Weekly Market Update, July 22, 2019

Posted on July 24, 2019 by Neal Gallagher

Presented by Mark Gallagher

General Market News
• Rates fell across the curve last week, with the largest declines on the short end of the curve. The 10-year Treasury yield opened the week at 2.04 percent, and the 30-year opened at 2.56 percent.
• Markets were down on the week. The technology sector was dragged down by Netflix, which missed the mark on expected second-quarter subscriber growth. With a decline in U.S. subscribers and a miss in international growth, this news led Netflix stock to post a loss of 15.6 percent. The financials and consumer discretionary sectors declined, as investors are growing cautious ahead of expected lower interest rates and the recent dip in consumer confidence. Industrials and energy also grabbed headlines, with CSX Corporation cutting spending following lighter loads on railways. Despite some of the negative headlines, bank earnings remained strong.
• Turning to economic reports, last Tuesday brought the release of June’s retail sales report, which came in better than expected. Economists had expected to see modest month-over-month growth of 0.2 percent, but consumers surprised to the upside, with 0.4 percent growth in June. This marks the fourth straight month of strong retail sales growth, which bodes well for overall economic growth in the second quarter.
• June’s industrial production report also was released on Tuesday. Production was unchanged for the month, against expectations for modest growth of 0.1 percent. But this weakness was due to an unusually warm month that caused utility output to drop noticeably. Meanwhile, manufacturing output rose by 0.4 percent, which is the best monthly result since December. This bump in output is not likely to last, however, given the slowdown in global manufacturing and low confidence levels for manufacturers.
• The National Association of Home Builders index ticked up slightly on Tuesday, from 64 to 65. Economists had expected this measure of homebuilder confidence to remain flat for July; however, rising sentiment in the West and South more than offset declines in the Northeast and Midwest.
• Despite the rise in confidence, homebuilders were still hesitant to break ground on new housing, as evidenced by Wednesday’s release of June’s housing starts report. It showed a decline of 0.9 percent for the month. Building permits, which are another indicator of homebuilders’ willingness to build more houses, declined by 6.1 percent. Permits had increased in May for the first time in seven months, so these declines were disappointing.
• Finally, the week ended with the release of the University of Michigan consumer confidence survey, which increased from 98.2 in June to 98.4 in July. This uptick in confidence was due in large part to the continued positive performance of the stock market and the solid employment situation.

Equity Index	Week-to-Date	Month-to-Date	Year-to-Date	12-Month
S&P 500	–1.21%	1.29%	20.06%	8.30%
Nasdaq Composite	–1.18%	1.78%	23.48%	5.25%
DJIA	–0.61%	2.21%	17.95%	10.92%
MSCI EAFE	–0.13%	–0.16%	14.31%	0.80%
MSCI Emerging Markets	0.76%	0.70%	11.54%	2.65%
Russell 2000	–1.40%	–1.15%	15.64%	–7.73%

Source: Bloomberg

Fixed Income Index	Month-to-Date	Year-to-Date	12-Month
U.S. Broad Market	0.01%	6.13%	7.46%
U.S. Treasury	–0.22%	4.95%	6.85%
U.S. Mortgages	0.34%	4.52%	6.25%
Municipal Bond	0.52%	5.64%	6.82%

Source: Morningstar Direct

What to Look Forward To
On Tuesday, June’s existing home sales data is set to be released. Sales are expected to remain flat for the month, despite a surge in mortgage applications in May. Wednesday will see the release of June’s new home sales data, which is expected to show solid 3.5 percent monthly growth. Given the decline in rates this year and the corresponding increase in mortgage applications, faster growth in housing sales during the summer would be very welcome.

On Thursday, we will receive June’s durable goods orders data. It is expected to show headline orders increasing by 0.8 percent for the month, following a 1.3 percent decline in May. May’s decline was due in large part to a drop in orders for Boeing, following the grounding of the 737 MAX airplane. The core figure, which excludes the impact of volatile transportation orders, is expected to show steady growth of 0.2 percent following 0.4 percent growth in May.

On Friday, we will receive the first estimate of second-quarter gross domestic product growth. It is expected to come in at an annualized rate of 1.8 percent for the quarter, down from the 3.1 percent annualized growth rate in the first quarter. This result would be due primarily to declining business inventories and a drop in net trade. These two factors accounted for 1.7 percent of the growth in the first quarter and are expected to drag down growth by 1.9 percent in the second quarter. On a more positive note, consumer spending is expected to be a major source of growth for the second quarter, as consumers were both willing and able to spend more in the second quarter than in the first.

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.

