Presented by Mark Gallagher

General Market News
• The 10-year Treasury yield reached a high of 1.75 percent last week and opened at 1.50 percent on Monday. In the same time frame, the 30-year went from a high of 2.20 percent to below 2 percent, and the 2-year went from 1.68 percent to 1.35 percent. This volatility is likely here to stay, but as we’ve mentioned before, the general trend over the next year should lean toward lower rates.
• Global equities were mostly down last week, as concerns over global growth ticked up. Equities sold off following a 10-year low in the Institute for Supply Management (ISM) Manufacturing index. It showed a decline from 49.1 to 47.8, against an expected increase to 50. As this is a diffusion index, the decline further below 50 shows that the manufacturing sector of the economy continues to contract.
• We also saw softness in the ISM Nonmanufacturing index, which hit a 3-year low on Thursday. It fell from 56.4 to 52.6, against an estimated decline to 55. Although the value is still above 50, indicating expansion, it does reveal some concern about the slowdown in manufacturing leaking into the broader service sector of the economy. This result was offset partially by an increase in expectations for an October federal funds rate cut.
• The top-performing sectors last week were technology, health care, and consumer staples. Technology was supported by reports that Apple’s iPhone production was raised by 10 percent. The worst-performing sectors were energy, materials, and industrials. The 5.5 percent drop in West Texas Intermediate crude oil led to weakness in the energy sector.
• On Friday, the employment report was a mixed bag. Nonfarm payrolls came in at 136,000, slightly below expectations of 145,000. The August jobs numbers were revised upward by 38,000. Unemployment declined from 3.7 percent to 3.5 percent, while underemployment declined from 7.2 percent to 6.9 percent, all postrecession lows. One drawback to the report was that average hourly earnings were flat versus an expectation of 0.2 percent month-over-month growth.
• The international trade balance was also released on Friday. It showed a slight widening to $54.9 billion versus the prior period of $54 billion, as the trade war with China continues to affect the balance of trade. The U.S. also recently won a WTO ruling, which allowed the U.S. to put $7.5 billion of tariffs on EU goods. This move could affect the trade balance going forward.

Source: Bloomberg

Source: Morningstar Direct

What to Look Forward To
On Tuesday, September’s Producer Price Index is set to be released. Economists expect to see a modest increase of 0.1 percent for the month, as declining fuel prices helped calm inflationary pressures. On an annual basis, producer inflation is expected to come in at 1.8 percent. Core producer inflation, which strips out the effect of food and energy prices, is expected to show monthly and annual growth of 0.2 percent and 2.4 percent, respectively.

On Wednesday, the minutes from the Federal Reserve’s (Fed’s) September meeting will be released. This will be a closely followed release, as the Fed cut the federal funds rate by 25 basis points at that meeting. Three of the voting members voted against the rate cut. The minutes are expected to provide details into why they dissented and what it could take to make them vote for further rate cuts. Given the disappointing data we’ve seen since the September meeting, market participants widely expect the Fed to cut interest rates by another 25 basis points at its December meeting.

On Thursday, we’ll get a look at consumer inflation with the release of the Consumer Price Index for September. Consumer prices are expected to show an increase comparable to producer prices, with 0.1 percent monthly and 1.9 percent annual growth forecasted. Core prices that strip out gas and food are expected to come in slightly higher, with 0.2 percent and 2.4 percent monthly and annual growth, respectively. If results meet the forecasts, they would mark an 11-year high for core consumer inflation. There is potential for further price increases, as tariffs enacted at the beginning of the month on Chinese goods focused largely on consumer products.

Finally, we’ll finish the week with the release of the University of Michigan consumer confidence survey, which is expected to show a slight decline from 93.2 in September to 92 in October. These numbers are down sharply from a recent high of 100 in May. High levels of consumer confidence have supported the strong growth in consumer spending we’ve experienced in the past two quarters, so this projected drop is worth monitoring. It could indicate that consumers are losing confidence in the economic expansion and may be less willing to spend freely going forward.

