Presented by Mark Gallagher

Stormy March drags down markets
March was a rough month for markets, with all three major U.S. indices finishing down. The Dow Jones Industrial Average lost 3.59 percent, the S&P 500 Index fell 2.54 percent, and the Nasdaq Composite was down 2.79 percent. For the quarter, the Dow and S&P were down 1.96 percent and 0.76 percent, respectively. But the Nasdaq gained 2.59 percent.

Even as prices dropped, the fundamentals continued to improve. According to FactSet, as of March 29, the estimated earnings growth rate for the S&P 500 was 17.3 percent—the highest since 2011. But technical factors also weakened during the quarter, with the indices closing close to long-term trend lines.

International equities fared similarly. The MSCI EAFE Index declined 1.97 percent in March and 1.70 percent for the quarter on concerns over Russian aggression and potential protectionist policies. The MSCI Emerging Markets Index declined 1.97 percent in March, but strong performance to start the year helped it hang onto a 1.33-percent quarterly gain. Technical factors weakened toward quarter-end, taking both indices close to their long-term trend lines.

Fixed income rebounded somewhat in March, as yields dropped following a large increase in February. The Bloomberg Barclays U.S. Aggregate Bond Index gained 0.64 percent in March but lost 1.46 percent for the quarter.

High-yield bonds, which are less affected by interest rate movements, were also weak. The Bloomberg Barclays U.S. Corporate High Yield Index lost 0.60 percent for the month and 0.86 percent for the quarter.

Economic growth continues as February concerns abate
March was a solid month for economic news. Gross domestic product (GDP) growth for the fourth quarter of 2017 was revised up to a strong 2.9 percent annualized.

Meanwhile, a staggering 313,000 new jobs were added in February, with another 39,000 added to the already strong January report. The average workweek also increased by more than expected.

The Federal Reserve recognized this economic momentum in March with a 25-basis-point hike in the federal funds rate. Market participants expect two to three more rate hikes in 2018.

Both business and consumer confidence remain strong
This news helped keep confidence near multiyear highs. On the business front, following a slight dip in December, the Institute for Supply Management Composite index rebounded to near highs last seen in the mid-2000s (see Figure 1).

Figure 1. ISM Composite Index, 1998–2018

Consumer confidence improved as well—to levels last seen in the 1990s. Business and consumer spending data improved, too.

Both headline and core durable goods orders, which reflect business investment, bounced back from a weak January. In particular, core business investment grew by 1.2 percent for the month, which was more than enough to offset earlier declines.

The news on the consumer side was mixed. Retail sales disappointed in February, but personal spending data beat expectations, with growth steady at 0.2 percent.

Housing is another area to watch. Homebuilder sentiment declined in March, and housing starts and building permits both declined by more than expected. Supply shortages for new homes could lead to a material slowdown.

Political risks surge to the forefront
Meanwhile, political risks remain a concern. The White House’s announcement of tariffs on steel and aluminum imports and on Chinese goods raised the perception of risk. The tariffs appear to be more negotiating tactic than settled policy. Even so, the potential economic damage that could result from a trade war spooked markets during the month.

The attempted assassination of a former Russian double agent in the U.K. also increased the odds for political disruption. Following the event, many western countries responded by expelling dozens of Russian diplomats, and Russia has promised to retaliate in kind.

More volatility ahead?
The first quarter had its ups and downs, but improving fundamentals and high confidence levels should keep driving the economic expansion. Markets may be more at risk, though. The political risks strike directly at confidence, which could drive more volatility. As always, a well-diversified portfolio that matches your risk tolerance and time horizon remains the best way to pursue your 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®

Presented by Mark Gallagher

General market news  
• The yield on the 10-year Treasury broke the 2.80-percent level last Wednesday, though it was back down to 2.75 percent early Monday morning. The 30-year broke 3 percent on Friday and opened at 2.98 percent on Monday. The yield curve is the flattest it has been since October 2007. Though we are likely to see continued volatility, the curve is expected to continue to flatten as the Federal Reserve raises shorter-term rates this year.
• The three major U.S. markets recouped some of their losses from the past two weeks. Fears of a trade war waned as the Wall Street Journal and other media outlets reported that the U.S. and China had been quietly discussing trade issues. The focus of the talks reportedly included ease of Chinese companies accessing U.S. markets, an increase in the number of U.S. semiconductors purchased, and the ability for foreign financial groups to take majority stakes in securities companies. U.S. Trade Representative Robert Lighthizer stated that the tariffs would focus on tech goods, which helped explain the continued lag of the heavily tech-weighted Nasdaq Composite Index. Further affecting the performance of the Nasdaq were comments from President Trump, who stated that Amazon pays little or no state and local taxes and that he’s tired of the USPS operating as the firm’s “delivery boy.”
• Last week saw a number of important economic data releases. On Tuesday, the Conference Board Consumer Confidence Index declined slightly from its 18-year high in February. Confidence remains well above average, however, and is not a current concern.
• On Wednesday, the final estimate of fourth-quarter gross domestic product growth was revised upward to 2.9 percent annualized from 2.7 percent. Much of this was driven by strong consumption growth that, at 4 percent, beat expectations.
• On Thursday, February’s personal income and spending data came in as expected. Both measures grew modestly, with 0.4-percent month-over-month growth in income. Also on Thursday, the University of Michigan consumer sentiment survey declined slightly to 101.4 from 102. As was the case with the Conference Board’s index, this measure of consumer confidence still sits near multiyear highs.

