Weekly Market Update, January 3, 2023

Posted on January 7, 2023 by Neal Gallagher

Presented by Mark Gallagher

General Market News

The Federal Reserve (Fed)’s policy rate rang in the new year at a level of 4.5 percent. This came after an historic increase of 4.25 percent over the course of 2022. While the future path of interest rates is far from certain as we ease into the early days of 2023, Bloomberg surveyed economists are anticipating another half percent of rate hikes in the first quarter. Expectations then point to rates remaining stable through the second and third quarters before lowering toward the end of the year. U.S. Treasury yields increased modestly during the final week of 2022. The 2-year, 5-year, 10-year, and 30-year gained 5 basis points (bps) (to 4.39 percent), 1 bp (to 3.98 percent), 11 bps (to 3.86 percent), and 11 bps (to 3.94 percent), respectively.
The last week of the year saw U.S. indices decline, while international indices such as the MSCI EAFE Index and Emerging Markets Index were up slightly. The Russell 2000 was also up slightly and many of these trends were indicative of those seen throughout 2022. The technology-focused Nasdaq Composite Index was among the hardest hit last year as the companies that scaled out quickly in the low interest rate environment following the great financial crisis and in 2020 saw those trends reverse in 2022. Companies such as Amazon (AMZN), Netflix (NFLX), Walt Disney (DIS), and Meta Platforms (META) were among the worst 15 contributors for the S&P 500 index in 2022. These names focused on scaling ahead of profitability in prior years. These names suffered as central banking policy became more aggressive, and the cost of capital rose amid high inflation in 2022. Amazon was focused on scaling its warehousing and ecommerce market share; Netflix scaled out subscribers and viewership, agnostic of who was paying for the service; Walt Disney launched its own Disney+ streaming platform to compete with Netflix; and Meta scaled its Metaverse concept, which continues to be a costly work in progress in achieving its vision for the future of online interaction.
The Dow Jones Industrial Average, MSCI EAFE, and Russell 2000 fared better in 2022. The energy sector was just one of three positive sectors for the year, alongside utilities and consumer staples. That said, energy was the clear winner with the S&P 500 energy sector up more than 68 percent for the year versus just 2.16 and 0.42 percent in utilities and staples. Other sectors that held up a bit better included health care, industrials, financial, and materials. All three indices carry greater exposure to energy, utilities, staples, health care, industrials, and financials than the Nasdaq Composite. Consumer discretionary was also a major factor in 2022 as these S&P 500 sectors were down by 25.96 percent, 33.93 percent, and 38.56 percent, respectively. We look forward to 2023 to see if these trends will continue and if lower bars for sectors that were down in 2022 will set up easier comparisons in the second half of the year.
Last week’s data primarily focused on the housing market and the consumer. There were no major economic data releases during the holiday-shortened week.

Equity Index	Week-to-Date	Month-to-Date	Year-to-Date	12-Month
S&P 500	–0.11%	–5.76%	–18.11%	–18.11%
Nasdaq Composite	–0.28%	–8.67%	–32.54%	–32.54%
DJIA	–0.17%	–4.09%	–6.86%	–6.86%
MSCI EAFE	0.06%	0.08%	–14.45%	–14.45%
MSCI Emerging Markets	0.30%	–1.41%	–20.09%	–20.09%
Russell 2000	0.08%	–6.49%	–20.44%	–20.44%

Source: Bloomberg, as of December 30, 2022

Fixed Income Index	Month-to-Date	Year-to-Date	12-Month
U.S. Broad Market	–0.45%	–13.01%	–13.01%
U.S. Treasury	–0.52%	–12.46%	–12.46%
U.S. Mortgages	–0.44%	–11.81%	–11.81%
Municipal Bond	0.29%	–8.53%	–8.53%

Source: Bloomberg, as of December 30, 2022

What to Look Forward To

This week will be full of important economic releases, spanning ISM data to Federal Open Market Committee (FOMC) meeting minutes and the December employment report.

The major economic releases will ramp up on Wednesday with the release of ISM Manufacturing data and FOMC meeting minutes for December. Manufacturer confidence is expected to decline, which would leave the index in contractionary territory to start 2023. The Fed hiked the federal funds rate by 50 bps at its December meeting and signaled a likely slower path of rate hikes ahead, so the FOMC minutes will be closely examined by economists and investors for any hints on the future path of monetary policy.

Thursday will see the release of the international trade report for November. The monthly trade deficit is expected to decline in November following two months with rising deficits.

Finally, Friday will see the release of both the ISM Services and employment reports for December. Service sector confidence is set to fall in December after increased by more than expected in November. The index is still expected to remain in healthy expansionary territory during the month. The December employment report is set to show that 200,000 jobs were added during the month. The unemployment rate is expected to remain unchanged at 3.7 percent.

