Presented by Mark Gallagher

General Market News
• U.S. rates came down on a holiday-shortened week. On Monday, the 10-year Treasury yield opened at 1.84 percent, dropping from last week’s high of 1.97 percent. The 30-year reached a recent high of 2.43 percent and opened Monday at 2.32 percent. The 2-year moved from a high of 1.67 percent to 1.60 percent.
• Domestic markets moved higher last week, with international markets remaining flat and emerging markets moving down. The recent rally showed signs of investors rotating away from cyclicals and into defensive. The focus for investors continues to be the “phase one” deal between the U.S. and China.
• On Tuesday, the Wall Street Journal reported that the U.S. and China were having issues with the intellectual property protection and enforcement components of the potential deal. This report came after President Trump’s statement on November 8 that he has not agreed to roll back tariffs, although Larry Kudlow, director of the National Economic Council, suggested the two sides are getting close to a deal.
• The top-performing sectors on the week were health care, REITs, and utilities. The worst-performing sectors were energy, financials, discretionary, materials, and financials.
• On Wednesday, the Consumer Price Index (CPI) for October was released. Consumer inflation came in slightly higher than expected, with prices rising 0.4 percent for the month against expectations for a 0.3 percent increase. This brought headline inflation up to 1.8 percent for the year, driven by rising gas prices. Core CPI, which strips out the impact of energy and food prices, increased by only 0.2 percent for the month. Year-over-year core CPI growth fell from 2.4 percent in September to 2.3 percent in October. Overall, this report showed that consumer prices have not been feeling upward pressure from the additional tariffs on Chinese goods that took effect in September.
• Thursday saw the release of the Producer Price Index (PPI) for October. As was the case with consumer inflation, rising gas prices drove headline PPI growth to 0.4 percent, and core PPI saw a 0.3 percent increase. On a year-over-year basis, headline PPI fell to 1.1 percent, down from 1.4 percent in September. Core inflation increased by 1.6 percent over the past year, down from the 2 percent rate in September. Once again, it appears that despite the effect of increasing gas prices, core inflation pressure remains muted.
• On Friday, we finished the week with the release of the October retail sales report. Headline retail sales increased by 0.3 percent, against expectations for more modest 0.2 percent growth. This result was partially due to increased gas prices, as core retail sales grew only 0.1 percent during the month. Despite the miss on core retail sales growth, this was still a positive report, as both headline and core sales returned to growth following disappointing declines in September.

Source: Bloomberg

Source: Morningstar Direct

What to Look Forward To
The week began with Monday’s release of the National Association of Home Builders Housing Market Index, which declined slightly from 71 in October to 70 in November. This decline breaks a four-month streak of increased home builder confidence. Despite the modest pullback in November, home builder confidence still sits near post-recession highs, as cheap borrowing costs continue to drive an uptick in potential buyers. The portion of the index that focuses on future sales increased in November, which indicates that home builders are more optimistic about the next six months for the housing market. Overall, while the decline this month was slightly disappointing, home builder confidence remains high, so there is no immediate cause for concern.

Speaking of home builders, with Tuesday’s release of October’s building permits and housing starts reports, we’ll get a chance to see if the increased confidence has led to faster housing growth. Permits are expected to decline modestly, while starts are slated to increase by a healthy 4.9 percent. These measures of new home construction can be volatile on a month-to-month basis. But over the course of the year, housing starts have trended up. Material costs have come down from 2018 highs, while buyer demand remains strong.

On Wednesday, the Federal Open Market Committee minutes from the October meeting will be released. The committee voted to cut the federal funds rate by 25 basis points at this meeting, marking the third straight meeting with a rate cut. Recent comments from Federal Reserve (Fed) chairman Jerome Powell to Congress reiterated the Fed’s messaging that further rate cuts are unlikely unless a marked slowdown in economic growth occurs. Economists are looking for any hints in the October minutes as to what type of weakness would lead the Fed to reevaluate that stance. We might also get some interesting commentary regarding the recent volatility in the overnight repurchase market and how the Fed is reacting to this development.

Thursday will see the release of October’s existing home sales report. Home sales are expected to grow by 2.1 percent in October, rebounding from a decline of 2.2 percent in September. This result would mark the fourth straight month of year-over-year growth in existing home sales. Housing has been one of the major bright spots in the economy over the past few months, as the return to year-over-year growth in existing home sales demonstrates.

Finally, we’ll finish out the week with the second and final reading of the University of Michigan consumer confidence survey for November. Economists expect the index to increase slightly, from 95.7 at the start of the month to 95.8. Continued equity market strength and a better-than-expected jobs report helped boost confidence for the second straight month, following the surprising decline to a three-year low in August. Going forward, higher consumer confidence would be quite welcome, as high confidence levels should help support faster consumer spending 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.

