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.

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.

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.

Weekly Market Update, November 28, 2022

Posted on November 29, 2022 by Neal Gallagher

Presented by Mark Gallagher

General Market News

After the Federal Reserve (Fed)’s fourth consecutive rate increase of 75 basis points (bps), the recently released minutes from the early-November meeting indicate that most Federal Open Market Committee (FOMC) members could support dropping to a smaller rate hike when they reconvene in December. “A substantial majority of participants judged that a slowing in the pace of increase would soon be appropriate,” the minutes read. This comes as inflation remains at a stubbornly high level but is showing signs of potential moderation moving forward. While the pace of ongoing rate hikes is certainly an important piece of the puzzle, market participants are also looking for more clues as to what a likely terminal value may be at the end of the cycle. Currently, expectations are hovering around a terminal rate of about 5 percent, but there is plenty more data to be released before that end point comes more clearly into focus. The U.S. Treasury curve was slightly down last week. The 2-year, 5-year, 10-year, and 30-year lost 2 bps (to 4.5 percent), 3 bps (to 3.92 percent), 4 bps (to 3.73 percent), and 12 bps (to 3.76 percent), respectively. Last week’s data was lighter than usual due to the holiday, but the release of durable goods orders and the November FOMC minutes helped provide insight into economic conditions and policy. Equities moved higher as earnings and Fed speak about potentially slower rate increases moving forward helped lift markets. Dell (DELL), HP (HPQ), Analog Devices (ADI), and Deere & Company (DE) all posted modest earnings. While the semiconductor space will take any positive news it can get due to recent headwinds, HP announced it will lay off 6,000 employees through the end of 2025 amid cost cuts. The potential for slower rate increases, however, did not immediately lift growth stocks. The top-performing sectors last week were utilities, materials, financials, and consumer staples. Sectors that underperformed included energy, technology, and consumer discretionary. Wednesday saw the preliminary release of durable goods orders for October. Both headline and core durable goods orders came in above expectations during the month, which was a good sign for business spending. Wednesday also saw the release of FOMC meeting minutes for November. The minutes from the most recent Fed meeting showed that central bankers are carefully monitoring the path of inflation as they consider slowing the pace of rate hikes at future meetings.

Equity Index	Week-to-Date	Month-to-Date	Year-to-Date	12-Month
S&P 500	1.56%	4.15%	–14.29%	–10.96%
Nasdaq Composite	0.73%	2.29%	–27.70%	–26.95%
DJIA	1.80%	5.16%	–3.70%	0.46%
MSCI EAFE	2.15%	12.34%	–13.69%	–10.60%
MSCI Emerging Markets	–0.09%	11.12%	–21.57%	–20.79%
Russell 2000	1.07%	1.34%	–15.74%	–15.64%

Source: Bloomberg, as of November 25, 2022

Fixed Income Index	Month-to-Date	Year-to-Date	12-Month
U.S. Broad Market	3.48%	–12.78%	–12.84%
U.S. Treasury	2.36%	–12.28%	–12.54%
U.S. Mortgages	4.01%	–11.48%	–11.46%
Municipal Bond	4.06%	–9.32%	–9.02%

Source: Morningstar Direct, as of November 25, 2022

What to Look Forward To

This week’s data will provide a number of insights about consumers, including the November Conference Board’s Consumer Confidence survey and employment report as well as the October income and spending reports.

The week will kick off Tuesday with the Conference Board Consumer Confidence Survey for November. Consumer confidence is set to decline modestly in November, echoing a similar decline in the University of Michigan consumer sentiment survey during the month.

Thursday will see the release of both personal income and spending reports for October and the ISM Manufacturing index for November. Both personal income and personal spending are expected to show continued growth in October. Manufacturing confidence is expected to fall into contractionary territory, highlighting the headwinds that the industry is facing.

Finally, Friday will see the release of the employment report for November. Economists expect to see that 200,000 jobs were added during the month, which would be a step down from the 261,000 that were added in October but still strong on a historical basis.