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Weekly Market Update for September 13, 2019

by JM Hanley

The Dow was up on Friday, rising 37 points to close at 27,220. For the week, the Dow was up 1.6% (SP500 +1.0%) and year-to-date is now up 16.7% (SP500 +20.0%). The yield on the 10-year Treasury (an important interest-rate indicator) rose thirty-five basis points, closing at 1.90%. The price of crude oil fell 4% this week to $55 a barrel – up 21% YTD

The much-anticipated European Central Bank interest rate decision came Thursday. The reduction in interest rates, by one tenth of one percent, was less than expected. But the committee’s commentary about future interest rate cuts was more accommodative, emphasizing low inflation. Most dovish of all was the new policy for purchasing sovereign bonds (or “quantitative easing”). This policy, debuted after the financial crisis, has the effect of holding down interest rates and encouraging lending. Most QE programs specify a total amount of purchases at the outset, but Frankfurt announced this one would continue indefinitely (until inflation improves). Persistently slow growth in Europe suggests that could take a while.

Just as central bankers have come around to the view that inflation is chronically low, it is showing signs of accelerating. Consumer prices increased 2.4% last month, a recent high. Healthcare costs increased considerably, and the impact of tariffs is now being felt in prices. Used car prices and the cost of public transport also accelerated. Some common consumer areas, like car parts, furniture, and clothing, weren’t as bad. The news raises the odds that the Fed will cut interest rates by a quarter point at its meeting next week. Another sign that a dramatic downturn may not be imminent is strong consumer sentiment, which has rebounded this month. With industrial production slowing worldwide, confident consumers are the most important engine of the economy.

Signs the economy may be better than feared precipitated a noticeable rotation in equity markets. Last month, nervous investors sold stocks of so-called cyclicals, whose profits are reliant on economic growth. They rotated into companies that have done well recently, or are at least perceived as stable: software companies, utilities, service firms, and the like. These names became “crowded,” or overbought, to an extent not seen in ten years. Price-to-earnings multiples rose accordingly, while cyclicals got much cheaper.  Easing trade tensions and signs the jobs market remains robust prompted investors to reassess. In the first two weeks of the month, they’ve hurried back into cyclicals. Next week may bring more news on trade talks with China. Anything positive will give stocks a boost.

*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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