Presented by Mark Gallagher

General market news
• The 10-year Treasury yield dropped to as low as 2.79 percent early Tuesday, while the 30-year opened at 3.05 percent and the 2-year at 2.44 percent. The 10-year had been as high as 3.12 percent a little less than two weeks ago. The steepness of the yield curve (i.e., the spread between short and long rates) reached a new cycle low on Tuesday morning, with the spread between the 2-year and 10-year dropping to 41.5 basis points.
• The three major U.S. indices were up, although there was a mixed underlying story within the sectors. Up more than 1 percent, the Nasdaq Composite led the way, as technology stocks Microsoft, Netflix, and Apple were all major contributors to the S&P 500’s positive performance. Micron stock was also up, with the company announcing a $10 billion share buyback. The energy sector was the largest drag on the market as concerns mounted that OPEC and Russia will dial back their production cuts.
• There was some positive news surrounding trade talks between the U.S. and China. The two countries are looking at a deal to save ZTE in exchange for a change in firm management. Other points of discussion were a Chinese ramp-up in purchases of U.S. agriculture and potential U.S. tariffs on auto imports.
• The top-performing sectors were utilities, REITs, and technology. Those with the worst performance included energy, materials, and financials.
• Last week was relatively quiet on the economic news front. On Wednesday, new home sales showed a decline of 1.5 percent in April. On Thursday, existing home sales also showed weakness, dropping by 2.5 percent. Given increasing housing prices, low levels of supply, and rising mortgage rates, these measures of home ownership bear watching.
• On Friday, durable goods orders came in below expectations with a decline of 1.7 percent in the headline number. While this result was weaker than expected, the core figure, which strips out volatile transportation orders, was better than expected.

Source: Bloomberg

Source: Morningstar Direct

What to look forward to
This week’s economic news will give us a broad look at the economy.

On Thursday, the personal income and spending report is expected to show that income growth remained steady at 0.3 percent for April (the same as in March), while spending growth also remained steady at 0.4 percent. Given the inflation factor of 0.2 percent, these numbers would signal reasonable real growth rates. While some of the spending gain will come from rising gas prices, control group sales are expected to rise as well, suggesting that spending growth remains healthy.

On Friday, the employment report is expected to show job growth picked up from 164,000 in April to 190,000 in May. If so, this would be the highest level in the past two months, pushing the six-month average growth rate even higher. Much of the recent job growth has come from construction, manufacturing, and mining—a positive sign as these jobs are often high paying. Wage growth is expected to tick up from 0.1 percent in April to 0.3 percent in May, while the annual rate is expected to rise from 2.6 percent to 2.7 percent. The unemployment rate is expected to hold steady at 3.9 percent. Overall, if the report meets expectations, it would suggest the jobs market continues to be very strong and provide grounds for the Federal Reserve to raise rates in June.

Finally, also on Friday, the Institute for Supply Management (ISM) Manufacturing index is expected to rise from 57.3 to 58.1. This is a diffusion index, where values above 50 indicate expansion. As such, this would be a very positive report. Regional surveys have been strong, and there may be some upside potential here.

Overall, if the reports come in as expected, they would signal accelerating growth and confirm that the first-quarter slowdown continues to subside.

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
• The 10-year Treasury yield opened at 3.07 percent Monday morning, after being as high as 3.12 percent and as low as 2.94 percent last week. Meanwhile, the 30-year opened at 3.21 percent and the 2-year at 2.57 percent. Although the yield curve remains very flat, it has steepened by a few basis points over the past week.
• The three major U.S. markets ticked down slightly, as the continued strength of the dollar and higher rates led to a reversal of the prior week’s risk-on trade. The Russell 2000 Index fared best among the U.S. indices, with the strong dollar supporting small-caps. On the other hand, emerging markets came under pressure as investors dialed back risk in response to the 10-year yield rising back above 3 percent.
• Earnings season began to wind down, with many retailers (Home Depot [HD], Walmart [WMT], Macy’s [M]) reporting. Generally, the earnings were modestly disappointing, with colder-than-usual weather cited as one of the reasons for softer results. But according to FactSet, with 93 percent of the S&P 500 reporting, the blended growth rate for the first quarter is 24.5 percent—the best result since the third quarter of 2011. Some common potential headwinds cited in guidance were higher wages, transport, and commodities costs.
• Economic news last week was relatively quiet. On Tuesday, retail sales remained strong, with 0.3-percent growth in April. Encouragingly, March’s growth was also revised up to 0.8 percent. The strong March and April figures indicate that consumers may be spending some of their new tax savings.
• Also on Tuesday, the National Association of Home Builders Housing Market Index increased to 70, as expected. Given rising construction and land costs, continued home builder confidence will be key to solving the current supply issues in the market. Despite the high confidence level, building permits and housing starts were both down in April.

