Presented by Mark Gallagher

At the end of last year, the big question was, “Will 2019 bring the end of the recovery?” All of the data seemed to point to an answer of “Not yet.” And so far, that answer still holds. The big picture suggests growth is likely to continue for the rest of the year, which should, in turn, support the financial markets. But there’s more to the story . . .

Headlines Vs. Fundamentals
To date, it has been an eventful year. Markets moved up, pulled back sharply, and then bounced again. The economy was slow to start, picked up during the first quarter, and now may be slowing again. Meanwhile, the political story has included the Mueller report, a China trade deal and then a trade war, a postponement of Brexit, and looming tensions with Iran.

Reacting to all of these headlines would have been a bad strategy. Because while the markets have been more volatile this year, the fundamentals—the underpinnings of our economy—have remained solid.

Take job growth, for example. Although there has been volatility in the monthly job gains, the overall growth rate has remained steady at more than 2 million jobs per year. Over the past 40 years, when job growth has been at this level, a recession has been at least a year away. Yes, we have seen some weakening recently, but the year-on-year trend remains strong.

Similarly, consumer confidence levels remain high, at levels last seen in 2001, and the year-on-year change is positive. We have never had a recession without a decline in confidence of at least 20 points over the previous year. This should buy us another 12 months or more.

Business confidence is weaker than both job growth and consumer confidence, currently sitting at close to its lowest levels of the past several years. Despite that, it is still solidly expansionary, suggesting continued—though slower—growth.

Even the yield curve spread shows risk is not likely immediate. Although the yield curve is on the verge on inverting, an inversion would only start the recession clock ticking. Historically, the initial inversion has preceded a recession by a year or more, which once again leaves us in the green for the balance of 2019.

Looking at these fundamentals, it’s clear that conditions are better than the headlines suggest. We have never had a recession with job growth as strong as it is, with confidence where it is, and with the yield curve where it is. Some slowing is likely, but slowing is still growing, with calendar-year expectations for economic growth sitting between 1.5 percent and 2 percent.

The Fed and Monetary Policy
Given the healthy data mentioned above, we could have reasonably expected inflation to rise—and it did, but not by much. More, the most recent data suggests that, with slowing growth, inflation has started to pull back again. Although the Fed decided in 2018 that the risks of not raising rates were greater than those of raising them, in 2019 it has put that policy on hold because of this slowdown.

Expectations are for no more increases this year, plus a real possibility of cuts. Inflation is now expected to stay below 2 percent, and longer-term rates should end the year around current levels, with the yield on the 10-year Treasury between 1.75 percent and 2.25 percent.

What About the Stock Markets?
Steady growth and interest rates suggest that global stock markets are likely to continue to trade on fundamentals, such as revenue and earnings growth. Here in the U.S., revenue growth remains healthy, and while earnings growth has slowed, it is expected to remain positive. This should support the markets through the rest of the year.

With earnings growing, the real issue will be valuations. Historically, high confidence levels have driven up valuations, and we have seen that in recent years. As confidence moderates and growth slows, however, we can expect valuations to stop rising, meaning further appreciation will depend on earnings growth.

Given projected earnings growth and steady valuations, the S&P 500 is likely to end 2019 between 2,900 and 3,000. There is upside potential if earnings growth surprises or if valuations recover to the high levels seen in 2016 and 2017. But there may be more downside risk, if economic growth slows or if valuations drop on lower confidence. Still, this estimate is a reasonable base case.

Prospects Bright, but No Guarantees
Solid economic fundamentals should continue to support markets through the remainder of 2019, with moderate appreciation likely—if current trends hold. None of this, however, is guaranteed. Here in the U.S., we’ll need to keep an eye on potential impeachment of the administration by the Democrat-controlled House; the ongoing trade war between the U.S. and China; and, most notably, the upcoming debt ceiling confrontation between Congress and the administration. Abroad, we have pending issues in Europe, including Brexit and Italy, as well as a rising confrontation with Iran.

Even if growth does slow, though, or we see any of the other potential issues erupt, the underlying strength of the economy is likely to limit the damage. We’ve seen many similar situations in the not-so-distant past—and they didn’t knock the economy or markets off their paths.

When you look back at the recovery so far, this scenario is very similar to what we have seen for most of the past 10 years: slow growth threatened by multiple risks. And, just as we have seen over the past 10 years, although the concerns are real, the big picture is very much like what we have become accustomed to. Despite the worries, it’s still not a bad place to be.

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. All indices are unmanaged and investors cannot invest directly into an index. 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.

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, at Commonwealth Financial Network®.

© 2019 Commonwealth Financial Network ®

Presented by Mark Gallagher

A new year has begun. It’s time to evaluate what worked well for you financially in 2018 and whether you need to make any changes for 2019. As you do that, you’ll want to put together a plan for this year’s charitable giving.

A good place to start the process is to consider the following items:

1. Review your donations for 2018 and how you made them. How much would you like to donate in 2019?
2. Did you exceed the standard deduction and itemize your taxes for the 2018 tax year? Do you anticipate exceeding the standard deduction and itemizing your taxes for 2019?

