Presented by Mark Gallagher                              

General market news

• Early Monday morning, the yield on the 2-year Treasury opened just below 2 percent at 1.95 percent, while the longer end of the curve essentially stayed flat, making the entire curve flatter. After an initial spike in the yield curve, the spread between the 2-year and 10-year has dropped to about 51 basis points, its lowest since October 2007. The 10-year opened at 2.47 percent, and the 30-year opened at 2.79 percent.
• U.S. markets fared well during the first week of trading in 2018. All three major indices were up more than 2 percent. The Nasdaq Composite led the way, rising 3.4 percent on strength in semiconductors and FANG (Facebook, Amazon, Netflix, Google) stocks. This came despite news of two major flaws in computer chips—dubbed Meltdown and Spectre—which are expected to affect billions of devices. The S&P 500 followed with a 2.63-percent gain. The Dow Jones Industrial Average cracked the 25,000 mark for the first time and posted a 2.37-percent gain.
• One sector that performed well was energy, as WTI crude saw a 1.7-percent increase following civil unrest in Iran and a drop in inventory.
• Last week saw a number of important economic data points, covering the breadth of the economy. On Wednesday, the Institute for Supply Management (ISM) Manufacturing index surprised by increasing, despite expectations for a slight decline. This measure of manufacturing confidence is near a 13-year high.
• On Friday, the December employment report came in worse than expected, with 148,000 new jobs added against expectations for nearly 200,000. On the bright side, wage growth remained stable, and the unemployment rate did not change.
• Also on Friday, the ISM Nonmanufacturing index disappointed by declining for the second month in a row. Despite this pullback, this measure of service-side confidence remains in expansionary territory.

Source: Bloomberg

Source: Morningstar Direct

What to look forward to

There will be two major data releases to pay attention to this week, both on Friday.

The first data release will be the Consumer Price Index. The headline series, which includes both food and energy, is expected to decline from 0.4 percent in November to 0.2 percent in December, driven largely by declining gasoline prices. The annual figure is expected to decline from 2.2 percent to 2.1 percent. The core inflation number, on the other hand, which excludes food and energy, is expected to rise on a monthly basis from 0.1 percent in November to 0.2 percent in December, which would leave the annual figure at 1.7 percent. If these numbers come in as expected, they would remain consistent with past performance, and there would be no significant market impact.

The second data release will be retail sales. The headline number, including auto sales, is expected to drop from 0.8 percent in November to a still-robust 0.4 percent for December, driven by a decline in auto sales. Core retail sales, which exclude auto sales, are also expected to decline, from 1 percent in November to a still-strong 0.4 percent in December. There may be some downside risk to this figure. Overall, if the numbers come in as expected, they would indicate continued strong consumer demand growth in the fourth quarter.

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.

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Mark Gallagher is a financial advisor located at Gallagher Financial Services at 2586 East 7^th 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

Solid December caps strong year for markets
All three major U.S. indices were up during the last month and quarter of 2017. In December, the Dow Jones Industrial Average returned 1.92 percent, while the S&P 500 and Nasdaq Composite indices gained 1.11 percent and 0.48 percent, respectively. For the quarter, the Dow gained 10.96 percent; the S&P 500, 6.64 percent; and the Nasdaq, 6.55 percent. For the year, the Nasdaq rose an impressive 29.64 percent, with the Dow climbing 28.11 percent and the S&P 500 returning 21.83 percent. All three indices were trading above their 200-day moving averages at year-end.

Improving earnings largely drove the positive performance. Per FactSet, at year-end, estimated fourth-quarter earnings growth for the S&P 500 was 10.9 percent, with all 11 sectors projected to grow from third-quarter levels.

International markets also had a successful year. The MSCI EAFE Index of developed markets gained 1.61 percent, 4.23 percent, and 25.03 percent for the month, quarter, and year, respectively. The MSCI Emerging Markets Index returned 3.64 percent in December, 7.50 percent for the quarter, and 37.75 percent for the year. International markets closed 2017 with strong technical support.

The Federal Reserve increased the federal funds rate three times in 2017, demonstrating confidence in the economic expansion. Markets anticipate two or three rate increases in 2018.

Despite the rate hikes, the Bloomberg Barclays Aggregate Bond Index was up 0.46 percent in December, bringing the quarterly return to 0.39 percent and capping the annual return at 3.54 percent. The Bloomberg Barclays U.S. Corporate High Yield Index rose 0.30 percent and 0.47 percent for the month and quarter, though a stronger start to 2017 led to a 7.50-percent annual return.

