Market Update for the Month Ending February 29, 2020

A turbulent February for markets
February was a tough month for markets, ending in a terrible final week—the worst week for U.S. equity market returns since 2008. Investors were spooked by news about the spread of the coronavirus and fled to safe-haven assets. The S&P 500 fell by 8.23 percent, the Dow Jones Industrial Average (DJIA) dropped by 9.75 percent, and the Nasdaq Composite lost 6.27 percent.

This sell-off came despite positive fundamentals, with fourth-quarter earnings for the S&P 500 continuing to come in above expectations. Per Bloomberg Intelligence, as of February 20, the blended average earnings growth rate for the S&P 500 stands at 1.3 percent for the fourth quarter, with 86 percent of companies reporting. This is a solid improvement from initial estimates of a 1.2 percent decline. If this growth rate holds, it would represent the first quarter with year-over-year earnings growth since the fourth quarter of 2018. While prices can diverge from fundamentals over the short term, fundamentals drive growth in the long term. So, this return to growth is a positive development for markets.

Technicals were far less supportive for U.S. equities during the month. Both the S&P 500 and DJIA ended below their respective 200-day moving averages. The Nasdaq Composite was the only major equity index that finished above its trendline. It traded below this level on the final trading day of the month, however, before recovering and finishing above trend. This is an important technical signal, as prolonged breaks below this trendline could indicate a longer-term shift in investor sentiment.

The story was much the same internationally, with the MSCI EAFE Index falling by 9.04 percent for the month and emerging markets declining by 5.27 percent, both due to coronavirus concerns. Technicals were a headwind for international markets, with both indices finishing below their respective 200-day moving averages.

The major beneficiary from the risk-off sentiment was investment-grade fixed income. Investors sold out of riskier asset classes and flocked to the relative safety of bonds. Yields fell sharply, as shown by movements in the 10-year Treasury yield, which started February at 1.54 percent and finished at 1.13 percent. Falling yields drove the Bloomberg Barclays U.S. Aggregate Bond Index to a gain of 1.80 percent.

High-yield fixed income, which tends to be more closely correlated with equities than with interest rates, did not fare as well. The Bloomberg Barclays U.S. Corporate High Yield Index was positive for much of the month. But the risk-off sentiment that pervaded markets hit high-yield bonds near month-end, causing a decline of 1.41 percent. Investors demanded more yield to compensate for perceived higher levels of risk. As a result, credit spreads for high-yield bonds widened to levels last seen in June 2019.

Putting volatility in perspective
Concerns about the spread of the coronavirus were the major driver of market volatility in February. In January, investors were focused largely on the spread of the disease in China and the steps governments around the world were taking to contain it. But in February, news that the virus had spread throughout much of the world spurred fears of a pandemic. Reports of untraceable cases and the first death from the virus in the U.S. drove this point home for Americans.

Market reactions to this larger-scale problem were severe, as was the case with previous epidemics, such as Ebola, Zika, and SARS. In that sense, while the risks are real, we have seen this movie before. There’s certainly no guarantee things will play out as they have in the past. But with each of these epidemics, we saw short-term volatility followed by quick recovery once the disease was contained. Data from China and other countries around the world shows that, so far, the spread of the coronavirus is moderating. So, it is not unreasonable to expect a similar market recovery once more progress is made.

Economic updates positive, despite coronavirus threat
While investor attention was dominated by the sell-off at month-end, many of the economic updates released during the month showed signs of an improving economy. February’s consumer confidence reports were encouraging, with both major measures of consumer sentiment increasing to multi-month highs. The University of Michigan consumer sentiment survey was especially encouraging. It included survey responses from consumers through February 25, when markets were experiencing the virus-related sell-off. So far, consumer sentiment has remained resilient despite the spread of the virus. We will be monitoring this closely, however, given the close relationship between consumer confidence and spending.

Speaking of spending, consumer spending data released during the month was solid as well. Headline retail sales grew 0.3 percent in January, marking the fourth straight month of headline sales growth. Housing sales were also impressive, with existing home sales up nearly 10 percent year-over-year. New home sales were even more notable, increasing by 7.9 percent. This brought the pace of new home sales up to its highest monthly level since 2007, as you can see in Figure 1. Overall, February’s data releases showed the American consumer was very active to start the year.

Figure 1. New Home Sales, 2007–Present

chart

Businesses also showed improving confidence and spending figures. Both manufacturer and nonmanufacturer confidence increased by more than expected in January. Durable goods orders came in better than expected for both December and January. Core durable goods orders, which are a proxy for business investment, increased for the third straight month. This indicates the slowdown we saw in business investment throughout much of 2019 may be reversing. Although they could be at risk going forward, these positive economic fundamentals provide a substantial cushion for any economic damage from the virus.

Fundamentals vs. risks
Despite the strong fundamentals we saw during the month, risks remain, and more volatility is likely. Previous epidemics have had minimal long-term effects on markets, but there is no guarantee this outbreak will follow the same pattern.

That said, markets are now pricing in quite a bit of risk, and there is potential for good news to lead to a market rally. We’ve already seen some evidence of this in China, where reports of a slowdown in new cases led to a partial recovery in equity markets at month-end. In the U.S., fundamentals and spending are strong. So, we can still expect economic growth to continue in 2020. There is also the potential for market support from global central banks. They are monitoring the spread of the virus carefully and will be ready to step in with supportive monetary policy if necessary.

Ultimately, the major risk to the economy is the potential for a sharp drop in confidence in the face of the negative headlines. We will be watching this going forward. Given the likelihood of further short-term volatility, February’s results remind us of the importance of constructing portfolios that can withstand volatility. As always, a well-diversified portfolio that matches investor goals and time horizons remains the best path forward.

