Presented by Mark Gallagher

General market news
• Following the Federal Reserve’s (Fed’s) announcement on Wednesday to leave interest rates unchanged (for now), the 10-year Treasury spiked to 2.28 percent, its highest point since August 16. It opened Monday at 2.24 percent. The 30-year briefly touched 2.83 percent last Wednesday before opening Monday at 2.78 percent. The 2-year spiked from 1.39 percent to 1.44 percent after the Fed’s announcement, and it has maintained that level.
• U.S. markets were mixed last week as the Federal Open Market Committee meeting, mergers and acquisitions (M&A) activity, and individual stock performance all played a role. The Dow Jones Industrial Average led the way, posting a gain of 0.36 percent, as telecom, financials, industrials, and energy posted the largest gains. Telecom was up 3.8 percent on news that Sprint (S) and T-Mobile (TMUS) were nearing terms of a deal. The industrial sector also saw some M&A activity last week, as Orbital ATK, Inc., agreed to be acquired by Northrop Grumman Corp. (NOC) for an expected $7.8 billion.
• Financials were supported by the Fed’s plan for continued tightening, as it projected one additional rate hike this year and three for 2018. The S&P 500 was mostly flat as the bond proxies in consumer staples, utilities, and real estate experienced the largest declines last week. The Nasdaq Composite Index experienced a decline of 0.33 percent, as weak projected iPhone 8 sales weighed on Apple Inc. (AAPL) and the sector.
• Last week’s economic data focused mostly on housing. To start things off, the National Association of Home Builders Housing Market Index declined unexpectedly. This decline was likely due to increased costs for builders. Despite the decline, the index remains in healthy expansionary territory, as homebuilders are confident that demand is strong.
• Given high levels of homebuilder confidence, it is not surprising that both housing starts and building permits increased in August. Permits significantly outperformed expectations with an increase of 5.7 percent; they had been forecast to decline 0.8 percent.
• Finally, existing home sales disappointed by falling 1.7 percent in August. As has been the case for the entire year, existing home supply remains near all-time lows. This is due in large part to a reluctance by elder homeowners to sell, which has curtailed sales.

Source: Bloomberg

Source: Morningstar Direct

What to look forward to
This week will give us a broad look at the economy, with housing, consumer confidence, business investment, and personal income and spending reports lined up. Some weakness is expected, but it would be due to the effects of hurricanes Harvey and Irma and should be short lived. Overall, although the data this week will be worth watching, given the storm effects, we shouldn’t give excessive weight to it.

The new home sales report, due on Tuesday, is expected to rise from 571,000 in July to 590,000 in August, with significant upside potential. This would be a rebound from a surprise decline in July, which brought sales down by almost 10 percent. Should this number come in as expected or higher, it would suggest that last week’s disappointing existing homes data was due more to supply constraints than lack of demand.

Also on Tuesday, the Conference Board’s consumer confidence survey will be released. Expectations are for a small decline—from a very strong 122.5 in August to 119.5 in September—but there is some downside risk. A substantial rise in gas prices, due to the hurricanes, may give confidence a knock this month. If so, the drop may be temporary, as price gains are starting to reverse. In any event, even with a decline, this would keep confidence at a healthy level.

On Wednesday, durable goods orders are expected to bounce back at the headline level, from a drop of 6.8 percent in July to a gain of 0.9 percent in August, on a rebound in commercial aircraft orders. Core orders, which exclude transportation, are expected to rise 0.2 percent in September, after rising 0.6 percent in August. These results would suggest that business investment continues to improve.

Finally, on Friday, we’ll see personal income and spending figures. Personal income is expected to show a 0.3-percent gain in August, down from 0.4 percent in July. Spending is expected to show more of a slowdown, from 0.3 percent in July to 0.1 percent in August. These declines would be due largely to the hurricanes, as employment and wages, as well as retail sales, were directly affected. There may be some downside risk here as well, depending on how substantial the hurricane effects turn out to be. Although this would be something to watch, any weakness would be likely to reverse in subsequent months.

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 Bloomberg Barclays US 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 Bloomberg Barclays US 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 Bloomberg Barclays US Municipal 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.

Mark Gallagher is a financial advisor located at Gallagher Financial Services at 2586 East 7th Ave. Suite #304, 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.

