Presented by Mark Gallagher 

General market news
• Early Monday morning, the yield on the 10-year Treasury opened at 2.55 percent after climbing as high as 2.64 percent last Friday. The curve as a whole moved higher, as the 10-year was in sync with the 30-year, which closed just under 2.91 percent on Friday. The 2-year remained above 2 percent, closing the week at 2.06 percent.
• The risk-on rally carried its momentum through the third week of 2018, as consumer staples, health care, and technology helped push U.S. markets higher. All three major indices were up more than 0.8 percent for the week, pushing all three above 5-percent gains year-to-date.
• A solid start to earnings season has helped markets ignore the noise from a government shutdown and more hawkish trade talk from the Trump administration. (As we write this on Monday, the Senate is voting on an agreement to reopen the government.) As we get deeper into earnings season, future earnings results and guidance should provide an indicator as to whether the market can maintain this momentum.
• In addition to the shutdown, trade tensions rose as President Donald Trump discussed pulling out of the North American Free Trade Agreement (NAFTA) to gain leverage for U.S. trade deals. Additionally, the U.S. Department of Commerce continued to investigate Chinese trade practices, which are escalating tensions between the two countries. This potential volatility was reflected in the CBOE Volatility Index (VIX), which rose from 10 the previous week to 12.25 last week.
• The data released last week focused primarily on housing, and it showed a slight cool down. On Tuesday, the National Association of Home Builders Housing Market Index declined slightly. This measure of homebuilder confidence still remains near multi-year highs, however, as demand for new housing is strong.
• Lower homebuilder confidence translated into lower building permits and housing starts. Both of these indicators for future supply were expected to decline, however, following unexpected growth in November.

Source: Bloomberg

Source: Morningstar Direct

What to look forward to
The news this week is that there may be no economic news. With the government now in the third day of a shutdown, economic data releases may be postponed. If the government reopens quickly, there will be two major releases this week, both on Friday.

The first estimate of economic growth in the fourth quarter is expected to tick down from a very strong 3.2 percent to a still healthy 2.9 percent. The mix of growth should be strong, with consumer spending up around 4 percent and business investment rising at a double-digit pace, annualized. Government spending is also expected to rise at the state and local levels. Headwinds are expected to include imports growing faster than exports, which would make trade a net drag on growth.

The durable goods report is also expected to pull back a bit at the headline level, but the core figures should improve substantially. The headline number, which includes transportation, can be quite volatile. It is expected to drop from 1.3-percent growth to 0.9-percent growth on a seasonally adjusted decline in aircraft orders. The core figure, which excludes transportation, is expected to rise from a decline of 0.1 percent to 0.7-percent growth. This increase would reflect faster business investment growth and would be a positive sign 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.

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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 2.55 percent on Monday morning, up from 2.40 percent, where it started the year, but below its recent high of 2.59 percent. As actions by the Federal Reserve (Fed) continue to affect the short end of the yield curve, the longer end has stayed quite stable. The 30-year remains well below 3 percent at 2.83 percent, while the 2-year is now above 2 percent.
• U.S. markets continued their strong start to 2018. On the back of synchronized global growth and positive investor sentiment, all three major U.S. indices posted gains greater than 1.6 percent. Strong December retail sales and a hawkish tone from the European Central Bank minutes, both released last week, supported the global growth theme that has played out through the start of the year. Strong holiday sales favored stocks such as Target Corporation (TGT) and Kohl’s Corporation (KSS). The top-performing sectors for the week included industrials, energy, and consumer discretionary. Meanwhile, the bond proxies—the REIT, telecom, and utilities sectors—lagged.
• This week also kicked off earnings season. A number of large financial companies reported, including JPMorgan Chase & Co. (JPM), Wells Fargo & Co. (WFC), BlackRock, Inc. (BLK), and PNC Financial Services (PNC). All beat their earnings estimates, but Wells Fargo’s legal expenses from the prior year continued to weigh on revenues.
• Last week was relatively quiet in terms of economic news, with only three major data releases. On Thursday, the Producer Price Index came in below expectations, showing 2.3-percent growth on an annualized basis. This measure of producer inflation also declined on a month-over-month basis.
• On Friday, the Consumer Price Index beat expectations by growing at a 1.8-percent annual rate. Both of these measures of inflation remain near the Fed’s stated 2-percent target.
• Also on Friday, December retail sales remained strong, with 0.4-percent growth on a month-over-month basis. Given the strength of this figure, overall fourth-quarter growth may have been faster than previously expected.

