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Weekly Market Update for September 14, 2018

by JM Hanley

The Dow was up on Friday, rising nine points to close at 26,155. For the week, the Dow rose 0.9% (SP500 +1.2%) and year-to-date is now up 5.8% (SP500 +8.7%). The yield on the 10-year Treasury (an important interest-rate indicator) rose six basis points, closing at 3.00%.

Trade uncertainty has moved markets in ways that are often underappreciated. Equity investors enjoyed a banner year in 2017. Management teams soaked in a corporate tax cut and a lighter regulatory touch. After the market suffered a correction in January, major investment managers perceived that portions of the US equity market were fully valued. They began to shift funds abroad in search of returns. Then the trade wars began. Domestic markets looked like a safe harbor. Funds flowed back, raising stock prices. Now domestic valuations look full again.

Earnings growth, red-hot in the second quarter, may slow in the third. The dollar has gained value, so foreign profits are worth less since they are reported in dollars. The market typically reacts poorly to such a deceleration. Midterm elections in the US are also approaching. Equities are usually weakest in midterm years as investors fret about shifts in the political landscape. That hasn’t happened this year for the reasons described above. If control of the new Congress is divided between the two parties, additional fiscal stimulus (in the form of new spending or tax cuts) is unlikely to pass. Markets could face this headwind.

The price of crude oil rose 2% this week to $69 a barrel – up 14% YTD. US crude stockpiles showed a larger-than-expected draw – of 5.3m barrels – while product inventories of gasoline (+1.3m bls) and diesel (+6.2m bls) both rose. Oil prices moved upwards early in the week on global supply concerns, but faded later in the week following the mixed inventory report. In the IEA’s monthly oil report, the organization expressed more concern that we could see a price spike due to restricted exports out of Iran.  Venezuelan and possibly Libyan production is uncertain. They state, “The price range for Brent of $70-80/bbl in place since April could be tested. Things are tightening up.” Shares prices of domestic oil producers slightly outpaced the commodity, rising 3% this week.

The rate of inflation surprisingly declined to 2.7% (annualized) last month. Gasoline and other energy costs pushed the index higher. The costs of medical care, communication, and apparel all went down. Most still expect the Federal Reserve to raise interest rates twice more this year, at the end of September and December.

*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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