© 2019 Commonwealth Financial Network ®

Presented by Mark Gallagher

General Market News
• The 10-year Treasury yield closed last Friday at 1.94 percent, its highest level since early August. The 30-year closed at 2.42 percent, and the 2-year stood at 1.67 percent. One year ago today, the 10-year stood at 3.14 percent.
• Global equity markets rallied for much of the week, as expectations rose for a “phase one” trade deal between the U.S. and China. That was until Friday, when President Trump stated he had not yet agreed on rolling back tariffs. This news came just one day after China announced that both sides had agreed to roll back tariffs.
• Last week marked the fifth straight week of gains for the S&P 500, with the more cyclical sectors—financials, energy, and materials, and industrials—leading the way. The bond proxies in REITs, utilities, and consumer staples were among the worst-performing sectors.
• On Tuesday, the Institute for Supply Management Nonmanufacturing index was released. This measure of confidence for the service sector increased by more than expected, from a three-year low of 52.6 in September to 54.7 in October. Economists had predicted a more modest increase to 53.5. This is a diffusion index, where values greater than 50 indicate expansion, so this result may help calm fears of a potential recession in the service sector.
• On Friday, the University of Michigan consumer sentiment survey was released. Consumer confidence rose from 95.5 in October to 95.7 in November, against expectations to remain flat. A stronger-than-expected October jobs report, combined with equity markets near all-time highs early in the month, helped support higher confidence levels. High consumer confidence has supported the strong consumer spending growth we’ve experienced throughout most of the year, so this result was welcome, even if it was only a modest increase in absolute terms.

Source: Bloomberg

Source: Morningstar Direct

What to Look Forward To
On Wednesday, the Consumer Price Index (CPI) for October is scheduled to be released. Headline inflation is set to increase by 0.3 percent during the month, following a flat September. On a year-over-year basis, economists expect headline inflation to remain steady at 1.7 percent. One of the major drivers of low headline inflation is the low gas prices we’ve seen this year. Core CPI, which strips out the impact of volatile food and energy prices, is set to show 2.4 percent annual growth.

Speaking of inflation, on Thursday, the Producer Price Index for October will be released. As was the case with consumer prices, economists expect to see headline inflation increase by 0.3 percent during the month. Core producer inflation is expected to grow at a faster rate than the headline figure. The forecast for core prices is a 1.5 percent increase on a year-over-year basis, compared to 0.9 percent annual headline inflation growth. Despite the expected uptick in both consumer and producer prices for October, inflation remains largely subdued and below the Federal Reserve’s 2 percent target.

On Friday, the October retail sales report is set to be released. Economists expect a rebound in retail sales of 0.2 percent following the 0.3 percent decline in September. September marked the first time in seven months that sales declined, so a return to growth in October would be quite welcome. Consumer spending growth powered much of the economic expansion in the second and third quarters, so continued sales growth to start the fourth quarter would bode well for overall economic growth.

Finally, we’ll finish out the week with the release of the October industrial production report. Economists are predicting another down month for industrials, with a 0.3 percent decline expected to follow the 0.4 percent drop in September. Manufacturing output is expected to fall 0.5 percent in October, matching a similar decline in September. For the second month in a row, the GM strike is partially to blame for the anticipated decline. Even before the strike, however, manufacturer confidence had dropped to recessionary levels due to the uncertainty caused by the trade war. Going forward, there may be some room for industrial production growth in November. The end of the GM strike, combined with the potential de-escalation of the trade war, could help spur manufacturer confidence and output.

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

More treats than tricks for markets in October
October was another positive month for markets. Diminishing risks helped drive equity markets near all-time highs. The S&P 500 gained 2.17 percent in October and finished the month at a new record high. The Dow Jones Industrial Average grew by 0.59 percent in October, while the Nasdaq Composite led the way with a 3.71 percent return.

These positive results were supported by better-than-expected earnings during the month. According to Bloomberg Intelligence, the anticipated third-quarter earnings decline for the S&P 500 is 2.1 percent, with 60 percent of companies reporting as of October 31. This is up from estimates of a 3.2 percent decline at the end of September. Further, improvements are widespread, with 8 of the 11 sectors performing better than expected. Fundamentals drive long-term market performance, so this improving third-quarter earnings picture is encouraging. Technicals were also supportive for U.S. markets. All three major indices spent the month above their respective 200-day moving averages, despite some early volatility.

Results were also strong internationally, as receding risk of a “no deal” Brexit buoyed markets. The MSCI EAFE Index increased by a strong 3.59 percent during the month. Emerging markets fared even better, as the MSCI Emerging Markets index climbed 4.23 percent. Technical factors were mixed, however. The MSCI EAFE spent the beginning of October below its 200-day moving average before breaking above the trend line for the rest of the month. Emerging markets took longer to break above the trend but managed to finish the month above this important technical level for the first time since July.

