Presented by Mark Gallagher

General market news
• The 10-year Treasury yield was back to 3.05 percent late Friday and early Monday; 3.05 percent is a resistance level both on the way up and on the way down. Meanwhile, the 2-year opened at 2.82 percent and the 30-year at 3.23 percent. The 10-year was as high as 3.25 percent two weeks ago when bonds sold off. The volatility in the rates market is a result of global uncertainty and mixed economic numbers.
• U.S. equity markets were largely down last week, as earnings could not dispel investors’ numerous fears, including peak margins, decelerating Chinese growth, and waning benefits from tax reform. Two of the larger companies to report earnings were Amazon (AMZN) and Alphabet (GOOG/GOOGL). Unfortunately, Amazon (the nation’s largest online retailer) did not quell investor fears, as international sales growth and Prime subscribership slowed more than expected. The company also slightly lowered guidance for the holiday quarter. Google cited the strength of the U.S. dollar as a headwind for its miss on revenues. This week will see earnings for Facebook (FB), another large Internet advertiser, and for Apple (AAPL), a large tech retailer. Investors will have a keen eye on their earnings, as these names have been leaders through much of the bull market up until this point.
• There were a number of important data releases last week. On Wednesday, new home sales fell by 5.5 percent in September, as a slowdown in the Northeast affected overall sales.
• On Thursday, September’s durable goods orders came in better than expected, with 0.8-percent growth against expectations for a decline of 1.5 percent.
• On Friday, the first estimate of third-quarter gross domestic product growth was released. Overall economic activity expanded by 3.5 percent on an annualized basis. This result was better than the expected 3.4-percent growth, but it was down from 4.2 percent in the second quarter.

Source: Bloomberg

Source: Morningstar Direct

What to look forward to
This is a very busy week for economic news. We’ll get looks at consumer income, spending, and confidence, as well as manufacturing industry sentiment, the trade balance, and, most important, the job market.

On Monday, the personal income and spending report will be released. Personal income is expected to rise by 0.4 percent in September, up from 0.3 percent in August, on faster wage growth. There may be some downside risk here, as hiring slowed last month. Personal spending is also expected to rise. It should go from 0.3 percent in August to 0.4 percent in September on a spike in auto sales to replace those damaged by Hurricane Florence. Here, there may be some upside risk. This would remain a healthy level of spending growth and would be well supported by income growth.

On Tuesday, the Conference Board Consumer Confidence Index is expected to pull back slightly, going from 138.4 to a still very high 136.2 on rising gas prices. This result would still be close to the highest levels in the past 20 years and would be supportive of continued growth.

On Thursday, the Institute for Supply Management Manufacturing index is expected to drop slightly. It should go from 59.8 to 59.4, in another tick down after an unexpected surge in August. This is a diffusion index, where values above 50 indicate expansion and below 50 indicate contraction. So, even with the small decline, this level remains quite strong. The pullback is expected to come from slowing global growth in general and the recent appreciation in the dollar specifically, which has been increasing the costs of U.S. products to foreign buyers. Uncertainty over trade policy remains a headwind as well. With manufacturing growth slowing, there may be some downside risk to this indicator. Even with a larger pullback, however, this would still remain positive for the economy as a whole.

On Friday, the international trade report is expected to show the trade deficit improved slightly, going from $53.2 billion to $52.8 billion. We already know from the advance report that the trade deficit in goods widened, as export growth has now dropped back even as imports have increased. As such, there may be some additional downside risk to this report. Overall, if the numbers come in as expected, trade will likely be a drag on fourth-quarter growth.

Finally, on Friday, the employment report is expected to show that job growth rebounded to a very healthy 190,000 in October from a weak September report of 134,000. The unemployment rate is expected to stay at a very low 3.7 percent. Wage growth is expected to pull back a bit, from 0.3 percent in September to 0.2 percent for October, on a monthly basis; on an annual basis, however, wage growth is expected to rise from 2.8 percent to 3.1 percent on base effects. There is some downside risk here, depending on the impact from Hurricane Michael. But if the numbers come in as expected, this would be another healthy report and signal continued economic growth. It would also likely support another rate hike from the Federal Reserve in December.

