Market Updates

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GWA presents the Commonwealth Financial Monthly Market Update

Market Update

October 15, 2018

Presented by Kris Maksimovich:

General market news

  • The 10-year U.S. Treasury yield reached a current cycle high of 3.25 percent last Tuesday. It then moved lower to 3.15 percent, where it opened on Monday morning. The 30-year opened at 3.32 percent, while the 2-year opened at 2.84 percent. The 2-year was as high as 2.90 percent last week, which is where the 10-year stood about a month ago. As the Federal Reserve (Fed) continues to raise rates, it has added uncertainty and, therefore, volatility in the markets. With more rate increases ahead, the market will have bigger movements as we inevitably approach the next recession.
  • Last week, equities across the globe sold off as U.S. markets experienced a pickup in volatility, with bond yields rising and investors rotating away from growth. The 10-year bond yield rose to levels as high as 3.25 percent, leading investors to take a look at growth prospects moving forward. The worst performers on the week were materials, industrials, and financials. The top performers were utilities, consumer staples, and REITs.
  • The People’s Bank of China cut its reserve requirement ratio by 1 percent, as China looks to continue to support its domestic economy following U.S.-China trade tensions. There was one bright spot in the U.S.-China trade talks, however, as President Trump and Chinese President Xi will meet at November’s G20 summit.
  • Last week was another relatively slow week on the economic update front. On Wednesday, the Producer Price Index slowed to 2.6-percent growth on a year-over-year basis. On Thursday, the Consumer Price Index also showed slower inflation, with year-over-year growth of 2.3 percent. Rising inflation was a minor concern earlier in the year, so these results were welcome.
  • On Friday, the University of Michigan consumer sentiment survey showed a slight decline, going from 100.1 for September to 99 in October. This still represents a strong reading that shows consumers are confident in the current economic expansion.
Equity IndexWeek-to-Date Month-to-Date Year-to-Date 12-Month
S&P 500–4.07%–4.97%5.07%10.58%
Nasdaq Composite–3.74%–6.80%9.48%14.93%
DJIA–4.17%–4.17%4.29%13.45%
MSCI EAFE–3.93%–6.17%–7.09%–4.22%
MSCI Emerging Markets–2.02%–6.42%–13.33%–10.17%
Russell 2000–5.22%–8.81%1.69%4.06%

Source: Bloomberg

Fixed Income IndexMonth-to-Date Year-to-Date 12-Month
U.S. Broad Market–0.51%–2.10%–1.83%
U.S. Treasury–0.39%–2.05%–2.03%
U.S. Mortgages–0.55%–1.61%–1.53%
Municipal Bond–0.77%–1.16%–0.72%

Source: Morningstar Direct

What to look forward to

This is a busy week for economic news, with a wide range of data from across the economy.

On Monday, the retail sales report is expected to show growth of 0.7 percent for September, on a posthurricane jump in auto sales. This result would be a rebound from a 0.1-percent gain in August. Core retail sales, which exclude autos, are also expected to do well. Here, we should see growth of 0.4 percent for September, up from 0.3 percent in August. There may be some downside risk to this report, as gasoline prices have moderated. If the numbers come in as expected, they would be at healthy levels and be positive for the economy.

On Tuesday, the industrial production report is expected to tick down a bit, from a gain of 0.4 percent for August to a gain of 0.3 percent for September. There may be some upside risk here, on a weather-related increase in utilities output. Manufacturing is expected to show a similar result, going from a 0.2-percent gain in August to a 0.3-percent gain in September. Here, there may be some downside risk, as manufacturing labor demand declined last month. Again, the expected numbers would indicate continued growth and be positive for the economy.

Also on Tuesday, the National Association of Home Builders survey will be released. It is expected to stay steady at 67 for September, for the fourth month in a row. There may be some downside risk, as the industry continues to suffer from labor shortages, and rising interest rates are expected to affect demand.

The housing starts report, released on Wednesday, is expected to show a decline after a recovery in August. It should drop from 1.28 million in August to 1.22 million (annualized) in September, although better building permit data suggests the final result might be somewhat better than expected.

The minutes from the last Federal Reserve Open Market Committee meeting will also be released on Wednesday. Markets will be looking for guidance on whether the Fed expects to hike rates in December and on what to expect in 2019—that is, whether three hikes are indeed likely and on what factors might change that forecast.

Finally, on Friday, the existing home sales report is expected to show that sales have dropped from 5.34 million in August to 5.31 million in September. Housing, in general, appears to be in a slowing trend, and this data would continue that trend.

