Presented by Mark Gallagher

General Market News
• On Monday, the 10-year Treasury opened at 1.60 percent, down from last week’s 1.82 percent. The 30-year yield opened at 2.08 percent, dropping from 2.30 percent. The short end of the curve is inverted again, with the 2-year yield at 1.45 percent and the 3-year yield at 1.42 percent.
• Global markets sold off last week, as the spread of the Wuhan coronavirus has led to concerns over its effect on global growth. The Chinese government has restricted travel ahead of the Lunar New Year to help prevent the spread of the virus. The holiday was also extended to February 2 in an effort to keep citizens at home.
• Concerns amid global growth caused West Texas Intermediate to fall by 7.5 percent. This decline pulled energy as a whole down by 4 percent, making it the worst-performing sector. Other lagging sectors included materials and financials. The top-performing sectors were utilities, real estate, and technology. Technology was supported by a large beat by Intel, as the growth of its cloud service segment accelerated.
• On Wednesday, December’s existing home sales report was released. Sales of existing homes rose 3.6 percent, against expectations for 1.5 percent growth. This result brought the pace of sales to the highest level since February 2018. The housing sector staged a very impressive rebound in the second half of 2019 after slowing in late 2018, and these results point toward further growth in 2020. Low mortgage rates and high consumer confidence have drawn more prospective buyers into the market, leading to the impressive results we saw at the end of 2019.

Source: Bloomberg

Source: Morningstar Direct

What to Look Forward To
We started off the week with Monday’s release of the December new home sales report. Sales came in lower than predicted, falling 0.4 percent during the month against expectations for a 1.5 percent increase. New home sales are a relatively small portion of overall sales, however, and the results can often be more volatile than existing home sales on a monthly basis. So, despite the disappointing result, if we look at longer-term trends, new home sales are continuing to exhibit strong growth. Growth in year-over-year sales was up to 23.7 percent compared to December 2018. As for supply of new homes on the market, this area remains constrained. But the uptick in construction we’ve seen recently could help fuel sales growth as more homes become available for purchase. Given the strength in year-over-year growth and the potential tailwinds from new construction, the disappointing monthly result is nothing to be worried about for the time being.

On Tuesday, December’s durable goods orders report will be released. Durable goods orders are expected to increase by 1.2 percent, following a surprising decline of 2.1 percent in November. November’s results were caused by a sharp drop in volatile defensive aircraft orders, so a return to growth would help calm concerns of a prolonged slowdown in headline orders. Core orders, which strip out the impact of volatile transportation orders, are expected to show healthy 0.4 percent growth, following a 0.1 percent decline in November. Core orders are often seen as a proxy for business investment, so a return to growth here would be positive. It could signal a turnaround for business investment as we head into the new year.

Tuesday will also see the release of the Conference Board Consumer Confidence Index for January. It is set to increase to 128 in January, up from 126.5 in December. With confidence virtually unchanged in the fourth quarter, a return to growth would be a positive development, given that rising consumer confidence supports faster consumer spending. But even if we get an increase, the index would still sit below 2019’s high-water mark of 135.8. We have some ways to go before confidence is restored to the recent highs. With that being said, markets continue to set new highs, housing prices continue to increase, and jobs remain plentiful, so there is every reason to believe that confidence can recover.

On Thursday, the first estimate of fourth-quarter gross domestic product (GDP) growth will be released. Economist are calling for results showing faster growth. Will the economy expand at a 2.2 percent annualized rate, up from 2.1 percent in the third quarter? This result would be lower than the 3.2 percent growth rate we saw in the first quarter of 2019, but in line with the overall pace of growth for last year. Personal consumption, the major driver of economic growth in the second and third quarters, is expected to grow at an annualized rate of 2.3 percent during the fourth quarter, down from 3.2 percent in the third quarter. Given the importance of consumer spending to midyear expansion, GDP growth will bear watching as we kick off the new year.