Source: Bloomberg

Source: Morningstar Direct

What to look forward to
This week’s economic news will offer a look across the economy.

The industrial production report will be released on Wednesday. It is expected to show that growth ticked up from 0.2 percent in December to 0.4 percent in January on increased drilling and oil production. Manufacturing growth also is expected to tick up, from 0.2 percent in December to 0.3 percent in January, on strong global demand. There may be some downside risk in these estimates, after strong growth in recent months. Even if there is a slowdown, however, the overall trend remains positive.

Turning to housing, the National Association of Home Builders survey of homebuilder confidence also will be released on Wednesday. It is expected to drop slightly, from 74 in November—which was close to a 19-year high—to a still-strong 72, as demand for housing remains solid and prices continue to rise. Housing starts, released on Thursday, are expected to drop back to 1.27 million in December from 1.297 million in November. This slight pullback would signal that the industry remains healthy, despite shortages of labor, land, and materials.

Finally, on Friday, the University of Michigan consumer confidence survey is expected to rebound from 95.9 in December to 97.0 in January. The record stock market and strong job growth are expected to drive confidence higher. Historically, this level of confidence has indicated continued 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.

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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

• Early Monday morning, the yield on the 2-year Treasury opened just below 2 percent at 1.95 percent, while the longer end of the curve essentially stayed flat, making the entire curve flatter. After an initial spike in the yield curve, the spread between the 2-year and 10-year has dropped to about 51 basis points, its lowest since October 2007. The 10-year opened at 2.47 percent, and the 30-year opened at 2.79 percent.
• U.S. markets fared well during the first week of trading in 2018. All three major indices were up more than 2 percent. The Nasdaq Composite led the way, rising 3.4 percent on strength in semiconductors and FANG (Facebook, Amazon, Netflix, Google) stocks. This came despite news of two major flaws in computer chips—dubbed Meltdown and Spectre—which are expected to affect billions of devices. The S&P 500 followed with a 2.63-percent gain. The Dow Jones Industrial Average cracked the 25,000 mark for the first time and posted a 2.37-percent gain.
• One sector that performed well was energy, as WTI crude saw a 1.7-percent increase following civil unrest in Iran and a drop in inventory.
• Last week saw a number of important economic data points, covering the breadth of the economy. On Wednesday, the Institute for Supply Management (ISM) Manufacturing index surprised by increasing, despite expectations for a slight decline. This measure of manufacturing confidence is near a 13-year high.
• On Friday, the December employment report came in worse than expected, with 148,000 new jobs added against expectations for nearly 200,000. On the bright side, wage growth remained stable, and the unemployment rate did not change.
• Also on Friday, the ISM Nonmanufacturing index disappointed by declining for the second month in a row. Despite this pullback, this measure of service-side confidence remains in expansionary territory.

Source: Bloomberg

Source: Morningstar Direct

What to look forward to

There will be two major data releases to pay attention to this week, both on Friday.

The first data release will be the Consumer Price Index. The headline series, which includes both food and energy, is expected to decline from 0.4 percent in November to 0.2 percent in December, driven largely by declining gasoline prices. The annual figure is expected to decline from 2.2 percent to 2.1 percent. The core inflation number, on the other hand, which excludes food and energy, is expected to rise on a monthly basis from 0.1 percent in November to 0.2 percent in December, which would leave the annual figure at 1.7 percent. If these numbers come in as expected, they would remain consistent with past performance, and there would be no significant market impact.

The second data release will be retail sales. The headline number, including auto sales, is expected to drop from 0.8 percent in November to a still-robust 0.4 percent for December, driven by a decline in auto sales. Core retail sales, which exclude auto sales, are also expected to decline, from 1 percent in November to a still-strong 0.4 percent in December. There may be some downside risk to this figure. Overall, if the numbers come in as expected, they would indicate continued strong consumer demand growth in the fourth quarter.

