Presented by Mark Gallagher

A turbulent February for markets
February was a tough month for markets, ending in a terrible final week—the worst week for U.S. equity market returns since 2008. Investors were spooked by news about the spread of the coronavirus and fled to safe-haven assets. The S&P 500 fell by 8.23 percent, the Dow Jones Industrial Average (DJIA) dropped by 9.75 percent, and the Nasdaq Composite lost 6.27 percent.

This sell-off came despite positive fundamentals, with fourth-quarter earnings for the S&P 500 continuing to come in above expectations. Per Bloomberg Intelligence, as of February 20, the blended average earnings growth rate for the S&P 500 stands at 1.3 percent for the fourth quarter, with 86 percent of companies reporting. This is a solid improvement from initial estimates of a 1.2 percent decline. If this growth rate holds, it would represent the first quarter with year-over-year earnings growth since the fourth quarter of 2018. While prices can diverge from fundamentals over the short term, fundamentals drive growth in the long term. So, this return to growth is a positive development for markets.

Technicals were far less supportive for U.S. equities during the month. Both the S&P 500 and DJIA ended below their respective 200-day moving averages. The Nasdaq Composite was the only major equity index that finished above its trendline. It traded below this level on the final trading day of the month, however, before recovering and finishing above trend. This is an important technical signal, as prolonged breaks below this trendline could indicate a longer-term shift in investor sentiment.

The story was much the same internationally, with the MSCI EAFE Index falling by 9.04 percent for the month and emerging markets declining by 5.27 percent, both due to coronavirus concerns. Technicals were a headwind for international markets, with both indices finishing below their respective 200-day moving averages.

The major beneficiary from the risk-off sentiment was investment-grade fixed income. Investors sold out of riskier asset classes and flocked to the relative safety of bonds. Yields fell sharply, as shown by movements in the 10-year Treasury yield, which started February at 1.54 percent and finished at 1.13 percent. Falling yields drove the Bloomberg Barclays U.S. Aggregate Bond Index to a gain of 1.80 percent.

High-yield fixed income, which tends to be more closely correlated with equities than with interest rates, did not fare as well. The Bloomberg Barclays U.S. Corporate High Yield Index was positive for much of the month. But the risk-off sentiment that pervaded markets hit high-yield bonds near month-end, causing a decline of 1.41 percent. Investors demanded more yield to compensate for perceived higher levels of risk. As a result, credit spreads for high-yield bonds widened to levels last seen in June 2019.

Putting volatility in perspective
Concerns about the spread of the coronavirus were the major driver of market volatility in February. In January, investors were focused largely on the spread of the disease in China and the steps governments around the world were taking to contain it. But in February, news that the virus had spread throughout much of the world spurred fears of a pandemic. Reports of untraceable cases and the first death from the virus in the U.S. drove this point home for Americans.

Market reactions to this larger-scale problem were severe, as was the case with previous epidemics, such as Ebola, Zika, and SARS. In that sense, while the risks are real, we have seen this movie before. There’s certainly no guarantee things will play out as they have in the past. But with each of these epidemics, we saw short-term volatility followed by quick recovery once the disease was contained. Data from China and other countries around the world shows that, so far, the spread of the coronavirus is moderating. So, it is not unreasonable to expect a similar market recovery once more progress is made.

Economic updates positive, despite coronavirus threat
While investor attention was dominated by the sell-off at month-end, many of the economic updates released during the month showed signs of an improving economy. February’s consumer confidence reports were encouraging, with both major measures of consumer sentiment increasing to multi-month highs. The University of Michigan consumer sentiment survey was especially encouraging. It included survey responses from consumers through February 25, when markets were experiencing the virus-related sell-off. So far, consumer sentiment has remained resilient despite the spread of the virus. We will be monitoring this closely, however, given the close relationship between consumer confidence and spending.

Speaking of spending, consumer spending data released during the month was solid as well. Headline retail sales grew 0.3 percent in January, marking the fourth straight month of headline sales growth. Housing sales were also impressive, with existing home sales up nearly 10 percent year-over-year. New home sales were even more notable, increasing by 7.9 percent. This brought the pace of new home sales up to its highest monthly level since 2007, as you can see in Figure 1. Overall, February’s data releases showed the American consumer was very active to start the year.