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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Kris Maksimovich is a financial advisor located at Global Wealth Advisors 18170 Dallas Parkway, Suite 103, Dallas, TX 75287. 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 (972) 931-3818 or at info@gwadvisors.net.

Authored by the Investment Research team at Commonwealth Financial Network.

© 2018 Commonwealth Financial Network®

 

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Market Update and Financial Market News

Market Update

October 8, 2018

Presented by Kris Maksimovich:

General market news

  • Rates have moved higher recently, and with the bond market closed on Monday, yields are as of October 5. The 10-year Treasury stands at 3.23 percent, and the 30-year and 2-year are at 3.40 percent and 2.88 percent, respectively. The yield curve—which had been flattening, leading to worries about inversion—has steepened over the last week or so. The Federal Reserve’s (Fed’s) optimism about the economy has helped. On top of a September hike in the federal funds rate to 2.25 percent, the Fed has expressed plans to raise rates in December, as well as three times in 2019.
  • S. equity markets were mostly down last week. Investors appear to be moving out of equities in the face of rising Treasury yields and higher borrowing costs. Comments from Fed Chair Jerome Powell were seen as potentially hawkish; he stated that rates are still accommodative, and while they are moving toward a neutral level, they are still “a long way from neutral at this point.”
  • Markets also were likely reacting to the new trade agreement announced by President Trump—the U.S.-Mexico-Canada Agreement (USMCA)—which, if approved, will replace NAFTA. Although this is viewed as a win for the U.S., some language in the agreement could indicate an even greater divergence between North American and Chinese trade deals in the future.
  • Last week was a relatively quiet one for economic updates. On Monday, the Institute for Supply Management (ISM) Manufacturing index declined slightly, as expected, going from 61.3 to 59.8. This is a diffusion index, where values greater than 50 indicate expansion, so this is still a strong level. On Wednesday, the ISM Nonmanufacturing index surprised by rising to 61.6 from 58.5.
  • On Friday, the September employment report came in with mixed results: 134,000 new jobs were added, short of the expected 185,000. This headline miss is likely not as bad as it seems at first glance. Previous months were revised up by 87,000, which helps offset the shortfall. The unemployment rate fell to 3.7 percent, which is the lowest rate since 1969.
Equity IndexWeek-to-Date Month-to-Date Year-to-Date 12-Month
S&P 500–0.95%–0.95%9.52%15.25%
Nasdaq Composite–3.18%–3.18%13.75%19.55%
DJIA0.00%0.00%8.83%18.75%
MSCI EAFE–2.34%–2.34%–3.31%0.85%
MSCI Emerging Markets–4.48%–4.48%–11.64%–6.79%
Russell 2000–3.78%–3.78%7.30%9.30%

Source: Bloomberg

Fixed Income IndexMonth-to-Date Year-to-Date 12-Month
U.S. Broad Market–0.94%–2.53%–0.29%
U.S. Treasury–0.90%–2.55%–2.36%
U.S. Mortgages–0.97%–2.04%–1.84%
Municipal Bond–0.58%–0.97%–0.29%

Source: Morningstar Direct 

What to look forward to

This week’s economic data digs into pricing and inflation, as well as gives us another look at consumer confidence.

On Wednesday, the producer prices report is expected to show a 0.2-percent increase in the headline index, which includes energy and food, for September. This would be up from a decline of 0.1 percent in August. There may be some upside risk here from energy prices and tariff-driven increases in other input prices, especially steel and electronics. The annual change, however, is expected to drop—from 2.8 percent to 2.7 percent—indicating that longer-term inflation pressures are moderating but still elevated above the Fed’s target level of 2 percent. The core index, which excludes energy and food, is also expected to increase 0.2 percent for September, up from a 0.1-percent decline in August. Here, though, the annual figure is expected to rise to 2.6 percent from 2.3 percent. Such an increase would be due largely to base effects, but tariffs are reportedly driving faster input inflation, which could worsen next month as tariffs on Chinese goods increase.

On Thursday, the consumer prices report is expected to show continued inflation. The headline index, which, again, includes food and energy, is expected to rise by 0.2 percent for September. This would be on top of a 0.2-percent increase in August. The annual figure is expected to drop from 2.7 percent in August to 2.4 percent in September on base effects. The core index is expected to rise from a 0.1-percent increase in August to a 0.2-percent increase for September. In addition, the annual figure is expected to rise from 2.2 percent to 2.3 percent. As with producer prices, these figures indicate that inflation continues to run above the Fed’s target, which should continue to drive interest rate increases.