© 2017 Commonwealth Financial Network®

Presented by Mark Gallagher

General market news
• The yield on the 10-year Treasury was back up to 2.20 percent early Monday morning, after being as low as 2.01 percent fewer than six trading days ago. The move from one support level to the next in such a short period leads us to believe that investors are uncertain about the market and can’t decide whether to favor a risk-on or risk-off trade. The 30-year yield moved from 2.63 percent to 2.77 percent in the same period. It is still well below the 3-percent mark, however, implying that the risk-off trade is still in favor with many.
• U.S. markets took the opportunity to exhale last week after dealing with tumultuous news about North Korea and hurricanes Harvey and Irma in the week prior. The Dow Jones Industrial Average was the top performer, posting a gain of 2.19 percent. The S&P 500 Index and Nasdaq Composite followed with gains of 1.63 percent and 1.41 percent, respectively.
• Monetary policy grabbed headlines around the world last week. The People’s Bank of China removed a deposit requirement for currency forward trades and axed the deposit requirement for foreign banks’ yuan deposits. These actions are expected to make foreign deals more attractive. The Bank of England also made the news after it voted to keep interest rates steady, despite a 2.9-percent increase in inflation in August. The bank expects this increase in inflation to be temporary. This week, the focus will be on our own Federal Open Market Committee (FOMC).
• There were a number of important economic data points released last week. On Wednesday and Thursday, the Produce and Consumer Price Index reports showed higher-than-expected inflation data. Consumer prices have increased by 1.9 percent year-over-year, while producer prices have grown by 2 percent. Low inflation figures were a concern earlier in the year, but these readings are approaching the Fed’s stated target of 2-percent inflation.
• On Friday, retail sales for August came in lower than expected. Sales declined by 0.2 percent against expectations for 0.1-percent growth. The impact from Hurricane Harvey at the end of the month likely played a part in this miss, but we won’t know whether this slowdown was due to transitory factors until next month.
• The week ended with a slight decline in the University of Michigan Consumer Sentiment survey. This figure remains near post-election highs, so the result is nothing to worry about.

Source: Bloomberg

Source: Morningstar Direct

What to look forward to
Most of the economic data this week focuses on housing. On Monday, the National Association of Home Builders industry survey will be released. It is expected to decrease from a very strong level of 68 in August to a still strong level of 67 in September. Given extensive damage from hurricanes Harvey and Irma—which may worsen labor and material shortages for homebuilders—there may be some downside risk to this number.

On Tuesday, housing starts are expected to tick up from 1.155 million in July to 1.18 million in August. The July number was a surprise, resulting from declines in multi-family developments, which have historically been volatile. Single-family starts held their ground. Although multi-family starts are expected to decline even more in August, strong demand and limited supply for single-family homes should keep that sector increasing.

On Wednesday, existing home sales are likewise expected to tick up—from 5.44 million in July to 5.47 million in August. Once again, despite strong demand, low inventory is expected to constrain sales. This means there is some downside risk to this number. The July number was the lowest in almost a year, and the trend is likely to continue.

Also on Wednesday, the FOMC will conclude its regular meeting. Although the Fed is likely to continue viewing the economy in a positive light, uncertainty around inflation, as well as the unknown impacts of the hurricanes, will likely result in no change to interest rates. The Fed is expected, however, to start the process of reducing the balance sheet by slowing the reinvestment of maturing securities and payments. This has been well telegraphed to markets, and reaction should be minimal. Still, markets will be watching to make sure that the actual plan is the same as described previously.

Overall, if the news comes in as expected, the signal for the rest of the economy will be positive.

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 Bloomberg Barclays US 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 Bloomberg Barclays US 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 Bloomberg Barclays US Municipal 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.

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Mark Gallagher is a financial advisor located at Gallagher Financial Services at 2586 East 7th Ave. Suite #304, 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.

© 2017 Commonwealth Financial Network®

Presented by Mark Gallagher

General market news
• Treasury yields were lower across the long end of the curve last week, with the 10-year at 2.01 percent and the 30-year back to pre-election levels at 2.63 percent. The 10-year Treasury opened Monday at 2.09 percent and the 30-year opened at 2.71 percent. It seems for now that the Federal Reserve (Fed) will be on hold in terms of raising rates; with the Fed funds at 1.25 percent, the curve is quite flat.
• All three major U.S. markets were down on the week as uncertainty loomed from North Korea’s hydrogen bomb test and the U.S. suffered damage from hurricanes Harvey and Irma. The Nasdaq Composite led the move down, dropping 1.16 percent due to poor performance in the technology sector. The Dow Jones Industrial Average and S&P 500 followed, posting losses of 0.82 percent and 0.58 percent, respectively.
• Additional points of unease were the resignation of Fed Vice Chair Stanley Fischer and the passage of a new U.S. budget deal to extend the debt ceiling for three more months. The debt-ceiling deal transpired when President Donald Trump worked with Democrats for the first time to get legislation approved. This move came under fire from many Republicans, including Speaker of the House Paul Ryan, who wanted a longer-term deal.
• The health-care sector continued to lead the way last week, with energy and utilities following behind as oil prices moved higher. The worst-performing sectors on the week included telecom, financials, and materials.
• There were two important data releases last week. On Tuesday, durable goods orders data for August was released. For the second month in a row, this measure of business confidence declined due to a fall in aircraft orders. The core figure, which excludes airline sales, rose by a healthy 0.6 percent, however. This was also the second month in a row where core orders increased while headline figures disappointed.
• On Wednesday, the Institute for Supply Management (ISM) nonmanufacturing composite increased following a surprise decline in July. Given the recent strength in the manufacturing portion of this survey, this increase was quite favorable. Historically, ISM surveys at today’s levels have been linked to 4-percent annualized gross domestic product growth.

