Presented by Mark Gallagher

General market news
• The 10-year Treasury yield opened at 3.07 percent Monday morning, after being as high as 3.12 percent and as low as 2.94 percent last week. Meanwhile, the 30-year opened at 3.21 percent and the 2-year at 2.57 percent. Although the yield curve remains very flat, it has steepened by a few basis points over the past week.
• The three major U.S. markets ticked down slightly, as the continued strength of the dollar and higher rates led to a reversal of the prior week’s risk-on trade. The Russell 2000 Index fared best among the U.S. indices, with the strong dollar supporting small-caps. On the other hand, emerging markets came under pressure as investors dialed back risk in response to the 10-year yield rising back above 3 percent.
• Earnings season began to wind down, with many retailers (Home Depot [HD], Walmart [WMT], Macy’s [M]) reporting. Generally, the earnings were modestly disappointing, with colder-than-usual weather cited as one of the reasons for softer results. But according to FactSet, with 93 percent of the S&P 500 reporting, the blended growth rate for the first quarter is 24.5 percent—the best result since the third quarter of 2011. Some common potential headwinds cited in guidance were higher wages, transport, and commodities costs.
• Economic news last week was relatively quiet. On Tuesday, retail sales remained strong, with 0.3-percent growth in April. Encouragingly, March’s growth was also revised up to 0.8 percent. The strong March and April figures indicate that consumers may be spending some of their new tax savings.
• Also on Tuesday, the National Association of Home Builders Housing Market Index increased to 70, as expected. Given rising construction and land costs, continued home builder confidence will be key to solving the current supply issues in the market. Despite the high confidence level, building permits and housing starts were both down in April.

Source: Bloomberg

Source: Morningstar Direct

What to look forward to
This week will be a slow one for economic news, but the releases we will see are important.

On Wednesday, the Federal Reserve (Fed) will release the minutes of the last meeting of its Open Market Committee, which sets interest rates. The statement issued after that meeting was notable for pronouncing that the inflation target was “symmetric” around 2 percent, which suggests the Fed might be willing to let inflation run above that level for some time. Markets are hoping the minutes provide further context for that statement, as well as some clarity about what that could mean for future rate increases. With inflation heating up, interest rates will become increasingly important. Markets will also be looking for some color on how the Fed views the current trade policy disputes, with respect to future growth and inflation.

On Friday, the durable goods orders report is expected to show that headline orders for business equipment dropped from growth of 2.6 percent to a decline of 1.4 percent, on a substantial decline in aircraft orders. This headline index is notoriously volatile due to the airline component. But the core orders index, which excludes transportation and is a much better economic indicator, is expected to do the reverse. It is expected to improve from a decline of 0.1 percent to a gain of 0.5 percent, which would be a very healthy level. Strong regional surveys and manufacturing activity may even show some upside for this figure. If the core number comes in as anticipated, it would suggest that business investment will continue to support growth.

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.

© 2018 Commonwealth Financial Network®

Presented by Mark Gallagher

General market news
• The 10-year Treasury yield remained range-bound between 2.95 percent and 3 percent last week. Meanwhile, the 30-year opened Monday at 3.11 percent, and the 2-year stood at 2.53 percent. As the yield curve continues to flatten, the risk of an inverted yield curve—where short-term rates are higher than long-term rates—is rising. Historically, an inverted yield curve has been a good indicator of impending recession.
• The U.S. markets experienced a risk-on rally last week, with energy, technology, financials, and industrials all up more than 3 percent. Strength in oil helped bolster the performance of some of the more cyclical sectors. West Texas Intermediate and Brent crude gained 1.5 percent and 3 percent, respectively. With investors more interested in risk assets, bond proxies in the utilities, consumer staples, and REIT sectors struggled.
• Markets also were buoyed by inflation news (more below), as well as by more positive sentiment surrounding U.S.-China trade talks. The White House confirmed last week that China’s top economic official, Vice Premier Liu He, would be traveling to Washington for additional trade discussion.
• Turning to economic updates, last week was relatively quiet outside of inflation data. On Wednesday, the Producer Price Index moderated somewhat, coming in at 2.6-percent growth on an annual basis. This result may help offset some fears about rising prices.
• On Thursday, the Consumer Price Index came in at 2.5-percent year-over-year growth. This result was in line with expectations. Inflation figures will be watched closely for the rest of the year as the Fed continues to hike rates.
• Finally, on Friday, the University of Michigan consumer sentiment survey beat expectations by staying unchanged at 98.8. This high level of consumer confidence is encouraging and should spur spending growth in the second quarter.

