Presented by Mark Gallagher

General market news
• Rates were flat or slightly down during the shortened Thanksgiving week. On Monday morning, the 10-year Treasury opened at 3.05 percent, the 2-year opened at 2.84 percent, and the 30-year opened at 3.32 percent. During the previous week, rates dropped by as much as 20 basis points.
• All three major U.S. markets were down last week, as oil and technology stocks continued to decline. West Texas Intermediate crude oil dropped more than 9 percent to $51.28 due to ongoing supply concerns and decreasing demand. Oil also faced pressure on news that Saudi Arabia may not force an oil production cut.
• Apple (AAPL) and Facebook (FB) both faced their own issues last week. Apple shares came under pressure after the Wall Street Journal reported that the company had cut its production of all three versions of its new phones launched in September. Facebook CEO and founder Mark Zuckerberg is reportedly unhappy with the way Sheryl Sandberg, chief operating officer, handled the Cambridge Analytical scandal, leading to concerns over a change of key personnel at the company.
• Last week was relatively busy, even with the Thanksgiving holiday. On Tuesday, October’s housing starts and building permits reports came in. These were a mixed bag, as housing starts rose slightly while permits declined slightly.
• On Wednesday, October’s durable goods orders fell by 4.4 percent, against expectations for a more modest 2.6-percent loss. This miss was largely due to a decline in volatile aircraft purchases. The core figure, which strips out transportation, rose by 0.1 percent.
• Finally, also on Wednesday, the University of Michigan consumer sentiment survey declined slightly from 98.3 to 97.5. This still represents a very healthy level of consumer optimism heading into the important holiday shopping season.

Source: Bloomberg

Source: Morningstar Direct

What to look forward to
This week is a busy one on the economic front, giving us a wide range of information on where the economy is going.

On Tuesday, the Conference Board Consumer Confidence Index is expected to pull back slightly, from an almost two-decade high of 137.9 to a still very high 136.2. This pullback would be due to rising gas prices and recent stock market turbulence. Even with the pullback, confidence would remain close to its highest level in the past 20 years and would be supportive of continued growth.

On Wednesday, the second estimate of third-quarter gross domestic product growth is expected to be slightly better than the previous estimate, coming in at 3.6 percent. This number would indicate continued healthy growth, but it would also suggest that growth at the level of the first quarter may not be sustainable.

Also on Wednesday, the new home sales report is expected to improve, from 553,000 to 583,000, after a disappointing result last month. If the number comes in as expected, it will signal that while housing growth continues to slow, the downtrend may not be quite as bad as last month’s data suggested.

On Thursday, the personal income and spending report will be released. It is likely to show that personal income rose by 0.4 percent in October, up from 0.2 percent in September, due to faster job and wage growth. There may be some upside risk here, as hours worked also likely rose last month. Personal spending is expected to stay steady at 0.4 percent in October, the same as in September, due to a rebound in services spending. This result would indicate that spending growth remains at a healthy level and would be well supported by income growth.

Finally, on Friday, the minutes from the November Federal Reserve (Fed) meeting will be released. Markets are looking for confirmation that a rate hike is on the way in December and for the Fed’s reaction to weaker business investment. They will also be looking, probably in vain, for any hints that the Fed may slow or delay the rate increase process.

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  
• Yields fell across the curve last week, with the largest declines on the short end of the curve. The 10-year Treasury opened the week at 3.08 percent, while the 30-year fell to 3.34 percent.
• All three major U.S. markets were down on the week. The consumer discretionary, technology, and energy sectors were among the worst performers. Despite a solid October retail sales print, the earnings within that sector displayed signs of challenges. Macy’s (M) missed expectations and saw an increase in capital expenditures. Nordstrom (JWN) also missed on comparable sales and inventory levels. Dillard’s (DDS) and JCPenney (JCP) both had to increase promotional activity to drive sales, which hurt margins. Nvidia (NVDA) fell by more than 20 percent, as it lowered guidance following a softer cryptocurrency sales demand. Finally, we saw West Texas Intermediate fall by another 6 percent, moving it into bear market territory.
• On Wednesday, the Consumer Price Index showed year-over-year consumer inflation of 2.5 percent, which was in line with expectations and supports another Federal Reserve rate hike in December.
• On Thursday, October’s retail sales data showed stronger-than-expected growth of 0.8 percent on a month-over-month basis. The core figure that strips out volatile auto sales was also up a strong 0.7 percent.

Source: Bloomberg

Source: Morningstar Direct

What to look forward to
This week is a short but busy one on the economic front, with several reports on housing and a look at durable goods demand.

On Monday, the National Association of Home Builders (NAHB) Housing Market Index was released. This report came in well below expectations, down from 68 for October to 60 for November. This decline came despite reports of strong prospective buyer numbers and low lumber prices, suggesting that the housing slowdown will continue.