Friday will see the release of December’s personal income and personal spending reports. Economists expect to see both income and spending grow by a healthy 0.3 percent during the month, to cap off a solid year of growth. If the estimates prove accurate, December would mark the 10th straight month with increased personal spending. Spending grew at a similar rate throughout most of 2019, which indicates it was well supported by increasing incomes.

Finally, we’ll finish the week with Friday’s release of the second and final estimate of the University of Michigan consumer confidence survey for January. The first estimate showed confidence declining slightly from 99.3 in December to 99.1 in January. Economists expect a further modest decline, to 99, for the second estimate. But the index still sits well above the three-year low of 89.9 it hit in August, so there is no immediate cause for concern. Nonetheless, consumer confidence will be an important indicator to watch going forward, given the relationship between confidence and spending.

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.

© 2020 Commonwealth Financial Network ®

Presented by Mark Gallagher

General Market News
• On Tuesday, the 10-year Treasury opened at 1.78 percent, lower than where it closed on Friday. The 30-year and 2-year yields also opened lower, at 2.24 percent and 1.54 percent, respectively. Treasury yields continued their downward trend, which has been ongoing since before the December holidays. With continued global economic slowing, uncertain geopolitical headlines, and intensifying domestic election coverage, yields could continue their downward trend in the short run.
• Global markets rallied last week. On Wednesday, the U.S. and China signed the “phase one” trade deal. The de-escalation of global trade tensions was one of the major themes cited for moving markets higher. On Thursday, the U.S. Senate approved the United States-Mexico-Canada Agreement. The attention now turns to trade negotiations between Europe and the U.S., as well as a potential “phase two” deal with China.
• Results were mixed for the start of earnings season. Morgan Stanley was up more than 10 percent, supported by its fixed income and commodities and clearing business. Wells Fargo, on the other hand, was down by more than 6 percent on higher-than-expected expenses. The top-performing sectors were utilities, technology, and materials, while the worst-performing sectors included energy, consumer discretionary, and financials. Consumer discretionary lagged as Target reported lower-than-expected holiday sales, citing softness in toys and electronics for the overall weakness.
• Last week’s economic releases kicked off on Tuesday with the December Consumer Price Index report. Consumer prices rose by 0.2 percent, against expectations for 0.3 percent growth. This result led to year-over-year consumer inflation of 2.3 percent, which was below expectations for 2.4 percent. Core inflation, which strips out the impact of volatile food and energy prices, also came in below expectations with 0.1 percent growth, compared with the 0.2 percent that was forecasted.
• On Wednesday, December’s Producer Price Index was released. Price gains were muted for producers as well, with headline producer inflation increasing by 0.1 percent during the month against expectations for 0.2 percent growth. On a year-over-year basis, producer inflation grew by 1.3 percent, which was in line with expectations. The moderate increases in both consumer and producer inflation during the month leave inflation well within the Federal Reserve’s (Fed’s) stated 2 percent target range. The lack of inflationary pressure following a year with three interest rate cuts indicates that the Fed will likely view the past year’s cuts as appropriate. It’s unlikely the Fed will make any material changes to monetary policy, unless there is a major change to the current outlook.
• On Thursday, December’s retail sales report was released. Sales grew by 0.3 percent during the month, in line with expectations. This matches the revised 0.3 percent gain we saw in November and brought year-over-year growth up to 5.8 percent, the highest since August 2018. The gains were widespread, with all major categories seeing growth except for auto, which can be volatile on a month-to-month basis. Sales excluding autos grew by 0.7 percent, which is the best result for core sales in five months. Ending the year with retail sales growth is a positive for both fourth-quarter and future gross domestic product growth, as consumer spending has been the major driver of the economic expansion over the past year.
• Thursday also saw the release of the National Association of Home Builders Housing Market Index. This gauge of home builder confidence came in better than expected, falling from 76 in December to 75 in January, against expectations for a more severe drop to 74. November’s result was a 20-year high for the index, so this slight drop is nothing to worry about. In fact, this marks the highest back-to-back reading for the index since 1999. Low mortgage rates, high consumer confidence, and strong personal balance sheets continue to drive prospective buyers into the market, as the subindex that tracks prospective buyer traffic rose to the highest level since 1998. Home builders have certainly noticed this pickup in demand and have scrambled to ramp up construction accordingly.
• Speaking of new construction, Friday saw the release of December’s building permits and housing starts reports, which blew away expectations. Permits declined by slightly more than expected during the month, but the real story was housing starts, which increased by 16.9 percent against expectations for 1.1 percent. This brought the pace of new home sales to the highest level since December 2006, as home builders showed they are more than willing to meet rising buyer demand with new construction. On a year-over-year basis, housing starts grew by more than 40 percent in December, marking a six-year high. The strong rebound in the housing market was one of the major bright spots for the economy, so these better-than-expected results for home builder confidence and housing starts are a great sign for 2020.
• Finally, we finished the week with Friday’s release of the University of Michigan consumer sentiment index for January. Consumer sentiment declined slightly, from 99.3 in December to 99.1 in January, against expectations to remain steady at 99.3. Despite the slight decline to start the year, consumer sentiment still remains well above the recent three-year low of 89.8 we saw last August. The resiliency of the index is impressive, given the uncertainty caused by the escalating tensions between the U.S. and Iran. Ultimately, while the decline in sentiment is disappointing, given the events over the past few weeks and the recovery we saw in the fourth quarter, there is nothing to worry about for the time being.

