Presented by Mark Gallagher
General market news
• The yield on the 10-year Treasury was back up to 2.20 percent early Monday morning, after being as low as 2.01 percent fewer than six trading days ago. The move from one support level to the next in such a short period leads us to believe that investors are uncertain about the market and can’t decide whether to favor a risk-on or risk-off trade. The 30-year yield moved from 2.63 percent to 2.77 percent in the same period. It is still well below the 3-percent mark, however, implying that the risk-off trade is still in favor with many.
• U.S. markets took the opportunity to exhale last week after dealing with tumultuous news about North Korea and hurricanes Harvey and Irma in the week prior. The Dow Jones Industrial Average was the top performer, posting a gain of 2.19 percent. The S&P 500 Index and Nasdaq Composite followed with gains of 1.63 percent and 1.41 percent, respectively.
• Monetary policy grabbed headlines around the world last week. The People’s Bank of China removed a deposit requirement for currency forward trades and axed the deposit requirement for foreign banks’ yuan deposits. These actions are expected to make foreign deals more attractive. The Bank of England also made the news after it voted to keep interest rates steady, despite a 2.9-percent increase in inflation in August. The bank expects this increase in inflation to be temporary. This week, the focus will be on our own Federal Open Market Committee (FOMC).
• There were a number of important economic data points released last week. On Wednesday and Thursday, the Produce and Consumer Price Index reports showed higher-than-expected inflation data. Consumer prices have increased by 1.9 percent year-over-year, while producer prices have grown by 2 percent. Low inflation figures were a concern earlier in the year, but these readings are approaching the Fed’s stated target of 2-percent inflation.
• On Friday, retail sales for August came in lower than expected. Sales declined by 0.2 percent against expectations for 0.1-percent growth. The impact from Hurricane Harvey at the end of the month likely played a part in this miss, but we won’t know whether this slowdown was due to transitory factors until next month.
• The week ended with a slight decline in the University of Michigan Consumer Sentiment survey. This figure remains near post-election highs, so the result is nothing to worry about.
| Equity Index | Week-to-Date | Month-to-Date | Year-to-Date | 12-Month |
| S&P 500 | 1.63% | 1.25% | 13.33% | 18.86% |
| Nasdaq Composite | 1.41% | 0.34% | 20.81% | 24.34% |
| DJIA | 2.19% | 1.54% | 14.75% | 25.34% |
| MSCI EAFE | 0.57% | 1.81% | 19.66% | 21.04% |
| MSCI Emerging Markets | 1.07% | 1.44% | 30.45% | 27.25% |
| Russell 2000 | 2.35% | 1.95% | 6.45% | 18.27% |
Source: Bloomberg
| Fixed Income Index | Month-to-Date | Year-to-Date | 12-Month |
| U.S. Broad Market | –0.23% | 3.40% | 0.90% |
| U.S. Treasury | –0.34% | 2.80% | –0.56% |
| U.S. Mortgages | –0.10% | 2.45% | 0.60% |
| Municipal Bond | –0.03% | 5.17% | 1.52% |
Source: Morningstar Direct
What to look forward to
Most of the economic data this week focuses on housing. On Monday, the National Association of Home Builders industry survey will be released. It is expected to decrease from a very strong level of 68 in August to a still strong level of 67 in September. Given extensive damage from hurricanes Harvey and Irma—which may worsen labor and material shortages for homebuilders—there may be some downside risk to this number.
On Tuesday, housing starts are expected to tick up from 1.155 million in July to 1.18 million in August. The July number was a surprise, resulting from declines in multi-family developments, which have historically been volatile. Single-family starts held their ground. Although multi-family starts are expected to decline even more in August, strong demand and limited supply for single-family homes should keep that sector increasing.
On Wednesday, existing home sales are likewise expected to tick up—from 5.44 million in July to 5.47 million in August. Once again, despite strong demand, low inventory is expected to constrain sales. This means there is some downside risk to this number. The July number was the lowest in almost a year, and the trend is likely to continue.
Also on Wednesday, the FOMC will conclude its regular meeting. Although the Fed is likely to continue viewing the economy in a positive light, uncertainty around inflation, as well as the unknown impacts of the hurricanes, will likely result in no change to interest rates. The Fed is expected, however, to start the process of reducing the balance sheet by slowing the reinvestment of maturing securities and payments. This has been well telegraphed to markets, and reaction should be minimal. Still, markets will be watching to make sure that the actual plan is the same as described previously.
Overall, if the news comes in as expected, the signal for the rest of the economy will be positive.
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.
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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.
© 2017 Commonwealth Financial Network®