Presented by Mark Gallagher

General market news
• The 10-year Treasury opened at 2.369 percent early Monday, well above last Monday’s 2.21 percent. The 30-year was also higher at 2.86 percent, but it seems to still be holding strong below 3 percent. The 2-year reached a new post-recession high of 1.48 percent. It seems that Trump’s tax plan may have infused the markets with more optimism, but time will tell whether it will have any long-term effect.
• The three major U.S. indices were up last week. Weekly gains were led by the Nasdaq Composite Index, which moved by up by 1.09 percent. The S&P 500 and Dow Jones Industrial Average trailed with gains of 0.72 percent and 0.25 percent, respectively.
• The largest market gain last week occurred in the Russell 2000, which jumped by 2.83 percent as the GOP’s tax reform plan rolled out on Wednesday. As a feature of the plan is lower corporate tax rates, this index of small-cap domestic companies, which tend to be subject to higher tax rates than large-cap multinationals, was decidedly optimistic.
• Other headlines last week included Federal Reserve (Fed) Chair Janet Yellen’s speech at the National Association for Business Economics meeting on Tuesday. Yellen’s speech had hawkish undertones as she stated that it would be “. . . imprudent to keep monetary policy on hold until inflation is back to 2 percent.”
• Overseas last week, the German election resulted in a three-party coalition, as Angela Merkel’s Christian Democratic Union of Germany lost votes to the Alternative for Germany and the Free Democratic Party. Meanwhile, Japanese Prime Minister Shinzo Abe called for a snap election in Japan. Shinzo sees an immediate need to rebalance the country’s social security system to handle its growing number of retirees.
• Last week’s economic data was mixed, with the effects from the recent hurricanes likely playing a role. The week began with the release of new home sales data, which disappointed by declining against expectations for a slight increase. This figure was likely dragged down by a slowdown in August sales in the South, but it may rebound in the coming months.
• Last Wednesday’s durable goods orders also came in below expectations; however, this was mainly due to a large decrease in transportation spending. The core reading, which excludes volatile airline orders, rose by more than expected.
• Thursday saw the release of the third and final estimate for second-quarter gross domestic product, which was revised up to 3.1-percent annualized growth, primarily due to increases in inventory.
• Finally, on Friday, personal income and spending figures disappointed, although this was again likely due in large part to the hurricanes.

Source: Bloomberg

Source: Morningstar Direct

What to look forward to
This week’s economic data is all about business. We should get a sense of whether the high levels of business confidence survived the hurricanes, as well as how the storms affected hiring.

On Monday, the Institute for Supply Management (ISM) will release its manufacturing survey, which is expected to remain steady at 58.8 for September. This is a diffusion index, with numbers greater than 50 indicating growth. So, if the survey comes in as expected, this would be good news. With regional manufacturing surveys also increasing, another strong result would suggest that the hurricanes didn’t significantly affect the manufacturing sector.

On Wednesday, the ISM will release its survey of the nonmanufacturing sector, which is expected to improve from 55.3 in August to 57.0 in September. As with the manufacturing survey, if the index comes in as expected, this would signal continued strong business confidence, despite the storms.

Finally, on Friday, the employment report is expected to drop sharply. Job growth is expected to decline from 156,000 in August to 88,000 in September, while the unemployment rate remains constant at 4.4 percent. Wage growth is expected to pick up from a 0.1-percent gain in August to a 0.3-percent gain in September. If the job gains drop while unemployment and wage growth meet expectations, the effects would presumably be due to the storms. In any event, markets will take any change in the report with a grain of salt. Past storms have produced similar results, so any decline would be grounds for watchfulness, but not serious concern.

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.

© 2017 Commonwealth Financial Network®

Presented by Mark Gallagher

General market news
• Following the Federal Reserve’s (Fed’s) announcement on Wednesday to leave interest rates unchanged (for now), the 10-year Treasury spiked to 2.28 percent, its highest point since August 16. It opened Monday at 2.24 percent. The 30-year briefly touched 2.83 percent last Wednesday before opening Monday at 2.78 percent. The 2-year spiked from 1.39 percent to 1.44 percent after the Fed’s announcement, and it has maintained that level.
• U.S. markets were mixed last week as the Federal Open Market Committee meeting, mergers and acquisitions (M&A) activity, and individual stock performance all played a role. The Dow Jones Industrial Average led the way, posting a gain of 0.36 percent, as telecom, financials, industrials, and energy posted the largest gains. Telecom was up 3.8 percent on news that Sprint (S) and T-Mobile (TMUS) were nearing terms of a deal. The industrial sector also saw some M&A activity last week, as Orbital ATK, Inc., agreed to be acquired by Northrop Grumman Corp. (NOC) for an expected $7.8 billion.
• Financials were supported by the Fed’s plan for continued tightening, as it projected one additional rate hike this year and three for 2018. The S&P 500 was mostly flat as the bond proxies in consumer staples, utilities, and real estate experienced the largest declines last week. The Nasdaq Composite Index experienced a decline of 0.33 percent, as weak projected iPhone 8 sales weighed on Apple Inc. (AAPL) and the sector.
• Last week’s economic data focused mostly on housing. To start things off, the National Association of Home Builders Housing Market Index declined unexpectedly. This decline was likely due to increased costs for builders. Despite the decline, the index remains in healthy expansionary territory, as homebuilders are confident that demand is strong.
• Given high levels of homebuilder confidence, it is not surprising that both housing starts and building permits increased in August. Permits significantly outperformed expectations with an increase of 5.7 percent; they had been forecast to decline 0.8 percent.
• Finally, existing home sales disappointed by falling 1.7 percent in August. As has been the case for the entire year, existing home supply remains near all-time lows. This is due in large part to a reluctance by elder homeowners to sell, which has curtailed sales.

