Presented by Mark Gallagher

General market news  
• The 10-year Treasury was as low as 2.41 percent late last week before opening at 2.45 percent on Monday. Yields across the curve were lower, with the 2-year Treasury opening at 2.31 percent and the 30-year Treasury opening at 2.89 percent. As a result of slowing global growth, the dovish stance from the Federal Reserve (Fed), and tariff and debt concerns, investors have piled into more safety assets over the last couple of weeks. For the first time in this cycle, the 3-month yield was higher than the 10-year yield. That yield differential was small (–2.974 basis points) and reversed on Monday morning; however, it has become increasingly likely that we will see a full curve inversion at some point.
• The three major U.S. markets were down last week, as global growth fears led to a strong Friday sell-off. This result can be attributed to both the yield curve inversion and a weak Purchasing Managers’ Index (PMI) report out of Germany. The German PMI report, which has dropped significantly since its peak in 2017, marked the lowest level since 2012 for German manufacturers. The report stokes fears that China is not the only global marketplace that is seeing a slowdown in growth.
• The top-performing sectors on the week were consumer discretionary, REITs, and consumer staples. The worst-performing sectors were materials, industrials, and financials, which struggled in light of the yield curve inversion.
• There was no change in the National Association of Home Builders Housing Market Index during the month. It remained at 62.
• The Federal Open Market Committee (FOMC) rate decision came on Wednesday, with the Fed deciding not to change rates. The Fed dot plot indicated no rate hikes for the remainder of 2019. In addition, the Fed released a plan to begin to slow the pace of the balance sheet wind down in May and to finish winding down by the end of September. All of these moves were interpreted as more dovish than the market expected.
• On Friday, existing home sales showed strong gains of 11.8 percent. This result was well above the expectation for a 3.8-percent gain and reversed the previous month’s decline of 1.4 percent.

Source: Bloomberg

Source: Morningstar Direct

What to look forward to
This week will be a busy one for economic news, including looks at housing, trade, confidence, and consumer income and spending.

The data flow starts on Tuesday, with the release of the housing starts report. Starts are expected to drop back slightly, from 1.23 million annualized in January to 1.21 million in February. This would still be a very good result, as the January number was a nine-month high. There is likely to be some downside risk, however, as single-family building permits dropped back last month, and multifamily starts are likely to remain steady. If the numbers come in even close to expectations, it would be a positive signal for the industry and economy.

Also on Tuesday, the Conference Board will release its consumer confidence survey. It is expected to tick up a bit, from 131.4 in February to 132 in March. This result would continue the index’s rebound after a recent decline, leaving it at a relatively high level historically. With gas prices and the stock market rising during the month, there may be some upside risk here.

On Wednesday, the international trade report will be released. It is expected to show an easing in the trade deficit, from $59.8 billion in December—which was a 10-year high—to $57.3 billion in January. The improvement should come from a rise in Chinese soybean purchases and a drop in imports, rather than a rise in exports. Overall, trade is likely to be a drag on growth in the first quarter if the numbers come in close to expectations.

Finally, on Friday, the personal income and spending report is expected to show renewed growth in income, up from a drop of 0.1 percent in January to a gain of 0.3 percent for February. Last month’s drop was technical rather than fundamental—a timing issue related to dividend payments—so continued growth would be a positive sign. Personal spending is expected to rebound even more, from a 0.5-percent drop in December to a 0.3-percent gain in January. The difference in timing between the reports here is due to the ongoing catchup from the government shutdown. Again, the rebound would be consistent with renewed confidence and would be a positive sign.

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.

© 2019 Commonwealth Financial Network ®

Presented by Mark Gallagher

General market news  
• The 10-year Treasury was down on Monday morning, opening at 2.58 percent. This is its lowest level since January 3, when it hit 2.55 percent. The 2-year, 5-year, and 30-year Treasuries opened at 2.43 percent, 2.40 percent, and 3.02 percent, respectively. The short end of the curve remains inverted, with the 2-year Treasury yielding more than the 5-year. The long end of the curve remains about 60 basis points over the short end of the curve.
• The markets were up across the board last week. The Dow Jones Industrial Average lagged, as Boeing fell by more than 10 percent following the second crash of its new 737 MAX 8 aircraft.
• The news surrounding the U.S.-China trade talks was relatively quiet, with expectations for a deal to be pushed out to at least April. Chinese Premier Li Keqiang suggested that additional monetary, regulatory, and stimulus measures would be taken to counter recent pressures on the country’s economic growth. This follows a dovish trend from central banks worldwide.
• Last week was packed with economic data releases. On Monday, January’s retail sales data came in better than expected, with 0.2-percent growth. This was a strong result following a decline in December.
• On Tuesday, February’s Consumer Price Index was released. Consumer inflation grew by 0.2 percent during the month, leading to an annual increase of 1.5 percent. On Wednesday, the Producer Price Index had similar results, with a 0.1-percent monthly growth rate leading to an annual increase of 1.9 percent.
• On Thursday, new home sales in January disappointed, falling by 6.9 percent. Economists expected modest growth, so this large decline is concerning.

