Weekly Market Update, November 24, 2014

Posted on December 1, 2014 by Neal Gallagher

Presented by Mark Gallagher

General market news
• Treasury yields opened the week in the middle of last week’s range. The 10-year started Monday morning at 2.32 percent, after going as low as 2.28 percent and as high as 2.36 percent last week.
• Amid concerns over a global slowdown, with China lowering interest rates and continued central bank support in Europe and Japan, the demand for Treasuries could keep rates low for some time, even as the U.S. economy slowly improves.
• Equity markets continued their move upward, setting all-time highs on the Dow Jones Industrial Average and the S&P 500 Index. After performing poorly last week in the face of lower oil prices, the energy sector rebounded, becoming a major source of strength for the markets.
• With third-quarter earnings season in the rearview mirror, the market may begin to move more in tandem with geopolitical and economic headlines than with fundamentals. Last week, for example, the People’s Bank of China announced surprise interest rate cuts, and the European Central Bank revealed that it would step up its efforts to increase inflation, both of which helped push markets higher. This market environment may lead to heightened volatility going forward.

Equity Index	Week-to-Date %	Month-to-Date %	Year-to-Date %	12-Month %
S&P 500	1.21%	2.45%	13.70%	17.28%
Nasdaq Composite	0.58%	1.94%	14.12%	20.21%
DJIA	1.06%	2.69%	9.73%	13.88%
MSCI EAFE	0.16%	0.05%	−2.14%	0.56%
MSCI Emerging Markets	−0.06%	−2.51%	1.17%	1.29%
Russell 2000	−0.10%	−0.01%	1.88%	6.09%

Source: Bloomberg

Fixed Income Index	Month-to-Date %	Year-to-Date %	12-Month %
U.S. Broad Market	0.17%	5.57%	5.10%
U.S. Treasury	0.25%	5.05%	4.22%
U.S. Mortgages	0.36%	5.59%	4.88%
Municipal Bond	−0.14%	8.85%	8.75%

Source: Bloomberg

What to look forward to
This week will present several important economic releases. Preliminary third-quarter Gross Domestic Product data, expected to come in at 3.3 percent, will be released Tuesday, along with the S&P/Case-Shiller Home Price Index.

Most releases will come on Wednesday, before the holiday, including figures on Durable Goods Orders, which are expected to show some improvement; Personal Income and Outlays, which are expected to increase; and New Home Sales.

Disclosures: Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. All indices are unmanaged and are not available for direct investment by the public. Past performance is not indicative of future results. The S&P 500 is based on the average performance of the 500 industrial stocks monitored by Standard & Poor’s. The Nasdaq Composite Index measures the performance of all issues listed in the Nasdaq Stock Market, except for rights, warrants, units, and convertible debentures. The Dow Jones Industrial Average is computed by summing the prices of the stocks of 30 large companies and then dividing that total by an adjusted value, one which has been adjusted over the years to account for the effects of stock splits on the prices of the 30 companies. Dividends are reinvested to reflect the actual performance of the underlying securities. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a market capitalization-weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index. The Barclays Capital Aggregate Bond Index is an unmanaged market value-weighted performance benchmark for investment-grade fixed-rate debt issues, including government, corporate, asset-backed, and mortgage-backed securities with maturities of at least one year. The U.S. Treasury Index is based on the auctions of U.S. Treasury bills, or on the U.S. Treasury’s daily yield curve. The Barclays Capital Mortgage-Backed Securities (MBS) Index is an unmanaged market value-weighted index of 15- and 30-year fixed-rate securities backed by mortgage pools of the Government National Mortgage Association (GNMA), Federal National Mortgage Association (Fannie Mae), and the Federal Home Loan Mortgage Corporation (FHLMC), and balloon mortgages with fixed-rate coupons. The Barclays Capital Municipal Bond Index includes investment-grade, tax-exempt, and fixed-rate bonds with long-term maturities (greater than 2 years) selected from issues larger than $50 million. The Barclays Capital U.S. Treasury Inflation Protected Securities (TIPS) Index measures the performance of intermediate (1- to 10-year) U.S. TIPS.