Source: Bloomberg

Source: Morningstar Direct

What to Look Forward To
Wednesday will see the release of December’s existing home sales report. Sales are expected to increase by 1.5 percent during the month. November’s report showed a 1.7 percent decline, which was primarily attributed to lack of supply, as housing stock remains very low on average. If the estimates prove accurate, December would mark the sixth straight month with year-over-year growth in existing home sales. This upward trend follows a prolonged slowdown throughout 2018 and the early part of 2019. As we saw with the home builder figures released last week, housing has been on a hot streak. A return to monthly growth for existing home sales would help further solidify the strength of this important area of the economy.

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
• The bond markets experienced more volatility last week. The 10-year Treasury yield was as low as 1.70 percent and as high as 1.90 percent as a result of news from Iran. It opened at 1.83 percent on Monday. The 30-year bounced between 2.19 percent and 2.38 percent before opening at 2.29 percent. The 2-year, which is usually more stable given its shorter duration, swung between 1.44 percent and 1.61 percent.
• The three major domestic averages were up last week following the de-escalation in the U.S.-Iran conflict. The U.S. did not take any additional military actions against Iran after the ballistic missile strike of two Iraqi airbases that were housing American military personnel. Instead, the U.S. decided to impose sanctions on Iran, which caused markets to rally due to a pickup in volatility and oil prices. Both fell following President Trump’s Wednesday morning address.
• The top-performing sectors were communication services, technology, and health care. Energy, which saw prices fall after the de-escalation, was the worst-performing sector, followed by materials and industrials.
• Tuesday saw the release of the Institute for Supply Management (ISM) Nonmanufacturing index for December. Service sector business confidence rose from 53.9 in November to 55 in December, against expectations for a more modest rise to 54.5. This better-than-expected result helped calm fears of further economic slowdown following the disappointing results for manufacturer confidence during the month. This also caused the ISM composite index, which combines manufacturer and service sector confidence, to reach a four-month high.
• On Friday, the December employment report was released. About 145,000 new jobs were added during the month, which was less than the 160,000 that were expected. This result is disappointing given the better-than-expected job creation we saw in the previous two months; however, it was still strong enough to ensure that new jobs grew at their fastest quarterly pace since the first quarter of 2019. The underlying data was mixed. Wage growth also came in below expectations, but unemployment remained unchanged at a 51-year low of 3.5 percent. Unemployment fell from 6.9 percent to 6.7 percent, which is a post-recession low.

