2018 Outlook: Moving into the End of the Cycle

Posted on January 30, 2018 by Neal Gallagher

Presented by Mark Gallagher

As 2018 begins, the good economic news continues. Companies are hiring, both consumers and businesses feel confident, and economic growth is good and getting better. Even as conditions remain very positive, though, there are signs that the trend is changing. Job growth is slowing as we run out of available workers, and confidence seems to have peaked. The Federal Reserve (Fed), spurred on by the good conditions, is likely to continue raising rates, which would act as a headwind. These and other factors all suggest that, right now, things may be as good as they get. The end of 2018 may look different from today.

What to watch
Changing trends are certainly not indicators of immediate trouble, but they could indicate that growth is likely to peak sometime in 2018 and slow thereafter. For the stock market, which is now expecting strong growth in corporate investment and earnings, a slowdown—even as growth continues—could hit confidence and, thus, valuations.

On the economic front, four factors will affect growth:

1. Consumer spending: Though it’s held steady for several years, it could slow in 2018, dragging on growth.
2. Business investment: As the pool of new workers has run out, companies have invested to make existing employees more productive. This trend should continue through 2018, supporting economic growth.
3. Net exports: With a cheaper U.S. dollar, exports have exceeded imports in recent quarters. As the dollar gets more expensive, the balance is likely to shift back to negative, dragging on growth.
4. Government spending: This has had no noticeable contribution to economic growth, and it’s not expected to change.

Inflation also can be expected to rise slowly, putting the Fed in a difficult position. Current low unemployment says to raise rates, but low inflation says not yet. Which side will win in 2018? The Fed is likely to raise rates again as early as March in anticipation of inflation, rather than waiting until the evidence is unmistakable, which could be another change during the year.

The bigger picture
When we look at 2018 as a whole, the economy should grow between 1.5 percent and 2 percent, but that may consist of faster growth in the first half and slower growth in the second. Corporate profits should also grow at healthy rates. Inflation is expected to run around 2 percent for the year, but it may be slower in the first half and pick up in the second half. As the Fed raises rates in response to faster growth and rising inflation, the 10-year U.S. Treasury note should yield around 2.75 percent by year-end.

Solid fundamentals poised to calm turbulence
With both economic and profit growth likely to continue, sound fundamentals should support financial markets. But if confidence pulls back to more normal levels, lower valuations may offset those improvements. Thus, the real risks are to confidence; stocks are likely to rise in the first half of the year, only to give back much of the year’s gains in the second half, ending around 2,700 for the S&P 500.

At this point, the biggest apparent risk is political, not economic. With the mid-term elections approaching and political dysfunction rising, the potential for shaken confidence—and valuations—is very real. Fortunately, the solid economy should help mitigate any political turmoil. We are approaching the end of the cycle, but we’re not there—yet.

Certain sections of this commentary contain forward-looking statements 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. The S&P 500 Index tracks the performance of 500 widely held, large-capitalization U.S. stocks. All indices are unmanaged and are not available for direct investment by the public. Past performance is not indicative of future results.

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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 Brad McMillan, senior vice president, chief investment officer, at Commonwealth Financial Network®.

