Presented by Mark Gallagher

General Market News

Despite seeing some recent data that potentially points to a slowing pace of inflation, there is still tightening to be done. Core Consumer Price Index (CPI) data for October increased 0.3 percent month-over-month, but Federal Reserve (Fed) officials have indicated that this better-than-expected result should not be seen as a sign that the inflation fight is over. St. Louis Fed President James Bullard noted, “Thus far, the change in monetary policy stance appears to have had only limited effects on observed inflation . . .” He went on to say, “To attain a sufficiently restrictive level, the policy rate will need to be increased further.” The U.S. Treasury curve twisted slightly last week. The 2-year and 5-year gained 17 basis points (bps) (to 4.5 percent) and 4 bps (to 3.98 percent), respectively. The 10-year and 30-year fell 2 bps (to 3.79 percent) and 13 bps (to 3.89 percent), respectively.

Equity market performance was mixed last week as we saw varied commentary from Federal Open Market Committee (FOMC) members. FOMC Vice Chair Lael Brainard echoed the sentiment of James Bullard in that the Fed was potentially looking at slowing the pace of future rate hikes. The Fed’s continued hiking cycle saw inflationary plays such as consumer discretionary, energy, REITs, and materials sell off. The Nasdaq Composite also underperformed its Dow Jones and S&P 500 counterparts as growth stocks continued their underperformance in the face of higher costs of capital going forward. International markets fared a bit better with the MSCI Emerging Market Index up 79 bps as China has showed signs of easing some Covid-19 policies despite rising infection rates. Consumer staples, health care, and utilities outperformed, led by earnings from Walmart (WMT) as the store benefits from its food/staples business.

Last week’s data was focused on retail sales and the housing market, starting with the release of October retail sales data on Wednesday. Both headline and core retail sales growth came in above expectations, signaling continued resilience for the American consumer.

The week wrapped with the release of existing home sales for October. Existing home sales fell less than expected. This does mark 10 consecutive months with declining home sales, however, as rising prices and mortgage rates continue to cool the housing sector.

Source: Bloomberg, as of November 18, 2022

Source: Morningstar Direct, as of November 18, 2022

What to Look Forward To

This week’s data will be light as a result of the Thanksgiving holiday.

Wednesday will see the release of durable goods orders and the FOMC meeting minutes from November. Business spending is set to increase for the third consecutive month in October. Economists and investors will look to the minutes for any hints on the future path of monetary policy.

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.
© 2022 Commonwealth Financial Network®

Presented by Mark Gallagher                                  

General Market News

The Consumer Price Index (CPI) surprised markets last week with headline—which rose 0.4 percent month-over-month against an expected 0.6 percent gain—and core—which rose 0.3 percent month-over-month (excluding food and energy) against an expected 0.5 percent gain—numbers. These results were driven by a decline in prices for used vehicles, commodities, and medical care. The bond market rallied heavily on the news. The 2-year, 5-year, 10-year, and 30-year fell 24 basis points (bps) (to 4.42 percent), 33 bps (to 4 percent), 29 bps (to 3.87 percent), and 19 bps (to 4.06 percent), respectively.

Equity markets also rallied on the lower-than-expected inflation data as Thursday saw the S&P 500 and Nasdaq Composite Index up more than 5 and 7 percent, respectively. The top-performing sectors were those that have been hit hardest by the higher rates and cost of capital, including technology, communication services, and materials. The high growth and yet-to-be-profitable names rebounded sharply in this two-day rally as the potential for a lower cost of capital in theory increased company values via a lower discount rate. That said, not all of the inflation report was positive as both energy and shelter continued their trend higher. The data reflected that not all areas are out of the woods; it may make sense to err on the side of caution before assuming one data point will confirm the trend in the months to follow.

Thursday saw the release of the CPI for October. Consumer prices increased less than expected, due in part to declining prices for consumer goods.

Finally, Friday saw the release of the preliminary University of Michigan consumer sentiment report for November. Consumer sentiment fell more than expected during the month, as consumer views on current economic conditions soured to start November.

Source: Bloomberg, as of November 11, 2022

Source: Morningstar Direct, as of November 11, 2022

What to Look Forward To

This week’s data will focus on the consumer and housing.

Wednesday will see the release of retail sales figures for October. Retail sales are expected to increase 0.9 percent, which would be a sign of continued consumer resilience.

Friday will see the release of preliminary existing home sales data for October. Existing home sales are expected to fall for the ninth consecutive month, driven by rising mortgage rates and slowing demand.

