Weekly Market Update, June 25, 2018

Presented by Mark Gallagher

General market news
• Rates traded in a range over the past week, following the Federal Reserve (Fed) meeting in the previous week. The 10-year Treasury yield was as low as 2.85 percent and as high as 2.95 percent last week; it opened early Monday morning at 2.86 percent. The 30-year opened at 3.03 percent and the 2-year at 2.54 percent. More important, however, is the steepness of the yield curve. With a difference in yield of only 49 basis points between the 2-year and 30-year, it seems investors are not on the same page with the Fed’s projected growth over the next year.
• U.S. markets were mostly down in the past week, with the exception of the Russell 2000 small-cap index. The trade tensions between the U.S. and China continued to weigh on the major indices, with the Trump administration initially proposing a 10-percent tariff on another $200 billion worth of Chinese goods. Later in the week, the administration threatened to impose a tariff on a total number of Chinese goods up to $450 billion. Other news affecting the markets included a Wall Street Journal article titled, “Don’t Fight the Fed’s Balance Sheet Taper.” It suggested that the Fed’s balance sheet wind down is weighing on international government bond markets and risky global assets.
• Top-performing sectors of the week included real estate, utilities, and energy. Those that were among the worst performers included industrials, materials, and financials.
• Last week was relatively quiet on the economic news front. On Monday, the National Association of Home Builders Housing Market Index declined slightly, as rising labor and timber costs weighed on home builder sentiment.
• On Tuesday, housing starts and building permits were mixed; there were more starts than expected, but permits declined by 4.6 percent. Given the low supply of new homes in the country, these will be important data points to monitor.
• Finally, on Wednesday, existing home sales disappointed by declining slightly against expectations for 1.1-percent growth. Housing growth positively contributes to the U.S. economy, so the health of the housing market is worth watching.

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 –0.47% –1.95% –1.31%
U.S. Treasury –0.34% –1.43% –1.68%
U.S. Mortgages –0.30% –1.30% –0.64%
Municipal Bond –0.05% –0.38% 0.89%

Source: Morningstar Direct

What to look forward to
Housing kicks off the week with the new home sales report, which came in better than expected on Monday morning. The annualized monthly sales were up to 689,000 in May from 662,000 in April, substantially beating the expected 667,000 figure. This increased activity suggests housing demand remains healthy.

On Tuesday, the Conference Board will release its consumer confidence survey. It is expected to pull back slightly, from 128 to 127.5, which would still be a very high level. Should the number come in as anticipated, it would indicate that consumer demand is likely to keep growing.

On Wednesday, the durable goods orders report should give the same indicator for business investment. The headline index, which includes transportation and is heavily influenced by aircraft orders, is expected to improve slightly from a very weak decline of 1.6 percent in April to a still weak decline of 1 percent for May, largely on trends in aircraft orders. This volatility is normal for this data series. The core index, which excludes transportation, is expected to do much better, pulling back from monthly growth of 0.9 percent in April to 0.5 percent in May. This result would still be healthy and a good indicator of future growth.

On Friday, the personal income and spending report will give further insight into the consumer. Personal income growth is expected to rise from 0.3 percent in April to 0.4 percent in May. Personal spending growth, on the other hand, is expected to drop back from 0.6 percent in April to a still healthy 0.4 percent in May. We already know that retail spending growth was strong in May, but weaker auto sales may pull the overall figure back a bit. The match in income and spending growth is a good sign for the sustainability of this level of 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®