Weekly Market Update, January 29, 2018

Posted on January 30, 2018 by Neal Gallagher

Presented by Mark Gallagher

General market news
• The yield on the 10-year Treasury continued its rise from last week, opening at 2.69 percent early Monday morning, up from 2.64 percent last Friday. The 30-year also moved up, beginning the week at 2.94 percent.
• The “Fear of Missing Out” (FOMO) rally continued last week. The S&P 500 was up for the ninth time in 10 weeks. The Financial Times reported that global equity funds have received more than $77 billion in flows year-to-date through last Wednesday; this is five times higher than we saw in the first 24 days of 2017.
• Showing positive breadth and depth, all three major U.S. indices were up more than 2 percent last week. Further, every sector was up, with gains as large as 3.54 percent, 3.52 percent, and 3.23 percent experienced in health care, telecom, and consumer discretionary, respectively.
• Speaking of breadth, the International Monetary Fund (IMF) reported last week that approximately 120 economies saw a pickup in year-over-year gross domestic product (GDP) growth for 2017. This number is the highest it has been since 2010.
• As synchronized global growth continues to carry momentum in the market, attention turned to U.S. trade policy as Donald Trump addressed the World Economic Forum in Davos, Switzerland. He reiterated that his “America First” policy “does not mean America alone” but, rather, reflects the desire for fair global trade. The president also passed measures last week to increase tariffs on imported solar panels by 50 percent and washing machines by 30 percent. Trade policy and the strength of the U.S. dollar should remain in focus as the rally continues.
• The major economic news releases last week focused primarily on housing and consumption growth. On Wednesday and Thursday, existing and new home sales declined slightly. These declines were likely due to low supply levels, as housing stock has remained constrained for more than a year.
• On Friday, the first estimate of fourth-quarter GDP growth came in weaker than expected—at 2.6 percent rather than 2.9 percent. There may be more favorable revisions as new estimates are released.
• Durable goods orders, also released on Friday, were much more positive, with 2.9-percent growth against expectations for modest 0.8-percent growth. The increase for this proxy for business confidence is particularly important in light of the Tax Cuts and Jobs Act of 2017.

Equity Index	Week-to-Date	Month-to-Date	Year-to-Date	12-Month
S&P 500	2.23%	7.55%	7.55%	27.60%
Nasdaq Composite	2.31%	8.76%	8.76%	34.17%
DJIA	2.09%	7.77%	7.77%	35.60%
MSCI EAFE	1.50%	6.54%	6.54%	29.53%
MSCI Emerging Markets	3.29%	9.94%	9.94%	42.40%
Russell 2000	0.66%	4.76%	4.76%	18.45%

Source: Bloomberg

Fixed Income Index	Month-to-Date	Year-to-Date	12-Month
U.S. Broad Market	–0.95%	–0.95%	2.50%
U.S. Treasury	–1.15%	–1.15%	1.06%
U.S. Mortgages	–0.93%	–0.93%	1.74%
Municipal Bond	–0.63%	–0.63%	4.29%

Source: Morningstar Direct

What to look forward to
This will be a big week for economic data, with four major reports set to be released. On Monday, the personal income and spending report for December is expected to show that income growth held steady from November at 0.3 percent. Personal spending growth, on the other hand, is expected to decline slightly from 0.6 percent in November to 0.5 percent in December. Spending growth should be boosted by an increase in utilities expenditures due to the cold weather, which will be partially offset by a decrease in gasoline prices. If the numbers come in as expected, they would indicate continued expansion of the consumer sector.

On Tuesday, the Conference Board’s consumer confidence survey is expected to show that confidence rose from 122.1 in December to 123.1 in January. With the stock market rising and the tax cuts starting to affect paychecks, an increase seems likely. There may be some downside risk here, however, given recent declines in the other major confidence index from the University of Michigan. But even a small decline would leave this index at levels consistent with continued growth.

On Wednesday, the regular meeting of the Federal Open Market Committee will conclude. Expectations are for no action on interest rates. This will be Janet Yellen’s last meeting as chair, so markets will be watching for clues to see how the new chair’s policy tilt may change.

On Thursday, the Institute for Supply Management will release the January Manufacturing index. It is expected to tick down from a very strong 59.7 in December to an almost-as-strong 59.0 for January. This would reflect continued weakness of the dollar, which makes U.S.-manufactured goods more affordable and spurs continued global growth. Here again, there is some downside risk, given the weakening trends in regional surveys; however, even a larger pullback would still signal healthy growth.

Finally, on Friday, we get the employment report. The economy is expected to add 188,000 new jobs for January. This would be an improvement over the relatively weak 148,000 jobs added in December. If it does rebound, it would return job growth to the typical levels of the past year. The unemployment rate is expected to hold at 4.1 percent, a low level historically, and the average workweek is also expected to hold at 34.5 hours per week. Wage growth is expected to remain constant at 0.3 percent. The annual increase in this number, however, would rise from 2.5 percent in December to 2.7 percent in January, which could be a sign of acceleration. If the wage data meets expectations, it would indicate continued strong expansion of the economy as a whole.

