Presented by Mark Gallagher

General market news
• On Monday morning, the yield for the 10-year Treasury opened at 2.85 percent, closer to the bottom of the range in which it had been trading in recent days. The yields for the 30- and 2-year Treasuries were 3.01 percent and 2.6 percent, respectively. Most parts of the curve opened at or close to the flattest they’ve been in this cycle, with the spread between the 2- and 10-year notes at less than 24 basis points (bps). The difference between yields on the 2- and 30-year Treasuries was down to only 39 bps—just above its most recent low.
• The markets were mixed last week. In the U.S., the Dow Jones Industrial Average led the way with a 1.49-percent gain, backed by earnings strength from retailers Walmart (WMT) and Nordstrom (JWN). The Nasdaq lagged, as we saw a rotation toward value. Telecommunications, consumer staples, and REITs were among last week’s top performers. Energy, materials, and consumer discretionary were among the top laggards. Meanwhile, in international markets, the MSCI Emerging Markets Index continued to be hurt by contagion fears surrounding Turkey’s currency weakness.
• Several news items out of China affected last week’s market performance. The first story announced that the U.S. and China had agreed to resume trade talks this week. The second story speculated that softer July activity was leading to some concerns about a slowdown in global growth momentum. The third story reported that China had frozen its approvals of game licenses. China’s government continues to reorganize various departments, and its regulators have become more concerned about the content in some games.
• Last week was busy on the economic update front. On Wednesday, July’s retail sales data came in better than expected, as consumers are still spending. On a month-over-month basis, sales grew 0.5 percent against expectations for 0.1-percent growth.
• On Thursday, building permits and housing starts were a mixed bag; starts declined while permits rose slightly. Given the current low level of new home supply, these measures will be an important barometer of the overall health of the housing market.
• Finally, on Friday, the University of Michigan consumer sentiment survey dropped to 95.3, against expectations that it would remain steady at 97.9. The result still represents a strong level of confidence. Consumers are continuing to spend, as reflected in the strong retail sales figure.

Source: Bloomberg

Source: Morningstar Direct

What to look forward to 
This week will be relatively quiet on the economic news front, with only two major data releases.

On Wednesday, the minutes from the August 1 meeting of the Federal Open Market Committee will be released. At that meeting, the committee kept rates flat. The major section of the minutes to watch for will be the commentary surrounding inflation, as most inflation figures are now above the Federal Reserve’s stated 2-percent target.

On Friday, July’s durable goods orders are expected to show a slight decline due to transportation orders. The core figure, which excludes volatile transportation orders, is expected to show steady 0.5-percent growth. This proxy for business confidence has been growing steadily throughout the year, so a decline in the headline number would be nothing to worry about.

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 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 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.

Authored by the Investment Research team at Commonwealth Financial Network.

© 2018 Commonwealth Financial Network®

Presented by Mark Gallagher

General market news  
• After jumping as high as 3.01 percent last Wednesday—the same day that the Federal Reserve (Fed) decided not to raise rates—the yield for the 10-year Treasury opened at 2.95 percent this morning. The yield for the 30- and 2-year Treasuries opened at 3.09 percent and 2.64 percent, respectively.
• The yield curve remains very flat, and the spread between short and long rates remains slightly off its lows. It looks as if the Fed will hike rates in September—or at least once more this year—possibly pushing the curve to new cycle lows in terms of spreads.
• As noted above, surprising few observers, the Federal Open Market Committee did not raise interest rates at last Wednesday’s meeting. It did, however, provide “strong” hints of a September hike by repeatedly noting the strength of the U.S. economy.
• The three major U.S. indices were all up last week. They were led by the Nasdaq, which posted a 0.98-percent gain. Despite continued volatility surrounding U.S.-China trade policy, stocks seemed to brush off the continued noise, as strong earnings helped support markets.
• On Tuesday, Bloomberg reported that the U.S. and China were trying to restart their trade talks to avoid a trade war, but the Wall Street Journal later suggested that these talks were in the preliminary stages. As the week went on, volatility ramped up further, as the Trump administration confirmed that it was considering raising the $200 billion tariff on Chinese goods to 25 percent from the previously planned 10 percent.
• In the earnings picture, Apple calmed technology and FAANG stock (i.e., Facebook, Amazon, Netflix, and Google) fears, as strong service revenue growth and pricing helped it beat earnings. On Thursday, the tech giant’s stock passed $1 trillion in market cap—the first company’s valuation ever to do so.
• Last week was a busy one for economic updates. On Tuesday, personal income and personal spending both showed growth of 0.4 percent in June, matching expectations.
• On Wednesday, the Institute for Supply Management Manufacturing index declined slightly. Even so, manufacturers’ confidence is still at an expansionary level.
• Finally, Friday saw the release of July’s employment report. Last month, 157,000 new jobs were added, against expectations for 193,000. Although the headline figure disappointed, June’s report was revised up by 35,000, nearly enough to offset the shortfall.