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 opened at 3.19 percent early Monday, while the 30-year opened at 3.37 percent and the 2-year at 2.90 percent. The yield curve flattened last week. It is off its recent lows of late September but lower than the level seen after the Federal Reserve (Fed) raised rates a couple of weeks ago. With the Fed apparently ready to raise rates again in December, rate volatility is likely as the market attempts to balance economic growth and the effect of Fed action.
• U.S. equity markets were mixed last week, as investors favored more defensive investments. Not surprising, then, the more defensive Dow led the way for the three major U.S. markets, while the tech- and growth-oriented Nasdaq Composite Index lagged. Consumer staples, REITs, and utilities were among the top three performers. Consumer discretionary, energy, and materials were among the top laggards.
• After last week’s steep sell-off, earnings still remain strong at approximately 19.5 percent for the third quarter, per FactSet estimates. Although this result is a sign that strength remains for U.S. markets, China saw its gross domestic product (GDP) growth fall to 6.5 percent in the third quarter compared with 6.7 percent in the second quarter. The Chinese economy continues to take actions to promote growth, including lowering its reserve requirement ratio.
• Last week saw the release of only a handful of notable economic updates. On Monday, September’s retail sales data came in lower than expected, with 0.1-percent growth for the month. This follows several months of strong growth, so this is not an immediate concern but should be monitored.
• On Wednesday, both housing starts and building permits declined, as the slowdown in new housing growth continues.
• On Friday, existing home sales disappointed, falling 3.4 percent against expectations for a more modest loss of 0.9 percent.

Source: Bloomberg

Source: Morningstar Direct

What to look forward to
This week is a busy one on the economic front, giving us a final look at housing for the month, as well as whether business investment continues to improve. We’ll also get a preliminary look at how the economy performed in the third quarter.

On Wednesday, the new home sales report is expected to stay steady at 629,000. This result would be indicative of a potential pause in the ongoing housing slowdown. If the number comes in as expected, it will also signal that while housing growth continues to slow, the downtrend remains under control in one of the most economically impactful sectors.

On Thursday, the durable goods orders report will be released. The headline index is expected to pull back after a significant bounce last month. It should go from a 4.4-percent gain in August to a 1-percent decline in September, on a decrease in transportation orders. This headline index is notoriously volatile, as we can see from these numbers. The core index, which excludes transportation and is a much better economic indicator, is expected to improve from flat growth in August to 0.3-percent growth in September, on growing business investment. This would be a healthy level of growth.

Finally, on Friday, the first estimate of third-quarter growth in GDP is expected to show that economic growth slowed from 4.2 percent in the second quarter to a still healthy 3.3 percent in the third quarter. While there was some volatility in trade-related components, that is likely to have largely netted out. As such, the slowdown would be due to slower domestic economic activity. If the number comes in as expected, it would show continued healthy growth but also suggest that growth at the level of last quarter was not sustainable.

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 U.S. Treasury yield reached a current cycle high of 3.25 percent last Tuesday. It then moved lower to 3.15 percent, where it opened on Monday morning. The 30-year opened at 3.32 percent, while the 2-year opened at 2.84 percent. The 2-year was as high as 2.90 percent last week, which is where the 10-year stood about a month ago. As the Federal Reserve (Fed) continues to raise rates, it has added uncertainty and, therefore, volatility in the markets. With more rate increases ahead, the market will have bigger movements as we inevitably approach the next recession.
• Last week, equities across the globe sold off as U.S. markets experienced a pickup in volatility, with bond yields rising and investors rotating away from growth. The 10-year bond yield rose to levels as high as 3.25 percent, leading investors to take a look at growth prospects moving forward. The worst performers on the week were materials, industrials, and financials. The top performers were utilities, consumer staples, and REITs.
• The People’s Bank of China cut its reserve requirement ratio by 1 percent, as China looks to continue to support its domestic economy following U.S.-China trade tensions. There was one bright spot in the U.S.-China trade talks, however, as President Trump and Chinese President Xi will meet at November’s G20 summit.
• Last week was another relatively slow week on the economic update front. On Wednesday, the Producer Price Index slowed to 2.6-percent growth on a year-over-year basis. On Thursday, the Consumer Price Index also showed slower inflation, with year-over-year growth of 2.3 percent. Rising inflation was a minor concern earlier in the year, so these results were welcome.
• On Friday, the University of Michigan consumer sentiment survey showed a slight decline, going from 100.1 for September to 99 in October. This still represents a strong reading that shows consumers are confident in the current economic expansion.

Source: Bloomberg

Source: Morningstar Direct

What to look forward to
This is a busy week for economic news, with a wide range of data from across the economy.

On Monday, the retail sales report is expected to show growth of 0.7 percent for September, on a post-hurricane jump in auto sales. This result would be a rebound from a 0.1-percent gain in August. Core retail sales, which exclude autos, are also expected to do well. Here, we should see growth of 0.4 percent for September, up from 0.3 percent in August. There may be some downside risk to this report, as gasoline prices have moderated. If the numbers come in as expected, they would be at healthy levels and be positive for the economy.

