Presented by Mark Gallagher

General market news  
• Yields for intermediate and long-term Treasuries continued to rise last week. The 10-year yield opened Monday at 2.97 percent, putting it within striking distance of 3 percent, a level it hasn’t seen since late 2013. The 30-year yield also increased, starting the week at 3.15 percent.
• U.S. equity markets were up modestly last week. The Nasdaq Composite led the way with a gain of 0.56 percent. The S&P 500 Index and Dow Jones Industrial Average trailed just behind at 0.54 percent and 0.46 percent, respectively. As volatility-inducing headlines—including trade policy and geopolitical tensions in Syria—disappeared (at least for the time being), the focus turned to the first major week of earnings.
• Expectations appear to be high. Similar to other banks, Goldman Sachs reported strong earnings, along with revenue that increased more than 31 percent. Earnings were up more than 20 percent over consensus, coming in at $6.95 per share for the quarter. The spike was helped by an 85-percent increase in trading revenue over the prior quarter. The stock sold off following the results. Other sectors, such as industrials, didn’t face the same scrutiny. Investors reacted favorably to General Electric, for example, as the company works to turn itself around. It will be interesting to see if the reaction to earnings news will continue to be sector specific or if investors will decide that the bar has been raised for the market as whole.
• Last week was a busy one for economic news, with a focus on housing and consumers. On Monday, retail sales for March beat expectations by growing 0.6 percent. This data helps put aside concerns following a surprise decline in February.
• Also on Monday, the National Association of Home Builders Housing Market Index dropped slightly, from 70 in March down to 69. This is still a very solid number and indicates that homebuilders remain confident in the economy.
• On Tuesday, high homebuilder confidence translated to growth in both housing starts and building permits. Both of these indicators of future supply declined in February, so the uptick in housing activity is a good sign.

Source: Bloomberg

Source: Morningstar Direct

What to look forward to
This week’s economic news starts with housing. Monday’s existing home sales report came in better than expected. It showed that sales rose from 5.54 million in February to 5.6 million in March, continuing the recovery from a disappointing January. On Tuesday, new home sales are also expected to rise, from 618,000 to 625,000. Again, this would be a partial recovery from a significant drop late last year. If the numbers come in as expected, they would indicate a continued recovery in housing to its previous growth level.

Also on Tuesday, the Conference Board’s survey of consumer confidence is expected to drop again, from 127.7 to 126.0. Although this is still a very high level, confidence has been declining slowly from its recent decade-plus high. There also may be some downside risk to this number, given rising gas prices and recent stock market turbulence.

On Thursday, the durable goods orders report is expected to show a slowdown in growth from a very strong 3 percent in February to a still strong 1.1 percent in March, supported by rising aircraft orders and motor vehicle sales. Core orders, which exclude transportation, are expected to slow from 1-percent growth in February to 0.4-percent growth in March. These numbers would represent a full recovery from January’s decline. Further, they would indicate that business investment, although slowing, continues to expand.

Finally, on Friday, we’ll see the first estimate of gross domestic product growth for the first quarter. Growth is expected to drop from 2.9 percent in the last quarter of 2017 to 2.1 percent for the first quarter of 2018 due to slower increases in household spending and business investment. It’s possible that remaining seasonal effects could push the number down even more, as has happened in the past, which would 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  
• After spending the better part of the past two weeks below 2.80 percent, the 10-year Treasury bounced back and opened Monday at 2.86 percent. The 30-year opened at 3.06 percent, and the 2-year was at 2.38 percent. The yield curve hasn’t been this flat since 2007.
• U.S. markets were up across the board last week, as protectionism concerns waned and the Federal Open Market Committee expressed positive economic sentiment in its meeting minutes. A number of events supported free trade, including Chinese President Xi Jinping’s speech at the Boao Forum, during which he vowed to further open his country’s markets. In addition, there was news out of the White House about a possible NAFTA deal. President Trump also expressed interest in potentially rejoining the Trans-Pacific Partnership, an 11-nation free trade deal.
• The week was not without volatility, however, as we waited to see if and when the U.S., U.K., and France would strike at supposed chemical weapons facilities in Syria. Prices for West Texas Intermediate rose more than 8 percent on the news. Unsurprisingly, the energy sector posted the largest gain on the week. Technology followed, as investors reacted favorably to Mark Zuckerberg’s testimony before Congress. The bond proxies in the utilities, REIT, and telecom sectors were among the worst performers.
• Last week was relatively quiet in terms of economic news. On Tuesday, the Producer Price Index came in higher than expected, with a 0.3-percent monthly gain. This put year-over-year growth at 3 percent.
• On Wednesday, the Consumer Price Index showed a 2.4-percent year-over-year increase, which was a step up from last month’s reading of 2.2 percent. Given the healthy employment market, the Fed will keep a close eye on inflation as it determines when to hike rates again this year.
• Finally, on Friday, the University of Michigan consumer sentiment survey came in below expectations, declining to 97.8 in April. This is down from March’s level of 101.4, but it is still a very strong reading historically.