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 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 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 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. One basis point is equal to 1/100th of 1 percent, or 0.01 percent.

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, December 27, 2022

Posted on December 28, 2022 by Neal Gallagher

Presented by Mark Gallagher

General Market News

The Federal Reserve’s (Fed’s) policy rate is set to end the year at 4.5 percent. Throughout 2022, the central bank hiked rates 17 times (4.25 percent of increases). Although the path of interest rates in 2023 is uncertain, Bloomberg-surveyed economists expect to see another 0.5 percent in rate increases in the first quarter before levels stabilize through the second and third quarters. Surveyed economists have also indicated that they expect the Fed to cut interest rates in the fourth quarter of 2023.
S. Treasury yields increased, with the 2-year rising 13 bps to 4.31 percent, the 5-year growing 21 bps to 3.84 percent, and the 10-and 30-year each climbing 22 bps to 3.71 percent and 3.77 percent, respectively.
Global equities were mixed in the final full week of trading, which was light. The biggest news was the surprise adjustment by the Bank of Japan to tweak its bond yield controls. Japan is the largest buyer of U.S. Treasuries, and the adjustment saw yields move higher, causing value stocks to outperform growth stocks. Top-performing sectors were energy, utilities, and financials. Underperforming sectors included consumer discretionary, technology, and communication services.
Home builder sentiment dropped more than expected in December, marking 12 consecutive months with declining home builder confidence.
Housing starts and building permits declined during the month, which was expected due to the slowdown in new home construction this year.
Existing home sales fell more than expected, marking 11 consecutive months with falling home sales due to high prices and mortgage rates.
Consumer confidence improved more than expected, bringing the index to its highest level since April.
Personal income and spending increased in November, which was an encouraging signal that consumers remained willing and able to spend.

Equity Index	Week-to-Date	Month-to-Date	Year-to-Date	12-Month
S&P 500	–0.17%	–5.66%	–18.02%	–17.30%
Nasdaq Composite	–1.93%	–8.41%	–32.35%	–32.38%
DJIA	0.86%	–3.93%	–6.70%	–5.70%
MSCI EAFE	0.37%	0.06%	–14.50%	–13.74%
MSCI Emerging Markets	–0.24%	–1.52%	–20.33%	–19.50%
Russell 2000	–0.12%	–6.57%	–20.50%	–20.33%

Source: Bloomberg, as of December 27, 2022

Fixed Income Index	Month-to-Date	Year-to-Date	12-Month
U.S. Broad Market	0.20%	–12.44%	–12.30%
U.S. Treasury	0.04%	–11.97%	–11.88%
U.S. Mortgages	0.37%	–11.09%	–11.00%
Municipal Bond	0.55%	-8.28%	-8.24%

Source: Bloomberg, as of December 27, 2022

What to Look Forward To

There are no major economic data releases scheduled for the holiday-shortened week.

Authored by the Investment Research team at Commonwealth Financial Network.

Market Update for the Month Ending November 30, 2022

Posted on December 12, 2022 by Neal Gallagher

Presented by Mark Gallagher

Markets Rally in November

November saw continued market gains, as all three major U.S. indices rose for the second consecutive month. The S&P 500 returned 5.59 percent during the month, while the Dow Jones Industrial Average (DJIA) notched a 6.04 percent return. The Nasdaq Composite also had a solid month, with the technology-heavy index increasing 4.51 percent. Equity markets were supported by rising optimism from investors that the Federal Reserve (Fed) is set to start slowing the pace of rate hikes in the near future.

These positive results were also supported by solid fundamentals. Per Bloomberg Intelligence, as of November 23, 2022, with 96 percent of companies having reported actual earnings, the blended earnings growth rate for the S&P 500 in the third quarter was 4.49 percent. This is up from initial estimates at the start of earnings season for a more modest 2.57 percent increase. Fundamentals drive long-term market performance, so the sustained earnings growth was a positive sign for businesses and investors.

Technical factors also ended the month mostly supportive, with both the S&P 500 and DJIA ending above their 200-day moving averages. This is the second straight month that the DJIA finished above trend and the first time that the S&P 500 has ended a month above trend since March 2022. The Nasdaq, on the other hand, finished November below its 200-day moving average, as it has every month this year. The 200-day moving average is a widely monitored technical signal since prolonged breaks above or below this trendline can signal shifting investor sentiment for an index. While it’s too early to say that technical support for U.S. markets is back and here to stay, the positive results for both indices were encouraging.