Even fixed income had a solid month, as the Federal Reserve (Fed) cut the federal funds rate by 25 basis points at its October meeting. This marks the third straight meeting where the Fed has cut interest rates, as concerns surrounding lackluster job growth and slowing global trade continue to weigh on board members’ minds. Interest rates rose slightly on the long end of the curve. The 10-year Treasury yield started the month at 1.65 percent and ended at 1.69 percent. The Bloomberg Barclays U.S. Aggregate Bond Index increased by 0.30 percent during the month, and the Bloomberg Barclays U.S. Corporate High Yield Index gained 0.28 percent.

Economic data points to slower growth
The positive returns we saw in October came despite recent data releases that painted a picture of slower overall growth. Annualized third-quarter gross domestic product growth came in at 1.9 percent. This result was down from the 2 percent growth seen in the second quarter and the 3.1 percent growth seen in the first quarter. While slowing overall growth is disappointing, economists had forecast a larger drop to 1.6 percent, so there is some reason for optimism here. This result was driven by stronger-than-expected consumer spending, which offset a slowdown in government spending and business investment.

Consumer spending will likely be the major driver of economic growth in the fourth quarter, as business confidence and spending continue to disappoint. Manufacturer confidence has declined sharply throughout the year, hitting a 10-year low in September. We also saw a decline in the nonmanufacturing sector, which accounts for the lion’s share of economic output. After rebounding in August, the Institute for Supply Management (ISM) Nonmanufacturing index fell to 52.6 in September. The ISM composite index, which aggregates the manufacturing and nonmanufacturing indices, has fallen sharply since reaching a high point in September 2018, as uncertainty from trade wars and various political developments have weighed on business-owner confidence.

Figure 1. ISM Composite Index, 2009–Present

With business confidence declining, it’s no surprise that spending was lackluster as well. Durable goods orders fell by 1.1 percent in September, against expectations for a more moderate decline of 0.7 percent. Industrial production fell 0.4 percent, and manufacturing output fell 0.5 percent. The General Motors strike may be to blame for some of this decline. But the overall trend points toward continued weakness in business confidence and spending for the immediate future.

Consumer confidence rebounds as spending continues
With markets near or at all-time highs and the unemployment rate near a 50-year low, it is not surprising consumer confidence rebounded in October. The University of Michigan consumer sentiment index increased from 93.2 in September to 95.5 in October. Overall, things are going pretty well for consumers, and higher confidence levels should help drive continued spending growth.

In fact, consumer spending increased by 0.2 percent in September, marking the seventh straight month of growth. This result was supported by a 0.3 percent increase in personal income, which has grown in each of the past 12 months. Solid income growth indicates that the personal spending growth we have experienced this year is sustainable.

The housing sector, likewise, has shown positive momentum following a weak start to the year. Existing home sales fell slightly in September. On a year-over-year basis, however, they rose by a healthy 3.9 percent. We have seen year-over-year growth in housing sales for the past 3 months, following 16 straight months of year-over-year declines. The continued growth in housing is encouraging given the effect it can have on other sectors of the economy. And while high consumer confidence and strong balance sheets are certainly factors in this housing turnaround, the Fed deserves some credit too. Mortgage rates have dropped near two-year lows, as the central bank continues to cut rates and support the ongoing economic expansion.

Political risks shift in October
We entered October with concerns about the escalating trade war between the U.S. and China, as well as the risk of a “no-deal” Brexit. Both of these risks receded during the month, however. Plans for a preliminary U.S.-China trade deal are now on the table, and another extension of the Brexit deadline was announced, this time to January 31, 2020. Markets reacted favorably to these receding risks, but new concerns have emerged to take their place.

Domestically, the impeachment inquiry highlights the very real risk impeachment presents to markets. With public hearings set to begin this month, growing uncertainty may cause volatility. Earlier in the month, a surprise withdrawal of U.S. troops from portions of Syria also seized headlines. Markets quickly shrugged off this development, however.

Internationally, new risks have emerged as well. The British elections are now set for mid-December, as the U.K. and the European Union continue to hammer out a Brexit deal. And if trade war tensions ratchet back up or the protests in Hong Kong increase in intensity, we may see additional market volatility.

Short-term risks remain, but fundamentals are solid
Despite politically driven uncertainty, economic fundamentals remain solid in the U.S. While growth appears to be slowing from earlier in the year, slower growth is still growth. Rebounding consumer confidence and continued strong consumer spending indicate the economy is in a better place than the headlines suggest. If business confidence and spending can follow suit, the economy would be poised for accelerated growth.

There are still very real risks out there, however—the ongoing impeachment inquiry in particular. While short-term volatility may be likely given the political risks, the strong fundamentals should continue to support markets. As always, a well-diversified portfolio that matches investors’ goals can provide the best path forward in these uncertain times.

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, senior investment research analyst, at Commonwealth Financial Network®.

© 2019 Commonwealth Financial Network ®