Source: Bloomberg

Source: Morningstar Direct

What to look forward to
We’ll see a wide range of economic news this week. We’ll get a good look at consumer behavior, manufacturing, and the economy as a whole. These combined factors will influence the Fed’s decision on when to raise rates.

On Thursday, the Consumer Price Index will be released, giving us a look at inflation. The headline index, which includes food and energy, is expected to rise 0.3 percent in August, largely due to a spike in gas prices after Hurricane Harvey. This will take the annual inflation rate from 1.7 percent to 1.8 percent, which is closer to the Fed’s 2-percent target. There may be some upside risk to this number. Core prices, which exclude energy and food, are expected to rise a more modest 0.2 percent for the month. On an annual basis, however, core prices are expected to decline from 1.7 percent to 1.6 percent. Core prices are a better signal for underlying economic conditions because energy and food prices can be volatile, although a decrease could raise the Fed’s concern about low inflation.

On Friday, headline retail sales are expected to slow from 0.6 percent in July to 0.1 percent in August due to a decline in auto sales. The core figure, which excludes auto sales and is a better indicator for underlying trends, is expected to remain steady at 0.5-percent growth. There could be some upside to these results, as consumer confidence is high, and buying ahead of the hurricanes may have driven sales higher.

Industrial production is expected to decline modestly, from 0.2-percent growth in July to 0.1-percent growth in August. This decline can be attributed to low utilities output. Manufacturing growth is expected to increase strongly from negative to 0.5-percent growth, as exports continue to rise on the weak dollar. This growth would align with the improved Institute for Supply Management nonmanufacturing survey, which would be a boon for the economy.

Finally, the University of Michigan Consumer Confidence survey is expected to decline from 96.8 to 96.6. There may be some downside risk due to the hurricanes and rising gas prices, but the overall confidence level is likely to remain strong, indicating a robust economy.

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 Bloomberg Barclays US 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 Bloomberg Barclays US 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 Bloomberg Barclays US Municipal 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.

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Mark Gallagher is a financial advisor located at Gallagher Financial Services at 2586 East 7th Ave. Suite #304, 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.

© 2017 Commonwealth Financial Network®

Presented by Mark Gallagher

General market news
• The 10-year Treasury opened Monday morning at 2.13 percent, up from a low of 2.08 percent last week, which was its lowest level since November 10, 2016. The 30-year yield opened at 2.75 percent Monday, up from 2.68 percent last week. The 30-year last touched 2.71 percent back in June and is only about 15 basis points above where it stood on November 7.
• Despite both Hurricane Harvey and increasing political tension with North Korea, U.S. markets were up for the second straight week. Tax reform returned to focus, and mergers and acquisitions within health care helped push markets higher. The Nasdaq Composite led the way, increasing by 2.73 percent, following the news that biotech giant Gilead Sciences had proposed a deal to acquire Kite Pharma for almost $12 billion.
• The S&P 500 and Dow Jones Industrial Average were also up, posting gains of 1.43 percent and 0.88 percent, respectively. The market continued to shrug off tensions in international relations and focused on news of improved growth—namely, that U.S. growth for the second quarter was revised up to a 3-percent annual pace, according to a report from the Bureau of Economic Analysis. In addition to health care, technology and materials were the best-performing sectors last week; however, bond proxies, such as telecom and utilities, lagged.
• There were three major data releases last week, and they all pointed toward continued growth. On Thursday, the personal income and outlays data was released. Both had strong results, with income rising 0.4 percent month-over-month against expectations of a 0.3-percent increase. Spending rose 0.3 percent against expectations of a 0.4-percent increase. Both of these figures are quite healthy, and continued growth at these levels could bolster growth for the rest of the year.
• On Friday, the August employment report came in as a mixed bag, with only 156,000 new jobs added against expectations for 180,000 new jobs. The underlying data was also disappointing, with wage growth slowing down and average hours worked decreasing slightly. The slowed hiring pace may be due either to a lack of demand (new jobs) or supply (qualified workers).
• Finally, the Institute for Supply Management Manufacturing Index handily beat expectations by increasing to 58.8, against expectations for only 56.5. This represents the highest reading since April 2011 and shows that manufacturers are optimistic about their prospects going forward.

Source: Bloomberg

Source: Morningstar Direct

What to look forward to
After a busy week last week, this week will be lighter on the economic news front. We expect only two major releases.

First, durable goods orders data will be released on Tuesday. After a sharp dive in the headline measure in August due to a drop in aircraft orders, this proxy for business confidence is expected to rebound. The core figure strips out transportation equipment, and it is expected to grow modestly as well.

On Wednesday, the Institute for Supply Management will release its nonmanufacturing index. This measure of confidence for the service side of the economy is also expected to increase. Given the strength in manufacturing confidence, any increase in this measure would be considered validation of today’s continuing economic strength.

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 Bloomberg Barclays US 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 Bloomberg Barclays US 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 Bloomberg Barclays US Municipal 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.

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Mark Gallagher is a financial advisor located at Gallagher Financial Services at 2586 East 7th Ave. Suite #304, 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.

© 2017 Commonwealth Financial Network®