Presented by Mark Gallagher
General market news
• The yield on the 10-year Treasury tested its floor of 2.20 percent last week. Rates dipped to 2.18 percent for the first time in over a month and for only the third time since the November election. The 10-year opened this Monday at 2.20 percent. For just the second time since the election, the 30-year yield was as low as 2.76 percent last week. It opened Monday at 2.81 percent.
• Markets were down across the board last week as tensions between the U.S. and North Korea flared. The Nasdaq Composite suffered the worst performance, falling 1.44 percent. The S&P 500 Index and the Dow Jones Industrial Average dropped 1.37 percent and 0.91 percent, respectively. Except for consumer staples, all sectors within the S&P 500 were down on the week. Financials, energy, and materials fared the worst. Performance was hindered by declining oil prices and below-target inflation.
• In fact, consumer prices increased just 0.1 percent in July, which was below expectations. Following the news, futures markets projected only a 40-percent chance of another rate hike this year. Previously, the Federal Reserve (Fed) had stated that it viewed the softness in inflation data as “transitory,” but this marks the fifth straight month that inflation has fallen below the forecasted moves.
• Only a handful of economic data points were released last week. On Thursday, the Bloomberg Consumer Comfort Index, a measure of consumer optimism, increased from 49.6 to 51.4, primarily due to low gas prices. Also on Thursday, we saw Producer Price Index data. This is a measure of the prices that producers pay and is one of the most widely followed measures of inflation. Unfortunately, the numbers were disappointing, with both the headline and core figures coming in below expectations on a monthly and annual basis.
• As mentioned above, we also saw data on the Consumer Price Index last week. As was the case with producer prices, the numbers disappointed, showing lower-than-expected levels of growth for both the headline and core figures. Given the current Fed-tightening course and the importance of maintaining price stability, low inflation figures could lead the Fed to pause before raising rates again.
| Equity Index | Week-to-Date | Month-to-Date | Year-to-Date | 12-Month |
| S&P 500 | –1.37% | –1.06% | 10.40% | 14.02% |
| Nasdaq Composite | –1.44% | –1.37% | 17.06% | 21.15% |
| DJIA | –0.91% | 0.19% | 12.30% | 20.41% |
| MSCI EAFE | –1.48% | –0.88% | 16.50% | 15.87% |
| MSCI Emerging Markets | –2.24% | –2.10% | 23.10% | 17.94% |
| Russell 2000 | –2.67% | –3.52% | 2.03% | 13.34% |
Source: Bloomberg
| Fixed Income Index | Month-to-Date | Year-to-Date | 12-Month |
| U.S. Broad Market | 0.41% | 3.14% | 0.00% |
| U.S. Treasury | 0.68% | 2.74% | –1.55% |
| U.S. Mortgages | 0.36% | 2.18% | 0.52% |
| Municipal Bond | 0.47% | 4.90% | 0.68% |
Source: Morningstar Direct
What to look forward to
This will be a busy week for economic data, offering looks at all major sectors of the economy. Although the data is expected to be mixed, it should suggest continued growth overall.
On Tuesday, the retail sales report will tell us whether consumers are willing to spend again. After last month’s 0.2-percent decline, headline sales are expected to bounce back by 0.4 percent on more stable gasoline prices and a recovery in auto sales. Core retail sales, which exclude autos, are also expected to bounce from a 0.2-percent drop to a 0.4-percent gain. That said, there are downside risks, and the results might come in below expectations. If so, the gap between confidence and spending behavior will continue as a worry point.
The National Association of Home Builders survey, released Tuesday, is expected to rebound from 64 to 65 after a surprising decline last month. This would be a positive sign of moderating industry sentiment. On Wednesday, housing starts are expected to show a small increase from 1.215 million to 1.225 million. Recent strong building permit data suggests that there might be some upside to this number. If both reports come in as expected, that would be positive for both the housing sector and the economy as a whole.
Also on Wednesday, the Federal Open Market Committee will release the notes from its July meeting. Markets will be looking for details on how concerned the Fed is about low inflation, as well as any comments on the pending debt ceiling debate. Most important, though, will be language that suggests a likely September start for the Fed’s balance sheet reduction plan. This would be considered a vote of confidence in the economy as a whole.
On Thursday, we get a look at the business side of the economy with the industrial production numbers. Industrial production is expected to drop back slightly, from growth of 0.4 percent in June to 0.3 percent in July, still a strong result. Growth will come once again from increases in oil production and gains in manufacturing. Manufacturing is expected to maintain solid growth, at 0.2 percent for July, supported by a weaker dollar and stronger economies around the world. Continued growth in the business sector would help offset weaker consumer spending growth.
To conclude the week, we will get another look at the consumer with the University of Michigan Consumer Confidence survey. This is expected to tick up from 93.4 in July to 94.0 in August after three straight months of declines. Despite weaker expectations recently, this index has remained at a healthy level that is consistent with 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.
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.
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