Presented by Mark Gallagher

Another strong month for markets
February was a short but sweet month for investors. U.S. equity markets followed up their strong performance in January with another solid month of positive returns. The Dow Jones Industrial Average led the way with a monthly return of 4.03 percent. The S&P 500 and Nasdaq Composite were close behind with returns of 3.21 percent and 3.60 percent, respectively. All three indices have already returned double digits to start the year.

Improving fundamentals supported this positive performance. According to FactSet, the blended earnings growth rate for the S&P 500 stands at 13.1 percent (as of February 22, 2019). This result is up from estimates of 12.1 percent at the end of December. Further, this improvement was widespread, with 7 of 11 sectors reporting better earnings than at year-end. Technicals were also supportive, with all three indices ending the month above their 200-day moving averages.

The international story was much the same. The MSCI EAFE Index gained 2.55 percent in February. The MSCI Emerging Markets Index came in a bit lower, with a return of 0.23 percent. Developed markets were supported by news of a potential Brexit delay, but a global slowdown in trade continued to weigh on emerging markets.

Technicals continued to be a challenge for developed international markets. The MSCI EAFE Index remained below its 200-day moving average for the ninth month in a row, although it came close to hitting its trend line by month-end. Technically speaking, emerging markets had a better month. They broke above their trend line at the beginning of the month and ended February in positive territory.

Fixed income had a slightly more difficult month. The Bloomberg Barclays U.S. Aggregate Bond Index fell by 0.06 percent. This decline was due to a slight increase in rates in February. The 10-year U.S. Treasury opened the month at 2.70 percent and ended it at 2.73 percent. High-yield fared better, with a solid return of 1.66 percent in February. High-yield spreads have come down steadily to start the year following a spike in December.

Risks diminished as economic news trickled in
Another driver of the strong market performance was the widespread reduction in major risks to markets. Here in the U.S., we avoided a second government shutdown in as many months by passing a bipartisan funding bill by the February 15 deadline. We also saw progress on trade negotiations with China, with the U.S. putting a stop to scheduled tariff increases while negotiations continued. Any positive news here would be a boon for markets.

Looking abroad, political developments were also positive. Namely, an announcement by British Prime Minister Theresa May buoyed European markets. In it, she said the British Parliament may vote to delay Brexit if a deal is not reached by the March 29 deadline. This delay could avoid the dreaded no-deal Brexit scenario, which would likely throw the U.K. economy into chaos as trade deals and everyday routines would get disrupted overnight. Risks do remain here, and the negotiations should be monitored. But, overall, concerns appear to have diminished for the time being.

Economic picture messy and incomplete
The government shutdown in December and January delayed most of the major economic data releases scheduled for that time. In fact, we are still receiving this delayed data sporadically. But much of the data we do have has painted a picture of an economy that took a stumble in December before rebounding to start the year.

This drop and subsequent rebound can be seen through the lens of consumer confidence. Figure 1 shows the Conference Board’s monthly survey of consumer confidence. It declined sharply in December and January before showing a solid rebound in February. This rebound was driven by the end of the government shutdown and the strong market performance to start the year. But a surge of 304,000 new jobs in January also played a part.

Figure 1. Conference Board Consumer Confidence Survey, 2014–Present

Increased confidence measures tend to lead to higher spending levels, so this rebound is encouraging. Much like confidence, consumer spending declined significantly in December. Here, retail sales were especially disappointing. In fact, December’s decline was the largest one-month drop since September 2009. On a more positive note, the personal savings rate in December was the highest it has been in nearly three years. As such, consumers still have money to spend. With the recent rise in confidence, hopefully we will see consumers more willing to spend some of these extra savings.

Disappointing consumer spending in December played a part in a lowered growth rate for the economy in the fourth quarter. The first estimate of fourth-quarter gross domestic product growth came in at 2.6 percent on an annualized basis. This figure is down from the 3.4-percent growth rate seen in the third quarter, although it still represents a solid end to the year. But if consumer spending can pick up steam and businesses can remain confident, we could see an increase in overall economic growth.

Keep an eye on the risks
Most of the major risks we have been worrying about over the past few months appear to be diminishing. Still, there are some important areas to watch. The housing market remains a major domestic concern and is in a period of contraction. Existing home sales have fallen on a year-over-year basis for each of the past 11 months. Plus, homebuilder confidence increased slightly in February but is still well below levels seen a year ago. Housing is a major sector of the U.S. economy and provides many knock-on effects for other industries. As such, this slowdown is concerning.

International risks also remain. Brexit negotiations in Europe and trade talks with China have garnered much of the attention. Recently, there have been positive developments in both of these areas. But these types of negotiations can be quite volatile. So, there is no guarantee that these potential areas for concern will not affect markets.

New risks could also spring up at any time. For example, the hostilities between India and Pakistan recently flared up over military conflict in the Kashmir region. This has been an ongoing conflict between the two countries since their separation. But any escalation between two nuclear powers is concerning. There have been positive developments here, including Pakistan’s offer to return a captured Indian pilot. Nonetheless, this is an important conflict to watch.