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.

Weekly Market Update January 22, 2018

Posted on January 26, 2018 by Neal Gallagher

Presented by Mark Gallagher

General market news
• Early Monday morning, the yield on the 10-year Treasury opened at 2.55 percent after climbing as high as 2.64 percent last Friday. The curve as a whole moved higher, as the 10-year was in sync with the 30-year, which closed just under 2.91 percent on Friday. The 2-year remained above 2 percent, closing the week at 2.06 percent.
• The risk-on rally carried its momentum through the third week of 2018, as consumer staples, health care, and technology helped push U.S. markets higher. All three major indices were up more than 0.8 percent for the week, pushing all three above 5-percent gains year-to-date.
• A solid start to earnings season has helped markets ignore the noise from a government shutdown and more hawkish trade talk from the Trump administration. (As we write this on Monday, the Senate is voting on an agreement to reopen the government.) As we get deeper into earnings season, future earnings results and guidance should provide an indicator as to whether the market can maintain this momentum.
• In addition to the shutdown, trade tensions rose as President Donald Trump discussed pulling out of the North American Free Trade Agreement (NAFTA) to gain leverage for U.S. trade deals. Additionally, the U.S. Department of Commerce continued to investigate Chinese trade practices, which are escalating tensions between the two countries. This potential volatility was reflected in the CBOE Volatility Index (VIX), which rose from 10 the previous week to 12.25 last week.
• The data released last week focused primarily on housing, and it showed a slight cool down. On Tuesday, the National Association of Home Builders Housing Market Index declined slightly. This measure of homebuilder confidence still remains near multi-year highs, however, as demand for new housing is strong.
• Lower homebuilder confidence translated into lower building permits and housing starts. Both of these indicators for future supply were expected to decline, however, following unexpected growth in November.

Equity Index	Week-to-Date	Month-to-Date	Year-to-Date	12-Month
S&P 500	0.88%	5.20%	5.20%	26.64%
Nasdaq Composite	1.04%	6.30%	6.30%	33.87%
DJIA	1.08%	5.56%	5.56%	35.30%
MSCI EAFE	1.25%	4.97%	4.97%	29.66%
MSCI Emerging Markets	2.02%	6.43%	6.43%	41.31%
Russell 2000	0.36%	4.08%	4.08%	20.28%

Source: Bloomberg

Fixed Income Index	Month-to-Date	Year-to-Date	12-Month
U.S. Broad Market	–0.93%	–0.93%	2.55%
U.S. Treasury	–1.06%	–1.06%	1.13%
U.S. Mortgages	–0.81%	–0.81%	1.87%
Municipal Bond	–0.37%	–0.37%	4.45%

Source: Morningstar Direct

What to look forward to
The news this week is that there may be no economic news. With the government now in the third day of a shutdown, economic data releases may be postponed. If the government reopens quickly, there will be two major releases this week, both on Friday.

The first estimate of economic growth in the fourth quarter is expected to tick down from a very strong 3.2 percent to a still healthy 2.9 percent. The mix of growth should be strong, with consumer spending up around 4 percent and business investment rising at a double-digit pace, annualized. Government spending is also expected to rise at the state and local levels. Headwinds are expected to include imports growing faster than exports, which would make trade a net drag on growth.

The durable goods report is also expected to pull back a bit at the headline level, but the core figures should improve substantially. The headline number, which includes transportation, can be quite volatile. It is expected to drop from 1.3-percent growth to 0.9-percent growth on a seasonally adjusted decline in aircraft orders. The core figure, which excludes transportation, is expected to rise from a decline of 0.1 percent to 0.7-percent growth. This increase would reflect faster business investment growth and would be a positive sign for the economy.

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Authored by the Investment Research team at Commonwealth Financial Network.