On Tuesday, the industrial production report is expected to tick down a bit, from a gain of 0.4 percent for August to a gain of 0.3 percent for September. There may be some upside risk here, on a weather-related increase in utilities output. Manufacturing is expected to show a similar result, going from a 0.2-percent gain in August to a 0.3-percent gain in September. Here, there may be some downside risk, as manufacturing labor demand declined last month. Again, the expected numbers would indicate continued growth and be positive for the economy.

Also on Tuesday, the National Association of Home Builders survey will be released. It is expected to stay steady at 67 for September, for the fourth month in a row. There may be some downside risk, as the industry continues to suffer from labor shortages, and rising interest rates are expected to affect demand.

The housing starts report, released on Wednesday, is expected to show a decline after a recovery in August. It should drop from 1.28 million in August to 1.22 million (annualized) in September, although better building permit data suggests the final result might be somewhat better than expected.

The minutes from the last Federal Reserve Open Market Committee meeting will also be released on Wednesday. Markets will be looking for guidance on whether the Fed expects to hike rates in December and on what to expect in 2019—that is, whether three hikes are indeed likely and on what factors might change that forecast.

Finally, on Friday, the existing home sales report is expected to show that sales have dropped from 5.34 million in August to 5.31 million in September. Housing, in general, appears to be in a slowing trend, and this data would continue that trend.

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  
•Rates have moved higher recently, and with the bond market closed on Monday, yields are as of October 5. The 10-year Treasury stands at 3.23 percent, and the 30-year and 2-year are at 3.40 percent and 2.88 percent, respectively. The yield curve—which had been flattening, leading to worries about inversion—has steepened over the last week or so. The Federal Reserve’s (Fed’s) optimism about the economy has helped. On top of a September hike in the federal funds rate to 2.25 percent, the Fed has expressed plans to raise rates in December, as well as three times in 2019.
•U.S. equity markets were mostly down last week. Investors appear to be moving out of equities in the face of rising Treasury yields and higher borrowing costs. Comments from Fed Chair Jerome Powell were seen as potentially hawkish; he stated that rates are still accommodative, and while they are moving toward a neutral level, they are still “a long way from neutral at this point.”
•Markets also were likely reacting to the new trade agreement announced by President Trump—the U.S.-Mexico-Canada Agreement (USMCA)—which, if approved, will replace NAFTA. Although this is viewed as a win for the U.S., some language in the agreement could indicate an even greater divergence between North American and Chinese trade deals in the future.
•Last week was a relatively quiet one for economic updates. On Monday, the Institute for Supply Management (ISM) Manufacturing index declined slightly, as expected, going from 61.3 to 59.8. This is a diffusion index, where values greater than 50 indicate expansion, so this is still a strong level. On Wednesday, the ISM Nonmanufacturing index surprised by rising to 61.6 from 58.5.
•On Friday, the September employment report came in with mixed results: 134,000 new jobs were added, short of the expected 185,000. This headline miss is likely not as bad as it seems at first glance. Previous months were revised up by 87,000, which helps offset the shortfall. The unemployment rate fell to 3.7 percent, which is the lowest rate since 1969.

Source: Bloomberg

Source: Morningstar Direct

What to look forward to
This week’s economic data digs into pricing and inflation, as well as gives us another look at consumer confidence.

On Wednesday, the producer prices report is expected to show a 0.2-percent increase in the headline index, which includes energy and food, for September. This would be up from a decline of 0.1 percent in August. There may be some upside risk here from energy prices and tariff-driven increases in other input prices, especially steel and electronics. The annual change, however, is expected to drop—from 2.8 percent to 2.7 percent—indicating that longer-term inflation pressures are moderating but still elevated above the Fed’s target level of 2 percent. The core index, which excludes energy and food, is also expected to increase 0.2 percent for September, up from a 0.1-percent decline in August. Here, though, the annual figure is expected to rise to 2.6 percent from 2.3 percent. Such an increase would be due largely to base effects, but tariffs are reportedly driving faster input inflation, which could worsen next month as tariffs on Chinese goods increase.

On Thursday, the consumer prices report is expected to show continued inflation. The headline index, which, again, includes food and energy, is expected to rise by 0.2 percent for September. This would be on top of a 0.2-percent increase in August. The annual figure is expected to drop from 2.7 percent in August to 2.4 percent in September on base effects. The core index is expected to rise from a 0.1-percent increase in August to a 0.2-percent increase for September. In addition, the annual figure is expected to rise from 2.2 percent to 2.3 percent. As with producer prices, these figures indicate that inflation continues to run above the Fed’s target, which should continue to drive interest rate increases.

Finally, the University of Michigan’s consumer confidence survey, released Friday, is expected to show confidence rising from 100.1 for September to 100.8 for October. This is a high level historically and suggests that consumers are not yet worried about the effects of a trade war. Combined with a strong labor market and the fact that the stock market remains close to its high, this should continue to support consumer spending and economic 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®