Presented by Mark Gallagher
General market news
• The 10-year U.S. Treasury has been bouncing between 2.70 percent and 2.75 percent since January 8. It opened early Monday at 2.74 percent, while the 2-year opened at 2.60 percent and the 30-year opened at 3 percent. Parts of the curve remain inverted as rate investors wait to hear more information on trade, politics, and economic trends.
• The three major U.S. markets were relatively flat, and the week saw mixed trading. With growing global growth concerns, REITs, technology, and utilities were the only three positive sectors. The technology stocks were buoyed by better-than-expected guidance out of the semiconductor space, with Texas Instruments (TXN), Lam Research (LRCX), and STMicroelectronics (STM) all up more than 5 percent on the week.
• China reported growth in its gross domestic product (GDP) of just 6.6 percent on Monday. This is the lowest level since 1990. These growth concerns come ahead of U.S.-China trade talks, which are set to resume on Wednesday.
• Last week was relatively quiet on the economic update front, with only two major data releases. On Tuesday, existing home sales for December came in worse than expected, with a decline of 6.4 percent on a monthly basis.
• On Thursday, the Markit U.S. Manufacturing Purchasing Manager Index rose from 53.8 to 54.9. This was a positive development that indicates that manufacturers are still investing in their businesses in the face of the recent government shutdown.
|MSCI Emerging Markets
|Fixed Income Index
|U.S. Broad Market
Source: Morningstar Direct
What to look forward to
This week will be a busy one on the economic front, although some reports may not be released due to the just-ended government shutdown.
On Tuesday, the Conference Board Consumer Confidence Index is expected to drop further after a surprise decline last month. It should go from 128.1 to 125, on rising concerns about the effects of the government shutdown. Even with the expected decline, confidence would remain at a healthy level and still be supportive of continued growth. But this drop could be a warning sign of weaker conditions ahead.
On Wednesday, the first estimate of economic growth for the fourth quarter of 2018 is due, although it may not be released as the government works at reopening. Growth in GDP is expected to drop from 3.4 percent in the third quarter to 2.5 percent in the fourth quarter, although there may be some upside risk on strong consumer spending.
Also on Wednesday, the meeting of the Federal Open Market Committee will conclude and be followed by a press conference. After the rate increase announced at the last meeting, markets are expecting rates to remain the same, and analysts will be looking to see whether the recent dovish tone on inflation has intensified. If so, markets could react positively.
On Thursday, the personal income and spending report for December is due, although (again) it may not be released. Income growth is expected to rise from 0.2 percent in November to 0.5 percent in December on strong job growth. Spending growth is expected to tick down from 0.4 percent in November to 0.3 percent for December, which would still be healthy.
On Friday, the employment report is expected to show that job growth decreased from an extremely strong 312,000 in December to 163,000 for January. The unemployment rate is expected to tick down from 3.9 percent in December to 3.8 percent for January. The job growth number will not include the federal workers currently on furlough, as they will be counted as employed. But these workers will show up in the unemployment index, which may push it up a bit above expectations. Wage growth is expected to tick down a bit, from 0.4 percent for December to 0.3 percent for January, on a monthly basis. The increase on an annual basis in wage growth is expected to stay steady at 3.2 percent. If the numbers come in as expected, this would be another healthy report and signal continued economic growth.
Finally on Friday, the Institute for Supply Management Manufacturing index is expected to increase slightly. It should go from 54.1 to 54.3 for January, after a surprise drop to a two-year low in December. This is a diffusion index, where values above 50 indicate expansion and below 50 indicate contraction. So, this index remains healthy. There is some downside risk here, on slowing global growth in general and the recent impact of the government shutdown. Uncertainty over trade policy remains a headwind as well. Even with a moderate pullback, however, this would still remain positive for the economy as a whole.
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 U.S. 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 U.S. 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 U.S. 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 firstname.lastname@example.org.
Authored by the Investment Research team at Commonwealth Financial Network.
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