Source: Bloomberg

Source: Morningstar Direct

What to look forward to

This will be a busy week for economic news, and it starts with the major business surveys.

On Monday, the Institute for Supply Management (ISM) Manufacturing survey is expected to drop slightly, from an extremely strong 60.8 in February to 60.0 for March. The February result was the highest in almost 14 years, and a small pullback would still leave the survey at a very high level. This is a diffusion index, where numbers above 50 indicate expansion, so anything close to the expected result would show strong expansion.

On Wednesday, the ISM Nonmanufacturing survey is also expected to pull back slightly. The February result of 59.5 is expected to tick down to 59.0, which is not quite as good as the Manufacturing survey, but still indicative of strong growth. Between the two results, business looks to continue as a positive force for the economy.

On Thursday, the international trade report is expected to show a small worsening of the trade deficit, from $56.6 billion in January to $56.8 billion in February. Exports have rebounded while import growth has moderated, but one-time factors are likely to pull down the final result. Trade is anticipated to be a drag on growth in the first quarter, but the numbers do seem to be improving overall.

Finally, on Friday, we’ll see the employment report. It is expected to show that job growth moderated significantly, down from 313,000 in February to 189,000 in March. The February number was much higher than expected, so even with a pullback, the employment market would be in good shape. There may be some upside potential here, as the flu epidemic may have slowed job growth in February. The unemployment rate is expected to drop from 4.1 percent to 4 percent, while wage growth is expected to rise by 0.2 percent on a monthly basis and 2.8 percent on an annual basis. Overall, if the numbers come in as expected, this would be a healthy report.

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 U.S. 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 U.S. 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 U.S. 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.
© 2018 Commonwealth Financial Network®

Presented by Mark Gallagher

General market news  
• The 10-year Treasury opened at 2.81 percent this week, slightly lower than last Monday’s open. In fact, this yield is at the low end of the range the 10-year has been trading in for the past month. The 30-year also opened lower, at 3.07 percent.
• The markets were unable to find their footing last week, as all three major U.S. indices declined by more than 5.5 percent. News that Cambridge Analytica, a political data firm, accessed the private information of more than 50 million Facebook users led to a sharp sell-off in Facebook stock. The stock’s significant weighting in the S&P 500 Index (it’s the fourth largest) and broad social media data concerns weighed heavily on the technology sector.
• Tariffs continued to grab headlines last week, as President Trump announced between $50 and $60 billion in trade tariffs on China. China’s response was swift, as the country announced its own tariffs of approximately $3 billion on U.S. steel, aluminum, pork, fruit, and wine. The actions led to concerns of a full-fledged trade war between the U.S. and China. On a positive note, the number of countries exempt from the U.S.’s proposed steel and aluminum tariffs has continued to grow. This trend will be one to monitor, as it provides an indication of the legitimacy of the proposed tariffs.
• Last week was a busy one for economic data. On Wednesday, existing home sales increased by more than expected in February, gaining 3 percent on a month-over-month basis. This increase was welcome, following declines in December and January.
• Also on Wednesday, the Federal Open Market Committee raised the upper limit of the federal funds rate from 1.50 percent to 1.75 percent. This was the first rate hike under new Chair Jerome Powell. Economists expect two to three more hikes this year.
• Finally, on Friday, February durable goods orders beat expectations, rising 3.1 percent against expectations for a 1.6-percent gain. This was a positive surprise, as business investment slowed in December and January. Given the high level of business confidence, this growth was welcome.

Source: Bloomberg

Source: Morningstar Direct

What to look forward to
There are only two major economic reports this week, but each will give us a look at the all-important consumer.

On Tuesday, the Conference Board will release its Consumer Confidence Index. The index is expected to rise from 130.8 in February to 131 in March, as the effects of the tax cuts continue to show up in paychecks. Although recent stock market turbulence may weaken confidence eventually, this survey was taken before last week’s declines, so it should not be affected. If the number comes in as expected, this would be a positive signal for the economy.

On Thursday, the personal income and spending report will be released. Personal income growth is expected to remain steady at a strong 0.4 percent for February, supported by continued employment growth and slow but steady wage growth. Personal spending growth is expected to tick down from 0.2 percent in January to 0.1 percent for February. Any decline would be due to a weather-related drop in utilities spending and a decline in gas prices, making this number better than it seems.