The story was even better internationally, as both developed and emerging market equities rallied in November. The MSCI EAFE Index gained 11.26 percent, marking two consecutive months with positive returns for developed markets. The MSCI Emerging Markets Index had an even better month, with the index showing a 14.85 percent return. Despite positive results, both indices remained well below their respective 200-day moving averages, signaling lingering investor concerns about international stocks.

Fixed income markets also had a positive month, driven by falling long-term interest rates. The 10-year U.S. Treasury yield fell from 4.07 percent at the start of November to 3.68 percent by month-end. The fall in yields helped drive the Bloomberg U.S. Aggregate Bond index to a 3.68 percent return.

High-yield bonds, which are typically less impacted by movements in interest rates and more closely aligned with equities, were also up in November. The Bloomberg U.S. High Yield Corporate Bond index gained 2.17 percent while high-yield credit spreads were largely unchanged.

Inflation Slows but Fed Remains Vigilant

High levels of inflation and the Fed’s tighter monetary policy have been major factors of market turbulence this year, and we saw signs in November that the Fed’s efforts to combat rising prices are starting to succeed. Reports showed encouraging signs that inflation has started to slow in the fourth quarter, although inflation stays high on a year-over-year basis. Multiple Fed officials have noted that the central bank is exploring slowing the pace of its rate hikes at future meetings, highlighted by Fed Chair Jerome Powell’s comments at month-end regarding the Fed potentially hiking the federal funds rate 50 basis points (bps)—following four consecutive 75 bps rate hikes— at its December meeting.

Markets reacted to the news positively, with equities staging a late-month rally following Powell’s comments. Although improvements on the inflation front and softer language from the Fed were encouraging, the Fed is closely monitoring the situation and will be dependent on data in the short term when it comes to setting monetary policy. Given the still high levels of inflation on a year-over-year basis, we may continue to see some short-term, inflation-driven volatility in the months ahead. Progress in November, however, was encouraging.

Consumer and Business Spending Growth Improves

Despite the slowdown in inflationary pressure caused in part by tighter monetary policy, most other economic data releases during the month showed ongoing economic growth. October’s job report showed that 261,000 jobs were added, well above the 193,000 that were expected. While this was down from the 319,000 jobs added in September, it still represents a strong month of job growth on a historical basis and a healthy job market.

The strong labor market helped support consumer spending growth, with retail sales and personal spending showing solid improvements in October. The 1.3 percent increase in headline retail sales was the best result since February, which highlights the strength of the American consumer.

Business spending also showed signs of improvement during the month. Durable goods orders increased 1 percent in October, well above economist estimates for a 0.4 percent increase. Core durable goods orders, which strip out the impact of volatile transportation orders, also increased more than expected. Core durable goods orders are often viewed as a proxy for business investment, so these strong results indicate that businesses continued to spend and invest in October.

Housing Remains Soft

Despite positive results for most areas of the economy, the housing sector showed signs of cooling in November. The pace of existing home sales fell to an annualized rate of 4.43 million in October—the lowest level since Covid-19 pandemic lockdowns in 2020—and well below the 2022 high of 6.49 million that we saw in January.

Still high mortgage rates, limited supply of homes for sale, and high prices continued to serve as headwinds for the housing sector, although we did see a modest decline in mortgage rates by month-end. Homebuilder confidence and new home construction also showed signs of a slowdown in November, with the drop in prospective home buyer demand giving homebuilders pause.

Housing costs are one of the major factors of inflation and the housing sector slowdown has caused prices to start to fall after rising notably throughout 2020 and 2021. As you can see in Figure 1, September marked three consecutive months with declining house prices, which is bad news for prospective sellers but an encouraging sign for the Fed while it tries to combat inflation.

Figure 1. S&P CoreLogic Case-Shiller Home Price Index, Oct. 2017–Present

Positive Outlook Despite Risks

While November brought positive results for markets and the economy, it’s important to remember that real risks to both remain. The fight against inflation isn’t over, as evidenced by still-high price growth on a year-over-year basis, and the potential for a rise in inflationary pressure and tighter monetary policy from the Fed exists in the short term. Additionally, while the conclusion of the midterm elections helped remove some political uncertainty during the month, a divided government could lead to further political turbulence in the new year, especially if we see another debt ceiling debate emerge.

Abroad, the continuous Russian invasion of Ukraine is a constant source of uncertainty. While the direct market impact of the war has largely faded at this point, an increase in hostilities could lead to further instability. The slowdown in China due to its zero-Covid policies is another factor that should be monitored given the importance of the country for global trade.

While none of these factors are expected to become immediate concerns for investors, any of them could negatively impact markets in the short term and further volatility is certainly possible. Despite these risks, however, the continued positive fundamental backdrop is encouraging.

