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Weekly Market Update for October 26, 2018

by JM Hanley

The Dow was down on Friday, falling 296 points to close at 24,688. For the week, the Dow was down 3.0% (SP500 -4.0%) and year-to-date is now down 0.1% (SP500 -0.6%). The yield on the 10-year Treasury (an important interest-rate indicator) fell twelve basis points, closing at 3.08%.

The improvement in the price of US Treasuries was modest considering the steep decline in equity markets. For one, the Federal Reserve remains intent on raising interest rates. The federal deficit is rising – and depending on the composition of Congress after the midterms, it could rise further still – so the supply of Treasuries is increasing. Finally, the strong dollar has diminished foreign Treasury buyers’ appetites.

The price of crude oil fell 2% this week to $67 a barrel – up 12% YTD. US crude stockpiles showed a greater-than-expected build – of 6.3m barrels – while product inventories of gasoline (-4.8m bls) and diesel (-2.3m bls) both fell. Prices fell through mid-day Tuesday after comments from the Saudi oil minister suggested higher future production, but then slowly climbed the rest of the week despite the pressure seen in equities. Share prices of domestic oil producers fell harder than the commodity, down 10% this week, with declines among highly-indebted companies even more pronounced.

Corporate earnings had previously been a constant bright spot, but this week a number of large firms disappointed Wall Street’s lofty estimates. Amazon’s third-quarter revenues were a bit low, but it did better than expected on the bottom line. The firm has sacrificed some near-term sales growth to shore up profitability. Instead, investors were concerned because the firm’s earnings estimates for the fourth quarter (which includes the Christmas season) were less than anticipated. A strong dollar, and higher wages for warehouse employees, may have taken a toll. But the ecommerce behemoth’s public numbers are typically conservative, and its senior management sounded optimistic about holiday sales.

The strong dollar also hurt Google. Excluding that, the quarter was good but unspectacular. The tech giant has rapidly taken a vast share of the domestic ad market over the past few years, and there’s simply limited room for further gains of that scale. Amazon and Google together make up 5% of the SP500. Their particularly steep decline amplified an already-poor day for the index.

Granite Construction proved a rare bright spot. The contractor continues to find operational efficiencies, and has held the line on pricing for project bids. Shares were up 12% in Friday trading.

Third quarter earnings season has been a disappointment so far. The new tariffs haven’t helped. But most of the damage has been done by more mundane suspects: higher wages, higher supply and transportation costs, and a strong dollar. Those are a product of America’s booming economy. Volatility on the stock market doesn’t mean a recession is near, and consumer confidence and corporate earnings growth remain strong by historic standards.

*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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