Weekly Market Update, January 16, 2018

Posted on January 17, 2018 by Neal Gallagher

Presented by Mark Gallagher

General market news
• The yield on the 10-year Treasury opened at 2.55 percent on Monday morning, up from 2.40 percent, where it started the year, but below its recent high of 2.59 percent. As actions by the Federal Reserve (Fed) continue to affect the short end of the yield curve, the longer end has stayed quite stable. The 30-year remains well below 3 percent at 2.83 percent, while the 2-year is now above 2 percent.
• U.S. markets continued their strong start to 2018. On the back of synchronized global growth and positive investor sentiment, all three major U.S. indices posted gains greater than 1.6 percent. Strong December retail sales and a hawkish tone from the European Central Bank minutes, both released last week, supported the global growth theme that has played out through the start of the year. Strong holiday sales favored stocks such as Target Corporation (TGT) and Kohl’s Corporation (KSS). The top-performing sectors for the week included industrials, energy, and consumer discretionary. Meanwhile, the bond proxies—the REIT, telecom, and utilities sectors—lagged.
• This week also kicked off earnings season. A number of large financial companies reported, including JPMorgan Chase & Co. (JPM), Wells Fargo & Co. (WFC), BlackRock, Inc. (BLK), and PNC Financial Services (PNC). All beat their earnings estimates, but Wells Fargo’s legal expenses from the prior year continued to weigh on revenues.
• Last week was relatively quiet in terms of economic news, with only three major data releases. On Thursday, the Producer Price Index came in below expectations, showing 2.3-percent growth on an annualized basis. This measure of producer inflation also declined on a month-over-month basis.
• On Friday, the Consumer Price Index beat expectations by growing at a 1.8-percent annual rate. Both of these measures of inflation remain near the Fed’s stated 2-percent target.
• Also on Friday, December retail sales remained strong, with 0.4-percent growth on a month-over-month basis. Given the strength of this figure, overall fourth-quarter growth may have been faster than previously expected.

Equity Index	Week-to-Date	Month-to-Date	Year-to-Date	12-Month
S&P 500	1.61%	4.28%	4.28%	25.19%
Nasdaq Composite	1.75%	5.21%	5.21%	32.32%
DJIA	2.02%	4.44%	4.44%	32.85%
MSCI EAFE	1.20%	3.68%	3.68%	27.33%
MSCI Emerging Markets	0.61%	4.32%	4.32%	38.18%
Russell 2000	2.06%	3.70%	3.70%	18.52%

Source: Bloomberg

Fixed Income Index	Month-to-Date	Year-to-Date	12-Month
U.S. Broad Market	–0.50%	–0.50%	2.64%
U.S. Treasury	–0.67%	–0.67%	1.21%
U.S. Mortgages	–0.38%	–0.38%	2.00%
Municipal Bond	–0.46%	–0.46%	3.75%

Source: Morningstar Direct

What to look forward to
This week’s economic news will offer a look across the economy.

The industrial production report will be released on Wednesday. It is expected to show that growth ticked up from 0.2 percent in December to 0.4 percent in January on increased drilling and oil production. Manufacturing growth also is expected to tick up, from 0.2 percent in December to 0.3 percent in January, on strong global demand. There may be some downside risk in these estimates, after strong growth in recent months. Even if there is a slowdown, however, the overall trend remains positive.

Turning to housing, the National Association of Home Builders survey of homebuilder confidence also will be released on Wednesday. It is expected to drop slightly, from 74 in November—which was close to a 19-year high—to a still-strong 72, as demand for housing remains solid and prices continue to rise. Housing starts, released on Thursday, are expected to drop back to 1.27 million in December from 1.297 million in November. This slight pullback would signal that the industry remains healthy, despite shortages of labor, land, and materials.

Finally, on Friday, the University of Michigan consumer confidence survey is expected to rebound from 95.9 in December to 97.0 in January. The record stock market and strong job growth are expected to drive confidence higher. Historically, this level of confidence has indicated continued growth.

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Authored by the Investment Research team at Commonwealth Financial Network.