Source: Bloomberg

Source: Morningstar Direct

What to look forward to
This will be a busy week for economic news. Reports will give us a look at consumer spending, the housing market, and industrial production and manufacturing. In other words, we’ll get an update on the entire economy.

The retail sales report, released on Monday, beat expectations, showing a gain of 0.6 percent in March. Economists had expected sales to grow by 0.4 percent. A rebound in auto sales and another increase in Internet sales helped push up the result. Core retail sales, which exclude autos, also improved over February, growing by 0.3 percent in March. These numbers are healthy and show that consumers are continuing to spend.

Also on Monday, the National Association of Home Builders survey dropped from a strong 70 to 69, which is still healthy and positive for the industry. Housing starts, released on Tuesday, are expected to rise from 1.24 million in February to 1.27 million in March. After volatility in both multifamily and single-family sectors in recent months, this would be a positive development. Overall, demand remains strong, although supply is constrained, especially for existing homes.

Industrial production growth, also released on Tuesday, is expected to moderate from an unsustainable 0.9 percent in February to a still healthy 0.3 percent in March. This variance includes substantial weather-driven swings in utility production. Manufacturing output, which is a better economic indicator, is also expected to decline, largely driven by oil and gas production, from 1.3-percent growth in February to a still healthy 0.4 percent for March. There may be some downside risk here, based on a decline in hours worked and February’s strong result.

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
• Rates were slightly higher last week. The yield on the 10-year Treasury broke 2.80 percent to the upside, though it was back below that level on Friday and opened Monday at 2.79 percent. The 30-year spent much of last week below 3 percent, though it opened Monday at 3.03 percent. The 2-year, meanwhile, was as high as 2.30 percent last week and opened this week at 2.28 percent. The difference between the 2-year and 10-year stands at about 50 basis points (0.50 percent), whereas the difference between the 2-year and the 30-year is 74 basis points (0.74 percent).
• All three major U.S. indices were down last week as rhetoric between the U.S. and China heated up. The Nasdaq Composite Index posted the largest decline of 2.08 percent. The tech-heavy index suffered in the wake of President Trump’s continued comments on potential legal action he could take against Amazon (AMZN). Volatility also increased following a disappointing U.S. employment report and increasing global lending costs.
• At the end of the week, markets digested news that the U.S. would potentially add another $100 billion in tariffs on Chinese products. This was a different story than the previous week’s news that the U.S. and China were discussing trade deals. In his March Senate Finance Committee testimony, U.S. Trade Representative Robert Lighthizer stated that he “anticipates about 60 days worth of public comment on a soon-to-be published tariff list.” As a result, it could be some time before the volatility surrounding fears of a trade war subsides.
• Turning to economic news, the Institute for Supply Management (ISM) Manufacturing index was released last week. Although the index came in below expectations at 59.3, the still-strong reading indicates that the economy is primed to expand at a healthy pace.
• The ISM Nonmanufacturing index came in at 58.8, close to the consensus of 59. This result also indicates that the economy is growing at a healthy pace. We do see some signs of capacity stress, however, with supplier deliveries taking longer and prices rising.
• Finally, on Friday, we saw a relatively weak March employment report. Only 103,000 jobs were created, against expectations for 175,000. This follows the strong February report, however, and brings the first-quarter average to 202,000 jobs created per month, which is slightly below the fourth-quarter average of 221,000. The unemployment rate remained at 4.1 percent for the sixth straight month, while the participation rate declined by 0.1 percent to 62.9 percent. Average hourly earnings growth came in at consensus with 0.3-percent growth month-over-month and 2.7-percent growth year-over-year. Overall, this report will likely tamp down pressure on the Federal Reserve (Fed) to increase its planned pace of rate hikes.