U.S. economy and outlook remain robust
Despite the risks and the slowdown at the end of 2018, the outlook for the economy and markets remains healthy. Corporations continue to post healthy earnings growth. Plus, markets appear to have weathered December’s volatility with two strong rebound months. Going forward, maintaining high confidence levels for both businesses and consumers remains important. We will need additional spending to grow the economy at a similar pace to last year.

Overall, things look pretty good for U.S. investors. Of course, some risks remain. But the markets’ rebound from the recent volatility showcases the importance of building a portfolio that can ride out short-term turbulence. As always, it is important to keep in mind that a well-diversified portfolio that matches your risk tolerance to your financial goals remains the best way to meet those goals going 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, fixed income analyst, at Commonwealth Financial Network®.

© 2019 Commonwealth Financial Network®

Presented by Mark Gallagher

General market news  
• Rates have risen slightly on the long end of the curve. The 10-year U.S. Treasury opened Monday at 2.67 percent, while the 30-year opened at 3.03 percent. The short end of the curve remained unchanged, with the 2-year starting the week at 2.50 percent.
• The three major U.S. stock indices were all up on the week. The continued push toward a U.S.-China trade deal, along with dovish signals from the January Federal Open Market Committee minutes, benefited stocks. Trade talks continued to progress, with Vice Premier Liu He agreeing to extend his visit, and President Trump offering to push back the tariff deadline of March 1. Turning to the Federal Reserve, last week’s minutes indicated that most officials want to reduce the runoff of the balance sheet (which includes Treasury and debt securities) later this year.
• Emerging markets rebounded as a result of the continued dovish stance. This asset class typically contains U.S.-dollar-denominated debt, which is cheaper in lower rate environments. The same theme played out in the U.S.; utilities and materials were the two top-performing sectors on the week, as they are supported by lower interest levels on debt and a potentially higher inflationary environment. This did not translate over to energy, however, which lagged along with health care and financials.
• There were only a handful of major data releases during the holiday-shortened week. On Thursday, December’s durable goods orders were released. Demand was weaker than expected, with 1.2-percent headline growth against expectations for 1.8 percent. The core figure, which strips out the effect of volatile transportation orders, grew by only 0.1 percent.
• Also on Thursday, January’s existing home sales disappointed, with a drop of 1.2 percent. Economists had expected modest growth, but with this drop, existing home sales have now declined for four months in a row.

Source: Bloomberg

Source: Morningstar Direct

What to look forward to
This will be a busy week in terms of economic updates, as we continue to see the release of data that was delayed by the government shutdown. On Tuesday, December’s housing starts are set to be released. Economists expect starts to decline slightly, from 1,256,000 in November to 1,250,000. Homebuilder confidence declined sharply in December, so it is possible that housing starts may decline by more than expected. But homebuilder confidence has rebounded to start the year, so any weakness in housing starts would likely be temporary.

On Thursday, the first estimate of fourth-quarter gross domestic product growth will be released. This measure of overall economic activity is expected to show solid 2.5-percent growth on an annualized basis. This result would be down from the 3.4-percent annualized rate we saw in the third quarter. The slowdown in the fourth quarter was partially driven by a slowdown in consumer spending at year-end, as December’s retail sales suffered the biggest monthly drop since 2009. As was the case with homebuilders, consumers saw a large drop in confidence in December that likely lowered spending. Consumer confidence numbers have also bounced back to start the year, so this slowdown in consumer spending is likely not as bad as it seems.

Speaking of consumer spending, on Friday, we will see the release of January’s personal income report and December’s personal spending report. Both are expected to show moderate growth—with income expected to increase 0.3 percent and spending slated to rise by 0.2 percent. These would be solid results; however, both income and spending were growing at faster rates in the third quarter.

Finally, also on Friday, the Institute for Supply Management Manufacturing index is expected to decline slightly, from 56.6 in January to 56 in February. This is a diffusion index, where results greater than 50 indicate expansion. As such, this slight decline is not a pressing concern. Continued trade talks with China have helped bolster manufacturer confidence in the face of slowing global trade, so this continued positive sentiment is very 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.

© 2019 Commonwealth Financial Network®

Presented by Mark Gallagher

General market news  
• Rates remained largely unchanged last week. The 10-year U.S. Treasury opened this morning at 2.64 percent, while the 30-year opened at 2.98 percent. Rates moved higher on the long end of the curve at the beginning of the week, but these increases were offset by declines on Thursday and Friday.
• All three major U.S. indices were up by more than 2 percent last week, supported by talks of trade progress and a bounce in oil. U.S. and China trade once again grabbed headlines, as talks are set to continue this week and President Trump suggested pushing back the March tariff deadline. Additionally, U.S. retail sales declined 1.2 percent month-over-month, which showed unexpected softness in the data. This is worth monitoring going forward, as both the U.S. and China are testing the resilience of their economies before the potential March trade.
• West Texas Intermediate crude was up more than 5 percent on the week, making energy the top-performing sector. This was followed by industrials and materials. The top underperformers were utilities, REITs, and communication services.
• Last week was relatively quiet on the economic update front, as there were only two major data releases. On Tuesday, the Institute for Supply Management Nonmanufacturing index declined by more than expected, falling to 56.7. This is still a level that indicates economic expansion.
• On Wednesday, the international trade report for November showed an unexpected decline in the trade deficit. This was driven by a larger decline in imports than exports, as U.S. firms stockpiled imports earlier in the year in anticipation of increased tariffs.

