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®

Presented by Mark Gallagher

New year kicks off with stock market rebound
Markets around the world had a great start to the year, with almost everything going up. Here in the U.S., the Nasdaq Composite led the pack with a return of 9.79 percent. The S&P 500 and Dow Jones Industrial Average (DJIA) were close behind with returns of 8.01 percent and 7.29 percent, respectively. These gains helped offset the losses in December and led to the best January in years.

One of the drivers of this market rebound was continued earnings growth. According to FactSet, with 22 percent of companies reporting, the blended average earnings growth rate for the S&P 500 for the fourth quarter is 10.9 percent (as of January 25, 2019). This figure would represent the fifth straight quarter of double-digit earnings growth. It would also be well above analyst forecasts. Still, it may be the last quarter of double-digit growth for a while. Analysts are currently forecasting low single-digit growth for the next three quarters.

From a technical perspective, all three major U.S. indices moved closer to their 200-day moving averages in January. The DJIA finished the month above its trend line, while the S&P 500 and Nasdaq finished near their respective moving averages. U.S. markets have been below these important technical levels since early in the fourth quarter of 2018. As such, a sustained break above them would be a positive development, indicating that investors’ views on the U.S. have become more positive.

The international story was much the same. The MSCI EAFE Index gained 6.57 percent in January. The MSCI Emerging Markets Index fared even better, with a gain of 8.78 percent. In fact, this gain was enough to bring the index above its 200-day moving average at month-end for the first time since May 2018. The developed market index remained below its trend line.

Even fixed income had a positive month, with a gain of 1.06 percent for the Bloomberg Barclays U.S. Aggregate Bond Index. High-yield did even better, with a gain of 4.52 percent for the Bloomberg Barclays U.S. Corporate High Yield Index. The Federal Reserve (Fed) did not increase the federal funds rate at its January meeting, and much of the released commentary was supportive of future economic growth. The potential for future rate hikes has subsided recently, which has also helped fixed income performance.

Despite uncertainty, economic growth continues
At the end of 2018, a wide range of negative news cast a shadow of uncertainty over the economy. But January was much more positive. First, the end of the longest government shutdown in U.S. history near month’s end helped considerably. Second, reported progress on China trade talks was also constructive. Of course, the potential for further uncertainty remains, especially with another possible shutdown beginning on February 15. But the temporary return to normal is certainly welcome.

Despite worries over the shutdown, trade, and Brexit, the fundamental economic data was positive. An impressive 304,000 new jobs were added during the month. This figure was well above expectations for a more modest 165,000. Unemployment rose to 4 percent—although this increase was largely due to the effects of the shutdown and should reverse next month. As you can see in Figure 1, the growth in jobs on a year-over-year basis steadily improved in 2018 following declines since 2015. It continues to do so to start off 2019.

Figure 1. Year-Over-Year Growth in Private Workers, 2010–2019

Other highlights from the month included better-than-expected manufacturing and industrial production in December. These gains were largely due to increased vehicle production. Manufacturing was especially impressive. Here, we saw 1.1-percent monthly growth against expectations for a more modest 0.3 percent. In the face of slowing global growth, a strong dollar, and trade concerns, these healthy figures show that U.S. manufacturing continues to move forward.

Another positive development was weaker-than-expected consumer and producer inflation. Both measures remain near the Fed’s targeted 2-percent inflation goal, so further rate hikes are possible. But the slowing growth in inflation means that the Fed may be more gradual if and when it decides to hike again.

Much of December’s and January’s data was delayed by the government shutdown. This included the first estimate of fourth-quarter gross domestic product growth. As such, we don’t have a complete picture of how the economy weathered the shutdown. That said, the data we did see was mostly positive. Given that, once we get the full story, we’ll likely see a healthy economy expanding at a solid pace.

Risks remain, especially in the short run
Although the economy is in solid shape, there are risks in the short term that bear watching. The most pressing is the potential for another government shutdown in mid-February. The same immigration debate that drove the last shutdown will take center stage. Once again, investors should be ready to withstand any potential volatility.