Source: Bloomberg

Source: Morningstar Direct

What to look forward to
This week will be a slow one for economic news, but the releases we will see are important.

On Wednesday, the Federal Reserve (Fed) will release the minutes of the last meeting of its Open Market Committee, which sets interest rates. The statement issued after that meeting was notable for pronouncing that the inflation target was “symmetric” around 2 percent, which suggests the Fed might be willing to let inflation run above that level for some time. Markets are hoping the minutes provide further context for that statement, as well as some clarity about what that could mean for future rate increases. With inflation heating up, interest rates will become increasingly important. Markets will also be looking for some color on how the Fed views the current trade policy disputes, with respect to future growth and inflation.

On Friday, the durable goods orders report is expected to show that headline orders for business equipment dropped from growth of 2.6 percent to a decline of 1.4 percent, on a substantial decline in aircraft orders. This headline index is notoriously volatile due to the airline component. But the core orders index, which excludes transportation and is a much better economic indicator, is expected to do the reverse. It is expected to improve from a decline of 0.1 percent to a gain of 0.5 percent, which would be a very healthy level. Strong regional surveys and manufacturing activity may even show some upside for this figure. If the core number comes in as anticipated, it would suggest that business investment will continue to support growth.

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
• The 10-year Treasury yield remained range-bound between 2.95 percent and 3 percent last week. Meanwhile, the 30-year opened Monday at 3.11 percent, and the 2-year stood at 2.53 percent. As the yield curve continues to flatten, the risk of an inverted yield curve—where short-term rates are higher than long-term rates—is rising. Historically, an inverted yield curve has been a good indicator of impending recession.
• The U.S. markets experienced a risk-on rally last week, with energy, technology, financials, and industrials all up more than 3 percent. Strength in oil helped bolster the performance of some of the more cyclical sectors. West Texas Intermediate and Brent crude gained 1.5 percent and 3 percent, respectively. With investors more interested in risk assets, bond proxies in the utilities, consumer staples, and REIT sectors struggled.
• Markets also were buoyed by inflation news (more below), as well as by more positive sentiment surrounding U.S.-China trade talks. The White House confirmed last week that China’s top economic official, Vice Premier Liu He, would be traveling to Washington for additional trade discussion.
• Turning to economic updates, last week was relatively quiet outside of inflation data. On Wednesday, the Producer Price Index moderated somewhat, coming in at 2.6-percent growth on an annual basis. This result may help offset some fears about rising prices.
• On Thursday, the Consumer Price Index came in at 2.5-percent year-over-year growth. This result was in line with expectations. Inflation figures will be watched closely for the rest of the year as the Fed continues to hike rates.
• Finally, on Friday, the University of Michigan consumer sentiment survey beat expectations by staying unchanged at 98.8. This high level of consumer confidence is encouraging and should spur spending growth in the second quarter.

Source: Bloomberg

Source: Morningstar Direct

What to look forward to
This week, we’ll be looking at the economic data to see whether earlier signs of a slowdown are passing.

Tuesday’s retail sales report may moderate somewhat at the headline level. Growth is expected to tick down from an extremely strong 0.6 percent in March to a still healthy 0.4 percent in April. There may be some downside risk here, as auto sales declined last month. A rise in gas prices should offset that, however, so any damage is likely to be limited. Core retail sales, which exclude autos, are expected to accelerate from 0.2-percent growth in March to 0.5-percent growth in April. Here, the rise in gas prices could improve this result. If growth remains strong, it will suggest that last month’s positive results are sustainable and that consumption growth is likely to exceed weak first-quarter levels going forward.