3. Are you age 70½ or older? Do you have an IRA or inherited IRA?

Charitable giving strategies to consider
Next, you’ll want to decide on a strategy for this year’s giving. Maybe one or multiple strategies can work together to create an effective plan to benefit your favorite charities. Below are several strategies to mull over.

• Group your charitable contributions together. The Tax Cuts and Jobs Act of 2017 brought us a higher standard deduction. Unless you have enough deductions to itemize above the standard deduction threshold, you may not be able to deduct your charitable contributions. Therefore, in combination with other deductions, you might want to consider grouping multiple years of charitable contributions together into a single year to generate a deduction larger than the standard amount.

• Contribute to a donor-advised fund (DAF). If you are interested in grouping charitable deductions together but would prefer spreading the distributions to charities out over a period of years, a DAF may be an option for you. It is a charitable giving vehicle that allows you to contribute as frequently as you desire and to recommend grants to your favorite charities from your fund. It can also be used to create a pool of money that will encourage giving by your family for generations to come.

A DAF is established through a public charity, so you can receive an immediate charitable tax deduction when you exceed the standard deduction threshold and itemize taxes. With the 2017 tax law, charitable deductions are limited to 60 percent of adjusted gross income (AGI) for cash gifts to the DAF or 30 percent of AGI for long-term appreciated assets (e.g., stock) to the DAF. Please note: You can also avoid capital gain taxes on gifts of appreciated assets to the DAF.

• Donate appreciated assets directly to charities. If you have stock or another asset that has increased in value over the years, you can gift the appreciated asset directly to a charity. Gifting appreciated assets directly may avoid the inconvenience of selling the assets, as well as the realization of a taxable gain. In addition, the gifted assets may qualify for a charitable deduction if you exceed the standard deduction threshold and itemize your taxes. Charitable deductions are limited to 30 percent of AGI for long-term appreciated assets (e.g., stock) gifted to a public charity.

• Consider a qualified charitable distribution (QCD). If you are 70½ or older and have an IRA or inherited IRA, you may contribute up to $100,000 from your IRA directly to a 501(c)(3) qualified charity without having to include that distribution as income. The QCD can go to a single charity or to a variety of charities.

You can make multiple QCDs if the total of all your distributions stays within the $100,000 annual limit. In addition, the distribution may be counted as your annual IRA required minimum distribution. Also, it doesn’t matter whether or not you itemize deductions for taxes because a QCD is not eligible as a charitable deduction.

These are just a few of the strategies that may be available to you. As always, before making any decisions, a best practice is to consult your financial advisor and a tax professional.

This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to be sure our information is accurate and useful, we recommend that you consult a tax preparer, professional tax advisor, or lawyer.

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.

© 2019 Commonwealth Financial Network®

Presented by Mark Gallagher

As we look back on the year, the market continues to drop. Plus, the major U.S. stock market indices are now in or approaching bear market territory (i.e., down 20 percent or more). As such, there is a real concern that this drawdown signals something even worse ahead. Worry levels are rising. And as the worry levels rise, the problem gets even worse.

A vicious cycle
Worry is both a cause of and a result of the drawdown—creating a vicious circle. Worries send stocks down, which in turn generates further worry, and so on, and so on. On top of the market volatility, the unprecedented dysfunction in Washington has generated additional concerns. Overall, there really does seem to be a lot to worry about and many reasons for stocks to keep dropping.

With this level of worry, the bad news is that the decline could continue for a while—and even get worse. The good news, however, is that despite all the worry, the economic fundamentals remain sound. This should act to limit the damage and hasten the recovery.

Worry versus fundamentals
It is important to distinguish between worry (which waxes and wanes) and the fundamentals (which change much more slowly). Worry and its flip side, confidence, can change quickly, even if there is no real reason, and then change back. We have seen that many times so far in this recovery. Because of that, drawdowns driven by worry can be sharp, but they also tend to be short as long as the fundamentals remain sound.

This is where we are today. Worry is spiking, on fears of an economic slowdown and disturbing political news, and stock prices are dropping. But the economic fundamentals remain sound.

Consumer spending, which is more than two-thirds of the economy, continues to grow strongly, buoyed by confidence at levels last seen in the dot-com boom and strong job and wage income growth. Real people with real jobs are working, making money, and spending money. Businesses continue to hire and invest. The government, despite the temporary shutdown now underway, continues to act as an economic stabilizing force. In other words, even as Wall Street wobbles, Main Street remains solid.

This is important. With Main Street solid, the worry that is driving Wall Street crazy will ultimately subside. With a solid economic base, there is real support under the financial markets. Although confidence can vary, and worry can take markets down, a solid economy should limit the damage and hasten the recovery.

Have we seen this before?
We have seen this before: in 2015, in 2016, and earlier this year. We saw a more severe version in 2011. In all those cases, solid economic fundamentals here in the U.S. took the markets back up after severe drawdowns. In fact, even as bad as the drawdown has been so far, by historical standards, it is still within normal parameters. Severe drawdowns happen every 5 to 10 years, so we are roughly on schedule. Such drawdowns certainly are not fun, but neither are they necessarily a harbinger of crisis.