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Mark Gallagher is a financial advisor located at Gallagher Financial Services at 2586 East 7th Avenue, North Saint Paul, MN 55109. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 651-774-8759 or at mark@markgallagher.com

Authored by the Investment Research team at Commonwealth Financial Network.

Weekly Market Update, November 10, 2014

Posted on December 1, 2014 by Neal Gallagher

Presented by Mark Gallagher

General market news
• The 10-year Treasury yield climbed as high as 2.39 percent on Friday before closing below 2.30 percent; it opened early Monday morning as low as 2.27 percent. Last week’s employment report, though positive, came in below expectations, and with global government yields so low (much lower than U.S. yields), investors continued moving assets to Treasuries.
• Despite the sell-off we’ve seen in Treasuries over the last couple of weeks, they remain the best-performing government debt over the last month, as yields on the 10-year moved from north of 2.50 percent to as low as 1.86 percent and now back to 2.27 percent. Money should continue to pour into Treasuries as global investors seek yield on safety assets, with the German 10-year bund yielding 0.804 percent.
• Equities continued to drift higher last week. Large-cap stocks performed well, with the S&P 500 Index and the Dow Jones Industrial Average both closing at record highs, returning 0.77 percent and 1.17 percent, respectively. Small-caps lagged larger-cap indices, as the Russell 2000 Index returned 0.01 percent after strong performance the week before. Internationally, both developed and emerging markets performed poorly, with the MSCI EAFE and MSCI Emerging Markets indices returning −0.64 percent and −2.42 percent, respectively.
• The move higher in U.S. equities was, in part, the result of October’s modest increase in jobs and a decline in the unemployment rate. Renewed worries over slow global growth, as well as increased regulatory scrutiny for banks in the eurozone, contributed to poor international performance.

Equity Index	Week-to-Date %	Month-to-Date %	Year-to-Date %	12-Month %
S&P 500	0.77%	0.77%	11.85%	18.69%
Nasdaq Composite	0.12%	0.12%	12.08%	21.62%
DJIA	1.17%	1.17%	8.10%	15.34%
MSCI EAFE	−0.64%	−0.64%	−2.82%	0.62%
MSCI Emerging Markets	−2.42%	−2.42%	1.26%	0.84%
Russell 2000	0.01%	0.01%	1.91%	10.16%

Source: Bloomberg

Fixed Income Index	Month-to-Date %	Year-to-Date %	12-Month %
U.S. Broad Market	0.07%	5.46%	4.59%
U.S. Treasury	0.14%	4.93%	3.62%
U.S. Mortgages	0.07%	5.28%	4.26%
Municipal Bond	−0.27%	8.70%	8.23%

Source: Bloomberg

What to look forward to
In a light week for economic news, we will see data on Retail Sales, which are expected to improve after a dip in the last reading, and the University of Michigan Consumer Sentiment survey.

Authored by the Investment Research team at Commonwealth Financial Network.

Weekly Market Update, November 3, 2014

Posted on December 1, 2014 by Neal Gallagher

Presented by Mark Gallagher

General market news
• Treasury yields were up initially following the release of last week’s Federal Reserve meeting minutes, which seemed to be more hawkish than anticipated. Reading between the lines, however, the Fed is still concerned with the pace at which the economy is expanding. The 10-year Treasury opened Monday morning at 2.32 percent, in line with where it began last week.
• The Fed ended its quantitative easing (QE) program with no major market movement, an encouraging sign for the time being. The end of QE is still fresh, though, and we will be keeping a close eye on the markets, both equity and fixed income, to see if there is any impact in the weeks to come.
• Equities posted a strong week of performance. Large-cap stocks fared well, with the S&P 500 Index and the Dow Jones Industrial Average returning 2.74 percent and 3.48 percent, respectively. Small-caps were the best-performing asset class, with the Russell 2000 Index returning 4.90 percent on the week.
• Several pieces of good news contributed to last week’s strong equity performance. An unexpected announcement from the Bank of Japan that it would increase its stimulus efforts helped boost equity markets across the globe. In addition, some positive economic data points from the eurozone tempered fears that the area will slip back into recession, and strong corporate earnings supported U.S. equities.

