Weekly Market Update, February 20, 2018

Posted on February 21, 2018 by Neal Gallagher

Presented by Mark Gallagher

General market news
• The yield on the 10-year Treasury opened at 2.89 percent early Tuesday morning, in line with where it opened early last week. The 30-year, at 3.15 percent, is seeing more resistance than is the short end of the curve. This will likely make it harder for longer rates to break significantly higher in the near term.
• All three major U.S. indices were up more than 4 percent last week. The S&P 500 saw gains in all five trading sessions. Further, every sector was up for the period, with technology, financials, and industrials leading the way.
• Wednesday’s Consumer Price Index data reaffirmed that inflation is moving higher in 2018. This data aligned with wage data from two weeks prior, which is what helped spur the sell-off. Despite confirmation of the inflationary trend, equity markets recouped some of their losses from the sell-off, as investors responded favorably to positive earnings news.
• Indeed, earnings guidance continued to be strong. With approximately 80 percent of S&P 500 companies reporting, the blended earnings growth rate for the fourth quarter is currently 15.2 percent, according to FactSet. This is the highest level since the third quarter of 2011. In addition, nearly all companies that have reported thus far have seen a positive surprise in sales.
• A number of key data points were released last week. As mentioned above, we saw Consumer Price Index data on Wednesday. The index increased by 2.1 percent on an annual basis, exceeding expectations for 1.9-percent growth. This was followed by the Producer Price Index on Thursday, which also came in higher than expected. Given the healthy economy and rising wages, the Federal Reserve (Fed) will be paying close attention to accelerating inflation.
• On Wednesday, retail sales for January came in lower than anticipated, declining 0.3 percent rather than growing the expected 0.2 percent. Core sales, which strip out volatile auto and gas sales, stayed flat during the month. While this was disappointing after strong growth in December, seasonality may have affected the data.
• Finally, on Friday, the University of Michigan consumer sentiment survey surprised to the upside. It rose to 99.9, beating expectations for a slight decline to 95.5. This is positive, given the recent stock market volatility, and shows that consumer confidence remains strong.

Equity Index	Week-to-Date	Month-to-Date	Year-to-Date	12-Month
S&P 500	4.37%	–3.09%	2.45%	18.71%
Nasdaq Composite	5.36%	–2.21%	5.03%	25.92%
DJIA	4.36%	–3.31%	2.37%	25.20%
MSCI EAFE	4.29%	–3.47%	1.38%	21.78%
MSCI Emerging Markets	5.03%	–4.31%	3.65%	30.13%
Russell 2000	4.48%	–1.92%	0.64%	11.78%

Source: Bloomberg

Fixed Income Index	Month-to-Date	Year-to-Date	12-Month
U.S. Broad Market	–0.98%	–2.12%	0.90%
U.S. Treasury	–0.83%	–2.17%	–0.28%
U.S. Mortgages	–0.73%	–1.89%	0.35%
Municipal Bond	–0.34%	–1.51%	3.11%

Source: Morningstar Direct

What to look forward to
The week ahead will be a slow one for economic data.

The only real news will be the release of the minutes from the last Federal Open Market Committee meeting. Markets will be looking for confirmation that the Fed expects to hike rates by another 25 basis points at the March meeting. The statement from the January meeting was relatively optimistic, so the minutes should provide some color as to how many participants shared that view.

