory report Wednesday, a decline in US equities on Thursday, and easing Saudi/US tensions later in the week pushed prices lower. On Friday, the soft China GDP report stoked concerns on oil demand.

This week saw the first full docket of third-quarter earnings reports. United Health Group again beat analysts’ expectations for earnings thanks to an analytics platform that has had great success reducing the cost of medical care. Bank of America’s report was largely as expected. Income from interest earned on deposits was impressive. That success was largely offset by weakness in its capital markets business.  Down the street, Goldman Sachs did better than expected.  Strong results in investment banking offset light trading volumes.

Elsewhere in financial services, Euronet Worldwide shook off earlier torpor after its report noted higher profit margins driven by its remittance business in India. Next week will also be busy: Google, 3M, General Electric, Granite Construction, Visa, and Amazon are all scheduled to report.

*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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