Source: Bloomberg

Source: Morningstar Direct

What to Look Forward To
We’ll start the week with Tuesday’s release of the December Consumer Price Index. This measure of consumer inflation is set to rise by 0.2 percent during the month, following a 0.3 percent increase in November. Year-over-year headline consumer inflation is expected to hit 2.4 percent, up from 2.1 percent in November. Core inflation, which strips out the impact of volatile food and energy prices, should rise by 0.2 percent during the month. This result would translate to year-over-year core consumer inflation of 2.3 percent. This forecast can be partially attributed to a rollback on September’s tariffs on consumer goods from China, which is set to occur as part of the phase one trade deal.

Wednesday will see the release of the December Producer Price Index, which is expected to go up by 0.2 percent, following a flat November. Year-over-year producer inflation is set to increase by 1.3 percent, up from 1.1 percent in November. Producer inflation fell sharply in November, as the prices for services dropped due to price cutting related to the trade war. But, although both consumer and producer prices are set to increase during December, inflation remains well within the Federal Reserve’s stated 2 percent target range. We’re unlikely to see any changes to the federal funds rate in the short term.

On Thursday, the December retail sales report will be released. Sales are expected to grow by 0.3 percent, following a 0.2 percent gain in November. This would mark the third straight month with solid retail sales growth, after a surprise decline in September. Consumer spending growth has been the major driver of gross domestic product (GDP) growth over the past year, so a strong result in December would bode well for fourth-quarter GDP growth. Core sales, which strip out the impact of auto and gas prices, are expected to show solid 0.4 percent monthly growth, indicating that consumers are still willing and able to spend.

Thursday will also see the release of the December National Association of Home Builders Housing Market Index. This gauge of home builder confidence is expected to fall from 76 in November to 74 in December. November’s result was a 20-year high for the index, so a pullback is not worrisome. Home builder confidence rebounded impressively in 2019, after falling to a three-year low of 58 in December 2018. Lowered mortgage rates were the driver, sending more prospective buyers into the market throughout the past year. Home builders took notice and ramped up new construction to meet the additional demand.

Speaking of new construction, Friday will see the release of December’s building permits and housing starts reports. Permits are expected to decline slightly, while economists predict housing starts to rise from 1,365,000 to 1,380,000. If this estimate holds, housing starts would be at their highest monthly level since the summer of 2007. The housing rebound was one of the bright spots for economic growth in 2019, so more new homes and construction spending would be quite welcome in markets with a constrained supply.

Friday will also see the release of December’s industrial production report. Production is expected to come in flat for the month. In contrast, we had a better-than-expected 1.1 percent gain in November, boosted by the end of the General Motors strike and the associated growth in auto manufacturing. Manufacturing output is set to increase by a modest 0.2 percent for December, following growth of 1.1 percent in November. The anticipated slowdown is not surprising, given the very weak manufacturer confidence we’ve seen over the past few months. Still, growth would be encouraging, even if it’s slower than November’s.

Finally, we’ll finish out the week with Friday’s release of the University of Michigan consumer confidence survey for January. Economists expect confidence to fall slightly, from 99.3 in December to 99.2 in January. December’s sentiment came in higher than originally estimated, so a pullback would not be an immediate cause for concern. The employment report for December, which slightly missed predictions, is likely one of the primary factors causing economists to forecast a pullback. A healthy jobs market is a major driver of consumer sentiment, and improving sentiment typically supports faster spending growth. So, given the largely rangebound nature of the index of the past year, this data release will be important.

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.