Source: Bloomberg

Source: Morningstar Direct

What to look forward to
This week will be relatively quiet on the economic update front, with only two major releases scheduled for the holiday-shortened week. On Wednesday, the minutes from the Federal Reserve’s (Fed’s) January meeting will be released. The Fed decided to keep rates unchanged in January, and the released statement removed language that spoke of future gradual rate hikes. This was a major change in the Fed’s policy, so economists are eager to see the discussions from the meeting.

On Thursday, December’s delayed durable goods orders are set to be released. Economists expect 1.7-percent growth in orders, driven by a large increase in aircraft orders for Boeing in December. The core index, which strips out volatile transportation orders, is expected to increase by a healthy 0.3 percent.

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  
• Rates continued to move lower last week, as the 10-year U.S. Treasury reached its lowest point in more than a month at 2.62 percent. The low for the 10-year in 2019 is 2.55 percent (on January 3). Over the past 12 months, the 10-year is down 20 basis points, standing as high as 3.23 percent last November. The longer end of the curve is pointing more and more toward an economic slowdown, as the 30-year broke below 3 percent on Monday morning.
• All three major U.S. indices were up slightly last week. The Nasdaq Composite led the way, posting a gain of 0.53 percent. This was supported by a rebound in large tech names, including Apple (AAPL), up 2.3 percent, and Microsoft (MSFT), up 2.8 percent on the week.
• The major news came from President Trump, as he stated that a meeting with Chinese President Xi will not take place before the March trade deal deadline. In other international news, the European Commission cut its eurozone forecast for 2019 to 1.3 percent from 1.9 percent. This comes following softer German manufacturing data for December.
• Last week was relatively quiet on the economic update front, as there were only two major data releases. On Tuesday, the Institute for Supply Management Nonmanufacturing index declined by more than expected, falling to 56.7. This is still a level that indicates economic expansion.
• On Wednesday, the international trade report for November showed an unexpected decline in the trade deficit. This was driven by a larger decline in imports than exports as U.S. firms stockpiled imports earlier in the year in anticipation of increased tariffs.

Source: Bloomberg

Source: Morningstar Direct

What to look forward to
This week is a busy one for economic data, with the regularly scheduled reports joined by some catch-up data.

On Wednesday, the consumer price reports will be released. The headline index, which includes energy and food, is expected to rise by 0.1 percent for January, up from a 0.1-percent decline in December. This would take the annual rate down from 1.9 percent to 1.5 percent on base effects. A drop in the price of gasoline and natural gas is the primary factor in the significant annual decline. The core index, which excludes food and energy, should hold steady at a 0.2-percent gain for January, the same as December. Here, the annual figure should pull back slightly from 2.2 percent to 2.1 percent. If the numbers come in as expected, inflation will remain solidly under control, which will likely keep the Federal Reserve patient on interest rates.

On Thursday, the producer price reports are also expected to show moderating inflation. The headline index should rise from a 0.2-percent decline in December to a 0.1-percent increase in January, but the annual rate will likely decline from 2.5 percent to 2.3 percent on base effects. Core prices are also expected to rise on a monthly basis, from a 0.1-percent decline in December to a 0.2-percent gain in January. The annual figure will likely drop here as well, however, from 2.7 percent to 2.5 percent.

The retail sales report, a catch-up report, will be released on Thursday. The headline index will likely pull back slightly, from a 0.2-percent gain in November to a 0.1-percent gain in December. The core index, which excludes autos, is expected to pull back a bit more, from a 0.2-percent gain in November to flat in December. Much of this is due to lower gasoline prices, but there are also signs that underlying spending growth may be slowing, and there is some downside risk to these numbers.

On Friday, the industrial production report is also expected to pull back slightly. Growth of 0.3 percent in December will likely drop to 0.1 percent in January, largely on reduced manufacturing output. Manufacturing is expected to decline from an unanticipated surge of 1.1-percent growth in December to 0.2 percent in January on a decline in employee hours. There may be some downside risk to both these numbers on slowing global demand.

Finally, also on Friday, the initial release of the University of Michigan consumer confidence index should rebound a bit, from 91.2 in January to 94 in February. The government shutdown was responsible for much of the recent decline, reportedly, so its end should help the index bounce back. Lower gas prices and the stock market recovery should also help.

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®