Presented by Mark Gallagher                              

General market news
• The long end of the Treasury yield curve rose last week. The 10-year Treasury note opened at 2.89 percent on Monday, while the 30-year Treasury bond started at 3.03 percent. These are the highest yields for the long end of the curve in nearly a month.
• U.S. markets were mostly flat last week, behind mixed sector performance. Financials led the way, up more than 2 percent on the week, and banks saw strong loan pipelines. The news headlines didn’t have much to offer, as both trade talks and Chair Powell’s testimony before Congress didn’t signal any definitive direction for the market.
• On the other side of earnings was Netflix, which was down more than 8 percent after missing second-quarter subscriber growth and guidance. With 17 percent of the companies in the S&P 500 reporting earnings, FactSet’s blended growth rate for second-quarter earnings per share came in just under 21 percent. The week ahead will be a busy one for earnings, with Alphabet (GOOG/GOOGL), Facebook (FB), and Amazon (AMZN) all reporting.
• Last week was a quiet one for economic news. On Monday, June’s retail sales figures came in strong, with 0.5-percent month-over-month growth. The core figure was encouraging as well, showing 0.3-percent growth.
• On Tuesday, the National Association of Home Builders Housing Market Index remained unchanged at 68. While this result did not meet expectations for a modest increase, it still represents a high level of overall confidence.
• On Wednesday, both housing starts and building permits declined. Permits were down 2.2 percent, and starts dropped by 12.3 percent. Given the higher costs of labor and materials, these declines were not unexpected, but the magnitude of the drops is concerning. This will be an important area of the economy to watch going forward.

Source: Bloomberg

Source: Morningstar Direct

What to look forward to
We’ll see a wide range of data released this week, starting with housing. On Monday, the existing home sales report came in weak. Sales dropped from a downwardly revised 5.41 million (annualized) in May to 5.38 million in June, well below the expected 5.48 million. Affordability is declining, which may be starting to affect demand. On Wednesday, the new home sales report is expected to show a decrease from 689,000 in May to 670,000 in June (annualized) on continued shortages of supply. After the sector’s weak report last week, these releases will provide a further look into whether housing is, in fact, rolling over.

On Thursday, the durable goods orders report is expected to show a swing from a decline of 0.4 percent in May to a gain of 2 percent in June. While this result would be positive, it would be primarily due to a surge in aircraft orders, making it less reliable as an economic indicator. The core orders, however, which exclude transportation, should also improve; a gain of 0.4 percent in June is expected, after a flat report in May. Manufacturing and industrial companies continue to benefit from both business investment here in the U.S. and stronger demand abroad.

On Friday, the first official estimate of second-quarter gross domestic product is expected to show rising growth, from 2 percent in the first quarter to 4 percent in the second quarter. This result would be due to increased consumer spending and exports, particularly from a surge in soybean exports to China. There may be some upside here as well, depending on the growth of imports. A strong second quarter has been anticipated for some time. So if the report comes in solid, it will simply meet expectations.

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 Treasury yield curve continues to flatten, with the 10-year, 30-year, and 2-year Treasuries coming in on Monday morning at 2.83 percent, 2.94 percent, and 2.60 percent, respectively. The difference in yield between the 2-year and 30-year Treasuries is at a cycle low of 34 basis points (bps). The difference in yield between the 5-year and 10-year Treasuries is down to 9.7 bps, and the difference between the 2-year and 5-year Treasuries is 14.8 bps.
• In a role reversal from the prior week, small-cap stocks and the Russell 2000 were among the laggards. The Dow Jones Industrial Average and Nasdaq Composite, on the other hand, rose as the market favored a risk-on rally led by technology, industrials, and consumer discretionary. Positive second-quarter earnings sentiment was cited as one of the main reasons for this strong performance, with FactSet showing second-quarter S&P 500 EPS growth of 20 percent. This level of growth would be the second highest since the third quarter of 2010 and would be due in part to the tax overhaul and higher buyback levels throughout the quarter.
• Amazon bolstered consumer discretionary performance with its announcement of a new program that would allow entrepreneurs to start their own delivery business. This program should reinforce Amazon’s last-mile efforts, and many believe it will also serve as a bargaining chip when negotiating delivery costs with other providers (e.g., UPS and FedEx).
• Last week was a quiet one for economic updates. On Wednesday, the Producer Price Index came in higher than expected, with 0.3-percent month-over-month growth dragging the annual figure to 3.1 percent. On Thursday, the Consumer Price Index also showed strong inflation levels, with a 2.9-percent annual gain.
• On Friday, the University of Michigan consumer sentiment survey declined slightly from 98.2 to 97.1. This result still represents a very strong reading.

Source: Bloomberg

Source: Morningstar Direct

What to look forward to
This will be a busy week for economic news, with wide-ranging reports.