The U.S. economy still shows signs of growth, with the strong job market and resilient consumer and business spending beating expectations. Fundamentals should help limit downside potential, which we’ve seen for markets over the past two months.

Ultimately, while risks remain, the outlook is positive; many of the risks have either diminished or been priced into markets at this point. The most likely path ahead is for continued growth and market appreciation, although the path and pace of further improvements is ambiguous. Given the short-term uncertainty, a well-diversified portfolio that aligns with investment goals and timelines is the best path forward for most. As always, reach out to your financial advisor to discuss your financial plan if you have questions or concerns.

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 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 government and corporate securities, mortgage-backed pass-through securities, and asset-backed securities. The Bloomberg 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.

Authored by the Investment Research team at Commonwealth Financial Network.

Weekly Market Update, December 5, 2022

Posted on December 5, 2022 by Neal Gallagher

Presented by Mark Gallagher

General Market News

Federal Reserve (Fed) Chair Jerome Powell gave a speech last Wednesday in which he stated, “Monetary policy affects the economy and inflation with uncertain lags, and the full effects of our rapid tightening so far are yet to be felt. Thus, it makes sense to moderate the pace of our rate increases.” While much of his speech explained that restrictive policy may be required for some time in order to get inflation down—specifically noting high wage growth—the market latched on to his moderation comments. Yields fell across the U.S. Treasury curve as a result, with the 2-year, 5-year, 10-year, and 30-year dropping 15 basis points (bps) (to 4.31 percent), 12 bps (to 3.74 percent), 18 bps (to 3.52 percent), and 10 bps (to 3.63 percent), respectively. Expectations for the terminal rate still hovered near 5 percent by the Fed’s March meeting, but with a slower pace of rate hikes, there is still plenty of data that could change between now and then.

Equities markets continued to move higher as they also latched on to Powell’s comments for a slower pace of rate hikes. The S&P rose above its 200-day moving average for the first time since April while the DJIA exited bear market territory. This led to strength for some rate-sensitive growth names, including gains of more than 12.2 percent by Netflix and more than 10.8 percent by Meta. Friday’s strong jobs report did complicate the picture, with wage growth coming in much higher than expected and reversing some gains from Powell’s comments as inflation concerns creeped back in. The top-performing sectors were communication services, consumer discretionary, and health care. Under-performing sectors included energy, financials, and utilities.

Tuesday saw the release of the Conference Board Consumer Confidence Index for November, which showed consumer confidence declining slightly less than expected. The second consecutive decline was driven by worsening consumer views on the current situation and souring expectations.

Two reports were released on Thursday. The personal spending and personal income reports for October indicated increases for the third consecutive month, with strong spending growth. The ISM Manufacturing index for November showed slightly higher-than-expected declines, bringing the index to its lowest level since mid-2020.

On Friday, the employment report for November displayed a strong labor with more jobs being added than expected. The unemployment rate remained unchanged, but the labor force participation fell while wages grew more than expected.

Equity Index	Week-to-Date	Month-to-Date	Year-to-Date	12-Month
S&P 500	1.19%	–0.18%	–13.28%	–9.62%
Nasdaq Composite	2.12%	–0.04%	–26.15%	–24.85%
DJIA	0.41%	–0.42%	–3.30%	1.51%
MSCI EAFE	1.06%	2.03%	–12.26%	–8.56%
MSCI Emerging Markets	3.51%	0.17%	–18.58%	–18.62%
Russell 2000	1.32%	0.34%	–14.64%	–13.04%

Source: Bloomberg, as of December 2, 2022

Fixed Income Index	Month-to-Date	Year-to-Date	12-Month
U.S. Broad Market	1.34%	–11.44%	–11.62%
U.S. Treasury	1.20%	–10.95%	–11.41%
U.S. Mortgages	1.36%	–10.21%	–10.15%
Municipal Bond	0.49%	–8.34%	–8.22%

Source: Bloomberg, as of December 2, 2022

What to Look Forward To

This week’s data will show some insights into business confidence and inflation with reports from the service sector and producer prices. We’ll also get a look at the consumer, with the University of Michigan consumer sentiment index due to come out on Friday.

Data reports will begin on Monday with the ISM Services index for November. Service sector confidence is expected to fall for the third consecutive month, which would be a sign that businesses continue to face headwinds.

The week will end with two more reports on Friday. The Producer Price Index for November is expected to show moderating producer inflation, a welcome sign for those hoping for the pace of Fed rate hikes to slow. The University of Michigan consumer sentiment index for December (preliminary) is expected to increase modestly after falling in November. This can be an important measure for determining whether consumers continue to spend in the face of higher prices and concerns over a recession.

Authored by the Investment Research team at Commonwealth Financial Network.