Presented by Mark Gallagher
General market news
• Yields rose again last week, as increased inflation expectations created upward pressure on rates. The yield on the 10-year Treasury was 2.85 percent Monday morning, up from 2.70 percent one week ago. The yield on the 30-year increased during the period as well, from 2.94 percent to 3.08 percent.
• All three major U.S. market indices declined more than 3.5 percent last week. In fact, the S&P 500 Index experienced its largest weekly decline since 2016. Among the top-performing sectors were telecom, utilities, and REITs. The largest declines came from energy, materials, and health care.
• Throughout the week, markets digested underwhelming earnings results from oil giants Exxon Mobil (XOM) and Chevron (CVX), as rising oil prices could not offset lower production levels. News out of the technology sector was likewise disappointing. Apple (AAPL) and Microsoft (MSFT) both beat earnings expectations, but lower guidance on iPhone sales drew a sell-off from investors. The health care sector also saw its stocks decline. Performance was affected by news that Amazon was entering into a joint venture with Warren Buffet of Berkshire Hathaway (BRK.B) and Jamie Dimon of J.P. Morgan (JPM) to reduce health care costs for employees. In addition, President Trump’s declaration that he would work to reduce drug prices, mentioned in his State of the Union address, put downward pressure on prices.
• Economic news last week was largely positive, with strong gains in spending and employment. On Monday, personal income and spending data beat expectations; spending growth of 0.3 percent capped off a strong fourth quarter of consumption.
• On Wednesday, the Federal Reserve kept interest rates unchanged, as expected, while the market continues to expect a rate hike in March. This was Janet Yellen’s last meeting as chair, and Jerome Powell is expected to be sworn in this month.
• Finally, on Friday, the January employment report came in much better than anticipated. The economy added 200,000 jobs against expectations for 183,000. December’s headline figure was also revised upward. The underlying data was solid as well: the annual pace of wage growth accelerated to 2.9 percent, and the unemployment rate remained at 4.1 percent.
| Equity Index | Week-to-Date | Month-to-Date | Year-to-Date | 12-Month |
| S&P 500 | –3.82% | –2.16% | 3.44% | 23.53% |
| Nasdaq Composite | –3.51% | –2.29% | 4.94% | 29.96% |
| DJIA | –4.11% | –2.39% | 3.34% | 31.42% |
| MSCI EAFE | –2.74% | –1.33% | 3.63% | 26.24% |
| MSCI Emerging Markets | –3.31% | –1.89% | 6.28% | 37.82% |
| Russell 2000 | –3.74% | –1.73% | 0.84% | 15.49% |
Source: Bloomberg
| Fixed Income Index | Month-to-Date | Year-to-Date | 12-Month |
| U.S. Broad Market | –0.68% | –1.82% | 1.63% |
| U.S. Treasury | –0.69% | –2.04% | 0.21% |
| U.S. Mortgages | –0.61% | –1.77% | 0.83% |
| Municipal Bond | –0.42% | –1.59% | 3.05% |
Source: Morningstar Direct
What to look forward to
This will be a light week for economic news, with only two major releases.
On Monday morning, the Institute for Supply Management (ISM) released its Nonmanufacturing index, which tracks the service sector. The index handily beat expectations, climbing to 59.9 in January, from 56.0 in December. This is a diffusion index, with values greater than 50 indicating expansion. After two down months, this result is especially welcome. It is also in line with last week’s ISM Manufacturing survey, as well as strong consumer confidence numbers.
On Tuesday, the international trade report is expected to show that the trade deficit widened again—from $50.5 billion in December to $52.1 billion in January. The Bureau of Economic Analysis reported earlier this month that the goods trade deficit widened by $1 billion, and services should account for the remainder. If the numbers come in as expected, this would be a further drag on fourth-quarter economic growth. Signs suggest, however, that export growth should start outpacing import growth in 2018, which would improve matters going forward.
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®