Finally, the University of Michigan’s consumer confidence survey, released Friday, is expected to show confidence rising from 100.1 for September to 100.8 for October. This is a high level historically and suggests that consumers are not yet worried about the effects of a trade war. Combined with a strong labor market and the fact that the stock market remains close to its high, this should continue to support consumer spending and 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.

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Kris Maksimovich is a financial advisor located at Global Wealth Advisors 18170 Dallas Parkway, Suite 103, Dallas, TX 75287. 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 (972) 931-3818 or at info@gwadvisors.net.

Authored by the Investment Research team at Commonwealth Financial Network.

© 2018 Commonwealth Financial Network®

 

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GWA presents the most recent market update from Commonwealth Financial Network

Market Update

October 1, 2018

Presented by Kris Maksimovich:

General market news

  • Volatility was back last week. The 10-year Treasury rate bounced between 3.11 percent and 3.02 percent. Given how flat the yield curve is today—with a difference of only 25 basis points between the 2-year and 10-year—a move of 9 basis points on the 10-year is significant. Further, the Federal Reserve (Fed) raised rates last week and is projected to raise them again over the next 12 months. As such, the longer end of the curve will see volatility, while the short end will move up in tandem with the federal funds rate. One note from last week’s Fed meeting is that the Fed no longer considers its stance as accommodative. Also, with the federal funds rate above 2 percent and the long-term target at 3 percent, the Fed is likely in the later stages of raising rates.
  • S. equity markets were mixed last week, as trade tensions and eurozone financial uncertainty weighed on the markets. The Wall Street Journal reported that China canceled its upcoming trade talks with the U.S., as China was displeased with the recent additional $200 billion in tariffs. It is expected that President Trump may soon offer a final $267 billion in tariffs. The news weighed heavily on the materials sector, which was down more than 4.4 percent on the week. The financials sector was also down by more than 4 percent on the week.
  • The Italian government agreed to a 2.4-percent budget deficit target, which could potentially be a breach of its EU obligations. Adding to the European volatility was continued uncertainty over Brexit, as Theresa May and her cabinet continue to work to come to an agreement with Europe.
  • Last week was a busy one for economic updates. On Tuesday, the Conference Board Consumer Confidence Index defied expectations for a slight pullback, instead rising to an 18-year high. On Wednesday, new home sales also came in better than expected, with 3.5-percent growth against expectations for 0.5-percent growth.
  • On Thursday, the final measure of second-quarter gross domestic product growth came in at 4.2 percent. Also on Thursday, August’s durable goods orders came in at a very strong 4.5 percent due to a large uptick in aircraft orders.
  • On Friday, the August personal income and personal spending reports both showed growth of 0.3 percent.
Equity IndexWeek-to-Date Month-to-Date Year-to-Date 12-Month
S&P 500–0.51%0.57%10.56%18.35%
Nasdaq Composite0.76%–0.70%17.48%26.00%
DJIA–1.07%1.97%8.83%20.89%
MSCI EAFE–0.85%0.88%–0.98%3.80%
MSCI Emerging Markets–0.25%–0.54%–7.39%0.43%
Russell 2000–0.86%–2.41%11.51%15.41%

Source: Bloomberg

 

Fixed Income IndexMonth-to-Date Year-to-Date 12-Month
U.S. Broad Market–0.64%–1.60%–1.22%
U.S. Treasury–0.93%–1.67%–1.66%
U.S. Mortgages–0.61%–1.07%–0.95%
Municipal Bond–0.65%–0.40%0.34%

Source: Morningstar Direct 

What to look forward to

This is a very busy week for economic news. We’ll have looks at business sentiment across the board, the trade balance, and, most important, the job market.

On Monday, the Institute for Supply Management (ISM) Manufacturing index dropped slightly. It went from 61.3 to 59.8, after an unexpected surge in August. This is a diffusion index, where values above 50 indicate expansion and below 50 indicate contraction. So, even with the decline, this result remains quite strong. In general, the pullback looks to have come from slowing global growth. More specifically, it may have resulted from the recent appreciation in the dollar, which has been increasing the costs of U.S. products to foreign buyers. Uncertainty over trade policy remains a headwind as well. With manufacturing growth slowing, the pullback is reasonable. Even with the pullback, however, sentiment remains quite strong and positive for the economy as a whole.

On Wednesday, the ISM Nonmanufacturing index is also expected to pull back slightly—from 58.5 to 58—after an increase in August. As with the manufacturing report, this is a diffusion index. So, it should continue to indicate expansion on strong retail sales growth, as well as strong regional surveys. With consumer confidence high and spending growth solid, this indicator should remain positive for the economy as a whole, despite the small expected decline.