Source: Bloomberg

Source: Morningstar Direct

What to look forward to
This week will give us a broad look at the economy, with housing, consumer confidence, business investment, and personal income and spending reports lined up. Some weakness is expected, but it would be due to the effects of hurricanes Harvey and Irma and should be short lived. Overall, although the data this week will be worth watching, given the storm effects, we shouldn’t give excessive weight to it.

The new home sales report, due on Tuesday, is expected to rise from 571,000 in July to 590,000 in August, with significant upside potential. This would be a rebound from a surprise decline in July, which brought sales down by almost 10 percent. Should this number come in as expected or higher, it would suggest that last week’s disappointing existing homes data was due more to supply constraints than lack of demand.

Also on Tuesday, the Conference Board’s consumer confidence survey will be released. Expectations are for a small decline—from a very strong 122.5 in August to 119.5 in September—but there is some downside risk. A substantial rise in gas prices, due to the hurricanes, may give confidence a knock this month. If so, the drop may be temporary, as price gains are starting to reverse. In any event, even with a decline, this would keep confidence at a healthy level.

On Wednesday, durable goods orders are expected to bounce back at the headline level, from a drop of 6.8 percent in July to a gain of 0.9 percent in August, on a rebound in commercial aircraft orders. Core orders, which exclude transportation, are expected to rise 0.2 percent in September, after rising 0.6 percent in August. These results would suggest that business investment continues to improve.

Finally, on Friday, we’ll see personal income and spending figures. Personal income is expected to show a 0.3-percent gain in August, down from 0.4 percent in July. Spending is expected to show more of a slowdown, from 0.3 percent in July to 0.1 percent in August. These declines would be due largely to the hurricanes, as employment and wages, as well as retail sales, were directly affected. There may be some downside risk here as well, depending on how substantial the hurricane effects turn out to be. Although this would be something to watch, any weakness would be likely to reverse in subsequent months.

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.

© 2017 Commonwealth Financial Network®

Presented by Mark Gallagher

General market news
• The yield on the 10-year Treasury was back up to 2.20 percent early Monday morning, after being as low as 2.01 percent fewer than six trading days ago. The move from one support level to the next in such a short period leads us to believe that investors are uncertain about the market and can’t decide whether to favor a risk-on or risk-off trade. The 30-year yield moved from 2.63 percent to 2.77 percent in the same period. It is still well below the 3-percent mark, however, implying that the risk-off trade is still in favor with many.
• U.S. markets took the opportunity to exhale last week after dealing with tumultuous news about North Korea and hurricanes Harvey and Irma in the week prior. The Dow Jones Industrial Average was the top performer, posting a gain of 2.19 percent. The S&P 500 Index and Nasdaq Composite followed with gains of 1.63 percent and 1.41 percent, respectively.
• Monetary policy grabbed headlines around the world last week. The People’s Bank of China removed a deposit requirement for currency forward trades and axed the deposit requirement for foreign banks’ yuan deposits. These actions are expected to make foreign deals more attractive. The Bank of England also made the news after it voted to keep interest rates steady, despite a 2.9-percent increase in inflation in August. The bank expects this increase in inflation to be temporary. This week, the focus will be on our own Federal Open Market Committee (FOMC).
• There were a number of important economic data points released last week. On Wednesday and Thursday, the Produce and Consumer Price Index reports showed higher-than-expected inflation data. Consumer prices have increased by 1.9 percent year-over-year, while producer prices have grown by 2 percent. Low inflation figures were a concern earlier in the year, but these readings are approaching the Fed’s stated target of 2-percent inflation.
• On Friday, retail sales for August came in lower than expected. Sales declined by 0.2 percent against expectations for 0.1-percent growth. The impact from Hurricane Harvey at the end of the month likely played a part in this miss, but we won’t know whether this slowdown was due to transitory factors until next month.
• The week ended with a slight decline in the University of Michigan Consumer Sentiment survey. This figure remains near post-election highs, so the result is nothing to worry about.

Source: Bloomberg

Source: Morningstar Direct

What to look forward to
Most of the economic data this week focuses on housing. On Monday, the National Association of Home Builders industry survey will be released. It is expected to decrease from a very strong level of 68 in August to a still strong level of 67 in September. Given extensive damage from hurricanes Harvey and Irma—which may worsen labor and material shortages for homebuilders—there may be some downside risk to this number.

