Presented by Mark Gallagher

General market news  
• Rates moved higher last week. The 10-year Treasury yield went from 2.87 percent to more than 3 percent this morning. The 3-year bond is now yielding what the 10-year was last week, and the 2-year is yielding what the 10-year was two weeks ago. As rates continue to compress and push up closer to a ceiling, the bond market seems to be telling us that while the economy looks good, there are factors indicating a recession in the future. The Federal Reserve (Fed) seems committed to raising rates. Keep in mind, however, that the Fed uses its “language” as a policy tool as well.
• All three major U.S. indices, the Russell 2000, and both the MSCI EAFE and MSCI Emerging Markets indices were up last week. Both improvement in fundamentals and the expectation of resumed trade talks between the U.S. and China were also in the news. The Wall Street Journal reported on Wednesday that Treasury Secretary Steven Mnuchin had reached out to continue trade talks with China. This was confirmed by the Chinese Foreign Ministry, which had reportedly welcomed the offer. Further, the Turkish Central Bank surprised last week when it increased the one-week repo rate by 625 basis points. This move followed the country’s continued currency weakness after the U.S. doubled its tariffs of Turkish steel and aluminum last month.
• Despite both Goldman Sachs and Stifel raising concerns over a potential peak in the memory chip cycle, the S&P 500’s technology sector posted a 1.83-percent gain. This move was supported both by Qualcomm announcing $16 billion of its common stock as the first phase of its $30 billion buyback plan and by a 1.2-percent move in Apple following the release of three new iPhones and a new version of the Apple watch.
• Economic news regarding inflation and consumer spending was released last week. On Wednesday, the Producer Price Index declined by more than expected, leaving annual inflation for producers at 2.8 percent. On Thursday, the Consumer Price Index showed a similar decline, with annual inflation of 2.7 percent.
• On Friday, August retail sales came in lower than expected at 0.2-percent growth month-over-month. July’s figure was revised upward, however, accounting for the lower-than-expected growth in August.

Source: Bloomberg

Source: Morningstar Direct

What to look forward to
This week’s economic data is all about housing.

On Tuesday, the National Association of Home Builders survey will be released. It is expected to tick down a bit further—from 67 in August to 66 in September—for the third month in a row. There may be some upside risk here. Although the industry continues to suffer from labor shortages and slowing housing demand, dropping lumber prices and an increase in permits may signal improved sentiment. That being said, this survey has shown declining confidence for several months now.

On a similar note, the housing starts report, released on Wednesday, is expected to show further recovery after a significant drop in June. It should rise from 1.17 million in July to 1.23 million (annualized) in August. Here again, this report will be constrained by rising supply and weakening demand. Even if it comes in as expected, it will still be below the levels from earlier this year.

Finally, on Thursday, the existing home sales report is also expected to show sales rising from 5.34 million in July to 5.38 million in August. This would be a partial recovery, but as with new home sales, it will be below the levels of the first half of the year.

Overall, while some recovery is expected from the weak results of last month, the data will likely show that housing continues to slow.

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.

© 2018 Commonwealth Financial Network®

Presented by Mark Gallagher 

General market news  
• Rates finished last week by moving higher. Short rates moved the most, as the 2-year Treasury yield opened on Monday at 2.70 percent. The 10-year had been at 2.80 percent a week and a half ago but opened Monday at 2.93 percent. The 30-year opened at 3.09 percent. The curve-flattening process is getting upward pressure from short rates as the market anticipates the Federal Reserve (Fed) moving short rates higher this fall. Long rates seem to be hitting a ceiling for the time being.
• All three major U.S. averages moved lower last week. The tech-heavy Nasdaq Composite Index had the largest loss in months, as technology shares had a large sell-off. Facebook and Twitter executives testified before Congress about foreign interference in U.S. elections and what steps are being taken to mitigate that, and investors responded negatively to the outcome. The energy sector further pressed U.S. markets lower as investors sold off in response to rising U.S. oil inventories. Finally, Chinese tariff talks have weighed on markets recently, but nothing has been implemented. The U.S. administration is evaluating the effects of the latest proposed round of tariffs before acting.
• Last week, several important economic reports were released. On Tuesday, the Institute for Supply Management (ISM) Manufacturing index defied expectations and rose to 61.3 from an already strong 58.1. On Thursday, the ISM Nonmanufacturing index also came in better than expected, jumping from 55.7 to 58.5. These positive results show that business confidence remains high.
• On Friday, the August employment report came in better than expected, with 201,000 new jobs added during the month. The underlying data was also strong, with unemployment remaining steady at 3.9 percent and average wage growth increasing to 2.9 percent annualized.

