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 ®

Presented by Mark Gallagher

General Market News
• Treasury yields retreated from recent highs last week. The 10-year Treasury yield fell from 1.92 percent at the beginning of the week to 1.88 percent at week-end. The 30-year also declined, from 2.35 percent to 2.32 percent.
• Global equities continued their rally yet again last week. The top-performing sectors were consumer discretionary, technology, and materials, and the tech-heavy Nasdaq Composite led the three major domestic indices. Growth in technology and consumer discretionary was driven largely by the first four of the five FAAMG constituents (i.e., Facebook, Amazon, Apple, and Microsoft). These four stocks were among the top seven contributors to the S&P 500 for the week. Amazon was supported by record-breaking holiday sales and more than 5 million new customers starting Prime trials in one week alone. The worst-performing sectors were utilities, real estate, and materials.
• On Monday, November’s durable goods orders report was released. Durable goods orders came in worse than expected, falling by 2 percent against expectations for 1.5 percent growth. Much of the weakness in headline orders is due to a significant slowdown in volatile defensive aircraft orders. Core durable goods orders, which strip out the impact of transportation orders, were flat for the month. Core durable goods orders are often used as a proxy for business investment, so the flat month for core orders was a silver lining in an otherwise disappointing release.
• Also on Monday, we saw the release of November’s new home sales report. New home sales increased by 1.3 percent during the month, which beat expectations for a modest 0.1 percent decline. Sales increased in the northeast and western regions but remained flat in the Midwest and declined in the South. This result left new home sales at their third-highest monthly level since 2007. On a year-over-year basis, new home sales are up more than 18 percent, highlighting the rebound in the housing sector that we’ve seen this year.

Source: Bloomberg

Source: Morningstar Direct

What to Look Forward To
On Tuesday, the Conference Board Consumer Confidence Index is set to be released. Consumer confidence is expected to increase from 125.5 in November to 128 in December. If the estimates are accurate, the index would hit its highest level since August, offsetting a surprising drop to a five-month low in November. With equity markets setting all-time highs during the month and November’s jobs report coming in above predictions, it’s not surprising that consumer confidence is expected to increase. Still, such a result would be quite welcome, as increasing consumer confidence helps support faster spending growth. A rebound in confidence in December would bode well for consumer spending data for the holiday season.

On Friday, the Institute for Supply Management Manufacturing index for December will be released. This measure of manufacturer confidence is expected to increase slightly from 48.1 in November to 49 in December. This is a diffusion index, where values below 50 indicate contraction, so, although the anticipated increase is welcome, it would still leave the manufacturing sector in a recessionary state. Trade-related uncertainty continues to weigh on manufacturer confidence. Additional progress between the U.S. and China on trade negotiations could help calm concerns and bring the index back to expansionary territory.

Friday will also see the release of the minutes from the December Federal Open Market Committee meeting. The Federal Reserve (Fed) decided to leave rates unchanged at this meeting, breaking a streak of three straight meetings with a rate cut. Fed Chairman Jerome Powell indicated at his post-meeting press conference that the Fed will likely leave rates unchanged for the foreseeable future, unless material risks to economic expansion emerge. Economists will be looking at the minutes to see how other Fed governors view the current expansion and what risks they are monitoring. Others will be interested in comments regarding the Fed’s ongoing actions in the overnight repurchase market. The Fed has been providing liquidity to this market since September, so market participants will be looking for clarity as to the Fed’s plans as we enter the new year.

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.