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

Positive month for markets caps off turbulent quarter
U.S. markets had a positive September, which helped offset volatility earlier in the quarter. The S&P 500 returned 1.87 percent in September and 1.70 percent for the quarter. The Dow Jones Industrial Average performed better, with a 2.05 percent monthly gain and quarterly growth of 1.83 percent. The Nasdaq Composite lagged, with a 0.54 percent monthly gain, taking the index to a 0.18 percent gain for the quarter.

These positive results for the month came despite worsening fundamentals. According to Bloomberg Intelligence (as of September 30, 2019), the S&P 500 is expected to show a year-over-year earnings decline of 3.2 percent for the third quarter. This result is down from the 3 percent decline forecast at the end of August. Although the estimates are negative, earnings season will kick off in earnest midmonth. As such, we’ll have a better picture of the actual results next month. Looking forward, analysts expect 3.3 percent growth in the fourth quarter. This growth could likely help support further market gains. From a technical perspective, all three major U.S. indices were supported, spending the entire month above their respective 200-day trend lines.

International stocks had a strong September. But the month’s positive results did not offset volatility seen earlier in the quarter. The MSCI EAFE Index gained a solid 2.87 percent in September but still had a quarterly loss of 1.07 percent. Emerging markets also gained during the month, at 1.94 percent, but showed a drop of 4.11 percent for the quarter. In both developed and emerging markets, rising political concerns and slowing growth figures weighed on investors.

Technicals were mixed for international stocks. The MSCI EAFE Index for developed international markets fell below its trend line at the start of the month. Still, it recovered and spent the rest of the month above trend. Emerging markets were another story. Here, the index spent the majority of the month below the trend line. September marks the second straight month in which technicals for emerging markets have been a headwind.

Finally, fixed income markets had a tough month. Whipsawing interest rates created volatility, despite the Federal Reserve’s move to cut the federal funds rate by 25 basis points at its September meeting. The 10-year Treasury yield started the month at 1.47 percent. It then rose to a midmonth high of 1.90 percent and finished the period at 1.67 percent. This result is down from the 2.03 percent yield seen at the beginning of the quarter.

The Bloomberg Barclays U.S. Aggregate Bond Index declined by 0.53 percent during the month, on higher rates during that time period. But it rose by 2.27 percent during the quarter, as rates went down. High-yield bonds, which are less affected by interest rate changes, had a better month with a gain of 0.36 percent. This move led the high-yield index to a 1.33 percent gain for the quarter.

Headlines hit markets, but not much
In September, there were many headline-grabbing events. For example, the drone attack on Saudi Arabian oil facilities took out an estimated half of Saudi production capacity. It was a major news story that touched on many sensitive geopolitical concerns. Still, there was no sustained impact on U.S. equity markets. Oil prices did spike as high as 20 percent immediately following the attack. But they ended September well below midmonth highs, as the U.S. and Saudi governments committed to tapping reserves and prioritizing repairs at the damaged facilities. Further, oil prices remain well below levels seen a year ago, and markets seemed to shrug off this event.

The continuing U.S.-China trade war and the slow and steady march toward Brexit also made news in September. The escalated trade war hurt markets in August, but neither story had much influence on markets in September. On the trade war front, new negotiations between the U.S. and China are scheduled for October. This announcement helped drive up equity markets at the beginning of the month. Unfortunately, this bump didn’t last long, as the S&P 500 ended the month below post-announcement highs.

Threats of a no-deal Brexit from British Prime Minister Boris Johnson drove international market volatility in August. But in September? The impact of Brexit on international markets was minimal. Here, developments have moved swiftly over the past month. The British Parliament and Johnson are trying to negotiate a trade deal with the European Union before the October 31 deadline. This situation may be a source of future volatility, especially for internationally developed markets.

Economic fundamentals withstand the risks
The political risks continued to draw attention in September. Nonetheless, many economic releases came in better than expected, with consumer spending continuing to play a key role. August’s retail sales figures beat expectations. Here, we saw 0.4 percent growth against expectations for a 0.2 percent increase. This result marks the sixth straight month of retail sales growth. Consumers have been driving the economic expansion for the past two quarters.