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.

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Mark Gallagher is a financial advisor located at Gallagher Financial Services at 2586 East 7^th 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

Solid December caps strong year for markets
All three major U.S. indices were up during the last month and quarter of 2017. In December, the Dow Jones Industrial Average returned 1.92 percent, while the S&P 500 and Nasdaq Composite indices gained 1.11 percent and 0.48 percent, respectively. For the quarter, the Dow gained 10.96 percent; the S&P 500, 6.64 percent; and the Nasdaq, 6.55 percent. For the year, the Nasdaq rose an impressive 29.64 percent, with the Dow climbing 28.11 percent and the S&P 500 returning 21.83 percent. All three indices were trading above their 200-day moving averages at year-end.

Improving earnings largely drove the positive performance. Per FactSet, at year-end, estimated fourth-quarter earnings growth for the S&P 500 was 10.9 percent, with all 11 sectors projected to grow from third-quarter levels.

International markets also had a successful year. The MSCI EAFE Index of developed markets gained 1.61 percent, 4.23 percent, and 25.03 percent for the month, quarter, and year, respectively. The MSCI Emerging Markets Index returned 3.64 percent in December, 7.50 percent for the quarter, and 37.75 percent for the year. International markets closed 2017 with strong technical support.

The Federal Reserve increased the federal funds rate three times in 2017, demonstrating confidence in the economic expansion. Markets anticipate two or three rate increases in 2018.

Despite the rate hikes, the Bloomberg Barclays Aggregate Bond Index was up 0.46 percent in December, bringing the quarterly return to 0.39 percent and capping the annual return at 3.54 percent. The Bloomberg Barclays U.S. Corporate High Yield Index rose 0.30 percent and 0.47 percent for the month and quarter, though a stronger start to 2017 led to a 7.50-percent annual return.

Consumers drive economic growth
High consumer confidence translated into much better-than-expected spending heading into the holidays. Retail sales surprised to the upside, with headline and core sales both increasing 0.8 percent over October. On an annualized basis, retail spending growth sits at 5.8 percent, the highest level since 2012 (see Figure 1).

Figure 1. Retail Sales Annualized Change, 2007–2017

The Conference Board’s consumer comfort survey hit a 17-year high in November. Confidence declined a bit in December, though it remains very high.

Strong job growth supports confidence and spending. In November, 228,000 jobs were added. Underlying data was also strong, though wage growth was less than anticipated. But the tight labor market and healthy economic growth point to possible faster wage growth in 2018.

In December, homebuilder confidence increased to levels last seen in 1999. This confidence translated into more housing starts, leading to the second-highest annualized growth since 2008. Existing home sales were up 5.6 percent last month while new home sales skyrocketed 17.5 percent.

Businesses also confident—and spending
Business sentiment stayed strong last month, with industry surveys in healthy expansionary territory. Durable goods orders increased 1.3 percent in November. Core orders declined slightly, but that was offset by a positive revision to October’s strong growth. Industrial production and manufacturing output grew 0.2 percent in November.

Persistent political risk looms over markets
Here and abroad, the major sources of market risk are political. The Brexit process and continuing attempts to form a German government, issues surrounding North Korea, and the potential for a U.S. government shutdown could lead to market upheaval or adversely affect economic growth.

2018 starts with lots of momentum
High confidence, continued job and potential wage growth, increased spending, and improving economic fundamentals leave consumers and businesses in good shape entering the new year. Combine that with reduced regulation and the possible positive impact of tax reform, and we could see even faster growth in 2018.

Strong fundamentals should drive the economy and markets forward, but volatility is likely. The calm of 2017 is unlikely to last, so we must remember that markets can go down as well as up. A well-diversified portfolio that takes advantage of long-term growth opportunities remains the best path 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.

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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, senior vice president, chief investment officer, and Sam Millette, fixed income analyst, at Commonwealth Financial Network®.

© 2018 Commonwealth Financial Network®