Presented by Mark Gallagher
General market news
• The yield on the 10-year Treasury continued its rise from last week, opening at 2.69 percent early Monday morning, up from 2.64 percent last Friday. The 30-year also moved up, beginning the week at 2.94 percent.
• The “Fear of Missing Out” (FOMO) rally continued last week. The S&P 500 was up for the ninth time in 10 weeks. The Financial Times reported that global equity funds have received more than $77 billion in flows year-to-date through last Wednesday; this is five times higher than we saw in the first 24 days of 2017.
• Showing positive breadth and depth, all three major U.S. indices were up more than 2 percent last week. Further, every sector was up, with gains as large as 3.54 percent, 3.52 percent, and 3.23 percent experienced in health care, telecom, and consumer discretionary, respectively.
• Speaking of breadth, the International Monetary Fund (IMF) reported last week that approximately 120 economies saw a pickup in year-over-year gross domestic product (GDP) growth for 2017. This number is the highest it has been since 2010.
• As synchronized global growth continues to carry momentum in the market, attention turned to U.S. trade policy as Donald Trump addressed the World Economic Forum in Davos, Switzerland. He reiterated that his “America First” policy “does not mean America alone” but, rather, reflects the desire for fair global trade. The president also passed measures last week to increase tariffs on imported solar panels by 50 percent and washing machines by 30 percent. Trade policy and the strength of the U.S. dollar should remain in focus as the rally continues.
• The major economic news releases last week focused primarily on housing and consumption growth. On Wednesday and Thursday, existing and new home sales declined slightly. These declines were likely due to low supply levels, as housing stock has remained constrained for more than a year.
• On Friday, the first estimate of fourth-quarter GDP growth came in weaker than expected—at 2.6 percent rather than 2.9 percent. There may be more favorable revisions as new estimates are released.
• Durable goods orders, also released on Friday, were much more positive, with 2.9-percent growth against expectations for modest 0.8-percent growth. The increase for this proxy for business confidence is particularly important in light of the Tax Cuts and Jobs Act of 2017.
|MSCI Emerging Markets||3.29%||9.94%||9.94%||42.40%|
|Fixed Income Index||Month-to-Date||Year-to-Date||12-Month|
|U.S. Broad Market||–0.95%||–0.95%||2.50%|
Source: Morningstar Direct
What to look forward to
This will be a big week for economic data, with four major reports set to be released. On Monday, the personal income and spending report for December is expected to show that income growth held steady from November at 0.3 percent. Personal spending growth, on the other hand, is expected to decline slightly from 0.6 percent in November to 0.5 percent in December. Spending growth should be boosted by an increase in utilities expenditures due to the cold weather, which will be partially offset by a decrease in gasoline prices. If the numbers come in as expected, they would indicate continued expansion of the consumer sector.
On Tuesday, the Conference Board’s consumer confidence survey is expected to show that confidence rose from 122.1 in December to 123.1 in January. With the stock market rising and the tax cuts starting to affect paychecks, an increase seems likely. There may be some downside risk here, however, given recent declines in the other major confidence index from the University of Michigan. But even a small decline would leave this index at levels consistent with continued growth.
On Wednesday, the regular meeting of the Federal Open Market Committee will conclude. Expectations are for no action on interest rates. This will be Janet Yellen’s last meeting as chair, so markets will be watching for clues to see how the new chair’s policy tilt may change.
On Thursday, the Institute for Supply Management will release the January Manufacturing index. It is expected to tick down from a very strong 59.7 in December to an almost-as-strong 59.0 for January. This would reflect continued weakness of the dollar, which makes U.S.-manufactured goods more affordable and spurs continued global growth. Here again, there is some downside risk, given the weakening trends in regional surveys; however, even a larger pullback would still signal healthy growth.
Finally, on Friday, we get the employment report. The economy is expected to add 188,000 new jobs for January. This would be an improvement over the relatively weak 148,000 jobs added in December. If it does rebound, it would return job growth to the typical levels of the past year. The unemployment rate is expected to hold at 4.1 percent, a low level historically, and the average workweek is also expected to hold at 34.5 hours per week. Wage growth is expected to remain constant at 0.3 percent. The annual increase in this number, however, would rise from 2.5 percent in December to 2.7 percent in January, which could be a sign of acceleration. If the wage data meets expectations, it would indicate continued strong expansion of 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 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 email@example.com.
Authored by the Investment Research team at Commonwealth Financial Network.
© 2018 Commonwealth Financial Network®