Housing is the next area where a rebound is expected. The National Association of Home Builders survey, released on Tuesday, is expected to rebound from 69 in April to 70 in May. Meanwhile, the housing starts report is expected to remain steady at 1.32 million in April, the same as in March. A drop in building permits and elevated lumber prices could weigh on this result.

Finally, on Wednesday, we’ll see the industrial production report. It is expected to show an acceleration in the headline index from 0.5-percent growth in March to 0.6-percent growth in April, driven by gains in manufacturing output. In fact, manufacturing is expected to bounce back, rising from 0.1-percent growth in March to 0.8-percent growth in April, due to strong growth in hours worked. This would also be a rebound from a weak first quarter and suggest faster growth ahead.

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  
• The yield on the 10-year Treasury opened at 2.94 percent Monday morning, in line with where it spent most of last week. Meanwhile, the 30-year stood at 3.10 percent, while the 2-year was at 2.49 percent. The yield curve remains at its flattest level of this current cycle. The Federal Reserve (Fed) decided not to raise rates last week, which would have put more flattening pressure on the curve. It seems likely the Fed will raise rates in June, however.
• U.S. markets were mixed last week, as trade talks and earnings season continued to grab the majority of headlines. The technology-focused Nasdaq Composite was up 1.29 percent as slower smartphone demand weighed less on earnings from Apple (AAPL) than expected. In fact, earnings this quarter have remained strong. According to FactSet, the estimated blended growth rate for first-quarter earnings for the S&P 500 Index is now at 24.2 percent. Despite the high rate, some companies continue to cite rising input and labor prices as reasons for potentially softer guidance moving forward.
• The Chinese-U.S. trade talks concluded in a stalemate, with neither side wanting to make concessions. In other trade-related news, the U.S. did extend temporary exemptions for steel and aluminum tariffs to Canada, Mexico, and the European Union. The exemptions are set to expire in June.
• Last week was a busy one for economic data. On Monday, personal income and personal spending figures for March came in largely in line with expectations, at 0.3-percent growth and 0.4-percent growth, respectively.
• On Tuesday, the Institute for Supply Management (ISM) Manufacturing index declined to 57.3 from 59.3. This was below estimates for a reading of 58.5. On Thursday, the ISM Nonmanufacturing index also declined, dropping from 58.8 to 56.8. Both of these measures of business confidence remain in expansionary territory, so these declines are not alarming; however, further drops should be monitored.
• Finally, on Friday, the April employment report was released. The economy added 164,000 new jobs against expectations for 185,000. The underemployment and unemployment rates both dropped, to 7.8 percent and 3.9 percent, respectively.

Source: Bloomberg

Source: Morningstar Direct

What to look forward to
The main focus of this week’s economic data is prices, though we’ll get a look at consumer confidence at the end of the week as well.

Wednesday’s producer prices report is expected to show that headline price growth moderated from 0.3 percent in March to 0.2 percent in April. There is significant upside risk here, however, as energy prices have increased across the board. On an annual basis, producer price growth is expected to drop from 3 percent in March to 2.8 percent in April, which would still be a high figure. Here as well there is risk that inflation could move higher.

Core producer prices, which exclude energy, are also expected to moderate, from 0.3-percent growth in March to 0.2-percent growth in April. Here, though, there is less upside risk as energy prices are not included. On an annual basis, growth in core producer prices is expected to tighten from 2.7 percent to 2.4 percent. This would still put price growth above the Fed’s 2-percent inflation target, suggesting that more rate hikes are on the way.

Thursday’s consumer prices report is expected to show the opposite, with the headline index rising from a decline of 0.1 percent in March to a gain of 0.3 percent in April. This would take the annual figure from 2.4 percent to 2.5 percent, again primarily on rising energy prices. Core prices, which exclude food and energy, are expected to show constant growth, at 0.2 percent for both March and April. Due to base effects, however, the annual figure is expected to rise from 2.1 percent in March to 2.2 percent in April. Again, this would be above the Fed’s target, suggesting that rates will keep rising.

Finally, on Friday, the University of Michigan consumer confidence survey is expected to pull back slightly, from 98.8 in April to 98.3 in May. The survey would remain at a high level, however, consistent with continued growth, and the pullback would have no material effect. In fact, if confidence remains at the expected level, it would suggest that consumption growth is likely to rebound after a slow first quarter, which would be constructive for the economy.

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®