Weekly Market Update, July 15, 2019

Posted on July 16, 2019 by Neal Gallagher

Presented by Mark Gallagher

General Market News
• Last week, rates moved higher across the curve. The 10-year opened on Monday at 2.11 percent, while the 30-year opened at 2.64 percent and the 2-year opened at 1.83 percent.
• U.S. indices continued their streak of gains last week, with the S&P 500 closing above the 3,000 level. The leading sectors were energy, consumer discretionary, and technology. The top detractors were health care, materials, REITs, and utilities.
• On Wednesday, we saw the release of the minutes from the most recent Federal Open Market Committee meeting in June. As expected, they showed that many Federal Reserve (Fed) officials are growing more concerned with downside risks to the economy, as global growth continues to slow in the face of ongoing trade turbulence. Officials indicated that these concerns may be enough to justify near-term rate cuts to support the economy. This supportive attitude, combined with similar comments made to Congress by Fed Chairman Jerome Powell, has market participants widely expecting a rate cut at the next Fed meeting at the end of the month.
• On Thursday, the Consumer Price Index for June was released. Headline inflation came in as expected, falling to 1.6 percent on a year-over-year basis due in large part to weakness in energy prices. Consumer inflation has declined on a year-over-year basis in each of the past three months, and it now sits well below the Fed’s stated 2 percent inflation target. The core inflation figure, which strips out the impact of food and energy costs, came in higher than expected, with 0.3 percent monthly growth. This result brought the year-over-year core figure to 2.1 percent. Consumer inflation may be set to increase further, as the impact from tariffs on Chinese goods has yet to fully hit consumers.
• On Friday, June’s Producer Price Index was released. It showed higher-than-expected producer inflation. Monthly inflation rose by 0.1 percent against expectations of no change. On a year-over-year basis, producer inflation grew by 2.3 percent. As was the case with consumers, low energy prices held back faster inflation during the month, and there may be room for faster growth due to increased pressure from Chinese tariffs.

Equity Index	Week-to-Date	Month-to-Date	Year-to-Date	12-Month
S&P 500	0.82%	2.53%	21.54%	9.89%
Nasdaq Composite	1.01%	3.00%	24.96%	6.53%
DJIA	1.54%	2.83%	18.66%	12.27%
MSCI EAFE	–0.54%	–0.02%	14.47%	1.18%
MSCI Emerging Markets	–0.75%	–0.06%	10.70%	1.04%
Russell 2000	–0.34%	0.25%	17.28%	–5.80%

Source: Bloomberg

Fixed Income Index	Month-to-Date	Year-to-Date	12-Month
U.S. Broad Market	–0.36%	5.73%	7.19%
U.S. Treasury	–0.58%	4.57%	6.52%
U.S. Mortgages	0.01%	4.18%	6.12%
Municipal Bond	0.36%	5.48%	6.77%

Source: Morningstar Direct

What to Look Forward To
On Tuesday, June’s retail sales data is set to be released. Economists expect to see monthly growth of 0.2 percent, following a 0.5 percent increase in May. Core sales, which exclude auto and gas prices, are expected to show healthy growth of 0.4 percent. Consumer confidence remains near multidecade highs, so steady growth in sales should follow.

Also on Tuesday, June’s industrial production report is set to be released. Production increased by 0.4 percent in May, partially due to 0.2 percent growth in manufacturing output. Economists expect 0.1 percent growth in production and 0.3 percent growth in manufacturing output for the month. Declining confidence figures in the manufacturing sector indicate that any increase in output is likely to be short lived unless confidence rebounds meaningfully.

Speaking of confidence, the National Association of Home Builders index is also set to be released on Tuesday. This measure of homebuilder confidence is expected to remain stable at 64 for July, as homebuilders remain reasonably confident in the housing market. The index is broken down by region. For most of the year, homebuilders in the Northeast and Midwest have shown significantly lower confidence scores than their counterparts in the South and West, which suggests regional weakness rather than a country-wide decline.

Wednesday will see the release of June’s housing starts data. It is expected to show a decline of 0.7 percent, following a decline of 0.9 percent in May. The decline in May lined up with a similar decline in homebuilder confidence, as a shortage of workers caused homebuilders to pause on new construction. There may be some upside potential here, as building permits increased in May for the first time in seven months, and homebuilder confidence is not expected to drop.

Finally, we’ll end the week with Friday’s release of the University of Michigan consumer confidence survey. Confidence is expected to pick up slightly, from 98.2 in June to 98.6 in July. Given the strong jobs market and stock markets that are near all-time highs, this expected increase in confidence would make a lot of sense. Growing consumer confidence bodes well for future economic growth in the second half of the year, as consumer spending is the backbone of the economy.

Authored by the Investment Research team at Commonwealth Financial Network.