Source: Bloomberg

Source: Morningstar Direct

What to look forward to
This week, we’ll be looking at the economic data to see whether earlier signs of a slowdown are passing.

Tuesday’s retail sales report may moderate somewhat at the headline level. Growth is expected to tick down from an extremely strong 0.6 percent in March to a still healthy 0.4 percent in April. There may be some downside risk here, as auto sales declined last month. A rise in gas prices should offset that, however, so any damage is likely to be limited. Core retail sales, which exclude autos, are expected to accelerate from 0.2-percent growth in March to 0.5-percent growth in April. Here, the rise in gas prices could improve this result. If growth remains strong, it will suggest that last month’s positive results are sustainable and that consumption growth is likely to exceed weak first-quarter levels going forward.

Housing is the next area where a rebound is expected. The National Association of Home Builders survey, released on Tuesday, is expected to rebound from 69 in April to 70 in May. Meanwhile, the housing starts report is expected to remain steady at 1.32 million in April, the same as in March. A drop in building permits and elevated lumber prices could weigh on this result.

Finally, on Wednesday, we’ll see the industrial production report. It is expected to show an acceleration in the headline index from 0.5-percent growth in March to 0.6-percent growth in April, driven by gains in manufacturing output. In fact, manufacturing is expected to bounce back, rising from 0.1-percent growth in March to 0.8-percent growth in April, due to strong growth in hours worked. This would also be a rebound from a weak first quarter and suggest faster growth ahead.

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.

© 2018 Commonwealth Financial Network®

Presented by Mark Gallagher

General market news  
• The yield on the 10-year Treasury opened at 2.94 percent Monday morning, in line with where it spent most of last week. Meanwhile, the 30-year stood at 3.10 percent, while the 2-year was at 2.49 percent. The yield curve remains at its flattest level of this current cycle. The Federal Reserve (Fed) decided not to raise rates last week, which would have put more flattening pressure on the curve. It seems likely the Fed will raise rates in June, however.
• U.S. markets were mixed last week, as trade talks and earnings season continued to grab the majority of headlines. The technology-focused Nasdaq Composite was up 1.29 percent as slower smartphone demand weighed less on earnings from Apple (AAPL) than expected. In fact, earnings this quarter have remained strong. According to FactSet, the estimated blended growth rate for first-quarter earnings for the S&P 500 Index is now at 24.2 percent. Despite the high rate, some companies continue to cite rising input and labor prices as reasons for potentially softer guidance moving forward.
• The Chinese-U.S. trade talks concluded in a stalemate, with neither side wanting to make concessions. In other trade-related news, the U.S. did extend temporary exemptions for steel and aluminum tariffs to Canada, Mexico, and the European Union. The exemptions are set to expire in June.
• Last week was a busy one for economic data. On Monday, personal income and personal spending figures for March came in largely in line with expectations, at 0.3-percent growth and 0.4-percent growth, respectively.
• On Tuesday, the Institute for Supply Management (ISM) Manufacturing index declined to 57.3 from 59.3. This was below estimates for a reading of 58.5. On Thursday, the ISM Nonmanufacturing index also declined, dropping from 58.8 to 56.8. Both of these measures of business confidence remain in expansionary territory, so these declines are not alarming; however, further drops should be monitored.
• Finally, on Friday, the April employment report was released. The economy added 164,000 new jobs against expectations for 185,000. The underemployment and unemployment rates both dropped, to 7.8 percent and 3.9 percent, respectively.

Source: Bloomberg

Source: Morningstar Direct

What to look forward to
The main focus of this week’s economic data is prices, though we’ll get a look at consumer confidence at the end of the week as well.

Wednesday’s producer prices report is expected to show that headline price growth moderated from 0.3 percent in March to 0.2 percent in April. There is significant upside risk here, however, as energy prices have increased across the board. On an annual basis, producer price growth is expected to drop from 3 percent in March to 2.8 percent in April, which would still be a high figure. Here as well there is risk that inflation could move higher.

Core producer prices, which exclude energy, are also expected to moderate, from 0.3-percent growth in March to 0.2-percent growth in April. Here, though, there is less upside risk as energy prices are not included. On an annual basis, growth in core producer prices is expected to tighten from 2.7 percent to 2.4 percent. This would still put price growth above the Fed’s 2-percent inflation target, suggesting that more rate hikes are on the way.