Much of this spending growth appears to be sustainable, which is encouraging. Personal income grew by 0.4 percent in August, which marks the eighth straight month of income growth. There is also some evidence that the tight jobs market is leading to faster wage growth. Indeed, August’s employment report showed wages up 0.4 percent on a monthly basis. Wage growth over the trailing three months is currently at its highest annualized rate in 11 years. This growth bodes well for future consumer spending.

Another key area of strength was the housing sector. It showed solid growth for the second straight month. In September, homebuilder confidence increased to an 11-month high. Here, strong homebuyer demand and low mortgage rates boosted sales. In fact, both new and existing home sales grew by more than expected in August. Existing home sales were especially impressive, with August marking the second straight month of year-over-year growth. As illustrated in Figure 1, existing home sales have struggled to show any year-over-year growth over the past two years. So, these back-to-back solid months are very encouraging.

Figure 1. Existing Home Sales, September 2014–August 2019

Now, let’s move from the consumer to the business side of the economy. Nonmanufacturer confidence saw a solid rebound in August. The service sector accounts for the lion’s share of economic output. So, this result helped calm fears of a slowdown in the service sector and was a very good development. There was even a positive surprise for the manufacturing sector. Manufacturing output rose by a strong 0.5 percent in August, despite a drop in manufacturer confidence during that time.

Beware the risks ahead
Despite the positive fundamentals, risks remain that could have a dramatic effect on markets. Domestically, the beginning of impeachment proceedings at month-end will likely lead to a contentious election cycle. Of course, the direct economic impact from impeachment proceedings is difficult to forecast. But the uncertainty of this situation will likely weigh on consumer and business confidence and spending. Slowing job growth and declining consumer confidence figures are also areas to watch. Both could lead to lowered spending and economic growth.

Abroad, the ongoing U.S.-China trade war and Brexit have the potential to affect markets. As we saw in September, there is no telling what will happen with these politically sensitive issues. Plus, there is no guarantee that markets will react to new developments as expected.

Risks can hit markets at any time. When looking at the sheer number of them, it seems likely that one or more of the recent stories will disrupt markets in the near future. October is known to be a difficult month for markets, which has elevated the concerns.

Even if we do see a pullback, there is still a lot to like about the U.S. economy. These economic strengths should help cushion any market downturn. Consumer spending growth has been healthy this year, and there are few signs of a slowdown in the immediate future. The rebound in service sector confidence and manufacturing output also indicates that the fundamentals may be more resilient than they seem. Again, this strength could help protect against any short-term disruptions.

Ultimately, volatility is possible and may even be likely over the next few months. But the healthy U.S. economic background should help calm fears of a sustained downturn if and when we face market turbulence. As always, a well-diversified portfolio combined with a long-term view toward investing remains the best way forward in an uncertain world.

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®.