Source: Bloomberg

Source: Morningstar Direct

What to look forward to
This week’s data is all about prices—and whether inflation is picking up.

On Thursday, the producer price reports are expected to show that the headline index, which includes energy and food, rose 0.3 percent for July, the same as the 0.3-percent increase in June. There may be some downside here, on declining energy prices. The question will be how much that factor is offset by tariff-driven increases in other input prices, especially steel and electronics. The annual change is expected to stay stable at 3.4 percent, indicating that longer-term inflation pressures remain above the Fed’s target range. The core index, which excludes energy and food, is also expected to remain steady at 0.3 percent for July, the same as for June. The annual number should remain solid at 2.8 percent. Although these figures are stable in the aggregate, under the surface, tariffs are reportedly driving a faster rise in inflation. The effect of tariffs, however, is not expected to show up in the aggregate numbers yet.

Also on Thursday, the consumer price reports are expected to show rising inflation at the headline level. The headline index, which includes food and energy, is expected to have risen 0.2 percent in July, up from 0.1 percent in June. The annual figure is also expected to have risen from 2.9 percent in June to 3 percent in July. The core price index, on the other hand, is expected to remain steady, with the monthly figure at 0.2 percent and the annual figure staying put at 2.3 percent. As with the producer price numbers, these figures would indicate that inflation continues to run above the Fed’s target levels, which should continue to drive interest rates up.

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.

© 2018 Commonwealth Financial Network®

Presented by Mark Gallagher

Strong July for global markets
Global markets had a strong July, rebounding from a volatile June. Here in the U.S., the S&P 500 Index gained 3.72 percent while the Dow Jones Industrial Average grew 4.83 percent. The Nasdaq lagged its counterparts with a gain of 2.19 percent, after a technology sell-off pulled down performance at month-end.

Better-than-expected fundamentals supported the positive returns. Spurred by the strong economy, corporate sales have taken off. Almost three-quarters of S&P 500 companies have reported sales increases above expectations, which is significantly above the five-year average. The size of the beats has also been above average. Not only is sales growth doing well in absolute terms, but it is surpassing expectations, which is positive for market performance.

Sales matter, but it is the money a company keeps—its earnings—that matter more. The news here was also very good, with five out of six companies beating estimates thus far. Earnings growth for the third quarter is also better than expected; it was 21.3 percent as of July’s end, up from an estimated 20 percent on June 30.

Fundamentals drive long-term performance, so the second quarter was very positive. Moreover, analysts project double-digit earnings growth for the rest of the year.

Technicals were also supportive for U.S. markets. Although it began the month below its 200-day moving average, the Dow finished July above this trend line. The other two major indices remained well above their respective averages throughout the month.

International markets bounced back in July after a weak June. The MSCI EAFE Index finished the period up 2.46 percent. Emerging markets posted similar returns, with the MSCI Emerging Markets Index rising 2.28 percent.

Technicals for developed and emerging markets were challenging in July, as the June pullback proved too deep to recover from in just one month. Both indices stayed below their long-term trend lines.

Finally, fixed income had a difficult July, as a rise in rates on the long end of the curve at month-end upset markets. The yield for the 10-year U.S. Treasury rose from 2.87 percent to 2.96 percent during the month. Typically, rising rates are bad for bond returns, and the Bloomberg Barclays Aggregate Bond Index rose just 0.02 percent in July.