On Friday, the international trade report is expected to show the trade deficit has worsened. It is anticipated to go from $50.1 billion to $50.7 billion. We already know from the advance report that the trade deficit in goods widened, as export growth has now dropped back even as imports have increased. As such, there may be some additional downside risk to this report. Overall, if the numbers come in as expected, trade will likely be a drag on third-quarter growth.

Finally, on Friday, the employment report will be released. It is expected to show that job growth pulled back to a still healthy 188,000 in September from a strong August report of 201,000. The unemployment rate is expected to drop from 3.9 percent to 3.8 percent. Wage growth should also pull back a bit. It should go from 0.4 percent in August to 0.3 percent for September on a monthly basis and from 2.9 percent to 2.8 percent on an annual basis. If these numbers come in as anticipated, this would be another healthy report and signal continued economic growth. It would also likely support another rate hike from the Fed in December.

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.

###

Kris Maksimovich is a financial advisor located at Global Wealth Advisors 18170 Dallas Parkway, Suite 103, Dallas, TX 75287. 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 (972) 931-3818 or at info@gwadvisors.net.

Authored by the Investment Research team at Commonwealth Financial Network.

© 2018 Commonwealth Financial Network®

 

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Figure 1. U-6 Unemployment, 1998–2018

Market Update

Quarter Ending September 30, 2018

Presented by Kris Maksimovich:

A mixed September but strong quarter for U.S. stocks

September started with some volatility, but it ended on a positive note for most U.S. markets, capping off a strong third quarter. The Dow Jones Industrial Average (DJIA) led the way for the month with a return of 1.97 percent, and the S&P 500 followed with a 0.57-percent return. But the Nasdaq Composite could not overcome the early declines, finishing the month down 0.70 percent. Despite its poor performance in September, the Nasdaq did end the quarter largely in line with its peers; it returned 7.41 percent for the quarter compared with 7.71 percent for the S&P 500 and 9.63 percent for the DJIA.

These solid returns were supported by strong fundamentals. Per FactSet, as of quarter-end, the estimated third-quarter earnings growth rate for the S&P 500 was 19.3 percent. This would be the third-highest quarterly earnings growth rate since early 2011 and would come on top of a 25-percent growth rate in the second quarter. Ultimately, fundamentals drive long-term market performance. So, the strong expected earnings growth is worth our attention. From a technical perspective, all three indices were well above their 200-day moving averages for the month and the quarter, which indicates the trend remains positive.

Internationally, the results were more mixed. Concerns around a slowdown in global trade and weakening emerging market currencies caused volatility. For developed markets, the MSCI EAFE Index gained 0.87 percent in September and 1.35 percent for the quarter, despite periods of heavy volatility. The MSCI Emerging Markets Index didn’t fare as well, losing 0.50 percent for the month and 0.95 percent for the quarter on fears of a currency crisis and trade worries. Both indices remained below their 200-day moving averages, suggesting investors remain wary of the perceived higher risks outside the U.S.

Fixed income also had a challenging month but managed to post a gain for the quarter. The Bloomberg Barclays Aggregate Bond Index declined by 0.64 percent for the month. For the quarter, however, the index eked out a small gain of 0.02 percent. These lackluster results were driven by rising rates, which negatively affect bond prices, with the 10-year U.S. Treasury yield going from 2.87 percent to 3.05 percent during the quarter. Rates were driven up by signs of rising inflation as well as Federal Reserve (Fed) action. The Fed hiked rates in September and is expected to do so again in December. High-yield bonds, which are typically less influenced by interest rate movements, had a stronger month and quarter, returning 0.56 percent and 2.40 percent, respectively.

Economic expansion inspires confidence

The economic news for the quarter was substantially positive. High confidence levels were matched by strong spending growth for both businesses and consumers. In one surprising development, the Conference Board Consumer Confidence Index spiked to an 18-year high in September. This index is well above the levels seen in the mid-2000s and sits near the all-time highs set in the late 1990s and early 2000s.

Consumers were not alone when it came to improving confidence for the month. After declining in July, both the Institute for Supply Management (ISM) Manufacturing and ISM Nonmanufacturing indices bounced back significantly in August. The rise in the ISM Manufacturing index—to a 14-year high—was especially notable and showed that manufacturers remain quite confident in the ongoing economic expansion despite headwinds such as a strong dollar and trade concerns.