Source: Bloomberg

Source: Morningstar Direct

What to look forward to
This week’s data will start with prices and concerns over inflation.

On Wednesday, the producer price reports will be released. The headline index, which includes energy and food, is expected to rise by 0.2 percent for August, up from a flat result in July. There may be some upside risk on energy prices, as well as tariff-driven increases in other input prices—particularly steel and electronics. The annual change is expected to drop from 3.3 percent to 3.2 percent, indicating that longer-term inflation pressures remain above the target range set by the Fed. The core index, which excludes energy and food, should also rise. It is expected to go from 0.1 percent in July to 0.2 percent for August. The annual figure should stay steady at 2.7 percent. Tariffs are reported to be driving faster input inflation, although it is not yet expected to show up in the aggregate figures.

On Thursday, the consumer price reports are expected to show continued inflation at the headline level. The headline index will likely rise by 0.3 percent in August, up from 0.2 percent in July. The annual figure is expected to drop from 2.9 percent in July to 2.8 percent in August. The core index, on the other hand, should stay steady—with the monthly figure holding at 0.2 percent and the annual figure at 2.4 percent. As with the producer prices, these figures indicate inflation continues to run above the Fed’s target levels, which should continue to drive interest rates higher.

On Friday, the retail sales report is expected to show growth of 0.6 percent for August, up from 0.5 percent in July, on a rise in gasoline prices and steady auto sales. There is some downside risk, as a modest pullback may be likely after a big increase in July. Core retail sales, which exclude autos, are also expected to do well. August growth should remain steady at 0.6 percent—the same as in July.

Also on Friday, the industrial production report should tick up a bit, from a gain of 0.1 percent for July to a gain of 0.3 percent for August. Manufacturing will likely show similar growth—from a 0.3-percent gain in July to a 0.4-percent gain in August. There’s some downside risk with these numbers, as manufacturing employment declined last month and growth in oil drilling and utility production was moderate.

Finally, we’ll see the University of Michigan consumer confidence survey on Friday. It is expected to hold steady from August to September at 96.2. This is a historically high level and suggests that consumers are not yet worried about the effects of a trade war, given a decline in gas prices and the recent stock market surge. There may be some upside risk here, as the recent increase in the Conference Board survey brought it close to an 18-year high.

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.

© 2018 Commonwealth Financial Network®

Presented by Mark Gallagher

General market news  
• Volatility was back in rates last week. The 10-year Treasury yield went from as low as 2.80 percent to as high as 2.90 percent; it ended the week at 2.86 percent, where it opened on Monday. Meanwhile, the 30-year was at 2.95 percent early last week before selling for 3.03 percent midweek; it was back to 2.97 percent by Friday and opened at 3.04 percent on Monday morning. The uncertainty here stemmed mostly from unclear political direction, tariffs, and trade wars.
• All three major U.S. markets moved higher last week. The Nasdaq Composite Index led the way, with technology, consumer discretionary, and health care among the top performers. Bond proxies (telecom, utilities, staples) lagged, however, as the week favored a risk-on rally ahead of a widely expected September rate hike. The major news last week was the U.S.–Mexico trade agreement, which seemed to ease the minds of investors, even as trade concerns between the U.S. and China continued to grab headlines. Meanwhile, the U.S. and Canada are set to resume their trade talks this week.
• Last week was active on the economic update front. On Tuesday, the Conference Board Consumer Confidence Index surprised to the upside. It jumped from 127.4 to 133.4—the highest level in nearly 18 years.
• On Wednesday, the second estimate of second-quarter gross domestic product growth also came in better than expected. This measure of overall economic activity was revised up to 4.2-percent annualized growth.
• Finally, on Thursday, personal income and spending figures from July were released. These came in at 0.3 percent and 0.4 percent, respectively, which represents healthy growth levels.

Source: Bloomberg

Source: Morningstar Direct

What to look forward to 
This is a short week but a very busy one for economic news, with looks at business sentiment, the trade balance, and, most important, the job market.