© 2019 Commonwealth Financial Network ®

Presented by Mark Gallagher 

General Market News  
• Last week, the 10-year Treasury went up to 1.90 percent late, but it pulled back after the news from Saudi Arabia over the weekend and opened at 1.80 percent on Monday. The rest of the curve had similar moves. The 2-year Treasury was as high as 1.80 percent and opened at 1.75 percent, and the 30-year Treasury was as high as 3.37 percent and opened at 2.26 percent.
• Global equities rallied last week following speculation of an interim U.S.-China trade deal, as well as a rate cut and economic stimulus from the European Central Bank (ECB). The de-escalation in trade tensions came on both sides, as the week began with President Trump delaying tariffs on the $250 billion in Chinese imports until October 15. Later in the week, China announced that it would exempt some of the tariffs on soybeans and pork. On Thursday, the president of the ECB, Mario Draghi, announced that the ECB would cut its deposit rate by 10 basis points to –0.5 percent. The ECB also announced that it would restart its quantitative easing program by buying 20 billion euros per month in securities, beginning in November. This decision was met with dissent from several of the other European central bankers. Finally, we saw a large rotation from growth to value, with financials, energy, and materials among the top performers. Those that underperformed included REITs, consumer staples, and technology.
• We started off the week with Wednesday’s release of the Producer Price Index for August. Producer prices increased by 0.1 percent during the month and 1.8 percent year-over-year, as expected. Core prices, which strip out the impact of volatile food and energy prices, came in higher than expected, with 0.4 percent monthly growth and 2.3 percent year-over-year growth. This increase in core producer inflation largely offset a surprise 0.3 percent decline in July. Producer inflation appears to be picking up, and there may be more upward pressure coming, as additional tariffs on Chinese goods came into effect on September 1.
• Thursday saw the release of the Consumer Price Index for August. As was the case with producer prices, consumers saw prices rise during the month, with 0.1 percent monthly and 1.7 percent year-over-year growth. Headline consumer inflation came in slightly below expectations for 1.8 percent year-over-year growth, but this was largely due to a drop in gasoline prices. Core consumer inflation came in higher than expected, with 0.3 percent monthly growth and 2.4 percent year-over-year growth. This result represents the highest annual core consumer inflation rate in 11 years. Consumers are starting to feel the negative effects of the ongoing trade war, as prices for home furnishings and recreational goods have grown notably over the past year. Going forward, the new September tariffs will likely add more pressure on consumer prices, as this round includes tariffs on additional categories of retail goods.
• Despite the rise in consumer prices this year, spending has been a bright spot in the economy. On Thursday, that trend continued with the release of the August retail sales report. Sales came in better than expected, with 0.4 percent growth against expectations for 0.2 percent. This result follows a strong 0.7 percent increase in July. This is the sixth straight month of growing retail sales, as consumers have been powering the ongoing economic expansion. Consumer confidence has remained strong in the face of rising inflation and trade war-related uncertainty, and consumers have been more than willing to translate high confidence levels into additional spending.
• Speaking of confidence, we finished the week with Friday’s release of the University of Michigan consumer sentiment survey for September. The survey rose from 89.8 in August to 92 in September, against expectations for a modest increase to 90.8. Confidence dropped in August, in large part due to market volatility during the month. So, it is encouraging to see this rebound now that markets are approaching all-time highs. Lowered gas prices and continued low jobless claims also likely helped support this rebound in confidence. Despite the increase in September, the survey remains well below levels seen earlier in the year, so this will be an important data series to monitor.

Source: Bloomberg

Source: Morningstar Direct

What to Look Forward To
Tuesday will see the release of the August industrial production report. It is set to show 0.2 percent growth following a 0.2 percent decline in July. A rebound in manufacturing output, a major driver of the July decline, should offset lower-than-expected utilities production. If manufacturing output shows the growth that economists forecast, it would help calm fears of a larger slowdown in manufacturing following recent declines in manufacturer confidence.

Also on Tuesday, the National Association of Home Builders Housing Market Index is set to be released. Home builder confidence is expected to remain steady at 66 in September. Although home builder confidence has recovered well from a plunge at the end of 2018, the index still sits below recent highs seen at the end of 2017 and the beginning of 2018.

Wednesday is set for the release of August’s building permits and housing starts data. Housing starts are expected to increase following an increase in permits in July. This increase would be welcome given the shortage of new homes in key markets.

The Federal Open Market Committee (FOMC) is meeting this Tuesday and Wednesday to discuss the state of the economy and set the federal funds rate. The FOMC rate decision will be released Wednesday afternoon. Economists widely expect the FOMC to lower the upper bound of the federal funds rate from 2.25 percent to 2 percent at this meeting, as the Federal Reserve continues to cut rates in order to support the economy in the face of slowing international trade. Markets have priced in two more rate cuts this year.

Thursday will see the release of August’s existing home sales report. It is expected to show sales declining by 0.9 percent in August, following a surprisingly strong 2.5 percent increase in July. Despite the anticipated monthly decline, sales are expected to show growth on a year-over-year basis. This would mark the second straight month that year-over-year existing home sales have grown following 17 months of declines.