Consumers drive economic growth
High consumer confidence translated into much better-than-expected spending heading into the holidays. Retail sales surprised to the upside, with headline and core sales both increasing 0.8 percent over October. On an annualized basis, retail spending growth sits at 5.8 percent, the highest level since 2012 (see Figure 1).

Figure 1. Retail Sales Annualized Change, 2007–2017

The Conference Board’s consumer comfort survey hit a 17-year high in November. Confidence declined a bit in December, though it remains very high.

Strong job growth supports confidence and spending. In November, 228,000 jobs were added. Underlying data was also strong, though wage growth was less than anticipated. But the tight labor market and healthy economic growth point to possible faster wage growth in 2018.

In December, homebuilder confidence increased to levels last seen in 1999. This confidence translated into more housing starts, leading to the second-highest annualized growth since 2008. Existing home sales were up 5.6 percent last month while new home sales skyrocketed 17.5 percent.

Businesses also confident—and spending
Business sentiment stayed strong last month, with industry surveys in healthy expansionary territory. Durable goods orders increased 1.3 percent in November. Core orders declined slightly, but that was offset by a positive revision to October’s strong growth. Industrial production and manufacturing output grew 0.2 percent in November.

Persistent political risk looms over markets
Here and abroad, the major sources of market risk are political. The Brexit process and continuing attempts to form a German government, issues surrounding North Korea, and the potential for a U.S. government shutdown could lead to market upheaval or adversely affect economic growth.

2018 starts with lots of momentum
High confidence, continued job and potential wage growth, increased spending, and improving economic fundamentals leave consumers and businesses in good shape entering the new year. Combine that with reduced regulation and the possible positive impact of tax reform, and we could see even faster growth in 2018.

Strong fundamentals should drive the economy and markets forward, but volatility is likely. The calm of 2017 is unlikely to last, so we must remember that markets can go down as well as up. A well-diversified portfolio that takes advantage of long-term growth opportunities remains the best path 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.

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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, senior vice president, chief investment officer, and Sam Millette, fixed income analyst, at Commonwealth Financial Network®.

© 2018 Commonwealth Financial Network®

Presented by Mark Gallagher

General market news
• After dropping to 2.32 percent at the end of last week, the yield on the 10-year Treasury opened Monday at 2.40 percent. The 30-year experienced a similar drop in yield last week before opening the current week at 2.79 percent.
• U.S. markets were mixed last week, as tax reform continued to progress in the Senate, and the market saw rotation from growth to value. The Dow Jones Industrial Average surged 3 percent on the week, while the S&P 500 Index jumped 1.60 percent. Strong performance from value sectors, such as telecom and financials, helped bolster weekly performance for the two indices. The more tech-oriented Nasdaq Composite struggled, however, posting a loss of 0.58 percent. Tech companies with low tax rates, such as Netflix (NFLX) and Nvidia (NVDA), suffered losses of more than 5 percent on the week.
• In other news last week, Jerome Powell, Federal Reserve chair appointee, testified before the Senate Banking Committee on Tuesday as part of the confirmation progress. Meanwhile, there was positive economic data overseas, as the European manufacturing purchasing manager’s index rose to 60.1 for December, its highest level since 2000. In addition, the U.K. and European Union (EU) agreed to a framework for determining the amount the U.K. will need to pay the EU to complete Brexit.
• We saw a number of important domestic economic reports last week. On Monday, new home sales increased by a healthy 6.1 percent month-over-month, an indication that September’s negative figure was hurricane related.
• On Wednesday, the second estimate for third-quarter gross domestic product showed an increase to 3.2-percent growth for the quarter. This represents the second straight quarter of growth above 3 percent.
• On Thursday, personal income and outlays data was also positive, with income rising by more than expected. The personal consumption expenditures figures also came in higher than expected.

Source: Bloomberg

Source: Morningstar Direct

What to look forward to
This will be a busy week for economic news. On Tuesday, the international trade report is expected to show that the trade deficit has worsened, moving from $43.5 billion to $46 billion. Imports continue to rise, so any decline would be due mostly to a drop in food exports. This may be the result of an adjustment problem related to last year’s pop in soybean exports. If so, it would be reversed later.