Source: Bloomberg

Source: Morningstar Direct

What to look forward to
Next week will be a slow one for economic news, consisting of housing reports and the regular meeting of the Federal Reserve (Fed).

On Monday, the National Association of Home Builders will release its industry survey. It is expected to rise from 62 to 63, reflecting continued moderate confidence in the homebuilding market. With interest rates declining, affordability is showing improvement, making such an increase seem pretty reasonable.

On Wednesday, the regular meeting of the Federal Open Market Committee will conclude with the release of the policy announcement and a press conference with Fed Chair Jerome Powell. Expectations are for the Fed to hold steady on interest rates, but the focus will be on whether and how the future projections for economic growth and rate changes have shifted. Weak inflation data from last week, as well as slowing economic growth in the first quarter, support expectations that the Fed will dial back its projects and that rate increases will remain on hold.

On Friday, the existing home sales report is expected to increase from $4.9 million to $5.1 million in sales on an annualized basis. Such an improvement would indicate that the housing market is stabilizing after a slowdown. This result would be consistent with the rise in affordability and would be a positive economic indicator.

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.

© 2019 Commonwealth Financial Network®

Presented by Mark Gallagher

General market news  
• Rates rose higher late last week, as the 10-year Treasury moved from 2.65 percent to 2.76 percent and opened at those levels on Monday. The 30-year Treasury came in at 3.11 percent, while parts of the short end of the curve remained inverted. The 2-year Treasury opened at 2.55 percent Monday, after being as low as 2.47 percent late last week.
• The three major U.S. indices were all up once again last week. The Nasdaq led the way, with technology among the three top-performing sectors, alongside energy and financials. Amazon, Microsoft, Alphabet, and Apple were among the top contributors for the S&P 500. These results reflected the return of flows into equities.
• The two major news stories last week were the U.S.’s agreement to delay its $200 billion March 1 tariff deadline with China and the testimony of Fed Chair Jerome Powell in front of the House and Senate. The market did not have a strong reaction, as the tariff deadline concession was widely expected. In addition, Chair Powell continued to preach patience to both sets of representatives. One takeaway from his testimony was that, as it now stands, he expects the central bank to end its balance sheet runoff in the later part of the year.
• Last week saw the release of a large number of economic data points. On Tuesday, December’s housing starts and building permits were mixed, with starts declining by more than expected but permits increasing slightly. Also on Tuesday, the Conference Board consumer confidence survey came in much better than expected, with a reading of 131.4 against expectations for 124.9.
• On Wednesday, January’s pending home sales rose by 4.6 percent, which was more than expected following a decline in December. On Thursday, the first estimate of fourth-quarter gross domestic product growth came in at 2.6 percent, which was above expectations but lower than the growth rate seen in the third quarter.
• Finally, on Friday, January’s personal income report showed a decline of 0.1 percent against expectations for a slight increase. December’s personal spending report also disappointed, with a decline of 0.5 percent to end the year.

Source: Bloomberg

Source: Morningstar Direct

What to look forward to
This will be a busy week of economic data that should provide further insight on whether the recent spate of weak reports is likely to continue.

On Tuesday, the Institute for Supply Management’s Nonmanufacturing index is expected to rise slightly, from 56.7 to 57.2, after a significant drop in recent months. This is a diffusion index, where values greater than 50 indicate expansion and less than 50 indicate contraction. So, this would be a very healthy figure.

On Wednesday, the international trade report is expected to show the trade deficit has worsened, going from $49.3 billion to $54.2 billion, after an improvement last month. Advance reports show that the goods deficit rebounded in December, as exports have continued to decline. If the data comes in as expected, this will be a headwind to fourth-quarter growth.

On Friday, the employment report is expected to decline from 304,000 in January to 185,000 in February. The unemployment rate likely will tick back down to 3.9 percent from 4 percent, while wage growth is expected to rebound from 0.1 percent to 0.3 percent. These results would provide more assurance that economic fundamentals are sound, despite recent weakness.

This week’s data will also shed some light on the housing market. On Friday, the housing starts report is expected to show a rebound from 1.08 million to 1.18 million, annualized. While this recovery would be helpful, recent weakness has been widespread enough that it would suggest only stabilization.

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.

© 2019 Commonwealth Financial Network®

Presented by Mark Gallagher

Another strong month for markets
February was a short but sweet month for investors. U.S. equity markets followed up their strong performance in January with another solid month of positive returns. The Dow Jones Industrial Average led the way with a monthly return of 4.03 percent. The S&P 500 and Nasdaq Composite were close behind with returns of 3.21 percent and 3.60 percent, respectively. All three indices have already returned double digits to start the year.

Improving fundamentals supported this positive performance. According to FactSet, the blended earnings growth rate for the S&P 500 stands at 13.1 percent (as of February 22, 2019). This result is up from estimates of 12.1 percent at the end of December. Further, this improvement was widespread, with 7 of 11 sectors reporting better earnings than at year-end. Technicals were also supportive, with all three indices ending the month above their 200-day moving averages.

