Presented by Mark Gallagher

General market news
• The strong move Treasuries experienced in January continued in the first week of February. The 10-year Treasury opened with a yield of 1.85 percent early Monday morning and promptly moved lower to 1.79 percent. The 30-year opened at 2.68 percent and dropped to 2.63 percent, while the 2-year opened at 0.73 percent and moved to 0.67 percent.
• Equity markets lacked direction and leadership last week, with the S&P 500 Index dropping more than 3 percent. The weakness started on Tuesday with nearly a 2-percent loss and carried into Wednesday, before a strong rally allowed for a minor gain for the day. But negative sentiment prevailed yet again, bringing another large sell-off on Friday.
• Earnings results have been mixed, driving increased stock volatility. In addition, economic reports have been coming in somewhat weaker than anticipated, highlighted by Friday’s relatively poor jobs report.

Source: Bloomberg

Source: Morningstar Direct

What to look forward to
This week will be light in important economic news, with much of the closely followed data released on Friday.

Retail Sales are expected to have increased in January.

We will also see the preliminary reading of University of Michigan Consumer Sentiment for February.

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 Barclays Capital 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 Barclays Capital 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 Barclays Capital Municipal Bond 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. The Barclays Capital U.S. Treasury Inflation Protected Securities (TIPS) Index measures the performance of intermediate (1- to 10-year) U.S. TIPS.

For IARs: Mark Gallagher is a financial advisor located at Gallagher Financial Services at 2586 East 7th Ave #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.

© 2016 Commonwealth Financial Network®

Presented by Mark Gallagher

Markets drop around the world
January was a terrible month for markets around the world. U.S. markets had their worst January since 2009, with all three major indices posting declines. The Dow Jones Industrial Average was down 5.39 percent, the S&P 500 Index declined 4.96 percent, and the Nasdaq dropped 7.82 percent. All three indices are now well below their 200-day moving averages.

A loss of confidence was the primary reason for the downturn. Market turbulence in China rattled investors, as the Federal Reserve’s (Fed’s) rate increase started to remove their security blanket. Fundamentals also weighed in. A further substantial drop in oil prices eroded that industry’s revenue and profit prospects. Moreover, corporate earnings for fourth-quarter 2015 were expected to decline 5.8 percent. Declining earnings made it difficult to justify the relatively high stock valuations that had prevailed at the start of 2016.

International markets had a worse January than U.S. markets. The MSCI EAFE Index of developed markets dropped 7.23 percent, and the MSCI Emerging Markets Index declined 6.48 percent. Technically, both indices are well below their 200-day moving averages.

Fixed income did well. The Barclays Capital Aggregate Bond Index gained 1.38 percent for the month.

U.S. economy grows, though more slowly
U.S. gross domestic product (GDP) growth for fourth-quarter 2015, reported in January, was 0.7 percent, down from the previous quarter’s 2 percent. The decline was due largely to weakness in U.S. manufacturing and exports, held in check by the strong dollar.

Consumer spending growth also declined in the fourth quarter, though consumer confidence remained strong and savings rates increased. These trends continued into January.

Positive economic signs included a strong jobs picture and rising wage growth. The housing market also grew strongly, with December new home sales surprising to the upside. This factor appears to offer the prospect of further growth, as new home sales remain below historical levels and therefore could have room to improve (see Figure 1).

International problems multiply
Much of the slowdown in U.S. GDP appears to have stemmed from problems in the rest of the world. Substantial declines in China’s stock markets forced concerns about that nation’s financial system and slowing economy to the forefront of world attention. Although the People’s Bank of China continues to drive stimulus, there are signs that the bank’s ability to affect the economy is waning.

Europe also continues to struggle. The European Central Bank is still pursuing stimulus policies, but eurozone political concerns may negatively affect growth.

Finally, at month-end, Japan announced negative interest rates. This is widely considered a radical move and one that Japan’s central bank took only because all other measures had not succeeded.

The Fed starts to raise interest rates
Despite global economic problems, the Fed felt confident enough in the U.S. economy to raise interest rates. But this move exacerbated other concerns, notably about the future strength of the dollar.

The strong dollar has made U.S. manufacturers less competitive abroad and has been a significant headwind for the overall U.S. economy. With other central banks easing monetary policy and the Fed starting to tighten U.S. monetary policy, the divergence could drive the dollar higher. If so, the headwinds for the U.S. economy could strengthen. With this and other factors in play, the Fed could decide to raise rates more slowly than it now projects.

Rising risks mean nervous markets
January’s stock market declines reflect this risky environment. Nevertheless, though risks abound, there are opportunities. U.S. growth continues, and forward-looking indicators suggest that it may accelerate. Moreover, the perceptions of risk seem excessive.

Consequently, although it has been a difficult month, investors should remain calm. January’s events underscore the need for maintaining a diversified portfolio and a long-term perspective. Cautious optimism remains the appropriate stance, as history has shown that markets and economies consistently return to a growth path.

All information according to Bloomberg, unless stated otherwise.

Disclosure: 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. 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 Barclays Capital 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 Barclays Capital government and corporate securities, mortgage-backed pass-through securities, and asset-backed securities.

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Mark Gallagher is a financial advisor located at Gallagher Financial Services at 2586 East 7th Ave #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@markgallagfher.com.

Authored by Brad McMillan, senior vice president, chief investment officer, at Commonwealth Financial Network.