Figure 1. New Home Sales, 2007–Present

Businesses also showed improving confidence and spending figures. Both manufacturer and nonmanufacturer confidence increased by more than expected in January. Durable goods orders came in better than expected for both December and January. Core durable goods orders, which are a proxy for business investment, increased for the third straight month. This indicates the slowdown we saw in business investment throughout much of 2019 may be reversing. Although they could be at risk going forward, these positive economic fundamentals provide a substantial cushion for any economic damage from the virus.

Fundamentals vs. risks
Despite the strong fundamentals we saw during the month, risks remain, and more volatility is likely. Previous epidemics have had minimal long-term effects on markets, but there is no guarantee this outbreak will follow the same pattern.

That said, markets are now pricing in quite a bit of risk, and there is potential for good news to lead to a market rally. We’ve already seen some evidence of this in China, where reports of a slowdown in new cases led to a partial recovery in equity markets at month-end. In the U.S., fundamentals and spending are strong. So, we can still expect economic growth to continue in 2020. There is also the potential for market support from global central banks. They are monitoring the spread of the virus carefully and will be ready to step in with supportive monetary policy if necessary.

Ultimately, the major risk to the economy is the potential for a sharp drop in confidence in the face of the negative headlines. We will be watching this going forward. Given the likelihood of further short-term volatility, February’s results remind us of the importance of constructing portfolios that can withstand volatility. As always, a well-diversified portfolio that matches investor goals and time horizons 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.

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, senior investment research analyst, at Commonwealth Financial Network®.

© 2020 Commonwealth Financial Network ®

Presented by Mark Gallagher

General Market News
• Global concerns about the spread of the coronavirus pushed yields to historical lows late last week, with the 10-year Treasury yield sinking as low as 1.02 percent on Monday. The 30-year stands at 1.63 percent, which is where the 10-year stood less than two weeks ago. The 2-year opened at 0.72 percent. Currently, there are 19 developed countries with yields lower than the U.S.—Switzerland has one of the world’s lowest yields, with its 10-year yielding –0.915 percent. The Federal Open Market Committee is likely to look for a cut in rates at its next meeting on March 18.
• U.S. markets posted their largest weekly decline since October 2008, as the number of coronavirus cases outside of China picked up. This resulted in concern over future earnings growth, as travel restrictions and forced closures of Chinese businesses have wreaked havoc on the global supply chain. The fear over the spread outside of China also battered travel stocks. The S&P 500 dropped 11.4 percent, the Dow Jones Industrial Average dropped 12.3 percent, and the Nasdaq Composite dropped 10.5 percent. Federal Reserve (Fed) Chair Jerome Powell issued a statement on Friday stating that the Fed would “act as appropriate to support the economy.”
• The worst-performing sectors on the week were energy, financials, and materials, with WTI crude falling more than 16 percent. The best-performing sectors were communication services, consumer staples, and health care.
• We started the week with Tuesday’s release of the Conference Board Consumer Confidence Index for February. Consumer confidence increased modestly from 130.4 in January to 130.7 in February, against expectations for an increase to 132.2. While this moderate increase looks solid at first glance, it actually represents a slight decline from January’s initial estimate of 131.6. Despite January’s revision, February’s result still represents impressively resilient consumer confidence, given the negative headlines from the continued spread of the coronavirus.
• On Wednesday, January’s new home sales report was released. New home sales increased by more than expected, rising 7.9 percent against expectations for a 3.5 percent increase. This result brought new home sales up to their highest level since 2007. New home sales rallied considerably in the second half of 2019, as mortgage rates fell. And with Treasury rates setting all-time lows in February, this tailwind appears likely to continue into 2020. Housing has been one of the most impressive sectors in the recent economic expansion, and this report is just another example of the current strength of the housing sector.
• On Thursday, the second estimate of fourth-quarter gross domestic product (GDP) growth was released. The pace of economic growth in the fourth quarter remained at 2.1 percent annualized. This was in line with economist estimates and the 2.1 percent growth rate we saw in the third quarter. Personal consumption was revised down slightly from 1.8 percent to 1.7 percent, which was also in line with economist estimates. Net trade was the major driver of fourth-quarter GDP growth. The economy grew by 2.3 percent during the year, down from the 2.9 percent growth we saw in 2018. While the slowdown in annual growth is slightly disappointing, slow growth is still growth and is certainly better than the alternative.
• Thursday also saw the release of January’s preliminary durable goods orders report. Durable goods orders came in better than expected, declining 0.2 percent against expectations for a 1.4 percent drop. Orders were held back by a fall in defensive aircraft orders, which are typically volatile on a month-to-month basis. Core durable goods orders, which strip out the impact of transportation orders, increased by 0.9 percent during the month, against expectations for 0.2 percent growth. Core orders are often used as a proxy for business investment, so this result is a very positive development. After three straight months of core durable goods orders growth, the slowdown in business investment we saw throughout much of 2019 may be behind us.
• On Friday, January’s personal income and personal spending reports were released. Personal income grew by 0.6 percent during the month, while spending increased by 0.2 percent. Economists had forecasted 0.4 percent growth for personal income and 0.3 percent growth for personal spending. Overall, these were solid reports for consumers to start the year, although the miss in personal spending is a bit disappointing, given the high levels of confidence we saw during the month. The better-than-expected result for personal income growth was more encouraging and reflects the benefits of a strong jobs market. Typically, we would expect to see a pickup in spending growth given the strength in income. But the recent negative sentiment driven by the spread of the coronavirus will likely be a headwind for consumers.
• We finished the week with the second and final reading of the University of Michigan consumer sentiment survey. Consumer sentiment came in better than expected, increasing from 100.9 midmonth to 101 at month-end, against expectations for a slight pullback to 100.7. Consumer sentiment has remained resilient despite the spread of the virus, but it should be closely monitored given the escalating nature of the situation and the important relationship between consumer confidence and spending.

