Market Update for June 12, 2017
Market Update for June 12, 2017

Market Update for June 12, 2017

 

By:

J. Reed Murphy
J. Reed Murphy
CIMA®

President
Chief Investment Officer

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Market Update for June 12, 2017

OPEC, US Infrastructure and Charity

MARKET RECAP

Headlines dominated the week. On Thursday the U.S. saw the testimony of former FBI Director James Comey, who testified that President Trump urged him to drop an investigation into members of his White House staff. The investigation and the conversation around obstruction of justice will be on-going. Despite the vitriol in the headlines, the U.S. equity market had a quiet week as the S&P finished down 0.28%. The Trump administration also announced preliminary concepts for an infrastructure plan and regulatory rollbacks of the Dodd-Frank Wall Street Reform Act. On that news financials was the week’s best performing sector. Across the pond, U.K. Prime Minister Theresa May’s Conservative Party lost their majority in a special election called by the Prime Minister herself. The intent of the special election was to strengthen the Conservative Party’s majority and thus the support for tough Brexit negotiations. The loss diminishes May’s authority and creates uncertainty around the Brexit negotiation table. International developed markets fell 1.17% on the week. Emerging Markets continued their climb up 0.36% on the week. Yields on U.S. Treasury bonds rose Friday on expectations of a Fed rate hike next week. U.S. bonds provided a negative total return of 0.15% through Friday. The crude oil market was taken by surprise Wednesday as the weekly inventory report came in well above estimates. Oil fell by over $2 on Wednesday, sitting at the yearly low previously seen in May.

Exhibit #1

This week has several economic announcements including inflation, housing data and consumer sentiment. Amidst these releases we have a Fed decision on Wednesday. Another rate increase is now extremely likely. Market attention has turned to the impact of recent inflation misses and balance sheet normalization on the funds rate path. We will highlight the potential investment implications of the Fed reducing its balance sheet in an upcoming edition.

WHY HAVE OIL PRICES SLIPPED DESPITE OPEC CUTS & U.S. PULLOUT OF THE PARIS ACCORD?

Oil prices have declined over 10% in a little over two weeks despite the major announcement that OPEC would extend its production cuts into 2018. OPEC’s target is to reduce global inventories during that time back to a 5-year average. While this is supportive news for oil prices, the commodity dropped the day of the news based on concerns for what happens after the extension of the agreement. An energy expert that we work closely with believes that OPEC and Russia will do ‘whatever it takes’ to support oil prices. In the meantime, markets are overly focused on current inventory levels, which remain stubbornly high particularly in the U.S. – witness the drop in prices on inventory levels this past Wednesday.

On a related note, President Trump announced that the U.S. would pull out of the Paris climate accord the prior week. (See our blog entry of June 5 for further comment). This too would normally be considered supportive for oil prices. Nonetheless, the withdrawal and the significant number of regulation rollbacks in the energy sector has been a boon for increased production of late and for the future. While increased production levels in the U.S. may put downward pressures on oil and gas prices, it may be supportive for companies involved in the transportation of oil and gas. The U.S. has a plethora of natural gas and significant cost advantages versus international players. While oil prices may soften, it is not necessarily bad for energy companies involved in the transportation of oil and gas (i.e., MLPs). We are witnessing a massive move in exports. This Wall Street Journal article provides a good overview of how this trend is benefiting the U.S. economy.

INFRASTRUCTURE PLAN – IT IS A DUD SO FAR

Last week was billed as infrastructure week. Not only did it get buried in the news, but it also fizzled like a dud…for now anyway. The festivities started on Monday with a plan to privatize air-traffic control. During the week, we witnessed a broader infrastructure spending plan. The rough strokes are for the federal government to spend $200 billion over 10 years, but with various incentives to develop Public Private Partnerships for the remaining $800 billion of the Trump campaign promise. While many thought this might be one of the easiest campaign promises to obtain bipartisan support, the lack of details has many doubting the plan. As an NPR article states, the plan needs a lot more planning. In fairness, the administration also highlighted a revamped committee to help project managers navigate the federal bureaucracy and stated it would cut regulations to help the government "get out of the way" of building projects. While many have been cautiously optimistic about a U.S. infrastructure plan, it is prudent to consider a globally oriented investment.

MAKING A DIFFERENCE IN LIVES

Sometimes it is good to step back from our routines and honor those less fortunate. This past week Bill Giffin (our CEO) and I had the pleasure to participate in the 35th Annual Marklund Golf Classic. Cheryl Simoncelli (Trust Company of Illinois Retirement Plan Service Manager) donated her time by working the function. We have been a proud sponsor of Marklund for over 15 years. Marklund is a not-for-profit organization whose mission is to make everyday life possible for individuals with profound disabilities. It is currently home to over 170 people providing compassionate care to the most medically fragile population in the community. Marklund also offers a day school for children and young adults with special needs and those diagnosed on the autism spectrum. With the recent proposed cutbacks in Medicaid, it is ever more important to understand organizations like Marklund. If you want to learn more about this worthy cause, please visit them at Marklund.org.

UPCOMING EDITION

We will discuss the recent DOL Fiduciary Rule that went into effect. As many have suggested, this will be problematic for some advisors to abide by. We will focus on what it is and why it’s important. Also, we will highlight two very ominous views by two distinct investors. Stay tuned.


 
Tags:  Brexit, Dodd-Frank Wall Street Reform Act, Economy, Economy News, Energy Prices, Global Economy, Infrastructure, Infrastructure Plan, June, 2017, Market Analysis, Market Commentary, Market News, Market Trends, Market Update, Marklund, MLPs, News and Markets, OPEC, Reed Between the Lines, Trump Presidency, US Economy

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