The international story was much the same. The MSCI EAFE Index gained 2.55 percent in February. The MSCI Emerging Markets Index came in a bit lower, with a return of 0.23 percent. Developed markets were supported by news of a potential Brexit delay, but a global slowdown in trade continued to weigh on emerging markets.

Technicals continued to be a challenge for developed international markets. The MSCI EAFE Index remained below its 200-day moving average for the ninth month in a row, although it came close to hitting its trend line by month-end. Technically speaking, emerging markets had a better month. They broke above their trend line at the beginning of the month and ended February in positive territory.

Fixed income had a slightly more difficult month. The Bloomberg Barclays U.S. Aggregate Bond Index fell by 0.06 percent. This decline was due to a slight increase in rates in February. The 10-year U.S. Treasury opened the month at 2.70 percent and ended it at 2.73 percent. High-yield fared better, with a solid return of 1.66 percent in February. High-yield spreads have come down steadily to start the year following a spike in December.

Risks diminished as economic news trickled in
Another driver of the strong market performance was the widespread reduction in major risks to markets. Here in the U.S., we avoided a second government shutdown in as many months by passing a bipartisan funding bill by the February 15 deadline. We also saw progress on trade negotiations with China, with the U.S. putting a stop to scheduled tariff increases while negotiations continued. Any positive news here would be a boon for markets.

Looking abroad, political developments were also positive. Namely, an announcement by British Prime Minister Theresa May buoyed European markets. In it, she said the British Parliament may vote to delay Brexit if a deal is not reached by the March 29 deadline. This delay could avoid the dreaded no-deal Brexit scenario, which would likely throw the U.K. economy into chaos as trade deals and everyday routines would get disrupted overnight. Risks do remain here, and the negotiations should be monitored. But, overall, concerns appear to have diminished for the time being.

Economic picture messy and incomplete
The government shutdown in December and January delayed most of the major economic data releases scheduled for that time. In fact, we are still receiving this delayed data sporadically. But much of the data we do have has painted a picture of an economy that took a stumble in December before rebounding to start the year.

This drop and subsequent rebound can be seen through the lens of consumer confidence. Figure 1 shows the Conference Board’s monthly survey of consumer confidence. It declined sharply in December and January before showing a solid rebound in February. This rebound was driven by the end of the government shutdown and the strong market performance to start the year. But a surge of 304,000 new jobs in January also played a part.

Figure 1. Conference Board Consumer Confidence Survey, 2014–Present

Increased confidence measures tend to lead to higher spending levels, so this rebound is encouraging. Much like confidence, consumer spending declined significantly in December. Here, retail sales were especially disappointing. In fact, December’s decline was the largest one-month drop since September 2009. On a more positive note, the personal savings rate in December was the highest it has been in nearly three years. As such, consumers still have money to spend. With the recent rise in confidence, hopefully we will see consumers more willing to spend some of these extra savings.

Disappointing consumer spending in December played a part in a lowered growth rate for the economy in the fourth quarter. The first estimate of fourth-quarter gross domestic product growth came in at 2.6 percent on an annualized basis. This figure is down from the 3.4-percent growth rate seen in the third quarter, although it still represents a solid end to the year. But if consumer spending can pick up steam and businesses can remain confident, we could see an increase in overall economic growth.

Keep an eye on the risks
Most of the major risks we have been worrying about over the past few months appear to be diminishing. Still, there are some important areas to watch. The housing market remains a major domestic concern and is in a period of contraction. Existing home sales have fallen on a year-over-year basis for each of the past 11 months. Plus, homebuilder confidence increased slightly in February but is still well below levels seen a year ago. Housing is a major sector of the U.S. economy and provides many knock-on effects for other industries. As such, this slowdown is concerning.

International risks also remain. Brexit negotiations in Europe and trade talks with China have garnered much of the attention. Recently, there have been positive developments in both of these areas. But these types of negotiations can be quite volatile. So, there is no guarantee that these potential areas for concern will not affect markets.

New risks could also spring up at any time. For example, the hostilities between India and Pakistan recently flared up over military conflict in the Kashmir region. This has been an ongoing conflict between the two countries since their separation. But any escalation between two nuclear powers is concerning. There have been positive developments here, including Pakistan’s offer to return a captured Indian pilot. Nonetheless, this is an important conflict to watch.

U.S. economy and outlook remain robust
Despite the risks and the slowdown at the end of 2018, the outlook for the economy and markets remains healthy. Corporations continue to post healthy earnings growth. Plus, markets appear to have weathered December’s volatility with two strong rebound months. Going forward, maintaining high confidence levels for both businesses and consumers remains important. We will need additional spending to grow the economy at a similar pace to last year.

Overall, things look pretty good for U.S. investors. Of course, some risks remain. But the markets’ rebound from the recent volatility showcases the importance of building a portfolio that can ride out short-term turbulence. As always, it is important to keep in mind that a well-diversified portfolio that matches your risk tolerance to your financial goals remains the best way to meet those goals going forward.

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®.

© 2019 Commonwealth Financial Network®