Source: Bloomberg

Source: Morningstar Direct

What to Look Forward To
We started the week with Monday’s release of the Institute for Supply Management (ISM) Manufacturing index for February. This measure of manufacturer confidence fell by more than expected during the month, from 50.9 in January to 50.1 in February, against expectations for a more modest decline to 50.5. This is a diffusion index, where values above 50 indicate expansion, so the index is still pointing toward growth, albeit at a slow rate. This decline was largely attributable to worries regarding the spread of the coronavirus, with manufacturers citing uncertainty along global supply chains as their primary concern. Despite the disappointing result, the February report represents the second-best reading for the index in seven months. It also marks the second straight month where the index has been in expansionary territory, so things could certainly be worse. We’ll continue to monitor this important gauge of manufacturer confidence, to see if the headwinds created by the coronavirus continue in March.

On Wednesday, the ISM Nonmanufacturing index will be released. This survey measures confidence in the service sector, which accounts for the lion’s share of economic activity. Economists expect service sector confidence to decrease moderately, from 55.5 in January to 55 in February. As was the case with the manufacturer index, service sector confidence improved by more than expected in January, so this anticipated decline is understandable. If estimates hold, the combined measure of manufacturer and service sector confidence would sit at levels that have historically indicated economic growth between 1 percent and 1.5 percent.

On Friday, we’ll get January’s international trade report. The trade deficit is expected to shrink modestly, from $48.9 billion in December to $48.5 billion in January. Previously released monthly reports on trade showed a modest drop in exported goods that was more than offset by a larger drop in imports. This report is unlikely to be affected by the concerns over the coronavirus, given that most of the measures taken by countries and businesses to halt the spread of the virus were enacted in February. Trade was a net contributor to economic growth in the fourth quarter, but going forward results will likely be volatile given the global uncertainty regarding the spread of the coronavirus.

We’ll finish the week with Friday’s release of the February employment report. Economists expect it to show that 175,000 new jobs were created during the month, following January’s better-than-expected result of 225,000 new jobs. The underlying data should also show positive momentum, with the unemployment rate expected to decline from 3.6 percent to 3.5 percent. Average hourly earnings growth is set to improve, with January’s 0.2 percent gain followed by a 0.3 percent rise in February. If these estimates prove to be accurate, February would represent another solid month of updates for the job market. This sector, which softened at the start of 2019, has shown signs of strength over the past few months.