© 2020 Commonwealth Financial Network ®

Presented by Mark Gallagher

Strong December caps off terrific year for markets
What a difference a year can make. At the end of 2018, markets were selling off due to political concerns, and the year finished on a sour note. But 2019 had a significantly better ending for investors. Markets experienced solid gains in December, capping off an impressive quarter and year. All three major U.S. indices were up for the month; the S&P 500 returned 3.02 percent, the Dow Jones Industrial Average (DJIA) gained 1.87 percent, and the Nasdaq Composite rose 3.63 percent. This positive performance led to a quarterly gain of 9.07 percent for the S&P 500, 6.67 percent for the DJIA, and 12.47 percent for the Nasdaq. The annual figures are even more impressive, with the S&P returning 31.49 percent, while the DJIA and Nasdaq grew by 25.34 percent and 36.69 percent, respectively.

This strong performance came despite weak fundamentals. Per Bloomberg Intelligence, earnings for the S&P 500 fell by 1.2 percent during the third quarter, which marks the second straight quarter with declining earnings. Although this result was disappointing, it was better than anticipated, as analysts originally forecasted a decline of 3.6 percent. Looking forward, analysts expect earnings to decline in the fourth quarter before returning to growth in the first quarter of 2020. Over the long term, fundamentals drive performance, so a return to earnings growth would be a boon for equity markets. From a technical perspective, markets were well supported, with all three indices spending the entire month and quarter above their respective 200-day moving averages.

International markets also had a strong month, quarter, and year, despite suffering from more volatility than their domestic counterparts. The MSCI EAFE Index gained 3.25 percent in December, which contributed to a quarterly gain of 8.17 percent and an annual return of 22.01 percent. The MSCI Emerging Markets Index had a very strong end to the year, gaining 7.53 percent for the month, 11.93 percent for the quarter, and 18.90 percent for the year. From a technical perspective, both the developed and emerging market indices spent time below their trendlines in October, but they recovered and spent November and December comfortably above their 200-day trend lines.

Fixed income had a more challenging month, as rising rates put a damper on returns. The 10-year Treasury yield ended November at 1.78 percent and fell as low as 1.72 percent during the month before finishing December at 1.92 percent. The volatile rate environment caused the Bloomberg Barclays U.S. Aggregate Bond Index to fall by 0.07 percent in December. The index returned 0.18 percent for the quarter and a more impressive 8.72 percent for the year, as long-term rates fell significantly in 2019.

High-yield bonds, which are typically less affected by changes in interest rates, had positive results over the past month, quarter, and year. The Bloomberg Barclays U.S. Corporate High Yield Index returned 2 percent in December, leading to a quarterly gain of 2.61 percent and an annual return of 14.32 percent. High-yield spreads tightened during the course of the year, falling from 5.35 percent at the start of January to 3.60 percent at the end of December.

Economic growth continues
December’s economic updates continued to paint a picture of steady growth for the economy. Third-quarter gross domestic product (GDP) showed the economy growing at an annualized rate of 2.1 percent, which was much better than initial economist estimates of 1.6 percent. This result was also an improvement on the second quarter, when GDP grew at a 2 percent annualized rate. Although third-quarter growth came in below the 3.1 percent growth rate we saw in the first quarter of 2019, this better-than-expected result helped calm concerns of a more serious slowdown for the economy.

The major driver of economic growth in the third quarter was consumer spending, with personal consumption growing at an annualized rate of 3.2 percent during the quarter. Although this is down from the 4.1 percent growth rate in the second quarter, it’s better than initial estimates of 2.9 percent annualized growth.

In addition, data released in December showed that consumer spending continued to grow in the fourth quarter. For example, November’s personal income and spending reports highlighted the strength in spending growth we saw in 2019. The 0.4 percent increase in November’s personal spending marked the ninth straight month of growth, including solid 0.3 percent growth in October. Consumer spending growth was well supported by personal income growth throughout the year as well, indicating that spending increases in 2019 are sustainable as we head into 2020. Spending growth was driven by high consumer confidence, which, in turn, was buoyed by a better-than-expected November jobs report and equity markets setting all-time highs throughout the month.