Equity Index	Week-to-Date %	Month-to-Date %	Year-to-Date %	12-Month %
S&P 500	2.74%	2.44%	10.99%	17.26%
Nasdaq Composite	3.30%	3.10%	11.95%	19.65%
DJIA	3.48%	2.16%	6.86%	14.48%
MSCI EAFE	1.13%	−2.50%	−3.28%	−1.02%
MSCI Emerging Markets	2.38%	0.34%	2.91%	0.11%
Russell 2000	4.90%	6.59%	1.90%	8.07%

Source: Bloomberg

Fixed Income Index	Month-to-Date %	Year-to-Date %	12-Month %
U.S. Broad Market	0.99%	5.39%	4.27%
U.S. Treasury	1.09%	4.78%	3.25%
U.S. Mortgages	0.96%	5.21%	3.98%
Municipal Bond	0.61%	8.99%	8.37%

Source: Bloomberg

What to look forward to
This week will feature data on manufacturing activity, with ISM Manufacturing expected to remain fairly solid, as well as Factory Orders. ISM Non-Manufacturing data is expected on Wednesday.

The week will end with the Employment report, which is expected to remain mostly unchanged, with a slight increase in average hourly earnings.

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Authored by the Investment Research team at Commonwealth Financial Network.

Market Update for the Month Ending October 31, 2014

Posted on December 1, 2014 by Neal Gallagher

Presented by Mark Gallagher
October lives up to its scary reputation
October provided a roller-coaster ride for financial markets. The Dow Jones Industrial Average ended the month up 2.16 percent, after a drop of more than 5 percent mid-month, while the S&P 500 Index rose 2.44 percent, after a similar drop. The Nasdaq wound up best, posting a 3.06-percent gain, after declining more than 6 percent.

The drop in the middle of the month was caused by a confluence of worries, including the Ebola outbreak, bad economic news from around the world, and weaker-than-expected economic news here in the U.S. Much of the reaction in the financial markets seemed to come from fears that the bad news meant that this was the correction for which everyone had been waiting. In fact, however, with fundamentals continuing strong, most markets rallied after a short-lived pullback and closed October with gains.

Fundamentally, conditions remain healthy. Corporate earnings have been beating expectations—by October’s end, more than three-quarters of reporting companies had surpassed earnings expectations. Revenues have also grown faster than expected, with almost three out of five companies beating revenue expectations. Technically, the trend for U.S. markets remains positive, even with prices having dropped through the 200-day moving average mid-month. The strong recovery since then has brought prices back into a positive trend, and the break itself is not necessarily a danger sign.

Foreign markets showed trends similar to the U.S. market during October, although to different degrees. Developed markets, represented by the MSCI EAFE Index, dropped more than 7 percent mid-month and, despite a late-month recovery, still ended up with a 1.45-percent loss. Emerging markets, represented by the MSCI Emerging Markets Index, did better, with less than a 3-percent loss at mid-month and a 1.07-percent gain by month-end.

The relative underperformance of the developed markets was due to the continued slowing of European growth trends—a result of both the economic impact of sanctions on Russia and growing political conflict between France and Germany. Emerging markets, on the other hand, benefited from a drop in interest rates. Technically, the EAFE remained below its 200-day moving average, which suggested further weakness, while the Emerging Markets index moved back above that trend line, suggesting a resumption of a positive trend.

Fixed income markets also did well following a drop in interest rates, with the benchmark 10-year U.S. Treasury yield declining from 2.489 percent to 2.335 percent during the month. The Barclays Capital Aggregate Bond Index returned 0.98 percent for the month, while high-yield bonds, represented by the Barclays Capital U.S. Corporate High Yield Index, rose 1.19 percent. The drop in rates was due largely to continued declines in European government debt, which drove U.S. rates downward sharply, though they later recovered.

U.S. economic recovery accelerates
Despite the month’s market turbulence, the U.S. economic recovery continued to accelerate. After a disappointing August jobs report, the news that 248,000 jobs had been added in September and that the unemployment rate had dropped to 5.9 percent—close to 2004 levels— showed that the recovery was still intact. Other supporting news included the number of job openings, which reached a 13-year high, and initial jobless claims, which came in at their lowest level since 2000. Improving employment trends led both major consumer confidence measures to seven-year highs.