Thursday’s consumer prices report is expected to show the opposite, with the headline index rising from a decline of 0.1 percent in March to a gain of 0.3 percent in April. This would take the annual figure from 2.4 percent to 2.5 percent, again primarily on rising energy prices. Core prices, which exclude food and energy, are expected to show constant growth, at 0.2 percent for both March and April. Due to base effects, however, the annual figure is expected to rise from 2.1 percent in March to 2.2 percent in April. Again, this would be above the Fed’s target, suggesting that rates will keep rising.

Finally, on Friday, the University of Michigan consumer confidence survey is expected to pull back slightly, from 98.8 in April to 98.3 in May. The survey would remain at a high level, however, consistent with continued growth, and the pullback would have no material effect. In fact, if confidence remains at the expected level, it would suggest that consumption growth is likely to rebound after a slow first quarter, which would be constructive for the 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.

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.

© 2018 Commonwealth Financial Network®

Presented by Mark Gallagher

General market news

• The 10-year Treasury yield briefly broke above 3 percent late last week, reaching 3.033 percent. The 30-year opened Monday at 3.13 percent, after being as high as 3.21 percent last week and below 3 percent a little over a week ago. The 2-year continued its steady climb, reaching 2.50 percent last week, which is double its yield from September 2017. The yield curve remains at its flattest level since 2007, with the difference in yield between the 2-year and the 30-year at just 63 basis points (0.63 percent).
• U.S. markets were down modestly on the week. Company earnings were the main driver of market action. Stocks sank on Tuesday following guidance from Caterpillar (CAT) that it expects this quarter to be the “high water mark” for earnings this year. The second half of the week was more optimistic, as Chipotle (CMG), Amazon (AMZN), and Facebook (FB) all posted strong earnings numbers.
• FactSet is projecting a quarterly earnings growth rate of 23.2 percent for the S&P 500 Index—the highest level since the third quarter of 2008. This week will include another slew of reports, including Apple (AAPL), Alibaba (BABA), and Pfizer (PFE). It will be interesting to see what these remaining firms will provide in terms of future earnings guidance and expectations.
• Turning to economic news, last week was busy, and the results were largely better than anticipated. On Monday, existing home sales came in higher than expected with 1.1-percent monthly growth. This was followed by the release of new home sales on Tuesday. Here, sales grew 4 percent, against expectations for 1.9-percent growth.
• On Thursday, durable goods orders grew 2.6 percent, beating expectations for 1.6-percent growth. This proxy for business confidence has shown solid growth so far this year.
• On Friday, the first estimate of first-quarter gross domestic product (GDP) growth also beat expectations. GDP grew by 2.3 percent to start the year, beating expectations for 2-percent growth, despite a dramatic decline in consumption growth. Given the strong employment market and high consumer confidence, this slowdown in consumption is unlikely to persist for the rest of the year.

Source: Bloomberg

Source: Morningstar Direct

What to look forward to
This will be a busy week for economic news, giving us a look at all major sectors. Wrapping things up will be the most important report of the month: employment.

Monday’s personal income and spending report remained strong, with income growth coming in at 0.3 percent for March, the same as the downwardly revised number for February. This was below expectations for 0.4-percent growth and is likely due to slower-than-expected job growth last month. Personal spending growth improved as expected, from a downwardly revised flat level in February to 0.4-percent growth in March, on rising auto sales and utility spending. This is helpful after a first-quarter slowdown in consumer spending and reflects continued high confidence.

On Tuesday, the Institute for Supply Management (ISM) Manufacturing survey is expected to weaken from 59.3 in March to 58.5 in April. This would still be a strongly expansionary level, though. (Values above 50 indicate expansion.) The weak U.S. dollar has continued to benefit this survey, although tariff worries may have a negative effect.

On Thursday, the international trade report is expected to show that the trade deficit narrowed, from $57.6 billion to $55.6 billion, as import growth slowed and export growth rose. Growth abroad and the weaker dollar are likely to keep export growth going, which should be constructive for the economy as a whole.

Thursday’s ISM Nonmanufacturing survey is also expected to weaken, from 58.8 in March to 58.0 in April. As with the Manufacturing survey, this is a strongly expansionary level and would indicate that economic momentum continues into the second quarter.

Finally, on Friday, the employment report is expected to show that job growth rebounded strongly, from 103,000 in March to 185,000 in April. This growth should push the unemployment rate down from 4.1 percent in March to 4 percent in April. Wage growth, meanwhile, is expected to tick down from 0.3 percent to 0.2 percent. These numbers would indicate continued job growth, albeit at a slightly slower pace, and would normalize the variance of the past two 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.

© 2018 Commonwealth Financial Network®