On Tuesday, the Institute for Supply Management (ISM) Manufacturing index was expected to drop slightly—from 58.1 to 57.6—but instead jumped to a 14-year high of 61.3. This is a diffusion index, where values above 50 indicate expansion and below 50 indicate contraction. So, with this increase, the index remains quite strong. The anticipated pullback was expected to come from slowing global growth—specifically the recent appreciation in the dollar, which has been increasing the costs of U.S. products to foreign buyers. Instead, the ISM’s new-orders index and employment gauge both increased. Further, 16 of the 18 industries reported expanding in August. Uncertainty over trade policy remains a headwind, but overall this dramatic growth signals a positive outlook for the economy.

On Wednesday, the international trade report is expected to show that the trade deficit has climbed from $46.3 billion to $47.5 billion. Exports surged in the second quarter as buyers bought ahead of pending tariffs. Export growth has now dropped back, which may suggest there is some additional downside risk here. Overall, if the numbers come in as expected, trade will likely be a drag on third-quarter growth.

On Thursday, the ISM Nonmanufacturing index is expected to rebound a bit—from 55.6 to 56.9—after a sharp drop in August. As with the manufacturing report, this is a diffusion index, so this level would indicate continued expansion. The expected bounce should come from strong retail sales growth, as well as strong regional surveys. With consumer confidence high and spending growth solid, this indicator should remain positive for the economy.

Finally, on Friday, the employment report is expected to show that job growth rebounded to 191,000 in August from a weak July report of 157,000. The unemployment rate is expected to remain steady at 3.9 percent as the labor force continues to grow. Wage growth is expected to stay steady at 0.3 percent on a monthly basis but tick up from 2.7 percent to 2.8 percent on an annual basis. If the numbers come in as expected, this would be another healthy report and signal continued economic growth. It would also likely lock in another rate hike from the Federal Reserve in September.

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.

© 2018 Commonwealth Financial Network®

Presented by Mark Gallagher

General market news
• On Monday morning, the yield for the 10-year Treasury opened at 2.85 percent, closer to the bottom of the range in which it had been trading in recent days. The yields for the 30- and 2-year Treasuries were 3.01 percent and 2.6 percent, respectively. Most parts of the curve opened at or close to the flattest they’ve been in this cycle, with the spread between the 2- and 10-year notes at less than 24 basis points (bps). The difference between yields on the 2- and 30-year Treasuries was down to only 39 bps—just above its most recent low.
• The markets were mixed last week. In the U.S., the Dow Jones Industrial Average led the way with a 1.49-percent gain, backed by earnings strength from retailers Walmart (WMT) and Nordstrom (JWN). The Nasdaq lagged, as we saw a rotation toward value. Telecommunications, consumer staples, and REITs were among last week’s top performers. Energy, materials, and consumer discretionary were among the top laggards. Meanwhile, in international markets, the MSCI Emerging Markets Index continued to be hurt by contagion fears surrounding Turkey’s currency weakness.
• Several news items out of China affected last week’s market performance. The first story announced that the U.S. and China had agreed to resume trade talks this week. The second story speculated that softer July activity was leading to some concerns about a slowdown in global growth momentum. The third story reported that China had frozen its approvals of game licenses. China’s government continues to reorganize various departments, and its regulators have become more concerned about the content in some games.
• Last week was busy on the economic update front. On Wednesday, July’s retail sales data came in better than expected, as consumers are still spending. On a month-over-month basis, sales grew 0.5 percent against expectations for 0.1-percent growth.
• On Thursday, building permits and housing starts were a mixed bag; starts declined while permits rose slightly. Given the current low level of new home supply, these measures will be an important barometer of the overall health of the housing market.
• Finally, on Friday, the University of Michigan consumer sentiment survey dropped to 95.3, against expectations that it would remain steady at 97.9. The result still represents a strong level of confidence. Consumers are continuing to spend, as reflected in the strong retail sales figure.

Source: Bloomberg

Source: Morningstar Direct

What to look forward to 
This week will be relatively quiet on the economic news front, with only two major data releases.

On Wednesday, the minutes from the August 1 meeting of the Federal Open Market Committee will be released. At that meeting, the committee kept rates flat. The major section of the minutes to watch for will be the commentary surrounding inflation, as most inflation figures are now above the Federal Reserve’s stated 2-percent target.

On Friday, July’s durable goods orders are expected to show a slight decline due to transportation orders. The core figure, which excludes volatile transportation orders, is expected to show steady 0.5-percent growth. This proxy for business confidence has been growing steadily throughout the year, so a decline in the headline number would be nothing to worry about.

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 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 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.

© 2018 Commonwealth Financial Network®