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.

© 2020 Commonwealth Financial Network ®

Presented by Mark Gallagher

General Market News
• Rates continued to fall last week, as concerns about the spread of the coronavirus rattled global markets. The 10-year Treasury yield opened at 1.38 percent, nearing lows last seen in 2016. The 30-year fell to 1.83 percent, which is its all-time low.
• Markets were down across the globe last week. Investors took a risk-off approach due to concerns about the spread of the coronavirus to areas beyond China. The increase in cases in countries such as South Korea, Iran, and Italy led to fears that what was once an epidemic more or less contained within China may become a global pandemic. The removal of passengers from the Japanese cruise ship Diamond Princess added to the number of cases outside of China.
• Not surprisingly, the bond proxies in REITs, consumer staples, and utilities were among the top-performing sectors on the week. Investors moved away from technology, financials, and consumer services, which were the worst-performing sectors.
• The National Association of Home Builders Housing Market Index for February was released on Tuesday. This measure of home builder confidence slid modestly from 75 in January to 74 in February, against expectations to remain flat for the month. The index remains just two points off of the 20-year high of 76 that was set in December. Geographically, results were mixed, with confidence in the South and the Northeast reaching new highs, while sentiment in the West and Midwest decreased slightly.
• We didn’t have to wait long to see the positive effects of high home builder confidence at the start of the year, as January’s building permits and housing starts reports came in better than expected. Permits increased by 9.2 percent during the month, against expectations for a 2.1 percent increase. Starts declined by 3.6 percent, but this was far better than economist expectations for an 11.2 percent decline. These two data points can be volatile on a month-to-month basis; however, both permits and starts showed a clear upward trend in the second half of 2019 that has continued into the new year. Permits now sit at their highest monthly level since 2007, while starts are at their second-highest monthly level over the same time period. So, the monthly volatility is nothing to worry about.
• Wednesday saw the release of January’s Producer Price Index report. Producer inflation increased by 0.5 percent during the month against expectations for a 0.1 percent increase. This brought year-over-year producer inflation up to 2.1 percent, which is much higher than December’s year-over-year inflation rate of 1.3 percent. Core producer inflation, which strips out the impact of volatile food and energy prices, showed similar monthly growth of 0.5 percent and year-over-year growth of 1.7 percent. Most of the increase can be attributed to higher costs for services, which make up roughly 65 percent of the headline figure and rose by 0.7 percent during the month. Despite the faster-than-expected growth for the month, on a year-over-year basis, inflation remains below recent highs set in 2018 and 2019. The Federal Reserve (Fed) has indicated it is willing to let inflation run above its state 2 percent target for the time being.
• Speaking of the Fed, the minutes from the January Federal Open Market Committee meeting were released on Wednesday. The Fed voted unanimously to keep the federal funds rate unchanged, and there were few major revelations from the minutes. Overall, Fed members appeared to be a bit more optimistic about the economic expansion; however, there was some discussion about the spread of the coronavirus from China and the potential effects that could have on global growth. They also discussed the plan to wind down their involvement in the repurchase market, which they anticipate will likely happen in the second quarter. Overall, the impact of this release was relatively minimal, as it echoed much of what Fed Chair Powell stated to Congress when he presented the semiannual Monetary Policy Report earlier in the month.
• We finished the week with Friday’s release of January’s existing home sales report. Sales declined by 1.3 percent during the month, but this was better than the expected 1.8 percent decline. On a year-over-year basis, sales are up more than 10 percent. This marks seven straight months with year-over-year growth for existing home sales, which is a strong turnaround following the prolonged slowdown in sales throughout 2018 and at the start of 2019. Housing’s rebound has been one of the bright spots of the economic expansion over the past few quarters, and this result indicates prospective home buyers are still willing and able to continue to fuel the expansion.