© 2016 Commonwealth Financial Network®

Presented by Mark Gallagher

A disappointing year for financial markets
U.S. markets posted weak results for December and 2015 as a whole, despite solid fourth-quarter gains. The Dow Jones Industrial Average, S&P 500 Index, and Nasdaq were all down in December—1.52 percent, 1.58 percent, and 1.98 percent, respectively. But all were up strongly for the quarter, with the Dow rising 7.70 percent, the S&P 500 gaining 7.04 percent, and the Nasdaq up a robust 8.38 percent.

For the year, the Dow was up 0.21 percent and the S&P 500 gained 1.38 percent. Although the Nasdaq was up 5.73 percent for the year, this result was well below average annual return levels.

International markets underperformed U.S. markets in 2015. The MSCI EAFE Index, which represents developed international markets, was down 1.35 percent for December but up 4.71 percent for the quarter. The MSCI Emerging Markets Index fared worse, down 2.48 percent for December and posting a marginal 0.26-percent quarterly gain. For the year as a whole, developed and emerging markets were down 0.81 percent and 16.96 percent, respectively. In addition, both indices ended the year well below their 200-day moving averages.

Fixed income had a relatively weak 2015. The Barclays Capital U.S. Aggregate Bond Index was down 0.32 percent for December and 0.57 percent for the fourth quarter, which resulted in a gain of only 0.55 percent for the year as a whole. This tepid performance was largely driven by volatility in interest rates throughout 2015.

Economic recovery continues slow but steady
The major economic story for the fourth quarter was the Federal Reserve’s decision to raise target interest rates, signaling that the economy was strong enough to accommodate a move toward normal interest rates.

The service sector—which constitutes roughly seven-eighths of the economy—performed strongly, generating substantial improvement in employment. More than 2.6 million jobs were created in 2015.

At year-end, slow wage growth showed signs of improvement. Although consumer spending growth was slower than wage income growth, savings rates approached previous high levels, suggesting that spending could accelerate.

Low oil prices support continued growth
Most observers had expected oil prices to rebound in 2015, but they remained low. After declining 50 percent from their 2014 peak, prices stabilized in mid-2015 at $55 to $60 per barrel, only to drop in the second half of the year to below $40 per barrel. This volatility is clearly seen in Figure 1.

Figure 1. WTI Crude Spot Prices, January 2014–January 2016

Source: Bloomberg

We have no direct evidence of increased consumer spending as a result of lower gas prices, but the fact that auto sales rose to more than 18 million vehicles in 2015 suggests that there has been a positive effect. Lower energy prices also benefit companies, in the form of lower costs, which helps profit margins and potentially stock prices.

Looking ahead, even though the previous oil price decline has worked its way into the economy, most of the more recent decline has not, suggesting that economic growth may continue to accelerate. Lower oil prices will also benefit other countries, especially China, Europe, and Japan. These economies continue to stagnate, and lower energy costs will act as a much-needed stimulus.

U.S. outlook remains good, but there are risks
We begin 2016 with a positive outlook; however, risks remain. China’s growth continues to decline, and Europe and Japan are at risk economically. In the case of Europe, the risks are also political because of the Syrian refugee crisis. Perhaps most worrisome is the Middle East, where ISIS is expanding.

Here in the U.S., there are signs of a slowdown. Corporate fundamentals may be weakening, though stock valuations remain high. Expected earnings growth has been downgraded for 2016, and further downgrades are possible.

These risks notwithstanding, the U.S. economy is solid, trends are good, and we are well positioned to overcome challenges. As always, a long-term perspective and diversified portfolio are the best ways to take advantage of opportunities and overcome risks.

All information according to Bloomberg, unless stated otherwise.

Disclosure: 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. 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 Barclays Capital 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 Barclays Capital government and corporate securities, mortgage-backed pass-through securities, and asset-backed securities.
Authored by Brad McMillan, senior vice president, chief investment officer, at Commonwealth Financial Network.

© 2016 Commonwealth Financial Network®

Presented by Mark Gallagher

General market news
• The 10-year Treasury opened 2016 with a yield of 2.29 percent before promptly dropping to as low as 2.20 percent. The 30-year Treasury also dipped from a 3.03-percent open to 2.95 percent in the first few hours of trading. The short end of the yield curve moved as well, with the 2-year Treasury opening at 1.06 percent before dropping to 1.02 percent.
• Global equity markets were a bit volatile last week.
• In the U.S., equity indices were down as a decline in the price of oil rippled through the markets. The S&P 500 Index decreased 0.80 percent, and the Russell 2000 Index dropped 1.57 percent.
• Internationally, the MSCI EAFE Index declined 0.26 percent while the MSCI Emerging Markets Index decreased 1.22 percent.

Source: Bloomberg

Source: Morningstar Direct

What to look forward to
The week will start with news on manufacturing. The ISM Manufacturing Index is expected to be up very slightly, and Factory Orders are expected to decrease.

Next, we’ll see International Trade data and the latest Federal Open Market Committee meeting minutes.

The week will end with the Employment Situation report for December.

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 Barclays Capital 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 Barclays Capital 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 Barclays Capital Municipal Bond 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. The Barclays Capital U.S. Treasury Inflation Protected Securities (TIPS) Index measures the performance of intermediate (1- to 10-year) U.S. TIPS.

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

© 2016 Commonwealth Financial Network®