Also on Tuesday, the Institute for Supply Management’s Nonmanufacturing index will be released. Expectations for this survey of the service sector are for a small decline, from 60.1 to 59.0. This decline would come from the unwinding of the statistical effects from the hurricanes, which distorted results in the previous months, rather than actual slowing. This is a diffusion index, and any number above 50 indicates expansion. So, even with a decline, this index remains a strong indicator of growth.

On Friday, the employment report is expected to show growth. Experts are projecting 200,000 job gains, with the unemployment rate holding steady at 4.1 percent. The workweek also is expected to hold steady, with pay growth remaining at 0.3 percent. These are all strong numbers, and if the wage growth number comes in as expected, it would take the annual growth rate to 2.7 percent, close to a high for the recovery.

Finally, and also on Friday, the University of Michigan consumer confidence survey is expected to rise from 98.5 to 99.0 on a strong labor market and rising stock market. Given the strong result in the Conference Board’s recent survey, there may be some upside risk here, which is reinforced by the seasonal factors that normally drive up this survey around this time of year. Strong consumer confidence helps drive consumer spending, and this would be a positive result.

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.

© 2017 Commonwealth Financial Network®

Presented by Mark Gallagher

General market news
• Since reaching a high of 2.41 percent on November 19, the yield on the 10-year Treasury has hovered around 2.34 percent. The 30-year has moved back below 2.80 percent—a level it has reached only a few times in the past year. Meanwhile, the 2-year is back above 1.75 percent. As the short end of the curve moves higher and the long end maintains its levels or moves lower, the flattening yield curve is increasingly something we need to pay attention to.
• Markets were up across the board during the holiday-shortened week. Technology stocks helped support the advance of the Nasdaq Composite and the S&P 500 Index, as Apple and Amazon posted gains of 2.83 percent and 4.97 percent, respectively. In fact, the S&P notched a new record high on November 21.
• Other top-performing sectors included telecom, industrials, and consumer discretionary. High expectations for the retail space should help consumer discretionary stocks. Earlier this month, Alibaba’s (BABA) Singles’ Day generated $25.3 billion in sales. Black Friday and Cyber Monday are expected to follow this strong performance. Those sectors that lagged on the week were consumer staples, utilities, and financials.
• Last week saw existing home sales come in very close to the consensus estimate. The number of homes sold increased 2 percent over the previous month, but sales were down 0.9 percent from last year. Because demand remains strong, supply continues to dwindle; it fell 3.2 percent, to 1.8 million homes.
• Durable goods orders were released on Wednesday, coming in well below the consensus with a decline of 1.2 percent month-over-month. Expectations were for a 0.4-percent increase. Commercial aircraft orders declined significantly but are expected to bounce back in November. Removing transportation, durable goods orders increased 0.4 percent, and the previous report was revised upwards by 0.4 percent as well.
• The University of Michigan consumer sentiment survey came in slightly above the consensus at 98.5—a sign that consumers’ confidence in the economy remains strong.

Source: Bloomberg

Source: Morningstar Direct

What to look forward to
This week, we’ll get a detailed look at the consumer, as well as sentiment at manufacturing companies.

On Tuesday, the Conference Board will release its confidence survey. The reading is expected to pull back a bit from a 16-year high of 125.9 in October to a still very high 124.0 in November. Strong job and stock markets should keep the index high, but rising gas prices may temper results. Even with the expected pullback, confidence is unusually high, and consumers are feeling very good. This is consistent with faster growth.

On Thursday, the personal income and spending reports will show whether consumers’ behavior is in line with confidence levels. Personal income growth is expected to pull back slightly, from a strong 0.4 percent in September to a still healthy 0.3 percent in October. Faster job growth in the aftermath of the hurricanes was offset by slower wage growth, so there may be some downside risk here. Personal spending growth also is expected to pull back from a 1-percent gain in September—when vehicle sales and rising gas prices buoyed growth—to a healthy gain of 0.3 percent in October. If the data comes in as expected, this will be a positive result for consumers, who represent the largest part of the economy.

Finally, on Friday, the Institute for Supply Management’s survey of manufacturing businesses is likewise expected to pull back from October’s seven-year high of 58.7 to 58.4. This is a diffusion index, where numbers above 50 indicate expansion. So, even with a small pullback, this index would still suggest strong growth. With declines in similar surveys, there may be more downside risk here, but the indicator would still be quite positive even with a larger pullback.

Although there may be some weakening of the data this week, it will be from very high levels and so nothing to worry about. Overall, this week’s data should keep pointing toward economic 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.

Authored by the Investment Research team at Commonwealth Financial Network.

© 2017 Commonwealth Financial Network®