Source: Bloomberg

Source: Morningstar Direct

What to Look Forward To
On Tuesday, the Conference Board Consumer Confidence Index for February will be released. Economists are forecasting a modest increase, from 131.6 in January to 132.1 in February. This result would match the month’s gains in the University of Michigan consumer sentiment survey. Consumer confidence hit a five-month high in January, after remaining rangebound for the fourth quarter. Higher confidence levels support additional spending growth, so an increase would certainly be regarded as a tailwind for future growth.

On Wednesday, January’s new home sales report is scheduled for release. Sales are expected to increase by 2.3 percent during the month, up from a modest 0.4 percent decrease in December. Compared with existing home sales, new home sales are a smaller and more volatile portion of the housing market. Still, they showed a notable uptick in the second half of 2019. If the January estimate proves accurate, it would represent the fastest pace of new home sales since 2007, providing another example of the housing sector’s strength.

On Thursday, we’ll get the second estimate of fourth-quarter gross domestic product growth. Economists believe the annualized pace of economic growth in the fourth quarter will be revised up from 2.1 percent to 2.2 percent. Personal consumption is expected to remain flat at a 1.8 percent annualized growth rate. If the estimates hold, they would mark an acceleration from the 2.1 percent growth rate achieved in the third quarter. Economists had previously forecasted 2 percent growth for the fourth quarter, so any additional improvements from the early estimate would certainly be positive.

Thursday will also see the release of the preliminary durable goods orders report for January. Orders are set to decline by 1.5 percent, following a better-than-expected 2.4 percent increase in December. Headline durable goods orders experienced a high level of monthly volatility during the fourth quarter, primarily driven by swings in defensive aircraft orders. Core durable goods orders, which strip out the effect of volatile transportation orders, are set to increase by 0.2 percent, up from a 0.1 percent decline in December. Core durable goods orders are often used as a proxy for business investment, so this anticipated increase would be quite welcome, especially given the decrease in core orders in November and December. Previously released surveys showed business confidence picking up in January, so there’s reason to believe that investment will also increase. This would be a good sign for overall growth, given the lack of business investment throughout much of 2019.

On Friday, January’s personal income and personal spending reports will be released. Both are expected to show 0.3 percent monthly growth. These results would be a solid start to the year for consumers, who were the major drivers of the economic expansion in 2019. Income and spending grew at similar rates throughout 2019, indicating that spending growth will be sustainable. As long as consumers are earning more and willing to spend more, the prospects for continued growth remain strong.

Finally, we’ll finish the week with the second and final reading of the University of Michigan consumer sentiment survey for February. Economists expect to see a slight pullback for the index from the midmonth reading of 100.9 to 100.6 at month-end. The first midmonth estimate came in above economist forecasts of 99.5, so this anticipated decline would still leave the survey above initial estimates for the month. Consumer sentiment has so far remained impressively resilient despite the continued spread of the coronavirus from China. It will be important to keep monitoring this sector, however, given the relationship between rising confidence and spending 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.

