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Weekly Market Update for October 11, 2019

by JM Hanley

The Dow was up on Friday, rising 320 points to close at 26,817. For the week, the Dow was up 0.9% (SP500 +0.6%) and year-to-date is now up 15.0% (SP500 +18.5%). The yield on the 10-year Treasury (an important interest-rate indicator) rose twenty basis points, closing at 1.73%.  The price of crude oil rose 4% this week to $55 a barrel – up 21% YTD.

News related to the trade dispute with China remains the most significant source of day-to-day volatility for US equities. The week seemed to begin with the usual regimen of saber-rattling.  But about mid-week, news broke that China would be satisfied with a “partial” deal if the US would forswear further tariff increases. The Administration reciprocated with licenses permitting US firms to supply Chinese telecom giant Huawei. Today the two sides apparently agreed to negotiate a deal in phases; the first will address intellectual property theft and Chinese agricultural purchases. The next round of tariffs, scheduled to come into effect next Tuesday, has been postponed.

Another positive political development came across the Atlantic. London and the European Union seem to have made substantial progress over the last few days on a Brexit deal. At the outset of the week, another postponement, and months more of uncertainty, seemed most likely. Brexit has never posed much fundamental risk to US equities, but the disruption caused by a volatile departure would likely be felt.

Economic data was less positive.  Inflation, excluding food and energy, was close to zero last month, which was less than expected. Too little inflation can restrain economic growth. The core goods category (which encompasses many expensive household items) pushed inflation up over the summer but down in September. Used vehicle prices showed a big drop. The less volatile cost of services, like rent and housing, increased at a steady clip.

Still-sluggish inflation makes it easier for the Fed to follow through on a plan to cut interest rates at the end of this month. Material improvements in the trade dispute (a major concern of the Fed’s members) could offset this. Some Fed members appear to be getting nervous about cutting rates in the midst of an economic expansion, judging by the most recent meeting minutes. Chairman Powell is apparently not among them. Powell announced that the Fed would resume purchasing short-term Treasury bills to resolve problems that have arisen in overnight bank lending markets. This policy bears a striking resemblance to quantitative easing, one of the “extraordinary measures” the Fed undertook in the aftermath of the recession to stimulate growth. Its reappearance in the midst of a mature recovery underscores the uncertainty currently hanging over monetary policy.

Third quarter earnings reports will come in force next week. Most notable will be those of the big banks at the end of the week. Earnings will be market moving.

*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.