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, February 12, 2018

Posted on February 12, 2018 by Neal Gallagher

Presented by Mark Gallagher

General market news
• The yield on the 10-year Treasury, which has been testing higher levels over the past two weeks, opened north of 2.80 percent on Monday morning. Although the short-term trend has been higher, we’ll have to wait to see if the 10-year can break new levels. With the 30-year barely above 3 percent, it might be difficult.
• The three major U.S. indices were down more than 5 percent last week, and both the Dow Jones Industrial Average and the S&P 500 officially entered correction territory. The largest declines occurred in the financials, telecom, and energy sectors, as the price of oil continued to fall. The top performers included utilities, materials, and real estate.
• The reasons for the market pullback include inflation fears, rising interest rates, and higher bond yields. A bump in the hourly wage growth rate to 2.9 percent in the January jobs report may have stemmed fears that the Federal Reserve (Fed) will accelerate its planned rate hikes (the market currently expects three hikes this year). Nevertheless, as the Fed continues winding down the balance sheet under the leadership of a new chair, Jerome Powell, the belief is that the economy will now have to stand on its own. The days of artificially low rates may be over.
• Earnings, on the other hand, have continued to come in strong. Of the nearly three-quarters of S&P 500 companies that have reported so far, more than 80 percent of them experienced better-than-expected profits in the fourth quarter.
• Last week was relatively quiet in terms of major economic news. On Monday, the Institute for Supply Management’s Nonmanufacturing composite recovered from a surprise decline in December, rising to 59.9 from 55.9. Confidence for both manufacturers and the service industry is near multiyear highs.
• On Wednesday, consumer credit rose by less than expected. The savings rate is at a 12-year low, so we’ll want to keep an eye on expanding credit use.

Equity Index	Week-to-Date	Month-to-Date	Year-to-Date	12-Month
S&P 500	–5.10%	–7.14%	–1.84%	15.77%
Nasdaq Composite	–5.01%	–7.19%	–0.32%	21.67%
DJIA	–5.08%	–7.35%	–1.90%	22.79%
MSCI EAFE	–6.19%	–7.44%	–2.78%	18.56%
MSCI Emerging Markets	–7.14%	–8.90%	–1.31%	26.59%
Russell 2000	–4.47%	–6.12%	–3.67%	8.62%

Source: Bloomberg

Fixed Income Index	Month-to-Date	Year-to-Date	12-Month
U.S. Broad Market	–0.77%	–1.92%	1.09%
U.S. Treasury	–0.56%	–1.91%	–0.09%
U.S. Mortgages	–0.59%	–1.75%	0.46%
Municipal Bond	–0.22%	–1.40%	3.01%

Source: Morningstar Direct

What to look forward to
This week’s economic data will cover wide slices of the economy.

On Wednesday, we’ll learn about consumer prices. Headline inflation, which includes food and energy, is expected to increase by 0.4 percent in January, up from a 0.2-percent increase in December, on higher gasoline and natural gas prices. On an annual basis, however, headline inflation is expected to decline—from 2.1 percent to 2 percent—due to base effects from one year ago. Core prices, which exclude food and energy, are expected to show a smaller increase, dropping from 0.3 percent in December to 0.2 percent in January. This would take the annual rate down to 1.7 percent.

We will also see the retail sales report on Wednesday. The headline number, which includes autos, is expected to drop from 0.4-percent growth in December to 0.3-percent growth in January. This would be due to a decline in auto sales, as the post-hurricane replacement sales wind down. Core retail sales, which exclude autos, are expected to increase from a 0.4-percent gain in December to a 0.5-percent gain in January. Much of this increase, though, would come from higher gasoline prices rather than higher spending on other items.

On Thursday, the industrial production report is expected to decline sharply, from a 0.9-percent increase in December to a 0.2-percent increase in January. Much of this decline, however, would be due to more normal weather conditions, just as last month’s increase resulted from higher utilities output caused by unusually cold weather. As such, this indicator would remain at a healthy level. Manufacturing output growth is expected to rise from 0.1 percent in December to 0.3 percent in January, as this sector continues to benefit from a weaker dollar and strong global demand.

Turning to the housing sector, on Thursday, the National Association of Home Builders survey is expected to remain at a strong 72, which is consistent with continued growth. On Friday, housing starts, which declined in December to an annual rate of 1.19 million, are expected to rebound in January to a rate of 1.25 million. Such increase would be due to a rise in building permits, which reached a 10-year high in December.

Finally, on Friday, the University of Michigan consumer confidence survey is expected to drop back marginally, from 95.7 in January to 95.5 in February. Strong job growth is expected to support this index, although the recent stock market pullback might present some downside risk.

Authored by the Investment Research team at Commonwealth Financial Network.