2019 Midyear Outlook: A Story of Headlines Vs. Fundamentals

Posted on July 8, 2019 by Neal Gallagher

Presented by Mark Gallagher

At the end of last year, the big question was, “Will 2019 bring the end of the recovery?” All of the data seemed to point to an answer of “Not yet.” And so far, that answer still holds. The big picture suggests growth is likely to continue for the rest of the year, which should, in turn, support the financial markets. But there’s more to the story . . .

Headlines Vs. Fundamentals
To date, it has been an eventful year. Markets moved up, pulled back sharply, and then bounced again. The economy was slow to start, picked up during the first quarter, and now may be slowing again. Meanwhile, the political story has included the Mueller report, a China trade deal and then a trade war, a postponement of Brexit, and looming tensions with Iran.

Reacting to all of these headlines would have been a bad strategy. Because while the markets have been more volatile this year, the fundamentals—the underpinnings of our economy—have remained solid.

Take job growth, for example. Although there has been volatility in the monthly job gains, the overall growth rate has remained steady at more than 2 million jobs per year. Over the past 40 years, when job growth has been at this level, a recession has been at least a year away. Yes, we have seen some weakening recently, but the year-on-year trend remains strong.

By the Numbers: 2019 Expectations

• GDP Growth: 1.50%–2%

• Inflation: 2%

• Federal Funds Rate: 1.75%–2.25%

• 10-Year U.S. Treasury Yield: 1.75%–2.25%

• S&P 500 Index: 2,900–3,000

Similarly, consumer confidence levels remain high, at levels last seen in 2001, and the year-on-year change is positive. We have never had a recession without a decline in confidence of at least 20 points over the previous year. This should buy us another 12 months or more.

Business confidence is weaker than both job growth and consumer confidence, currently sitting at close to its lowest levels of the past several years. Despite that, it is still solidly expansionary, suggesting continued—though slower—growth.

Even the yield curve spread shows risk is not likely immediate. Although the yield curve is on the verge on inverting, an inversion would only start the recession clock ticking. Historically, the initial inversion has preceded a recession by a year or more, which once again leaves us in the green for the balance of 2019.

Looking at these fundamentals, it’s clear that conditions are better than the headlines suggest. We have never had a recession with job growth as strong as it is, with confidence where it is, and with the yield curve where it is. Some slowing is likely, but slowing is still growing, with calendar-year expectations for economic growth sitting between 1.5 percent and 2 percent.

The Fed and Monetary Policy
Given the healthy data mentioned above, we could have reasonably expected inflation to rise—and it did, but not by much. More, the most recent data suggests that, with slowing growth, inflation has started to pull back again. Although the Fed decided in 2018 that the risks of not raising rates were greater than those of raising them, in 2019 it has put that policy on hold because of this slowdown.

Expectations are for no more increases this year, plus a real possibility of cuts. Inflation is now expected to stay below 2 percent, and longer-term rates should end the year around current levels, with the yield on the 10-year Treasury between 1.75 percent and 2.25 percent.

What About the Stock Markets?
Steady growth and interest rates suggest that global stock markets are likely to continue to trade on fundamentals, such as revenue and earnings growth. Here in the U.S., revenue growth remains healthy, and while earnings growth has slowed, it is expected to remain positive. This should support the markets through the rest of the year.

With earnings growing, the real issue will be valuations. Historically, high confidence levels have driven up valuations, and we have seen that in recent years. As confidence moderates and growth slows, however, we can expect valuations to stop rising, meaning further appreciation will depend on earnings growth.

Given projected earnings growth and steady valuations, the S&P 500 is likely to end 2019 between 2,900 and 3,000. There is upside potential if earnings growth surprises or if valuations recover to the high levels seen in 2016 and 2017. But there may be more downside risk, if economic growth slows or if valuations drop on lower confidence. Still, this estimate is a reasonable base case.

Prospects Bright, but No Guarantees
Solid economic fundamentals should continue to support markets through the remainder of 2019, with moderate appreciation likely—if current trends hold. None of this, however, is guaranteed. Here in the U.S., we’ll need to keep an eye on potential impeachment of the administration by the Democrat-controlled House; the ongoing trade war between the U.S. and China; and, most notably, the upcoming debt ceiling confrontation between Congress and the administration. Abroad, we have pending issues in Europe, including Brexit and Italy, as well as a rising confrontation with Iran.

Even if growth does slow, though, or we see any of the other potential issues erupt, the underlying strength of the economy is likely to limit the damage. We’ve seen many similar situations in the not-so-distant past—and they didn’t knock the economy or markets off their paths.

When you look back at the recovery so far, this scenario is very similar to what we have seen for most of the past 10 years: slow growth threatened by multiple risks. And, just as we have seen over the past 10 years, although the concerns are real, the big picture is very much like what we have become accustomed to. Despite the worries, it’s still not a bad place to be.