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.
© 2022 Commonwealth Financial Network®

Presented by Mark Gallagher                                  

General Market News

Last Wednesday brought the Federal Open Market Committee (FOMC)’s latest rate decision where it hiked the policy rate by 75 basis points (bps) for the fourth consecutive time. This brought the upper target of the central bank’s rate up to 4 percent for the first time since January of 2008 during the global financial crisis. As for the future path of the central bank’s policy rate, Federal Reserve (Fed) Chair Powell left room for flexibility but indicated that the Fed “will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.” While this might hint at a transition to a smaller rate hike in December, Powell went on to reiterate the “higher for longer” narrative that’s been developing, saying, “We still have some ways to go and incoming data since our last meeting suggests that the ultimate level of interest rates will be higher than previously expected.” U.S. Treasury yields were up across the curve last week. The 2-year, 5-year, 10-year, and 30-year gained 33 bps (to 4.75 percent), 19 bps (to 4.38 percent), 14 bps (to 4.16 percent), and 4 bps (to 4.19 percent).

Equity markets struggled last week amid discussion of a higher end target rate for the Fed. The result was a swift sell-off in riskier equities such as technology and consumer discretionary. The week’s stronger-than-expected employment report didn’t help the case for lower rates as strong employment data continued to make the case for further tightening and higher rates from the Fed. International equities stood out, particularly emerging market equities. Rumors via the New York Times and Financial Times of a move away from the Covid-19 zero policy in China lifted the market. Finally, earnings season remained mixed with earnings growing at a rate of just 2.2 percent in the third quarter, per FactSet. Major themes thus far have been mixed results from Covid-19 stocks, foreign exchange headwinds, travel momentum, and weaker ad spending. Energy continues to carry earnings this quarter; however, if the energy sector was excluded, earnings would have fallen 5.4 percent for the third quarter according to FactSet. Not surprisingly, energy, materials, and industrials were the best-performing sectors last week.

Last week’s data focused on the health of the manufacturing and services segment of the economy. The week also wrapped with the October employment report. But the most important news was the FOMC decision on Wednesday.

Tuesday saw the release of the ISM Manufacturing Index for October. Manufacturer confidence declined by slightly less than expected, and the index now sits at its lowest point since mid-2020—which signals headwinds for the manufacturing industry.

Wednesday was Fed day, as the Fed hiked the federal funds rate by 75 bps at its November meeting, which was in line with expectations. Fed Chair Powell indicated that the central bank is likely to hike again at its upcoming meeting in December as well as into 2023.

On Thursday, the ISM Services report for October was released. Service sector confidence fell by more than expected, but the index remained in expansionary territory despite the decline.

Finally, Friday saw the release of the employment report for October. More jobs than were expected were added in October and the September report was revised up as well. The unemployment rate increased by more than expected during the month yet remained low on an historical basis.

Source: Bloomberg, as of November 4, 2022

Source: Morningstar Direct, as of November 4, 2022

What to Look Forward To

This week’s data will focus on inflation and the consumer.

Thursday will see the release of the Consumer Price Index for October. The report is set to show continued inflationary pressure, with headline prices set to rise by 0.7 percent.

Friday will see the release of the preliminary University of Michigan consumer sentiment survey results for November. Consumer sentiment is set to decline modestly, which would break a four-month streak of improving confidence.

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.
© 2022 Commonwealth Financial Network®

Presented by Mark Gallagher

Markets Rebound in October

Equity markets showed signs of improvement in October, helping offset September losses. The S&P 500 gained 8.1 percent during the month, while the Nasdaq rose 3.94 percent. The Dow Jones Industrial Average (DJIA) experienced the best month of the three major indices, soaring 14.07 percent. Although these solid results were encouraging, all three indices remain down for the year.

That positive performance coincided with improving fundamentals. As of October 31, with 53.6 percent of companies having reported actual earnings, the blended earnings growth rate for the S&P 500 in the third quarter was 3.8 percent, according to Bloomberg Intelligence. At the start of earnings season, the growth rate was expected to be 2.6 percent. Over the long run, fundamentals drive market performance, so better-than-expected earnings growth was an encouraging signal, even though its pace has slowed this year.

Although fundamentals were supportive during the quarter, technical factors were mixed. Both the S&P 500 and Nasdaq finished the month well below their respective 200-day moving averages, marking seven consecutive months with both finishing below trend. The DJIA, on the other hand, ended above trend for the first time since March. The 200-day moving average is an important technical indicator because prolonged breaks above or below this level can signal shifting investor sentiment for an index. Continued technical weakness for the S&P 500 and Nasdaq should be monitored.

International equities were mixed. The MSCI EAFE Index increased 5.38 percent, while the MSCI Emerging Markets Index lost 3.09 percent. Emerging markets were hurt by the stronger dollar and a sell-off in Chinese equities, which was caused by uncertainty surrounding the country’s economic outlook. Technicals for developed and emerging markets were challenging; both indices finished below trend. In fact, they have ended every month this year below their respective 200-day moving averages, indicating continued investor unease with international stocks.

