Presented by Mark Gallagher
General market news
• Rates continued to drop last week, with the 10-year Treasury yield falling to a low of 2.82 percent on Friday; it opened Monday morning at 2.84 percent. Similarly, the 30-year Treasury yield hit a low of 2.95 percent last week, but it opened at 2.99 percent on Monday.
• All three major U.S. markets were down in the past week, as markets sold off broadly on continued trade concerns and the flattening of the yield curve.
• Chinese stocks entered bear territory, as the reserve ratio requirement was cut by 50 basis points (bps) in an effort to trigger increased lending. Further, the Wall Street Journal reported that, as a result of continued U.S.-China trade talks, firms with at least 25-percent Chinese ownership will be barred from purchasing U.S. companies with “industrially significant technology.” The White House countered this claim, saying that it would expand the authority of the Committee on Foreign Investment in the United States rather than apply new investment restrictions.
• The spread between the 2-year and 10-year Treasury notes reached 30 bps, the narrowest it’s been since 2007. As a result, defensive sectors—REITs, utilities, and telecom—posted the strongest performance. The industrials, health care, and consumer discretionary sectors were the worst performers, as investors moved away from growth stocks.
• Last week saw the release of a number of important data points. On Monday, new home sales beat expectations, growing by 6.7 percent against expectations for more modest 0.8-percent growth.
• On Tuesday, the Conference Board Consumer Confidence Index declined modestly yet remained near multiyear highs. On Wednesday, durable goods orders dropped by 0.8 percent for the month, as a 7-percent decline in automobile orders dragged down growth.
• On Thursday, the third and final measure of first-quarter gross domestic product (GDP) growth came in at 2 percent. This was down from the previous estimate of 2.2 percent. Second-quarter growth, however, is expected to increase meaningfully.
• Finally, on Friday, personal income and spending in May both grew, by 0.4 percent and 0.2 percent, respectively. This should help drive overall second-quarter GDP growth.
| Equity Index | Week-to-Date | Month-to-Date | Year-to-Date | 12-Month |
| S&P 500 | –0.87% | 1.95% | 4.00% | 15.38% |
| Nasdaq Composite | –0.68% | 3.42% | 12.02% | 24.71% |
| DJIA | –2.03% | 0.78% | 0.54% | 17.53% |
| MSCI EAFE | –0.95% | –0.16% | –1.38% | 8.44% |
| MSCI Emerging Markets | –2.26% | –2.72% | –5.22% | 10.60% |
| Russell 2000 | 0.11% | 3.26% | 10.39% | 21.54% |
Source: Bloomberg
| Fixed Income Index | Month-to-Date | Year-to-Date | 12-Month |
| U.S. Broad Market | –0.12% | –1.62% | –0.40% |
| U.S. Treasury | 0.02% | –1.08% | –0.65% |
| U.S. Mortgages | 0.05% | –0.95% | 0.15% |
| Municipal Bond | 0.09% | –0.25% | 1.56% |
Source: Morningstar Direct
What to look forward to
This week will be a very busy one, with a number of reports covering all aspects of the economy.
On Monday, the Institute for Supply Management (ISM) Manufacturing index will be released; it is expected to decline slightly from 58.7 in May to 58 in June. This is a diffusion index, where values above 50 indicate expansion. As such, the expected change would keep the index at a healthy level and should be positive for growth. The stronger U.S. dollar, which hurts manufacturers, as well as increasing trade conflicts may weigh on this result.
On Thursday, the ISM Nonmanufacturing index will be released; it also is expected to pull back slightly, from 58.6 in May to 58 in June. There may be some upside risk here, however, with retail sales and consumer spending doing well in response to tax cuts and high consumer confidence. As with the manufacturing index, even this slight pullback would leave the index at a healthy expansionary level.
Also on Thursday, the Federal Reserve will release the minutes from its June meeting. While there seemed to be a modest hawkish shift in the meeting statement, the minutes will provide insight into just how confident members are in their growth projections. The markets will be looking for details about the likely rate increases.
On Friday, the international trade report is expected to show a slight decline in the trade deficit from $46.2 billion in April to $45.4 billion in May. The deficit in traded goods declined significantly on strong export growth last month, so there may be potential for a positive surprise. If so, net exports could contribute meaningfully to second-quarter growth.
Also on Friday, the employment report is expected to show a decrease in job growth from 223,000 in May to a still strong 198,000 in June. Unemployment is expected to stay steady at 3.8 percent—the lowest level in decades. Growth in average earnings is also expected to remain solid at a healthy 0.3 percent, which would take the annual rate back up to 2.8 percent. While there may be some downside risk to the job creation numbers, if the report comes even close to expectations, it will mean good things for continued economic 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.
© 2018 Commonwealth Financial Network®