Looking forward, the three rate cuts from the Federal Reserve (Fed) in 2019 should help spur additional spending growth in the new year. Lowered interest rates allow consumers to spend more, especially on big-ticket items like cars and houses. We’ve already seen the positive effect lowered rates can have on the housing market, which experienced a rebound following a slowdown in 2018 and early 2019.

Rebound in housing marches on
The housing sector of the economy has been one of the bright spots in the current economic expansion over the past two quarters. High consumer confidence and lowered mortgage rates have drawn additional home buyers into the market, driving up sales of both existing and new homes. New home sales have been especially impressive; they hit their highest monthly level since 2007 in November, putting them up more than 18 percent on a year-over-year basis.

Home builders have benefited from the increased demand for housing, with home builder confidence rising to a 20-year high to end the year. As you can see in Figure 1, this is a very impressive rebound following a decline to a three-year low at the end of 2018. Home builders have backed up this increased confidence by building more, with November’s housing starts representing the second-highest monthly level since 2007.

Figure 1. NAHB Housing Market Index, 1999–Present

Source: National Association of Home Builders

As we saw during the most recent recession, the housing sector can have an outsize effect on the overall economy. So, this turnaround in the second half of 2019 is very encouraging as we head into the new year.

Risks continue to shift
Despite the strength in consumer spending we saw in 2019, very real risks to economic expansion remain. Business confidence continued to disappoint, with both the Institute for Supply Management Manufacturing and Nonmanufacturing indices unexpectedly declining in November. Manufacturing confidence has been especially disappointing, with the index remaining in contractionary territory for the past four months. Business investment has also been weaker than expected, as evidenced by November’s durable goods orders, which fell by 2 percent against expectations for a 1.5 percent increase. Although business confidence and spending were disappointing throughout 2019, there is the potential for a rebound in 2020, given continued progress with the trade talks between the U.S. and China.

Speaking of trade, the announcement of a preliminary “phase one” trade deal between the U.S. and China midmonth was a clear de-escalation in the ongoing trade war, even if the direct economic impact from the agreement may be minimal. At the very least, this agreement shows a willingness from both sides to continue to negotiate and makes additional tariffs seem unlikely for the time being. Although trade war-related risks may have decreased during the month, as we saw throughout 2019, these trade negotiations are a politically charged process that have the potential to affect markets at any time. The ongoing protests in Hong Kong and their increasing relevance in trade talks are an example of the unpredictable nature of this complex situation.

Another major political development in December was the general election in the U.K. Prime Minister Boris Johnson’s Conservative party consolidated power in advance of the January 31 deadline for the U.K.’s formal exit from the European Union. The ongoing negotiations on the terms of this exit will likely continue to serve as a potential source of volatility for international markets as we approach the latest deadline.

Finally, while they have not yet had a direct effect on markets, the ongoing impeachment proceedings in the U.S. still have the potential to create volatility. Previous impeachment proceedings have created short-term market disruptions, so this is certainly something to watch for—especially if a trial in the Senate becomes a drawn-out affair that creates uncertainty for market participants. For the time being, impeachment is not a major driver of volatility for markets, but it may become one in the future and should be monitored.

Better year than expected
All things considered, 2019 was a better year for markets and the economy than expected amid all the doom and gloom at the end of 2018. Strong consumer spending helped power further market gains here at home, even though lowered business investment and confidence remain areas of concern. Compared with where we were last year—with predictions of a recession and markets showing red for the year—2019 turned out much better than expected and puts us in a good position for growth in 2020.

Although we may have experienced a bit of a slowdown earlier in the year, slow growth is still growth and should be welcomed. Looking forward, continued support from the Fed, along with the anticipated return to earnings growth in 2020, should allow for continued market gains. With that being said, real risks to this outlook remain, especially politically. An unexpected result from the ongoing U.S.-China trade talks or further delays to the Brexit process could certainly lead to market volatility.

Despite the potential for future short-term market disruptions, the healthy economic fundamentals should support markets in the new year. Volatility has the potential to cause short-term pain for investors, but 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 ®