The Federal Reserve did its part to endorse the recovery by voting to end its bond-buying program and leaving the U.S. economy to stand on its own for the first time in years. Moreover, that move was quickly ratified by the announcement that the U.S. economy had grown at a 3.5-percent rate for the third quarter—above expectations.

Not all of the news was good. Sales of durables were down, which is somewhat worrisome, and consumer income and spending growth slowed. But the majority of the news supported an accelerating recovery. One data point, in particular, was encouraging at month-end. The employment cost index—a sign of pending wage growth—came in at a high for the second quarter in a row, suggesting that the final piece of the recovery, faster wage growth, may be on its way.

Also supporting growth during the month was a continuing decline in oil prices. As the graph shows, in October oil prices collapsed to levels seen only a couple of times in the past five years.

The Declining Price of Oil, May 15–October 31, 2014

Source: Bloomberg

The drop in oil prices could be a significant boost to U.S. growth. With a $10 change in the price of oil corresponding to roughly a 0.2-percent change in growth, the drop from $95 to $80 a barrel in October could add another 0.3 percent to growth in the next couple of quarters, on top of the already strong figures we now see.

Geopolitical turmoil strengthens the dollar
Continued oil price declines are quite possible, not only from a supply-and-demand perspective, but also as a result of a strengthening dollar. As the price of oil dropped over the past three months, the value of the dollar compared with other currencies increased.

A strong dollar helps hold down the prices of all imports, including oil and commodities, and strengthens the purchasing power of the U.S. consumer. The dollar’s appreciation comes from the growing strength of the U.S. economy, especially compared with the economies of other countries, as well as the Fed’s decision to stop buying bonds, even as Japan continues to do so and the prospect of the European Central Bank starting becomes more likely. With the Bank of Japan’s surprise decision at month-end to increase its bond purchases, and the ongoing economic troubles in Europe, continued dollar strength is likely, which should keep putting downward pressure on oil prices.

The downside of the strong dollar, however, is the probable negative effect on U.S. corporate earnings. Revenue from overseas, when translated to U.S. dollars, will be negatively affected, and this could be a headwind for earnings in the next couple of quarters. Overall, though, the net effect of a strong dollar could continue to benefit the economy and therefore the market.

Halloween much less scary than it might have been
October has historically been volatile, and the extreme price swings of almost all markets during the past month certainly lived up to that reputation. Despite the substantial drop in the middle of the month, though, the improving fundamentals of the U.S. economy and strong position of the U.S. internationally acted to cushion and ultimately reverse the decline.

Markets are inherently risky, and the volatility this month—even though we ended with a gain—should remind us that we will not always be so lucky. Risks remain around the world, and the trends from which we now benefit won’t always be there. It is important to stay focused on the long term and maintain a diversified portfolio that can ride out turbulence in both the short and medium terms.

Economic recovery in the U.S. has laid the foundation for continued profit gains for U.S. businesses, and economic growth has historically led to higher market valuations. This confluence of positive factors suggests that future results should be positive for investors and that the long-term perspective remains the correct one. Although volatility is still possible, and even likely, the longer-term perspective is still bright.

All information according to Bloomberg, unless stated otherwise.

Disclosure: Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets. All indices are unmanaged and investors cannot invest directly into an index. The Dow Jones Industrial Average is a price-weighted average of 30 actively traded blue-chip stocks. The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. The Nasdaq Composite Index measures the performance of all issues listed in the Nasdaq Stock Market, except for rights, warrants, units, and convertible debentures. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a market capitalization-weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. It excludes closed markets and those shares in otherwise free markets that are not purchasable by foreigners. The Barclays Capital Aggregate Bond Index is an unmanaged market value-weighted index representing securities that are SEC-registered, taxable, and dollar-denominated. It covers the U.S. investment-grade fixed-rate bond market, with index components for a combination of the Barclays Capital government and corporate securities, mortgage-backed pass-through securities, and asset-backed securities. The Barclays Capital U.S. Corporate High Yield Index covers the USD-denominated, non-investment-grade, fixed-rate, taxable corporate bond market. Securities are classified as high-yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below.

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