Consumer and business confidence levels would be most at risk from another shutdown. These levels dropped in January during the last shutdown but rebounded slightly once it ended. Another shutdown might well lead to further declines in confidence. It’s important to note that a short-term drop in confidence is not something to worry about. But sustained weakness here could lead to lower spending levels in the long run.

Another area of concern is housing, which remains weak despite lower mortgage rates. In December, pending home sales fell by 9.8 percent. This capped a year in which pending home sales declined on a year-over-year basis every month. Housing is an important sector of the economy with various knock-on effects, so this weakness should be monitored.

International risks also remain. Here, contentious Brexit negotiations and a slowdown in Chinese growth grabbed most of the headlines. Much like housing, these are longer-term issues that should be monitored. But they are not necessarily immediate sources of volatility for U.S. markets.

Solid start for 2019
Things went better than expected to start the year. Strong market performance in January and solid economic data show that the U.S. continues to be a healthy environment for investors. Of course, there is the potential for more volatility in the short term. But over the long term, a strong economy continues to be supportive of markets.

Many of the risks we faced at year-end moderated in January. This has left us in a stronger position than when the month started. Risks do remain, but the outlook is better than we could have expected only a month ago. As always, it is important to keep in mind that a well-diversified portfolio with a time horizon matching your goals remains the best path to achieve 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
• The 10-year U.S. Treasury has been bouncing between 2.70 percent and 2.75 percent since January 8. It opened early Monday at 2.74 percent, while the 2-year opened at 2.60 percent and the 30-year opened at 3 percent. Parts of the curve remain inverted as rate investors wait to hear more information on trade, politics, and economic trends.
• The three major U.S. markets were relatively flat, and the week saw mixed trading. With growing global growth concerns, REITs, technology, and utilities were the only three positive sectors. The technology stocks were buoyed by better-than-expected guidance out of the semiconductor space, with Texas Instruments (TXN), Lam Research (LRCX), and STMicroelectronics (STM) all up more than 5 percent on the week.
• China reported growth in its gross domestic product (GDP) of just 6.6 percent on Monday. This is the lowest level since 1990. These growth concerns come ahead of U.S.-China trade talks, which are set to resume on Wednesday.
• Last week was relatively quiet on the economic update front, with only two major data releases. On Tuesday, existing home sales for December came in worse than expected, with a decline of 6.4 percent on a monthly basis.
• On Thursday, the Markit U.S. Manufacturing Purchasing Manager Index rose from 53.8 to 54.9. This was a positive development that indicates that manufacturers are still investing in their businesses in the face of the recent government shutdown.

Source: Bloomberg

Source: Morningstar Direct

 What to look forward to
This week will be a busy one on the economic front, although some reports may not be released due to the just-ended government shutdown.

On Tuesday, the Conference Board Consumer Confidence Index is expected to drop further after a surprise decline last month. It should go from 128.1 to 125, on rising concerns about the effects of the government shutdown. Even with the expected decline, confidence would remain at a healthy level and still be supportive of continued growth. But this drop could be a warning sign of weaker conditions ahead.

On Wednesday, the first estimate of economic growth for the fourth quarter of 2018 is due, although it may not be released as the government works at reopening. Growth in GDP is expected to drop from 3.4 percent in the third quarter to 2.5 percent in the fourth quarter, although there may be some upside risk on strong consumer spending.

Also on Wednesday, the meeting of the Federal Open Market Committee will conclude and be followed by a press conference. After the rate increase announced at the last meeting, markets are expecting rates to remain the same, and analysts will be looking to see whether the recent dovish tone on inflation has intensified. If so, markets could react positively.

On Thursday, the personal income and spending report for December is due, although (again) it may not be released. Income growth is expected to rise from 0.2 percent in November to 0.5 percent in December on strong job growth. Spending growth is expected to tick down from 0.4 percent in November to 0.3 percent for December, which would still be healthy.