© 2019 Commonwealth Financial Network ®

Presented by Mark Gallagher

General Market News
• The volatility in rates continued last week. The 10-year Treasury yield moved from 1.77 percent to 1.95 percent and back down to 1.81 percent before opening at 1.85 percent on Monday. The 2-year moved from 1.58 percent to 1.69 percent and opened at 1.62 percent on Monday. The 30-year opened at 2.27 percent after briefly hitting 2.36 percent last week.
• Global markets rallied last week following the U.S. and China agreeing upon a phase one trade deal. The terms included additional U.S. agricultural purchases in exchange for the repealing of certain U.S. tariffs on Chinese goods. Emerging market stocks rose as a result, as investors saw easing trade tensions as a catalyst for investment. There was also positive trade news to report here in North America, with the U.S. House and President Trump agreeing upon the terms of the U.S.-Mexico-Canada Agreement.
• In European news, the U.K. held its third general election in five years, and the conservative party took a significant majority in Parliament. This majority will look to continue to push for a Brexit at the start of 2020.
• The top-performing sectors on the week were technology, consumer discretionary, and financials. The lagging sectors included the risk-off bond proxies in REITs, communication services, utilities, and consumer staples.
• On Wednesday, November’s Consumer Price Index (CPI) was released. Consumer prices increased by 0.3 percent during the month, which was slightly higher than the 0.2 percent forecast. This inflation growth was due to rising gas prices, as core CPI, which strips out the impact of volatile food and energy prices, rose by only 0.2 percent for the month. Consumer inflation rose to 2.1 percent on a year-over-year basis, which is a one-year high. Despite the faster-than-expected growth in November, September’s tariffs have not had much of an effect on consumer goods. It remains unlikely that we will see significantly faster inflation in the short term.
• On Thursday, November’s Producer Price Index data was released. Producer inflation came in flat for the month, against expectations for a 0.2 percent increase. This result dragged year-over-year inflation down to 1.1 percent, well below the Fed’s stated 2 percent inflation target. This was caused primarily by slowing prices for services, which fell by the most in a single month since February 2017, due to decreasing trade services margins. November’s lackluster inflation reports support the Fed’s pause as it waits to see if further easing is necessary.
• We finished the week with the release of November’s retail sales report. Retail sales came in below expectations, growing by 0.2 percent against expectations for 0.5 percent growth. Rising auto and gas sales boosted headline sales, as core retail sales grew by only 0.1 percent. This is a disappointing result, as there was some hope for accelerated sales growth, given improvements to consumer confidence during the month. Consumer spending has been the major driver of economic growth this year, so this slowdown indicates that overall economic growth is likely slowing as well. With that being said, there is some reason for optimism going forward, as an improving job market and continued support from the Fed indicate that spending is unlikely to fall further in the short term.

Source: Bloomberg

Source: Morningstar Direct

What to Look Forward To
We started the week with Monday’s release of the National Association of Home Builders Housing Market Index for December. Home builder confidence blew away expectations, with the index rising from 70 in November to 76 in December, against forecasts for a modest increase to 71. This is a 20-year high for the index, which is a very impressive turnaround considering home builder confidence hit a multiyear low of 56 in December 2018. This year, home builder sentiment has steadily improved, as low mortgage rates and high consumer confidence levels have been driving more interest in newly built homes. Builders have been happy to meet this demand by investing in and building new housing stock. Looking forward, increased home builder confidence should support additional construction as we head into the new year.

Speaking of new construction, on Tuesday, November’s building permits and housing starts reports are set to be released. Economists are forecasting a decline in building permits but a 2.1 percent increase in housing starts. Such a result in housing starts would bring that indicator to its second-highest monthly level since 2007, as home builders have been willing and able to meet buyer demand for new home construction. New home supply remains constrained in certain markets, so an increase would be a positive development for the housing market.

Tuesday will also see the release of November’s industrial production report. Production is set to show 0.8 percent monthly growth, following a 0.8 percent decline in October that was largely due to the General Motors strike and an associated plunge in auto production. Manufacturing output is also expected to bounce back from the October slowdown, with 0.8 percent growth expected. As we finish out the year, a rebound following the slowdown in September and October would help calm concerns over a broader extended decline in industrial production. Despite November’s anticipated rebound, slowing global demand is likely to put a damper on industrial production to start off 2020.

On Thursday, we’ll get a direct look at home buyer demand, with the release of November’s existing home sales report. Sales of existing homes are expected to decline from 5.46 million in October to 5.45 million in November. But even so, a decline would still represent 9 percent growth on a year-over-year basis. This result would mark the fifth straight month of year-over-year improvements in existing home sales, indicating the slowdown we saw at the end of 2018 is well behind us. Housing growth has been a bright spot in the ongoing expansion. Continued strength here would bode well for overall economic growth for the quarter.

Friday will see the release of November’s personal income and personal spending reports. Economists expect personal income to increase by 0.3 percent during the month, while spending is set to increase by 0.4 percent. The forecast for growth is encouraging, given October’s report showing income remaining surprisingly flat for the month. Spending has been strong this year; if the estimates are accurate, November’s report will mark the ninth straight month of spending growth. As long as personal income and spending numbers continue to be healthy, overall economic growth should remain positive even if its pace has slowed a bit.

Finally, we’ll finish the week with Friday’s release of the second and final reading of the University of Michigan consumer confidence survey for December. The index is expected to remain unchanged from the month’s first estimate. The preliminary estimate of 99.2 was higher than the initial forecast of 97, as a better-than-expected November jobs report and equity markets near all-time highs continue to support consumer confidence. If the index remains unchanged, this would mark the fourth straight month of increasing consumer sentiment, following a surprising fall to a two-year low in August. Consumer confidence supports additional spending growth, so an improvement in December 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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