Source: Bloomberg

Source: Morningstar Direct

What to look forward to
Inflation will be the focus this week, with producer and consumer prices due in the first half.

On Tuesday, the headline producer prices report is expected to show a 0.1-percent increase for March, down from a 0.2-percent increase in February due to lower energy prices. On an annual basis, the change is expected to move from 2.8 percent to 2.9 percent. The core index, which excludes food and energy and so is thus a better economic indicator, is expected to increase by 0.2 percent for March, as it did in February. The annual figure also is expected to increase from 2.5 percent to 2.6 percent. This would be a six-year high in producer prices, reflecting the dollar’s depreciation and the consequent rise in import prices. These results are well above the Fed’s target range and would boost the chances for a rate hike in June.

On Wednesday, we’ll get a look at consumer prices. The headline index is expected to drop from 0.2-percent growth in February to flat in March—again due to a decrease in gas prices. The annual figure, though, is expected to tick up from 2.2 percent to 2.3 percent, as weak March data from 2017 drops out of the calculation. Core inflation, which excludes food and energy, is expected to remain stable at a 0.2-percent growth rate for March. But the annual figure is expected to rise to 2.1 percent from 1.8 percent. As with producer prices, these figures are above the Fed’s target and would support a rate increase if they come in as expected.

Speaking of the Fed, on Wednesday the central bank will release the notes from the March meeting of its Open Market Committee. The notes will provide more details on the Fed’s decision to raise rates last month, as well as what would drive more hikes this year. As the Fed voters are split on how many increases this year would be appropriate, markets will examine the minutes closely in the context of the inflation data for suggestions that rate increases might come faster than expected.

Finally, on Friday, the University of Michigan will release its consumer confidence survey. Sentiment is expected to tick down from a very high 101.4 in March to a still high 101.0 in April. There is probably some downside risk here, as recent turmoil in the financial markets may have shaken confidence, but the strong job market and low gas prices should keep confidence elevated. High confidence would be constructive for the economy going forward.

Disclosures: Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. All indices are unmanaged and are not available for direct investment by the public. Past performance is not indicative of future results. The S&P 500 is based on the average performance of the 500 industrial stocks monitored by Standard & Poor’s. The Nasdaq Composite Index measures the performance of all issues listed in the Nasdaq Stock Market, except for rights, warrants, units, and convertible debentures. The Dow Jones Industrial Average is computed by summing the prices of the stocks of 30 large companies and then dividing that total by an adjusted value, one which has been adjusted over the years to account for the effects of stock splits on the prices of the 30 companies. Dividends are reinvested to reflect the actual performance of the underlying securities. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a market capitalization-weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index. The Bloomberg Barclays US Aggregate Bond Index is an unmanaged market value-weighted performance benchmark for investment-grade fixed-rate debt issues, including government, corporate, asset-backed, and mortgage-backed securities with maturities of at least one year. The U.S. Treasury Index is based on the auctions of U.S. Treasury bills, or on the U.S. Treasury’s daily yield curve. The Bloomberg Barclays US Mortgage Backed Securities (MBS) Index is an unmanaged market value-weighted index of 15- and 30-year fixed-rate securities backed by mortgage pools of the Government National Mortgage Association (GNMA), Federal National Mortgage Association (Fannie Mae), and the Federal Home Loan Mortgage Corporation (FHLMC), and balloon mortgages with fixed-rate coupons. The Bloomberg Barclays US Municipal Index includes investment-grade, tax-exempt, and fixed-rate bonds with long-term maturities (greater than 2 years) selected from issues larger than $50 million

Mark Gallagher is a financial advisor located at Gallagher Financial Services at 2586 East 7th Ave. Suite #304, North Saint Paul, MN 55109. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 651-774-8759 or at mark@markgallagher.com.