On Tuesday, housing starts are expected to tick up from 1.155 million in July to 1.18 million in August. The July number was a surprise, resulting from declines in multi-family developments, which have historically been volatile. Single-family starts held their ground. Although multi-family starts are expected to decline even more in August, strong demand and limited supply for single-family homes should keep that sector increasing.

On Wednesday, existing home sales are likewise expected to tick up—from 5.44 million in July to 5.47 million in August. Once again, despite strong demand, low inventory is expected to constrain sales. This means there is some downside risk to this number. The July number was the lowest in almost a year, and the trend is likely to continue.

Also on Wednesday, the FOMC will conclude its regular meeting. Although the Fed is likely to continue viewing the economy in a positive light, uncertainty around inflation, as well as the unknown impacts of the hurricanes, will likely result in no change to interest rates. The Fed is expected, however, to start the process of reducing the balance sheet by slowing the reinvestment of maturing securities and payments. This has been well telegraphed to markets, and reaction should be minimal. Still, markets will be watching to make sure that the actual plan is the same as described previously.

Overall, if the news comes in as expected, the signal for the rest of the economy will be positive.

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.

© 2017 Commonwealth Financial Network®

Presented by Mark Gallagher

General market news
• Treasury yields were lower across the long end of the curve last week, with the 10-year at 2.01 percent and the 30-year back to pre-election levels at 2.63 percent. The 10-year Treasury opened Monday at 2.09 percent and the 30-year opened at 2.71 percent. It seems for now that the Federal Reserve (Fed) will be on hold in terms of raising rates; with the Fed funds at 1.25 percent, the curve is quite flat.
• All three major U.S. markets were down on the week as uncertainty loomed from North Korea’s hydrogen bomb test and the U.S. suffered damage from hurricanes Harvey and Irma. The Nasdaq Composite led the move down, dropping 1.16 percent due to poor performance in the technology sector. The Dow Jones Industrial Average and S&P 500 followed, posting losses of 0.82 percent and 0.58 percent, respectively.
• Additional points of unease were the resignation of Fed Vice Chair Stanley Fischer and the passage of a new U.S. budget deal to extend the debt ceiling for three more months. The debt-ceiling deal transpired when President Donald Trump worked with Democrats for the first time to get legislation approved. This move came under fire from many Republicans, including Speaker of the House Paul Ryan, who wanted a longer-term deal.
• The health-care sector continued to lead the way last week, with energy and utilities following behind as oil prices moved higher. The worst-performing sectors on the week included telecom, financials, and materials.
• There were two important data releases last week. On Tuesday, durable goods orders data for August was released. For the second month in a row, this measure of business confidence declined due to a fall in aircraft orders. The core figure, which excludes airline sales, rose by a healthy 0.6 percent, however. This was also the second month in a row where core orders increased while headline figures disappointed.
• On Wednesday, the Institute for Supply Management (ISM) nonmanufacturing composite increased following a surprise decline in July. Given the recent strength in the manufacturing portion of this survey, this increase was quite favorable. Historically, ISM surveys at today’s levels have been linked to 4-percent annualized gross domestic product growth.

Source: Bloomberg

Source: Morningstar Direct

What to look forward to
We’ll see a wide range of economic news this week. We’ll get a good look at consumer behavior, manufacturing, and the economy as a whole. These combined factors will influence the Fed’s decision on when to raise rates.

On Thursday, the Consumer Price Index will be released, giving us a look at inflation. The headline index, which includes food and energy, is expected to rise 0.3 percent in August, largely due to a spike in gas prices after Hurricane Harvey. This will take the annual inflation rate from 1.7 percent to 1.8 percent, which is closer to the Fed’s 2-percent target. There may be some upside risk to this number. Core prices, which exclude energy and food, are expected to rise a more modest 0.2 percent for the month. On an annual basis, however, core prices are expected to decline from 1.7 percent to 1.6 percent. Core prices are a better signal for underlying economic conditions because energy and food prices can be volatile, although a decrease could raise the Fed’s concern about low inflation.

On Friday, headline retail sales are expected to slow from 0.6 percent in July to 0.1 percent in August due to a decline in auto sales. The core figure, which excludes auto sales and is a better indicator for underlying trends, is expected to remain steady at 0.5-percent growth. There could be some upside to these results, as consumer confidence is high, and buying ahead of the hurricanes may have driven sales higher.

Industrial production is expected to decline modestly, from 0.2-percent growth in July to 0.1-percent growth in August. This decline can be attributed to low utilities output. Manufacturing growth is expected to increase strongly from negative to 0.5-percent growth, as exports continue to rise on the weak dollar. This growth would align with the improved Institute for Supply Management nonmanufacturing survey, which would be a boon for the economy.

Finally, the University of Michigan Consumer Confidence survey is expected to decline from 96.8 to 96.6. There may be some downside risk due to the hurricanes and rising gas prices, but the overall confidence level is likely to remain strong, indicating a robust 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.

© 2017 Commonwealth Financial Network®