Market Update for the Month Ending January 31, 2018

Posted on February 6, 2018 by Neal Gallagher

Presented by Mark Gallagher

Stock markets have strong start to the year
All three major U.S. indices posted large gains in January, despite a dip at month-end. The Nasdaq Composite climbed 7.40 percent, the Dow Jones Industrial Average popped 5.88 percent, and the S&P 500 Index was up 5.73 percent.

Performance was supported by better-than-expected earnings results for the fourth quarter of 2017. According to FactSet, as of January 25, the blended earnings growth rate for the S&P 500 was 12 percent—up from estimates of 11-percent growth at the end of December.

U.S. markets were supported technically in January, with all three indices remaining above their respective trend lines.

International markets did equally as well. The MSCI EAFE Index increased 5.02 percent, and the MSCI Emerging Markets Index surged 8.34 percent. International stocks benefited from continued global expansion and a weaker dollar. Both indices also stayed above their 200-day moving averages.

Fixed income had a more challenging month, as increasing inflation expectations caused an upswing in rates. The yield on the 10-year U.S. Treasury rose from 2.46 percent to 2.72 percent during the month. This caused the Bloomberg Barclays U.S. Aggregate Bond Index to decline by 1.15 percent.

High-yield bonds had a better start. The Bloomberg Barclays U.S. Corporate High Yield Index managed a gain of 0.60 percent, and valuation levels remained near post-recession highs.

The economy keeps getting better
The first estimate of gross domestic product (GDP) growth for the fourth quarter of 2017 came in slightly below expectations at 2.6 percent. Nevertheless, strong spending and confidence levels indicate that growth could accelerate in 2018.

Corporate confidence continued to hold near multiyear highs. The Institute for Supply Management’s Manufacturing and Nonmanufacturing indices both retreated from December highs but remain in healthy expansionary territory.

Durable goods orders increased by 2.9 percent in December—the highest month-over-month growth level in six months.

Industrial production and manufacturing output also grew. In fact, manufacturing had the strongest fourth quarter in seven years, likely due to the weaker dollar. As Figure 1 shows, the trade-weighted value of the dollar has declined nearly 7 percent year-over-year versus major currencies.

Figure 1. Trade-Weighted Exchange Value of the U.S. Dollar, Year-Over-Year Change

Consumers also confident—and spending
The Conference Board’s measure of consumer confidence increased by more than expected and sits at levels consistent with strong consumption growth.

On the spending side, both headline and core retail sales figures had another strong month. Personal spending data also was stronger than expected—growing 3.8 percent, annualized, in the fourth quarter.

Housing slowed in January, however. Homebuilder confidence pulled back from multidecade highs, while housing starts and permits both decreased due to rising construction costs and lack of labor. Existing and new home sales also declined from previous months. This slowdown may prove to be temporary, but as affordability declines, this remains a sector to watch.

On a more positive note, the U.S. added 200,000 jobs in January. December’s headline figure was also revised upward. Further, annual wage growth increased to 2.9 percent—a positive sign—and the unemployment rate stayed at 4.1 percent.

Political risks persist
Despite the healthy economic picture, political developments could rattle markets. The brief government shutdown in January was proof that politicians are willing to use this issue as leverage for their respective platforms. The next vote in February remains a concern, and there is a real possibility that this situation could get worse.

International risks have pulled back a bit. With the Olympics scheduled to begin in South Korea, and a delegation of North Korean athletes expected to compete, this may be a chance for further diplomatic efforts to resolve tensions in the region. In Europe, there seems to be real progress in the German governmental negotiations, and concerns about the pending Italian elections have lessened. Still, there is the potential for volatility if any negative developments occur.

Foundation in place for a strong year
Markets had a great start to the year, cushioned by a strong economy. The positive economic data and improving earnings situation should provide a strong tailwind to help weather potential short-term turbulence.

Risks exist, but many of the most pressing concerns have moderated. As always, a well-diversified portfolio that aligns with your time horizon can be the best way to achieve financial goals.

All information according to Bloomberg, unless stated otherwise.