On Monday, the retail sales report showed growth of 0.5 percent for June. This number is down from May’s 0.8-percent growth but is still at a very strong level. This result is supported by a recovery in auto sales growth and is in line with expectations. Core retail sales, which exclude autos, also showed slower growth. The core number was down from 0.9 percent in May to 0.4 percent in June, coming in slightly above expectations for 0.3-percent growth. After a strong series of gains, these numbers still represent healthy growth and confident consumers who continue to spend.

On Tuesday, the industrial production report is expected to tick up. After a decline of 0.1 percent in May, this report should show a 0.5-percent gain for June due to an increase in oil drilling as prices rise. Manufacturing is likely to show an even bigger improvement. Coming off of a 0.6-percent decline in May, which was largely the result of a fire that disrupted auto industry supply chains, this report is expected to rebound for a gain of 0.5 percent in June. If the numbers come in as expected, they would signal continued economic growth.

Chair Powell will testify before the Senate on Tuesday and the House on Wednesday in the regular semiannual session. The markets will be looking for the Federal Reserve’s take on the rising trade confrontation and its effects on the economy, as well as what it may mean for interest rates. Currently, no changes are expected.

We’ll also get a look at the housing sector on Tuesday with the release of the National Association of Home Builders (NAHB) Housing Market Index and on Wednesday with the housing starts report. After last month’s pullback due to a drop in lumber prices, the NAHB index is expected to tick up slightly from 68 in June to 69 in July. Housing starts should drop slightly from 1.35 million in May to 1.33 million (annualized) in June. This result would be due to a decline in single-family building permits in prior months. If the housing starts number comes in as expected, it will mean that housing may be experiencing a minor slowdown.

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
• On Monday morning, the 10-year, 30-year, and 2-year Treasuries opened at 2.82 percent, 2.93 percent, and 2.53 percent, respectively. The difference between short rates and long rates is at the narrowest level we’ve seen during the current economic expansion—pushing the yield curve flatter. Historically, the curve has been a good indicator of oncoming recessions, and it’s now beginning to show signs that one may be on the horizon.
• After two consecutive weeks of losses for U.S. markets, performance turned around last week on news of a strong jobs report and generally positive sentiment from the Federal Open Market Committee meeting minutes. The Russell 2000 led the way up, followed by the Nasdaq Composite. Biogen (BIIB) was up more than 23 percent following positive results from its experimental Alzheimer’s drug, BAN2401. This move helped push health care to the top spot for sector performance, with utilities and technology rounding out the top three. Energy, financials, and materials were among the worst-performing sectors.
• The U.S. implemented $34 billion in tariffs on Chinese exports on Friday. China was quick to answer back with $34 billion of its own tariffs on 545 U.S. exports, including soybeans, cotton, and tobacco. Both moves could increase risk and uncertainty in the markets.
• Last week’s major data releases came in better than expected, as business confidence rose and jobs were added to the economy. On Monday, the Institute for Supply Management (ISM) Manufacturing index increased to 60.2 against expectations for a slight decline. This optimism was echoed by the ISM Nonmanufacturing index, which also moved higher despite expectations for a slight pullback.
• On Friday, the June employment report showed that 213,000 new jobs were added, against expectations for 200,000. In addition, wage growth remained steady at 2.7 percent on an annual basis.

Source: Bloomberg

Source: Morningstar Direct

What to look forward to
This week’s releases will focus on prices, as well as provide a look into consumer confidence.

On Wednesday, the Producer Price Index is expected to rise by 0.2 percent in the headline number, which includes energy and food. This result would be down from a 0.5-percent increase in May and would be due largely to flat gasoline prices and tariff-driven increases in other input prices. The annual change for the headline index is expected to remain stable at 3.1 percent, indicating that longer-term pressures are keeping inflation elevated above the Federal Reserve’s (Fed’s) 2-percent target. The core number, which excludes energy and food, is expected to tick up from 0.1 percent in May to 0.2 percent in June. The annual figure should remain solid at 2.6 percent. Overall, these figures are steady in aggregate. Beneath the surface, however, tariffs are driving faster input inflation.

On Thursday, the Consumer Price Index is likely to show steady inflation. The headline number is expected to rise by 0.2 percent in June, just as it did in May. The annual figure should increase from 2.8 percent in May to 2.9 percent in June on base effects. Similarly, the core number is expected to remain steady at 0.2 percent for June and tick up from 2.2 percent to 2.3 percent on an annual basis. As with the Producer Price Index, these figures indicate that inflation continues to run above the Fed’s target, driving interest rate increases.

On Friday, we’ll see the University of Michigan consumer confidence survey. It is expected to remain steady at a high 98.2, the same as in June. A small rise is possible, with the stock market moving back up and gas prices holding steady. But those factors may have been offset by rising concerns around trade. In any event, if confidence stays at the current elevated level, it would be a positive signal for continued 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®