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
• Last week, rates backed up across the curve as the 10-year Treasury moved from 1.42 percent to open at 1.59 percent early this Monday morning. The 30-year Treasury opened at 2.07 percent and the 2-year opened at 1.56 percent. The volatility in the rate market continues and should be expected going forward, with the longer-term trend likely to the downside.
• Global equities rallied following easing of political and trade tensions. The chief executive of Hong Kong announced the formal withdrawal of the extradition bill, which had sparked months-long protests in the region. Turning toward trade, the possibility of a no-deal Brexit declined, as the U.K. Parliament approved a bill to postpone the exit if there is no agreement in place by October 19. The British pound climbed following the lower probability of a no-deal Brexit. Finally, the U.S. and China set a date for their October meeting. The result was a risk-on rally, which saw energy, consumer discretionary, and technology among the best performers on the week. Utilities, health care, and materials were among those sectors that trailed in this rally.
• Last week started with Tuesday’s release of the Institute for Supply Management (ISM) Manufacturing index. It showed an unexpected decline from 51.2 in July to 49.1 in August. This is a diffusion index, where values above 50 represent expansion and values below 50 represent contraction. August’s reading is the lowest reading for the index since January 2016 and marks the first time the manufacturing sector has experienced a contraction since August 2016. This is the fifth straight month of decline for the index, as the slowdown in global trade and the uncertainty created by the ongoing U.S.-China trade war have negatively affected manufacturers.
• On Wednesday, July’s international trade report was released. The trade deficit narrowed slightly, from $55.5 billion in June to $54 billion in July. This result was in line with expectations for a shrinking trade deficit during the month. Exports rose during the month, while imports declined slightly. The trade deficit has widened slightly on a year-over-year basis, as a narrowing of the deficit with China has been offset by widened deficits with other countries, such as Mexico and Vietnam.
• On Thursday, the ISM Nonmanufacturing index for August was released. Service sector confidence increased by much more than expected. It rose from 53.7 in July to 56.4 in August, against expectations for a more modest increase to 54. The service sector accounts for roughly seven-eighths of the economy, so this result helps calm concerns raised by the drop in manufacturer confidence. All in all, this was a very positive report. It showed that the service sector is currently weathering the uncertainty caused by the trade war far better than manufacturers.
• Finally, we finished the week with the release of August’s employment report. Headline job creation disappointed, with only 130,000 new jobs added against expectations for 160,000. The underlying data was much better, however. The participation rate moved up, and unemployment remained unchanged at 3.7 percent. Wage growth also came in stronger than expected, with year-over-year average hourly earnings growing by 3.2 percent against expectations for 3 percent. Although the headline figure was disappointing, the increase in participation, along with faster-than-expected wage growth, indicates that the jobs market still remains healthy.

Source: Bloomberg

Source: Morningstar Direct

What to Look Forward To
The week will begin with Wednesday’s release of the Producer Price Index for August. Producer inflation is expected to come in at 0.1 percent for the month and 1.8 percent year-over-year. Core producer prices, which strip out the impact of volatile food and energy prices, are set to show monthly growth of 0.2 percent and year-over-year growth of 2.2 percent. Rising price pressure created by the imposition of 25 percent tariffs on $200 billion in Chinese goods has largely been offset by a decline in import prices, keeping producer inflation muted for the time being.

On Thursday, the Consumer Price Index is set to be released. Economists expect to see a similar August for consumers as for producers, with 0.1 percent monthly inflation and 1.8 percent year-over-year growth. As was the case with producers, core consumer inflation is set to come in higher than headline inflation, with 0.2 percent monthly growth and 2.3 percent annual growth expected. Rising labor costs are starting to be reflected in higher consumer prices, as annual core consumer inflation of 2.3 percent is the highest reading in more than a year. Despite the anticipated uptick in core consumer prices, overall inflation remains below the Federal Reserve’s stated 2 percent inflation target.

Thursday will also see the release of the August retail sales report. Sales are expected to increase by 0.2 percent in August, following a 0.7 percent gain in July. Retail sales growth has been one of the bright spots in the economy so far this summer, so continued growth here would be positive. This would mark the sixth straight month of sales growth.

Finally, we will finish the week with the first estimate of the University of Michigan consumer sentiment survey. It is set to increase to 90.5 in September following a sharp drop to 89.8 in August. Market volatility in August likely caused much of this drop, but equity markets have been able to rebound to near all-time highs to start the month. As such, a rebound in consumer confidence would make sense. Lower gas prices and low jobless claims should also help support an increase in consumer confidence for the month.

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 ®