Disclosure: 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. 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 Bloomberg Barclays 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 Bloomberg Barclays government and corporate securities, mortgage-backed pass-through securities, and asset-backed securities. The Bloomberg Barclays 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.

Weekly Market Update, February 5, 2018

Posted on February 6, 2018 by Neal Gallagher

Presented by Mark Gallagher

General market news
• Yields rose again last week, as increased inflation expectations created upward pressure on rates. The yield on the 10-year Treasury was 2.85 percent Monday morning, up from 2.70 percent one week ago. The yield on the 30-year increased during the period as well, from 2.94 percent to 3.08 percent.
• All three major U.S. market indices declined more than 3.5 percent last week. In fact, the S&P 500 Index experienced its largest weekly decline since 2016. Among the top-performing sectors were telecom, utilities, and REITs. The largest declines came from energy, materials, and health care.
• Throughout the week, markets digested underwhelming earnings results from oil giants Exxon Mobil (XOM) and Chevron (CVX), as rising oil prices could not offset lower production levels. News out of the technology sector was likewise disappointing. Apple (AAPL) and Microsoft (MSFT) both beat earnings expectations, but lower guidance on iPhone sales drew a sell-off from investors. The health care sector also saw its stocks decline. Performance was affected by news that Amazon was entering into a joint venture with Warren Buffet of Berkshire Hathaway (BRK.B) and Jamie Dimon of J.P. Morgan (JPM) to reduce health care costs for employees. In addition, President Trump’s declaration that he would work to reduce drug prices, mentioned in his State of the Union address, put downward pressure on prices.
• Economic news last week was largely positive, with strong gains in spending and employment. On Monday, personal income and spending data beat expectations; spending growth of 0.3 percent capped off a strong fourth quarter of consumption.
• On Wednesday, the Federal Reserve kept interest rates unchanged, as expected, while the market continues to expect a rate hike in March. This was Janet Yellen’s last meeting as chair, and Jerome Powell is expected to be sworn in this month.
• Finally, on Friday, the January employment report came in much better than anticipated. The economy added 200,000 jobs against expectations for 183,000. December’s headline figure was also revised upward. The underlying data was solid as well: the annual pace of wage growth accelerated to 2.9 percent, and the unemployment rate remained at 4.1 percent.

Equity Index	Week-to-Date	Month-to-Date	Year-to-Date	12-Month
S&P 500	–3.82%	–2.16%	3.44%	23.53%
Nasdaq Composite	–3.51%	–2.29%	4.94%	29.96%
DJIA	–4.11%	–2.39%	3.34%	31.42%
MSCI EAFE	–2.74%	–1.33%	3.63%	26.24%
MSCI Emerging Markets	–3.31%	–1.89%	6.28%	37.82%
Russell 2000	–3.74%	–1.73%	0.84%	15.49%

Source: Bloomberg

Fixed Income Index	Month-to-Date	Year-to-Date	12-Month
U.S. Broad Market	–0.68%	–1.82%	1.63%
U.S. Treasury	–0.69%	–2.04%	0.21%
U.S. Mortgages	–0.61%	–1.77%	0.83%
Municipal Bond	–0.42%	–1.59%	3.05%

Source: Morningstar Direct

What to look forward to
This will be a light week for economic news, with only two major releases.

On Monday morning, the Institute for Supply Management (ISM) released its Nonmanufacturing index, which tracks the service sector. The index handily beat expectations, climbing to 59.9 in January, from 56.0 in December. This is a diffusion index, with values greater than 50 indicating expansion. After two down months, this result is especially welcome. It is also in line with last week’s ISM Manufacturing survey, as well as strong consumer confidence numbers.

On Tuesday, the international trade report is expected to show that the trade deficit widened again—from $50.5 billion in December to $52.1 billion in January. The Bureau of Economic Analysis reported earlier this month that the goods trade deficit widened by $1 billion, and services should account for the remainder. If the numbers come in as expected, this would be a further drag on fourth-quarter economic growth. Signs suggest, however, that export growth should start outpacing import growth in 2018, which would improve matters going forward.

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Authored by the Investment Research team at Commonwealth Financial Network.