Fixed income markets continued to experience losses due to rising interest rates. The 10-year Treasury yield rose from 3.83 percent at the end of September to 4.1 percent at the end of October. That marked the first time the 10-year yield finished a month above 4 percent since May 2008, highlighting the rise in interest rates over the past year. The Bloomberg Aggregate Bond Index declined 1.3 percent.

Although investment-grade bonds experienced losses, high-yield fixed income fared better. High-yield credit spreads declined notably, dropping from 5.43 percent to 4.63 percent. Those declining credit spreads helped the Bloomberg U.S. Corporate High Yield Index gain 2.6 percent.

Interest Rate Uncertainty Remains

Interest rate volatility continued, as investors remained concerned about higher rates from the Federal Reserve (Fed) in the short term. The Consumer Price Index showed that consumer inflation accelerated, leading to higher fixed income yields due to expectations for additional Fed rate hikes. The central bank remains committed to tightening monetary policy to combat inflation, and additional increases are expected at its December and February meetings.

Until we see consistent evidence that higher rates are leading to less inflationary pressure, short-term interest rate uncertainty will remain. Although the impact of higher rates on equity markets was muted last month, we’ve seen how higher rates can hurt markets throughout the year, so continued short-term interest rate uncertainty presents a risk to markets that should be monitored.

Housing Continues to Slow

The housing sector is one area where we have seen direct evidence of a rate-induced slowdown. Existing home sales declined in September for the ninth consecutive month. The annualized pace of existing home sales is at its lowest since Covid lockdowns began in 2020, highlighting the slowdown in housing sales over the past year. Mortgage rates continued to rise, reaching 7.3 percent before retreating modestly to 7.22 percent. In a sign that the slowdown in sales has begun to affect prices, the Case-Shiller 20-City Composite Home Price Index fell 1.3 percent in August.

Although prices remain up year-over-year, the slowdown in sales and monthly decline in prices indicate that higher rates are starting to lower inflationary pressure in the housing sector. In the medium to long run, this should help support the Fed’s attempts to combat inflation across the economy. At the moment, however, still-high prices on a year-over-year basis signal that further home price declines may be ahead.

Economy Remains Solid

Despite the slowdown for the housing sector, overall economic growth remained on track. The advanced estimate for third-quarter GDP showed that the economy grew at an annualized rate of 2.6 percent, better than economist estimates and an encouraging rebound after two quarters of contraction. This result was supported by better-than-expected personal consumption growth during the quarter, an encouraging sign that economic fundamentals remain solid.

September saw 263,000 jobs added, surpassing expectations. This helped drive the unemployment rate to a pandemic-era low of 3.5 percent during the month. The job market, an area of strength throughout the economic recovery, has helped support gains in personal income and spending this year. September’s personal spending report showed that consumer spending held up well. In fact, as shown in Figure 1, consumer spending remained resilient during the month and has been largely consistent this year, other than a decline in July.

Figure 1. Personal Spending, October 2019–Present

Business spending also remained healthy; headline durable goods orders increased in September, and August’s results were revised upward. Although business confidence declined modestly, continued spending growth was encouraging.

Risks Cloud Short-Term Outlook

Market and economic updates were largely positive, but there remain risks to monitor. November midterm elections are a source of uncertainty that could lead to market turbulence depending on the outcomes; this uncertainty should be resolved soon, however. The Fed also remains a risk because it could scare investors and cause further interest rate instability if it indicates it plans to raise interest rates higher for longer to combat inflation.

Looking abroad, several risks remain, with the continued Russian invasion of Ukraine a primary risk. Although the market impact of the invasion has diminished, the possibility for an escalation and further instability remains. The slowdown in China and tighter monetary policy globally may also affect the U.S. economy and markets.

Despite these risks to the short-term outlook, market resilience was a positive development that signals many of the dangers may already be priced in. With fundamentals continuing to show signs of improvement, downside risks may be contained. Looking ahead, opportunities exist if fundamental improvements continue for the economy and short-term risks remain muted.

Ultimately, though the potential for short-term turbulence remains, continued growth remains the most likely outcome over the medium to long term. Given the potential for short-term uncertainty, a well-diversified portfolio that matches investor timelines with goals remains the best path forward for most. As always, if concerns remain, reach out to your financial advisor to discuss your plan.

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. One basis point is equal to 1/100th of 1 percent, or 0.01 percent. The Case-Shiller 20-City Composite Home Price Index tracks changes in the price of residential real estate in 20 major metropolitan regions in the U.S.

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, manager, fixed income, at Commonwealth Financial Network^®.

© 2022 Commonwealth Financial Network^®