Authored by the Investment Research team at Commonwealth Financial Network.

© 2018 Commonwealth Financial Network®

Presented by Mark Gallagher

Stormy March drags down markets
March was a rough month for markets, with all three major U.S. indices finishing down. The Dow Jones Industrial Average lost 3.59 percent, the S&P 500 Index fell 2.54 percent, and the Nasdaq Composite was down 2.79 percent. For the quarter, the Dow and S&P were down 1.96 percent and 0.76 percent, respectively. But the Nasdaq gained 2.59 percent.

Even as prices dropped, the fundamentals continued to improve. According to FactSet, as of March 29, the estimated earnings growth rate for the S&P 500 was 17.3 percent—the highest since 2011. But technical factors also weakened during the quarter, with the indices closing close to long-term trend lines.

International equities fared similarly. The MSCI EAFE Index declined 1.97 percent in March and 1.70 percent for the quarter on concerns over Russian aggression and potential protectionist policies. The MSCI Emerging Markets Index declined 1.97 percent in March, but strong performance to start the year helped it hang onto a 1.33-percent quarterly gain. Technical factors weakened toward quarter-end, taking both indices close to their long-term trend lines.

Fixed income rebounded somewhat in March, as yields dropped following a large increase in February. The Bloomberg Barclays U.S. Aggregate Bond Index gained 0.64 percent in March but lost 1.46 percent for the quarter.

High-yield bonds, which are less affected by interest rate movements, were also weak. The Bloomberg Barclays U.S. Corporate High Yield Index lost 0.60 percent for the month and 0.86 percent for the quarter.

Economic growth continues as February concerns abate
March was a solid month for economic news. Gross domestic product (GDP) growth for the fourth quarter of 2017 was revised up to a strong 2.9 percent annualized.

Meanwhile, a staggering 313,000 new jobs were added in February, with another 39,000 added to the already strong January report. The average workweek also increased by more than expected.

The Federal Reserve recognized this economic momentum in March with a 25-basis-point hike in the federal funds rate. Market participants expect two to three more rate hikes in 2018.

Both business and consumer confidence remain strong
This news helped keep confidence near multiyear highs. On the business front, following a slight dip in December, the Institute for Supply Management Composite index rebounded to near highs last seen in the mid-2000s (see Figure 1).

Figure 1. ISM Composite Index, 1998–2018

Consumer confidence improved as well—to levels last seen in the 1990s. Business and consumer spending data improved, too.

Both headline and core durable goods orders, which reflect business investment, bounced back from a weak January. In particular, core business investment grew by 1.2 percent for the month, which was more than enough to offset earlier declines.

The news on the consumer side was mixed. Retail sales disappointed in February, but personal spending data beat expectations, with growth steady at 0.2 percent.

Housing is another area to watch. Homebuilder sentiment declined in March, and housing starts and building permits both declined by more than expected. Supply shortages for new homes could lead to a material slowdown.

Political risks surge to the forefront
Meanwhile, political risks remain a concern. The White House’s announcement of tariffs on steel and aluminum imports and on Chinese goods raised the perception of risk. The tariffs appear to be more negotiating tactic than settled policy. Even so, the potential economic damage that could result from a trade war spooked markets during the month.

The attempted assassination of a former Russian double agent in the U.K. also increased the odds for political disruption. Following the event, many western countries responded by expelling dozens of Russian diplomats, and Russia has promised to retaliate in kind.

More volatility ahead?
The first quarter had its ups and downs, but improving fundamentals and high confidence levels should keep driving the economic expansion. Markets may be more at risk, though. The political risks strike directly at confidence, which could drive more volatility. As always, a well-diversified portfolio that matches your risk tolerance and time horizon remains the best way to pursue your financial goals.

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®.

© 2018 Commonwealth Financial Network®