Rising confidence leads to higher spending

Although these high levels of confidence are encouraging, a willingness to spend does not mean much without a similar uptick in the ability to spend. Fortunately, a combination of strong job growth and rising wage growth helped on that front. Stronger-than-anticipated wage growth in August took the annual rate to a nine-year high. This increase, combined with the 201,000 new jobs that were added in August, pushed consumer spending power and kept the labor market strong. The unemployment rate remained at 3.9 percent, a multiyear low, whereas the more comprehensive underemployment rate fell to a 17-year low (see Figure 1).

See Figure 1. U-6 Unemployment, 1998–2018

Given the rising willingness and ability to spend, retail sales continued to grow in August. This came on top of growth in July that was larger than expected. Overall, personal consumption for the third quarter appears to be close to matching the strong 3.8-percent pace of the second quarter. In turn, this could lead to another quarter of gross domestic product growth of more than 3 percent.

Businesses also did their part to boost spending. Durable goods orders for August rose by 4.5 percent, against expectations for 2-percent growth. This growth was driven in large part by a rise in aircraft orders. Although this measure of business investment can be volatile, this result is encouraging given a decline of 1.7 percent in July. Core orders growth was smaller but steadier, suggesting that even outside of transportation business, investment continues to improve.

With both consumers and business confident and spending, we seem to be in a virtuous cycle. Higher confidence causes higher spending, which in turn leads to faster growth and even higher confidence. This scenario is typical of a mature economic cycle.

Risks are real but not pressing

As good as things are, risks remain, as international markets showed during the quarter. The most visible concern, economically, is the growing confrontation on trade between the U.S. and China. Here in the U.S., however, fears of a trade cliff—driven by tariffs and trade barriers—have been replaced by the realization that the impact may be more like a slowly rising headwind. Although there has been real economic damage abroad, the U.S. economy and markets appear to be taking the increasing risk in stride. The announcement at the end of the month of an agreement on a revised trade deal with Mexico and Canada should also help blunt the negative effects of the ongoing U.S.-China confrontation, at least for now.

The other major risk factor is political, with the upcoming midterm elections in November. There may be some short-term volatility around the time of the elections, but fundamentally, they should not derail the strength of the economy. There are two possible outcomes here. In one, the Republicans retain control, which is likely to be considered positive for the economy. In the other, we have a divided government—which has also historically been considered a positive. Overall, while politics are certainly worth paying attention to, their direct impact on the markets is likely to be muted for the time being.

Beyond politics, economic risks appear to be well contained. Although there is a slowdown in housing, it is a slow process and may be moderating, as lower timber prices contributed to better-than-expected home builder confidence and housing starts. These results were a healthy development for the housing market, as low supply in new homes has played a part in disappointing sales. Other economic indicators remain positive.

Solid start for Q4, potential headwinds ahead

The start of the fourth quarter looks solid. The economic fundamentals are strong and should be able to withstand periods of short-term volatility. Confidence continues to be high and seems resilient in the face of political uncertainty.

At the same time, with pending elections and everything else going on, we may well see market volatility before the end of the year. Just because consumers and businesses have been confident in the face of potential headwinds so far does not guarantee that they will remain so. Therefore, despite the good news, we have to stay aware of risk and remember that a well-diversified portfolio that aligns financial goals and time lines remains the best way to get where you’re trying to go.

All information according to Bloomberg, unless stated otherwise.

 Disclosure: Certain sections of this commentary contain forward-looking statements 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. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets. All indices are unmanaged and investors cannot invest directly into an index. The Dow Jones Industrial Average is a price-weighted average of 30 actively traded blue-chip stocks. The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. 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 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. It excludes closed markets and those shares in otherwise free markets that are not purchasable by foreigners. The Bloomberg Barclays Aggregate Bond Index is an unmanaged market value-weighted index representing securities that are SEC-registered, taxable, and dollar-denominated. It covers the U.S. investment-grade fixed-rate bond market, with index components for a combination of the Bloomberg Barclays government and corporate securities, mortgage-backed pass-through securities, and asset-backed securities. The Bloomberg Barclays U.S. Corporate High Yield Index covers the USD-denominated, non-investment-grade, fixed-rate, taxable corporate bond market. Securities are classified as high-yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below. 

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Kris Maksimovich is a financial advisor located at Global Wealth Advisors 18170 Dallas Parkway, Suite 103, Dallas, TX 75287. 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 (972) 931-3818 or at info@gwadvisors.net.

Authored by the Investment Research team at Commonwealth Financial Network.

© 2018 Commonwealth Financial Network®

 

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