Disclosures: Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. All indices are unmanaged and are not available for direct investment by the public. Past performance is not indicative of future results. The S&P 500 is based on the average performance of the 500 industrial stocks monitored by Standard & Poor’s. The Nasdaq Composite Index measures the performance of all issues listed in the Nasdaq Stock Market, except for rights, warrants, units, and convertible debentures. The Dow Jones Industrial Average is computed by summing the prices of the stocks of 30 large companies and then dividing that total by an adjusted value, one which has been adjusted over the years to account for the effects of stock splits on the prices of the 30 companies. Dividends are reinvested to reflect the actual performance of the underlying securities. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a market capitalization-weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index. The Bloomberg Barclays US Aggregate Bond Index is an unmanaged market value-weighted performance benchmark for investment-grade fixed-rate debt issues, including government, corporate, asset-backed, and mortgage-backed securities with maturities of at least one year. The U.S. Treasury Index is based on the auctions of U.S. Treasury bills, or on the U.S. Treasury’s daily yield curve. The Bloomberg Barclays US Mortgage Backed Securities (MBS) Index is an unmanaged market value-weighted index of 15- and 30-year fixed-rate securities backed by mortgage pools of the Government National Mortgage Association (GNMA), Federal National Mortgage Association (Fannie Mae), and the Federal Home Loan Mortgage Corporation (FHLMC), and balloon mortgages with fixed-rate coupons. The Bloomberg Barclays US Municipal Index includes investment-grade, tax-exempt, and fixed-rate bonds with long-term maturities (greater than 2 years) selected from issues larger than $50 million.

Mark Gallagher is a financial advisor located at Gallagher Financial Services at 2586 East 7th Ave. Suite #304, North Saint Paul, MN 55109. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 651-774-8759 or at mark@markgallagher.com.

Authored by the Investment Research team at Commonwealth Financial Network.

© 2018 Commonwealth Financial Network®

Presented by Mark Gallagher

General market news
• The 10-year Treasury yield was the same this Monday morning as it was a week ago: 2.87 percent. It still seems to be moving within a range, however, as it was as low as 2.79 percent midweek last week. In fact, the 10-year has moved between 2.78 percent and 2.95 percent over the past 30 days on low volatility. Breaking above 3 percent will be difficult, and even if it does happen, the level will likely be hard to maintain for an extended period.
• The S&P 500, Nasdaq Composite, and Dow Jones Industrial Average were all down more than 1 percent last week. Due to the pullback in the 10-year Treasury yield during the week, bond proxies in the utilities, real estate, and telecom sectors were among the top performers.
• The week featured a slew of news from Washington. The week began with President Trump blocking Singapore-based Broadcom’s acquisition of U.S.-based Qualcomm, citing national security concerns. On Tuesday, Rex Tillerson was removed from his role as secretary of state. This was followed by the appointment of Larry Kudlow as chief economic advisor on Wednesday. On Thursday, special counsel Robert Mueller subpoenaed the Trump Organization for documents related to Russia’s meddling in the 2016 presidential election. The newly implemented trade tariffs on steel and aluminum were in the news as well, as the European Union and Japan requested exemptions from the trade restrictions.
• The release of major reports concerning inflation, spending, and housing made last week a busy one for economic data. On Tuesday, Consumer Price Index growth came as expected at 2.2-percent year-over-year. On Wednesday, Producer Price Index growth came in slightly lower than expected at 2.5 percent. Both of these measures sit near the 2-percent inflation target set by the Federal Reserve (Fed), which means further inflation growth may lead to additional rate hikes.
• Also on Wednesday, retail sales data was released, indicating a 0.1-percent decline in February. The core figure, which strips out volatile transportation spending, was stronger, with 0.3-percent growth in the month. Nevertheless, the decline in the headline figure was disappointing, given the boost to disposable income resulting from recent tax reform.
• Finally, on Friday, housing starts and building permits both declined by more than expected in February. Given low supply levels and rising housing prices, it appears as if homebuilders may be feeling the pinch of higher labor and material costs. This will be an important sector of the economy to monitor.

Source: Bloomberg

Source: Morningstar Direct

What to look forward to
This week, all eyes will be on the Fed. On Wednesday, the Fed will release its statement for the March meeting, which is widely expected to show a 25-basis-point increase in interest rates. This will be followed by a press conference at which new Fed Chair Jerome Powell will have his first chance to explain his thinking in this format. Markets will be looking for hints about whether and when more rate hikes will be coming.

Housing is another focus this week. The existing home sales report, released on Wednesday, is expected to show that sales rose from 5.38 million to 5.43 million in February. This would be only a partial recovery after last month’s significant decline. On Friday, the new home sales report is also expected to show a gain for February, from 593,000 to 620,000. Again, this would represent only a partial recovery after a significant decline. In conjunction with the recent pullback in builder confidence, these reports will give us an indication of how the housing market is trending.

Finally, on Friday, the durable goods orders report may show better news for business investment. The headline index, which includes transportation, is expected to recover from a monthly drop of 3.6 percent in January to a gain of 1.6 percent in February, on a recovery in the extremely volatile aircraft orders segment. The core orders report, which excludes transportation and is a better indicator for the general economy, is also expected to improve, from a decline of 0.3 percent to a gain of 0.5 percent. This would be a positive sign, suggesting that business investment is not slowing as much as earlier data had suggested.

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®