This result also calls into question the expectations around other housing reports. For example, on Tuesday, the housing starts report is expected to show a small increase after a decline last month, rising from 1.20 million in September to 1.23 million (annualized) in October. Building permit data suggests, however, that the final number might be even better than expected. On Wednesday, the existing home sales report is expected to show sales increasing slightly, from 5.15 million in September to 5.20 million in October. Housing in general appears to be in a slowing trend, but this data would suggest that the slowdown may be moderating, which would contradict the NAHB survey results.

Also on Wednesday, the headline index of the durable goods orders report is likely to show a substantial pullback. It is expected to fall from a 0.7-percent gain in September to a 2.1-percent decline in October due to a decrease in aircraft orders. The core index, which excludes transportation and is a much better economic indicator, is expected to improve from flat growth in September to 0.4-percent growth in October due to growing business investment. This would be a healthy level of growth. There may be some downside risk here, however, as the Institute for Supply Management Manufacturing index remained weak in October.

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 curve flattened late last week, and the bond market is closed on Monday due to Veterans Day. On Friday, the 2-year closed at 2.92 percent, the 10-year at 3.18 percent, and the 30-year at 3.38 percent. The conclusion of the midterm elections and the Federal Reserve (Fed) pausing on rates until December, at the very least, have answered some lingering questions. But volatility should continue, as will the flattening of the curve, in the weeks and months to come.
• The three major U.S. markets were all up last week, with the Dow Jones Industrial Average and the S&P 500 leading the way. The tech-oriented Nasdaq Composite continues to lag, with Apple Inc. (AAPL), Alphabet Inc. (GOOG/GOOGL), and Netflix (NFLX) continuing to be out of favor following their October sell-offs. The more traditional value and defensive sectors outperformed, with health care, REITs, utilities, consumer staples, and financials leading the gains.
• Last week’s two major events—the midterm elections and the November Federal Open Market Committee (FOMC) meeting—both went as expected. The Democrats regained control of the House, while the Republicans added to their existing control in the Senate. Turning to the FOMC meeting, the committee made only minor changes to its policy statement and continued to describe economic activity as strong; however, it did see some moderation from the “rapid” business investment earlier in the year.
• On Monday, the Institute for Supply Management Nonmanufacturing index was released, declining to 60.3 from 61.6. This result was above expectations for a decline to 59.
• On Friday, the Producer Price Index showed inflation of 2.9 percent, which was above expectations for a 2.5-percent gain. Excluding food and energy, the gain was 2.6 percent, coming in above expectations for a 2.3-percent gain.

Source: Bloomberg

Source: Morningstar Direct

What to look forward to
This week’s data starts with prices and whether inflation is picking up.

On Wednesday, the consumer price reports are expected to show continued inflation at the headline level. The headline index, which includes food and energy, is expected to rise by 0.3 percent in October, up from 0.1 percent in September, on an increase in gasoline costs. The annual figure is expected to rise to 2.5 percent in October from 2.3 percent in September. The core index should rise by less, going from a 0.1-percent increase in September to a 0.2-percent increase for October. Here, the annual figure should remain steady at 2.2 percent. These figures would indicate inflation continues to run somewhat above the Fed’s target levels, which should continue to support interest rate increases.

On Thursday, the retail sales report is expected to show faster growth after two weak months. It is anticipated to go from a 0.1-percent gain in September to a 0.5-percent gain for October, on a price-driven increase in gas sales and replacement auto sales for those damaged by Hurricane Florence. Core retail sales, which exclude autos, are also expected to do well. We should see October growth of 0.5 percent, up from a decline of 0.1 percent in September. There may be some upside risk here, as gasoline prices have risen. If the numbers come in as expected, they would be at healthy levels and positive for the economy.

Finally, on Friday, the industrial production report is expected to tick down a bit. It should go from a gain of 0.3 percent for September to a gain of 0.2 percent for October. There may be some downside risk here, on a weather-related decrease in oil production. Manufacturing is expected to do better, with growth rising from a 0.2-percent gain in September to a 0.3-percent gain in October. Again, there may be some downside risk, as the dollar continues to rise. The expected numbers would indicate continued growth and be positive 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

More tricks than treats for markets in October
Unfortunately, October lived up to its scary reputation for the markets. Here in the U.S., all three major indices were down for the month. The Nasdaq Composite fared worst with a 9.16-percent loss. Meanwhile, the S&P 500 and Dow Jones Industrial Average lost 6.84 percent and 4.98 percent, respectively.

Slowing growth and a change in sentiment with regard to large technology companies drove the stock sell-off. The big tech names have been a major driver of returns throughout the year. As such, a pullback here had a disproportionate impact on the broader markets. From a technical perspective, all three indices finished the month below their 200-day moving averages. But a rally at month-end cut losses and moved them back toward the trend line.

Given this partial recovery, there is reason to believe that the sell-off may have been a bit overdone. For example, fundamentals for U.S. companies remain strong. According to FactSet (as of October 26, 2018), with 48 percent of S&P 500 companies reporting, the blended average earnings growth rate was 22.5 percent. This result is an improvement from the beginning of the month, when analysts projected earnings growth of 19.3 percent. In the long run, fundamentals drive performance, so these better-than-expected results are encouraging.

