Presented by Mark Gallagher

Stormy March drags down markets
March was a rough month for markets, with all three major U.S. indices finishing down. The Dow Jones Industrial Average lost 3.59 percent, the S&P 500 Index fell 2.54 percent, and the Nasdaq Composite was down 2.79 percent. For the quarter, the Dow and S&P were down 1.96 percent and 0.76 percent, respectively. But the Nasdaq gained 2.59 percent.

Even as prices dropped, the fundamentals continued to improve. According to FactSet, as of March 29, the estimated earnings growth rate for the S&P 500 was 17.3 percent—the highest since 2011. But technical factors also weakened during the quarter, with the indices closing close to long-term trend lines.

International equities fared similarly. The MSCI EAFE Index declined 1.97 percent in March and 1.70 percent for the quarter on concerns over Russian aggression and potential protectionist policies. The MSCI Emerging Markets Index declined 1.97 percent in March, but strong performance to start the year helped it hang onto a 1.33-percent quarterly gain. Technical factors weakened toward quarter-end, taking both indices close to their long-term trend lines.

Fixed income rebounded somewhat in March, as yields dropped following a large increase in February. The Bloomberg Barclays U.S. Aggregate Bond Index gained 0.64 percent in March but lost 1.46 percent for the quarter.

High-yield bonds, which are less affected by interest rate movements, were also weak. The Bloomberg Barclays U.S. Corporate High Yield Index lost 0.60 percent for the month and 0.86 percent for the quarter.

Economic growth continues as February concerns abate
March was a solid month for economic news. Gross domestic product (GDP) growth for the fourth quarter of 2017 was revised up to a strong 2.9 percent annualized.

Meanwhile, a staggering 313,000 new jobs were added in February, with another 39,000 added to the already strong January report. The average workweek also increased by more than expected.

The Federal Reserve recognized this economic momentum in March with a 25-basis-point hike in the federal funds rate. Market participants expect two to three more rate hikes in 2018.

Both business and consumer confidence remain strong
This news helped keep confidence near multiyear highs. On the business front, following a slight dip in December, the Institute for Supply Management Composite index rebounded to near highs last seen in the mid-2000s (see Figure 1).

Figure 1. ISM Composite Index, 1998–2018

Consumer confidence improved as well—to levels last seen in the 1990s. Business and consumer spending data improved, too.

Both headline and core durable goods orders, which reflect business investment, bounced back from a weak January. In particular, core business investment grew by 1.2 percent for the month, which was more than enough to offset earlier declines.

The news on the consumer side was mixed. Retail sales disappointed in February, but personal spending data beat expectations, with growth steady at 0.2 percent.

Housing is another area to watch. Homebuilder sentiment declined in March, and housing starts and building permits both declined by more than expected. Supply shortages for new homes could lead to a material slowdown.

Political risks surge to the forefront
Meanwhile, political risks remain a concern. The White House’s announcement of tariffs on steel and aluminum imports and on Chinese goods raised the perception of risk. The tariffs appear to be more negotiating tactic than settled policy. Even so, the potential economic damage that could result from a trade war spooked markets during the month.

The attempted assassination of a former Russian double agent in the U.K. also increased the odds for political disruption. Following the event, many western countries responded by expelling dozens of Russian diplomats, and Russia has promised to retaliate in kind.

More volatility ahead?
The first quarter had its ups and downs, but improving fundamentals and high confidence levels should keep driving the economic expansion. Markets may be more at risk, though. The political risks strike directly at confidence, which could drive more volatility. As always, a well-diversified portfolio that matches your risk tolerance and time horizon remains the best way to pursue your 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.

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, CFA®, CAIA, MAI, managing principal, chief investment officer, and Sam Millette, fixed income analyst, at Commonwealth Financial Network®.

© 2018 Commonwealth Financial Network®

Presented by Mark Gallagher

General market news  
• The yield on the 10-year Treasury broke the 2.80-percent level last Wednesday, though it was back down to 2.75 percent early Monday morning. The 30-year broke 3 percent on Friday and opened at 2.98 percent on Monday. The yield curve is the flattest it has been since October 2007. Though we are likely to see continued volatility, the curve is expected to continue to flatten as the Federal Reserve raises shorter-term rates this year.
• The three major U.S. markets recouped some of their losses from the past two weeks. Fears of a trade war waned as the Wall Street Journal and other media outlets reported that the U.S. and China had been quietly discussing trade issues. The focus of the talks reportedly included ease of Chinese companies accessing U.S. markets, an increase in the number of U.S. semiconductors purchased, and the ability for foreign financial groups to take majority stakes in securities companies. U.S. Trade Representative Robert Lighthizer stated that the tariffs would focus on tech goods, which helped explain the continued lag of the heavily tech-weighted Nasdaq Composite Index. Further affecting the performance of the Nasdaq were comments from President Trump, who stated that Amazon pays little or no state and local taxes and that he’s tired of the USPS operating as the firm’s “delivery boy.”
• Last week saw a number of important economic data releases. On Tuesday, the Conference Board Consumer Confidence Index declined slightly from its 18-year high in February. Confidence remains well above average, however, and is not a current concern.
• On Wednesday, the final estimate of fourth-quarter gross domestic product growth was revised upward to 2.9 percent annualized from 2.7 percent. Much of this was driven by strong consumption growth that, at 4 percent, beat expectations.
• On Thursday, February’s personal income and spending data came in as expected. Both measures grew modestly, with 0.4-percent month-over-month growth in income. Also on Thursday, the University of Michigan consumer sentiment survey declined slightly to 101.4 from 102. As was the case with the Conference Board’s index, this measure of consumer confidence still sits near multiyear highs.

Source: Bloomberg

Source: Morningstar Direct

What to look forward to

This will be a busy week for economic news, and it starts with the major business surveys.

On Monday, the Institute for Supply Management (ISM) Manufacturing survey is expected to drop slightly, from an extremely strong 60.8 in February to 60.0 for March. The February result was the highest in almost 14 years, and a small pullback would still leave the survey at a very high level. This is a diffusion index, where numbers above 50 indicate expansion, so anything close to the expected result would show strong expansion.

On Wednesday, the ISM Nonmanufacturing survey is also expected to pull back slightly. The February result of 59.5 is expected to tick down to 59.0, which is not quite as good as the Manufacturing survey, but still indicative of strong growth. Between the two results, business looks to continue as a positive force for the economy.

On Thursday, the international trade report is expected to show a small worsening of the trade deficit, from $56.6 billion in January to $56.8 billion in February. Exports have rebounded while import growth has moderated, but one-time factors are likely to pull down the final result. Trade is anticipated to be a drag on growth in the first quarter, but the numbers do seem to be improving overall.

Finally, on Friday, we’ll see the employment report. It is expected to show that job growth moderated significantly, down from 313,000 in February to 189,000 in March. The February number was much higher than expected, so even with a pullback, the employment market would be in good shape. There may be some upside potential here, as the flu epidemic may have slowed job growth in February. The unemployment rate is expected to drop from 4.1 percent to 4 percent, while wage growth is expected to rise by 0.2 percent on a monthly basis and 2.8 percent on an annual basis. Overall, if the numbers come in as expected, this would be a healthy report.

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 U.S. 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 U.S. 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 U.S. 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.
© 2018 Commonwealth Financial Network®