Presented by Mark Gallagher
General market news
• The yield on the 10-year Treasury opened at 2.23 percent on Monday. This was up from last Thursday’s low of 2.17 percent but considerably lower than its recent high of 2.42 percent. The yield on the 30-year Treasury opened at 2.90 percent, down from 3.04 percent last week. The 2-year yield was at 1.28 percent, up from last week’s low of 1.22 percent but down from the recent high of 1.33 percent.
• All three major U.S. indices were down slightly for the week. The Nasdaq Composite declined the most, moving down by 0.55 percent, followed by 0.32-percent losses on the S&P 500 and Dow Jones Industrial Average. Volatility, which had been muted, returned last week. The CBOE Volatility Index (VIX) spiked to a high of 15.59 after being as low as 9.56 just a week earlier. Much of the volatility was driven by political uncertainty. Brazil has another presidential scandal on its hands. Michel Temer, who became president after Dilma Rousseff was impeached, is now under investigation by Brazil’s Supreme Court for bribery allegations. This news led Brazilian markets down by more than 10 percent. The U.S. also has its share of political uncertainty, as a special counsel has been appointed to investigate Russia’s interference in the 2016 presidential election and other improper contact with the Trump administration. This investigation will continue to take the wind out of the sails of the new administration’s efforts to pass tax and health-care reform.
• Last week’s economic news focused on the housing market, and it was largely disappointing. The week began on a bright note, with the National Association of Home Builders Housing Market Index coming in above expectations and rising near post-recession highs. This measure of home-builder sentiment is often seen as a leading indicator for the housing market, and increasing confidence bodes well for future growth.
• The good news ended there, however, as home-builder optimism failed to translate into faster construction. Housing starts and building permits data disappointed, as both measures decreased against expectations for modest gains. Although these decreases were surprising, strong homebuyer demand, low supply, and home-builder optimism indicate that this slowdown in starts and permits was likely temporary.
|MSCI Emerging Markets
|Fixed Income Index
|U.S. Broad Market
Source: Morningstar Direct
What to look forward to
This week offers a look at the housing market, what the Fed was thinking at its last meeting, and whether businesses are continuing to invest.
First up on Tuesday is the New Home Sales report. The report is expected to show a slight drop, from 621,000 sales in March to 615,000 in April, due to a limited supply of less expensive homes, which sell more quickly. Such a small decline, after strong gains in February and March, would not be a concern.
The Existing Home Sales report, released on Wednesday, is also expected to show a slight decline, from 5.71 million sales in March to 5.65 million in April. In this case, any decline would be due to a lack of supply. On a seasonally adjusted basis, the number of single-family homes for sale is at its lowest level since records started in 1982. There simply are not enough homes available for sale, despite strong demand. Here again, though, such a small decline would be nothing to worry about.
Also on Wednesday, the minutes from the Federal Open Market Committee’s last meeting will be released. Although these minutes are often out of date by the time they are released, there has been little public comment since the meeting, so they might provide useful guidance on the prospect of a June rate hike. In particular, we may learn whether officials are more concerned about the low unemployment rate or the drop in core inflation.
Finally, on Friday, we’ll see the Durable Goods Orders report for April. It is expected to show a 1.8-percent decline, after gaining 0.9 percent in March, on a sharp drop in commercial aircraft orders. Such orders are extremely volatile, so even if they decline, it will not necessarily be a bad indicator. Core orders, which exclude transportation, are expected to increase by 0.4 percent in April after a flat result in March. This is slower growth than in past months, but it would still be a healthy result.
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 firstname.lastname@example.org.
Authored by the Investment Research team at Commonwealth Financial Network.
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