On Friday, the employment report is expected to show that job growth decreased from an extremely strong 312,000 in December to 163,000 for January. The unemployment rate is expected to tick down from 3.9 percent in December to 3.8 percent for January. The job growth number will not include the federal workers currently on furlough, as they will be counted as employed. But these workers will show up in the unemployment index, which may push it up a bit above expectations. Wage growth is expected to tick down a bit, from 0.4 percent for December to 0.3 percent for January, on a monthly basis. The increase on an annual basis in wage growth is expected to stay steady at 3.2 percent. If the numbers come in as expected, this would be another healthy report and signal continued economic growth.

Finally on Friday, the Institute for Supply Management Manufacturing index is expected to increase slightly. It should go from 54.1 to 54.3 for January, after a surprise drop to a two-year low in December. This is a diffusion index, where values above 50 indicate expansion and below 50 indicate contraction. So, this index remains healthy. There is some downside risk here, on slowing global growth in general and the recent impact of the government shutdown. Uncertainty over trade policy remains a headwind as well. Even with a moderate pullback, however, this would still remain positive for the economy as a whole.

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 U.S. 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 U.S. 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 U.S. 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 moved up for the second week in a row, reversing some of the decline we experienced at the beginning of the year. The 10-year Treasury opened the week at 2.75 percent, while the 30-year opened slightly higher at 3.07 percent and the 2-year opened at 2.59 percent.
• The three major U.S. markets all posted gains on the week. The two main drivers of positive investor sentiment included optimism surrounding a U.S.-Chinese trade deal and a perceived dovish tone from Federal Reserve (Fed) members. On Thursday, the Wall Street Journal reported that Treasury Secretary Mnuchin had discussed lowering tariffs on Chinese goods as an olive branch to Chinese negotiators. Usually hawkish, Kansas City Fed President Esther George said that a pause in the Fed’s normalization process would give the bank time to make a proper assessment of the incoming data. Finally, New York Fed President Williams stated that a government shutdown could cut quarterly growth from 0.5 percent to 1 percent, depending on its length.
• Financials, industrials, and energy were among the top-performing sectors. Oil posted gains, and banks (including Goldman Sachs and Bank of America) posted strong beats. The worst performers were utilities and consumer staples, with investors favoring a risk-on sentiment.
• The Producer Price Index came in slightly softer than expected, with the core index (excluding food and energy) falling 0.1 percent month-over-month versus the estimate of a gain of 0.2 percent.
• The University of Michigan consumer sentiment survey declined from 98.3 to 90.7, which was much lower than the survey estimate of 96.8. This decline likely came from a combination of equity market volatility and the government shutdown weighing on consumers.
• Government data continues to become backlogged due to the shutdown. Some data points may be missed depending on the length of the shutdown.

Source: Bloomberg

Source: Morningstar Direct

What to look forward to
As with last week, several of the scheduled reports are prepared by government agencies currently affected by the shutdown and will not be released until the government reopens. This would be a slow week anyway. But with the shutdown, it will be especially slow.

On Tuesday, the existing home sales report is expected to pull back from 5,320,000 in November to 5,270,000 in December. This result would indicate continued weakness in the housing market and would be consistent with declining consumer confidence and housing affordability.

On Friday, the durable goods orders report will not be released, but the numbers are expected to improve. For the headline number, which includes the very volatile aircraft sector, growth is expected to rise from 0.8 percent in November to 1.5 percent in December. Here, there is significant upside risk based on increases in orders for planes. The core number, which is a much better economic indicator, is also expected to rise, from a decline of 0.3 percent in November to a gain of 0.2 percent for December. This result would indicate that business investment may be moderating but continues to expand.

Also on Friday, the new home sales report is scheduled, but it will not be released due to the shutdown. No estimates are currently available as to expected results.

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 U.S. 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 U.S. 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 U.S. 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®