The real fear is that this decline is a sign of another 2008 crisis. This is where the strong economic fundamentals are especially important. We simply do not have the risks in place now that we did then. The U.S. banking system is much better capitalized; the housing industry, although slowing, remains robust. We don’t see either the economic or financial imbalances now that we did then. We can certainly expect more challenges, but a 2008-style crisis remains a remote risk.

Collapse of investor confidence
With the fundamentals solid, what is driving the current pullback is a collapse in investor confidence, which determines where prices go in the short run. It can bounce around quickly and substantially. Looking back at earlier this year and in 2015–2016, those downturns—much like the present one—were driven by bad economic or political news. With rising trade war concerns, political disruption in Washington, and fears of an economic slowdown, we can easily see how confidence has taken a hit recently, as well as the effects on the markets.

We can also see that confidence tends to bounce back, and stock prices with it, when the fundamentals remain sound as they are now. It takes an economic decline, a recession, to create a sustained downturn in stock prices. Absent that recession, pullbacks tend to be short, although they can certainly be sharp. Right now, there are few signs of an imminent recession. In fact, the most reliable indicators say growth will continue for at least the next couple of quarters.

Yes, this is normal
As investors, we should be—and are—paying attention. But it is important to realize that, although the current drawdown is something we have not seen in years, it really is historically normal—and not a sign of another global crisis. As such, we should keep an eye on our longer-term goals and ensure that our portfolios reflect that rather than short-term volatility.

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.

All indices are unmanaged and investors cannot actually invest directly into an index. Unlike investments, indices do not incur management fees, charges, or expenses. Past performance does not guarantee future results.

Mark Gallagher is a financial consultant located at Gallagher Financial Services. He offers securities as a Registered Representative of Commonwealth Financial Network®, Member FINRA/SIPC. He can be reached at 651-774-8759 or at Mark@markgallagher.com.

© 2018 Commonwealth Financial Network®

Presented by Mark Gallagher

As 2018 begins, the good economic news continues. Companies are hiring, both consumers and businesses feel confident, and economic growth is good and getting better. Even as conditions remain very positive, though, there are signs that the trend is changing. Job growth is slowing as we run out of available workers, and confidence seems to have peaked. The Federal Reserve (Fed), spurred on by the good conditions, is likely to continue raising rates, which would act as a headwind. These and other factors all suggest that, right now, things may be as good as they get. The end of 2018 may look different from today.

What to watch
Changing trends are certainly not indicators of immediate trouble, but they could indicate that growth is likely to peak sometime in 2018 and slow thereafter. For the stock market, which is now expecting strong growth in corporate investment and earnings, a slowdown—even as growth continues—could hit confidence and, thus, valuations.

On the economic front, four factors will affect growth:

1.  Consumer spending: Though it’s held steady for several years, it could slow in 2018, dragging on growth.
2.  Business investment: As the pool of new workers has run out, companies have invested to make existing employees more productive. This trend should continue through 2018, supporting economic growth.
3.  Net exports: With a cheaper U.S. dollar, exports have exceeded imports in recent quarters. As the dollar gets more expensive, the balance is likely to shift back to negative, dragging on growth.
4.  Government spending: This has had no noticeable contribution to economic growth, and it’s not expected to change.

Inflation also can be expected to rise slowly, putting the Fed in a difficult position. Current low unemployment says to raise rates, but low inflation says not yet. Which side will win in 2018? The Fed is likely to raise rates again as early as March in anticipation of inflation, rather than waiting until the evidence is unmistakable, which could be another change during the year.

The bigger picture
When we look at 2018 as a whole, the economy should grow between 1.5 percent and 2 percent, but that may consist of faster growth in the first half and slower growth in the second. Corporate profits should also grow at healthy rates. Inflation is expected to run around 2 percent for the year, but it may be slower in the first half and pick up in the second half. As the Fed raises rates in response to faster growth and rising inflation, the 10-year U.S. Treasury note should yield around 2.75 percent by year-end.

Solid fundamentals poised to calm turbulence
With both economic and profit growth likely to continue, sound fundamentals should support financial markets. But if confidence pulls back to more normal levels, lower valuations may offset those improvements. Thus, the real risks are to confidence; stocks are likely to rise in the first half of the year, only to give back much of the year’s gains in the second half, ending around 2,700 for the S&P 500.

At this point, the biggest apparent risk is political, not economic. With the mid-term elections approaching and political dysfunction rising, the potential for shaken confidence—and valuations—is very real. Fortunately, the solid economy should help mitigate any political turmoil. We are approaching the end of the cycle, but we’re not there—yet.

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. The S&P 500 Index tracks the performance of 500 widely held, large-capitalization U.S. stocks. All indices are unmanaged and are not available for direct investment by the public. Past performance is not indicative of future results.

###

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, at Commonwealth Financial Network®.

© 2018 Commonwealth Financial Network®