High-yield corporate bonds, usually less tied to interest-rate moves, had a better month. Interest rate spreads compressed slightly in July. The Bloomberg Barclays U.S. Corporate High Yield Index rose 1.09 percent, showing that investors are still comfortable paying up for higher yields.

Economic reports point to faster growth
The global economy continued to grow, and the U.S. in particular grew faster in the second quarter. Second-quarter U.S. gross domestic product (GDP) growth came in at 4.1 percent, the highest level since 2014, as illustrated in the chart below. Meanwhile, first-quarter growth was revised up from 2 percent to 2.2 percent.

The growth was broad based, engendered by higher consumer spending, solid business investment, and faster government spending growth, along with a notable bump from a surge in exports.

Job growth remains healthy as well, despite a lackluster report in July, which came in at 157,000 new jobs versus expectations for 193,000. What this headline figure doesn’t show is that June’s strong employment report was revised up from 213,000 jobs to 248,000, accounting for most of July’s shortfall. The unemployment rate also improved from 4 percent to 3.9 percent, and average weekly hours worked stayed steady at 34.5.

The strong jobs market has helped support consumer confidence. The most recent Conference Board confidence survey rose to its third-highest level since 2000.

With consumers able and willing to spend, consumer spending growth also accelerated. It rose 4 percent against expectations for a more modest 3-percent gain. Retail sales data was also solid, with a 0.5-percent uptick and an upward revision to the prior month’s number. If consumers can continue to spend as they did in the second quarter, we may see GDP growth of more than 3 percent for the rest of 2018.

Although consumers were a bright spot in the second quarter, they weren’t alone in driving growth. Businesses were also confident and willing to spend. The Institute for Supply Management’s Manufacturing and Nonmanufacturing indices continued to post high expansionary numbers, as faster growth and lower corporate taxes led to healthy levels of investment. Business investment for the second quarter grew 7.3 percent, and durable goods orders for June rose a respectable 1 percent. Export growth of 9.3 percent was another bright spot, although here the details suggest that such a large increase isn’t likely to be repeated.

The Federal Reserve (Fed) also seems to be on board with the continuing recovery. Fed Chair Jerome Powell declared victory in congressional testimony in July, with both unemployment and inflation at Fed targets. This is a more positive take on the economy than we have had from the Fed in years, and it ratified the positive data we saw last month.

But housing disappoints
Not all the news was good. Housing, a key economic sector, appears to have slowed. Both existing and new home sales declined in June, with new home sales falling 5.3 percent. Homebuilder confidence, though still high, appears to be rolling over. Rising construction costs have lowered the profitability of new housing and led to a declining trend in housing starts and permits. During the past few years, builders have been able to pass along cost increases to homebuyers. Given today’s higher prices and rising mortgage rates, however, this trend may be nearing its end.

Some of the slowdown in housing can be attributed to low levels of supply, but another key factor is slumping affordability. Housing prices are climbing faster than incomes, and, as mentioned already, mortgage rates are ticking up.

Housing is among the key drivers of the U.S. economy and a proxy for overall consumer confidence. Even though the financial markets remain strong, and the economy continues to grow, any slowdown in housing growth must be taken seriously.

Political concerns muted but still there
In July, political stories grabbed the headlines, but domestic markets took the events in stride. Overall, the market’s perception of policy risks seemed to recede, as North Korea moved out of the headlines, and the trade war between Europe and the U.S. was put on hold. China, however, remains a major area of trade concern, with renewed U.S. tariff threats rattling markets at month-end.

In the months ahead, the midterm elections could lead to increased volatility. With a potential government shutdown in play, as well as the disruption brought about by the campaigns, political risks are more likely to rise than to fall. This will be something to keep an eye on as we move toward November.

Prospects remain positive
Despite very real risks, the positive economic news from July points to continued healthy growth for the rest of 2018. And politics notwithstanding, a healthy economy and rising profits should support the markets. That’s good news, but it doesn’t mean we won’t see volatility.

We should expect that, at some point, the news won’t be as good. But we should take it in stride. Whatever happens, a well-diversified portfolio that matches risk-and-return guidelines is the best path to follow for achieving long-term 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®