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. All indices are unmanaged and investors cannot invest directly into an index. 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.

Authored by Brad McMillan, CFA®, CAIA, MAI, managing principal, chief investment officer, at Commonwealth Financial Network®.

Weekly Market Update, July 1, 2019

Posted on July 2, 2019 by Neal Gallagher

Presented by Mark Gallagher

General Market News
• After the Federal Open Market Committee (FOMC) meeting on June 19, rates have ranged between 1.97 percent and 2.06 percent. The 10-year Treasury yield opened at 2.01 percent on Monday. Most of the curve moved slightly lower, with the 1-month and 3-month yields moving the most. Bond investors are anticipating a possible rate cut at the end of July FOMC meeting.
• All three major U.S. markets were down slightly ahead of the meeting between President Trump and Chinese leader Xi Jinping. Despite the tension surrounding the G20 meeting, the market actually moved away from bond proxies and favored a more risk-on sentiment. As the week continued, the consensus expectation was that there would be a truce that would restart trade negotiations. As a result, REITs and utilities sold off, and investors rotated into financials, materials, and industrials. Financials were supported by the U.S. banks passing their capital asset stress tests. The pass allowed many of these firms, such as JPMorgan, Bank of America, and Wells Fargo, to propose raising dividends.
• Turning to economic reports, we saw the release of May’s new home sales report last Tuesday. Sales fell by 7.8 percent during the month, which was a disappointment given economist expectations for growth of 2.2 percent. This marks the second straight month of declining new home sales.
• Also on Tuesday, the Conference Board Consumer Confidence Index was released, dropping sharply from 131.3 in May down to 121.5 in June. Both the present condition and future expectations indices declined during the month, as concerns regarding trade tensions with China outweighed the positive tailwind from the month’s strong equity performance.
• On Wednesday, we received the first estimate of May’s durable goods orders. Headline orders declined by 1.3 percent, in large part due to the ongoing issues Boeing is having with its grounded 737 MAX airplanes. The core durable goods figure, however, which strips out transportation orders, grew 0.3 percent in May. This steady growth in the core figure suggests that overall business investment remains healthy, despite the problems with Boeing.
• On Friday, May’s personal income and personal spending reports were released. Income grew by 0.5 percent in May, while spending rose by 0.4 percent. These results were largely in line with expectations and show growth remained constant with April’s levels.
• Finally, the week ended with the release of the second and final estimate of the University of Michigan consumer sentiment index for June. Consumer confidence increased from 97.9 mid-month to 98.2 by month-end. This improvement was driven by a jump in the current conditions index, which was likely helped by the strong equity returns we saw during the month. While this improvement is encouraging, the index still sits slightly below May’s level.

Equity Index	Week-to-Date	Month-to-Date	Year-to-Date	12-Month
S&P 500	–0.27%	7.05%	18.54%	10.51%
Nasdaq Composite	–0.30%	7.51%	21.33%	7.88%
DJIA	–0.45%	7.31%	15.40%	12.45%
MSCI EAFE	0.67%	5.93%	14.49%	2.64%
MSCI Emerging Markets	0.43%	6.24%	10.76%	3.83%
Russell 2000	1.16%	7.07%	16.98%	–3.41%

Source: Bloomberg

Fixed Income Index	Month-to-Date	Year-to-Date	12-Month
U.S. Broad Market	1.26%	6.11%	7.91%
U.S. Treasury	0.92%	5.18%	7.23%
U.S. Mortgages	0.72%	4.17%	6.31%
Municipal Bond	0.37%	5.09%	6.74%

Source: Morningstar Direct

What to Look Forward To
On Monday, data from the Institute for Supply Management (ISM) Manufacturing index was released. This measure of manufacturer optimism fell from 52.1 in May to 51.7 in June. This decline was smaller than economists expected, but it still brought the index to its lowest level since October 2016. This is a diffusion index, where values greater than 50 indicate expansion, so manufacturers still expect growth going forward.

On Wednesday, we will receive the report on May’s international trade balance. It is expected to show the deficit widening from $50.8 billion to $52.5 billion during the month. Declines in both imports and exports are expected, given the increasing pressure on global trade from the ongoing trade war between China and the U.S.

Wednesday will also see the release of the ISM Nonmanufacturing index. It is expected to drop from 56.9 to 56 in June, following a jump in May that was larger than economists expected. Despite the expected modest pullback, the index still shows solid growth expectations for the service sector.

Finally, on Friday, we will receive June’s employment report. It is slated to show 160,000 new jobs were added during the month. The unemployment rate is expected to stay at 3.6 percent, which represents the lowest level since August 1969.

Authored by the Investment Research team at Commonwealth Financial Network.