International markets also experienced volatility. The MCSI EAFE Index fell 7.96 percent, and the MSCI Emerging Markets Index declined by 8.70 percent. From a technical perspective, both indices remained well below their 200-day moving averages, as they have for the past few months. Political concerns in Europe and a strengthening dollar contributed to the losses seen in foreign markets.

Even fixed income markets fell in October, albeit for different reasons. The Bloomberg Barclays U.S. Aggregate Bond Index dropped by 0.79 percent, driven by rising interest rates. The 10-year Treasury yield ended September at 3.05 percent. It reached a high of 3.23 percent midmonth, before finishing October at 3.15 percent. This increase was caused in large part by rising inflation concerns.

High-yield fixed income also had a rough start to the quarter. The Bloomberg Barclays U.S. Corporate High Yield Index fell 1.60 percent in October. The high cost of capital and a risk-off stance by investors caused turbulence in this historically volatile asset class.

Slowing economic growth
October’s data painted a picture of slower growth throughout the economy. Third-quarter gross domestic product growth came in at 3.5 percent (annualized). This result was down from 4.2 percent in the second quarter. The pullback from the torrid pace of the second quarter is a bit disappointing. But it was also expected and still represents a healthy level of growth.

One of the major drivers of slower economic growth was a decrease in consumer spending. Retail sales disappointed for the second straight month in September, with a modest gain of 0.1 percent. This might indicate that the high levels of spending we saw in the second quarter were unsustainable. Despite the slowdown, spending growth remains at levels that will support continued economic growth for the time being.

Slowing wage income growth likely drove this slower spending growth. In September, only 134,000 new jobs were added, the worst monthly result since September 2017. Wage growth also declined to 2.8 percent on an annualized basis. The news turned around for October, however, as employers added 250,000 jobs, and annual wage income growth rebounded to 3.1 percent. The hurricanes in September and October may have distorted the results for both months, but there is a real prospect for job growth to continue at a strong pace through the rest of the year. Still, there may be constraints given the record number of job openings in the country and an unemployment rate of 3.7 percent.

Housing sales disappoint
With the economy growing but slowing, the housing market also extended its slowdown. Both new and existing home sales fell in September, as higher mortgage rates discouraged would-be buyers. Slower demand growth also resulted in relatively large growth in available housing supply in the third quarter. As you can see in Figure 1, supply grew at a modest rate in the first half of the year. But in the third quarter, housing supply grew more than 15 percent, the second-fastest rate since the last recession.

Figure 1. Monthly Supply of Housing in the U.S. (Quarterly Change), 2008–2018

Economists have cited a lack of supply as one of the reasons for the slowdown in housing this year. This time, however, lack of supply was not the cause. The decline in housing sales in September was disappointing, but there may be a lag between increased supply and sales growth. The recent hurricanes have also likely had an effect, as they did on jobs. So, October’s data will be worth watching. Home builders remain confident in the market, so things may pick up again.

Political risks take center stage
Once again, we’ve seen the major effect that politics can have on the markets. Here in the U.S., the upcoming midterm elections have generated a lot of media coverage and increased public uncertainty. But from an investment perspective, it does not matter who ends up controlling the House and the Senate. Any result is likely to be positive for the markets as the uncertainty subsides and the policy path forward becomes clearer. Historically, markets have performed well following midterms. As such, and given the usual positive year-end trends, tailwinds may resume after the midterms are over.

From an international perspective, concerns surrounding a global slowdown spooked the markets. Brexit, as well as the struggle between the Italian government and the European Union, has increased political uncertainty and economic fears in Europe. Further, German Chancellor Angela Merkel announced she will be stepping down as head of her party at the end of 2018. This move leaves the door open for new leadership in Germany for the first time in almost two decades. German leadership has been a major source of stability during Merkel’s time in office, so this will be a closely followed transition.

Last but not least, the ongoing trade disputes between the U.S. and China continue to rattle markets. With a new round of tariffs pending, and companies trying to deal with the effect, this remains a source of risk.

Short-term risks remain, but fundamentals are strong
Concerns over a slowing global economy, elections, trade, and rising interest rates could affect the markets. As such, the volatility seen in October could continue. That said, we have also seen strong corporate earnings growth and solid economic data. Plus, economic growth has remained steady, even through the slowdown. Given these healthy fundamentals, we are well positioned to weather any further volatility.

It’s also important to keep in mind that the uncertainty will subside. The midterms will pass, and Europe will likely find a deal again. Even a trade agreement remains possible, which would substantially calm markets.

Of course, short-term volatility is concerning and the risks are real. But when you look at the big picture, things look good right now. Given the otherwise healthy state of the economy, prospects remain positive. Even if there is more volatility ahead, over the long term, a well-diversified portfolio matched with an investor’s time horizon offers the best path to reaching 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®