© 2020 Commonwealth Financial Network ®

Presented by Mark Gallagher

General Market News
• Rates fell slightly last week, as concerns regarding the spread of the coronavirus continued to rattle investors. The 10-year Treasury yield fell to 1.54 percent to start the week, and the 30-year fell to 1.99 percent.
• Both domestic and emerging markets moved higher last week, while international developed markets remained flat. Utilities and REITs outperformed, supported by concerns about the impact of the coronavirus on global growth. These sectors were followed by consumer discretionary and technology, with the University of Michigan consumer sentiment survey surprising to the upside on Friday. The largest individual contributor was Nvidia, which was up more than 15 percent after beating sales and earnings expectations. Other top contributors included companies with heavy consumer exposure, such as Amazon, Visa, and Mastercard. The worst-performing sectors included materials, energy, and consumer staples.
• On Thursday, January’s Consumer Price Index (CPI) report was released. Consumer prices increased by a modest 0.1 percent during the month, which led to year-over-year growth of 2.5 percent. This is a slight increase from the 2.3 percent year-over-year growth we saw in December. Core CPI, which strips out the impact of volatile food and energy prices, rose by 0.2 percent for the month and 2.4 percent year-over-year. Even with the slight uptick in January, and three Federal Reserve (Fed) interest rate cuts last year, inflation remains modest. Fed board members have indicated they are comfortable with inflation coming in above their stated 2 percent target, so there is no major concern for the time being.
• Friday saw the release of January’s retail sales report. Headline sales grew by 0.3 percent during the month, marking four straight months of sales growth. Excluding volatile auto and gas purchases, the results were even better, with 0.4 percent growth in January. This was above economist estimates for 0.3 percent growth. Sales of building materials and furniture were two of the fastest-growing categories, spurred by mild weather and a strong housing market. Consumer spending was a major driver of gross domestic product growth in 2019, so this strong start to the year is a good sign for the economy as we kick off 2020.
• Friday also saw the release of December’s industrial production report, which came in slightly lower than estimates. Production declined by 0.3 percent during the month, against expectations for a 0.2 percent drop. This decline was caused in large part by a slowdown in utilities output, driven by January’s mild weather. Manufacturing output declined by 0.1 percent in January, which was in line with expectations. This decline was due largely to Boeing’s decision to temporarily halt production on the 737 MAX aircraft, as manufacturing output excluding aircraft rose by 0.3 percent during the month.
• We finished the week with the first reading of the University of Michigan consumer sentiment survey for February. Sentiment increased from 99.8 in January to 100.9 in February, despite forecasts for a slight decline to 99.5. This better-than-expected result brought the index to its highest level in nearly two years. The surprisingly strong January employment report, combined with positive equity markets and a healthy housing market, helped bolster consumer confidence.

Source: Bloomberg

Source: Morningstar Direct

What to Look Forward To
We’ll start the week with Monday’s release of the National Association of Home Builders Housing Market Index for February. This gauge of home builder confidence dropped one point, to 74, against expectations to remain steady. The index sits two points below a 20-year high. Home builder confidence has been supported by very strong home buyer demand, as demonstrated by the subindex that tracks prospective buyer traffic, which hit its highest level since 1998 in December. Falling mortgage rates and high consumer confidence have been driving more prospective buyers into the market, though supply continues to be a constraint. Home builders have noticed and ramped up construction accordingly.

Speaking of construction, on Tuesday, January’s building permits and housing starts reports will be released. Permits are expected to show moderate 2.1 percent growth, while starts are set to decline by 12.9 percent. While this anticipated drop in housing starts is notable, starts can be very volatile on a monthly basis, as evidenced by the 16.9 percent increase seen in December. Despite their tendency to fluctuate, housing starts showed a clear upward trend throughout 2019. Constrained supply and high buyer demand made home builders eager to start new construction as quickly as possible. If the estimates for January are accurate, housing starts will be at their second-highest monthly level since 2006, giving us no cause for concern.

Tuesday will also see the release of January’s Producer Price Index. Producer inflation is slated to increase by 0.1 percent during the month and 1.6 percent year-over-year. Core prices that exclude volatile food and energy prices are set to increase by 0.2 and 1.3 percent for the month and year, respectively. As noted with consumer prices, inflation remains muted despite the Fed’s supportive rate cuts last year. This measure of producer inflation has been below the Fed’s 2 percent target since May 2019.

On Wednesday, the minutes from the January Federal Open Market Committee meeting will be released. The Fed unanimously voted to keep the federal funds rate unchanged. Given this decision, as well as recent testimony from Fed Chairman Jerome Powell to Congress, the minutes are unlikely to contain any major surprises. We may get some commentary regarding the Fed’s plans to unwind its ongoing involvement in the repurchase market. Overall, however, the minutes are expected to give us an insight into the Fed’s views on the current economic expansion rather than revelations.

We’ll finish out the week with Friday’s release of January’s existing home sales report. Economists are forecasting a modest decline of 1.2 percent, following a 3.6 percent gain in December. Despite such a drop, the forecasted result would represent more than 10 percent growth on a year-over-year basis. It would also mark seven straight months with year-over-year growth, demonstrating a very solid turnaround from the prolonged slowdown in sales throughout 2018. Housing’s rebound has been one of the bright spots of the economic expansion, so a continued recovery would be quite welcome.

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.

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