Co-authored by Brad McMillan, managing principal, chief investment officer, and Sam Millette, senior investment research analyst, at Commonwealth Financial Network.

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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Market Update for the Month Ending January 31, 2020

Coronavirus outbreak leads to mixed results for markets
January was a mixed month for markets, with concerns about the spread of the Wuhan coronavirus having a negative effect at month-end. Despite spending most of the month in positive territory, both the S&P 500 and the Dow Jones Industrial Average declined. The former fell 0.04 percent while the latter dropped 0.89 percent. The Nasdaq Composite also saw some late-month volatility, but previous gains were strong enough to leave the index up 2.03 percent for the month.

Despite the rocky ending to the month, fundamentals may be showing signs of improvement. Per Bloomberg Intelligence, as of January 31, the blended year-over-year earnings growth estimate for the S&P 500 in the fourth quarter is –0.3 percent. If this estimate holds, it would mark four straight quarters with earnings declines. The situation has been improving, however, and analysts are currently forecasting a return to growth in the first quarter of 2020. Fundamentals drive market returns, so earnings growth this quarter would create a tailwind for future returns. From a technical perspective, all three major U.S. indices remained well above their respective 200-day moving averages.

International markets had a tough start to the year, facing more volatility than their U.S. counterparts. The MSCI EAFE Index fell by 2.09 percent in January, with much of the decline coming in the final week of the month. The MSCI Emerging Markets Index faced pressure as well, falling 4.66 percent. Concerns about the coronavirus and the effect it could have on China’s growth were the primary causes. Both indices remained above their 200-day moving averages, though, indicating continued investor support.

The broad fixed income market, on the other hand, had a very strong start to the year, as the general risk-off sentiment drove investors into safe-haven assets. Long-term U.S. Treasury yields fell sharply in January. The 10-year yield declined from 1.88 percent at the start of the month to 1.51 percent at month-end. This brought yields on the long end of the curve back down to October lows and drove the Bloomberg Barclays U.S. Aggregate Bond Index to a gain of 1.92 percent.

Although investment-grade fixed income started the year off well, the same can’t be said for high-yield bonds. This portion of the fixed income market is typically not driven much by movements in interest rates; rather, it’s more correlated with equities, due to the speculative nature of high-yield bonds. High-yield spreads increased notably during the month, as investors demanded greater yield to compensate for the additional credit risk. The Bloomberg Barclays U.S. Corporate High Yield Index inched up by 0.03 percent.

Shifting geopolitical risks affect markets
January provided a prime example of why it is important to expect the unexpected and construct portfolios that can withstand short-term market volatility. Throughout the month, several geopolitical risks grabbed headlines and rocked markets.

The most significant was the discovery and spread of the coronavirus, which was declared a public health emergency by the World Health Organization at the end of January. Governments around the world have taken swift action to work toward halting the spread of the disease. Still, it has been the major driver of global market volatility.

Here in the U.S., the spread of the virus appears to be contained for now, so the effect on public health has been minimal. The potential economic impact is not yet clear, however. So far, travel and technology companies have been hit the hardest. But as we saw with the market sell-off at the end of the month, investors were also spooked by the continued spread of the disease and general uncertainty created by the situation. Ultimately, we can’t predict what the final economic cost and public health implications will be, so we can expect to see more volatility in line with the headlines.

Another major news story during the month was the escalation of military tensions between the U.S. and Iran. Notably, a U.S. strike killed an Iranian general in Iraq. It was followed by the retaliatory strike from Iran on two Iraqi airbases that were housing American military personnel. This unexpected development captured global attention due to the potential for further escalation in the war-torn region. Although this story was in the headlines for more than a week, its effect on financial markets was short-lived.

Both of these events showed how unexpected risks can grab investors’ attention and lead to market gyrations. As we saw with the Iran situation, though, once more clarity becomes available, markets can recover swiftly from these short-term jolts. Therefore, building a portfolio that can withstand the occasional bout of volatility should be an important goal for any investor.

Economic data improves
Despite the news-driven market turmoil we saw at month-end, the economic data releases in January continued to show improving fundamentals in the U.S. After staying rangebound for much of the fourth quarter, both major surveys of consumer confidence climbed by more than expected in January. A strong jobs market and increased optimism about future equity market returns drove much of this better-than-expected result. High consumer confidence often leads to additional consumer spending. So, seeing both confidence measures increase bodes well for first-quarter growth.

Consumer spending data was healthy, with the most recent retail sales report showing 0.3 percent growth in December. This brought year-over-year growth up to 5.8 percent, the highest it’s been since August 2018. Headline sales figures were held back by slow auto sales, though. Excluding cars, retail sales increased by a strong 0.7 percent in December, the best monthly result since July. Even though these retail sales results were strong, it was the housing sector that truly impressed.

Housing continues to be a bright spot in the economic expansion. Low mortgage rates and high consumer confidence have driven prospective buyers into the market. Existing home sales increased by more than expected during the month, reaching the highest level since February 2018. Even this strong result was likely held back due to lack of supply; existing homes available for sale have declined for seven straight months and are down 8.5 percent year-over-year.

Declining supply is a headwind for potential home buyers, but it has been a boon for builders, who ramped up construction at the end of 2019.

As you can see in Figure 1, housing starts grew dramatically at year-end, reaching post-recession highs. Home builder confidence remains near 20-year highs, driven by buyer foot traffic at levels last seen in 1998. We’ve already begun to feel the positive effects from this building spree on the economy. Residential investment grew at the fastest rate in two years in the fourth quarter, and it was a positive contributor to fourth-quarter gross domestic product growth. The housing sector has an outsize effect on the economy due to the associated knock-on purchases that come with buying a house. So, the rebound we saw at the end of 2019 is very welcome, and we appear to be poised for continued growth in the new year.

Figure 1. Housing Starts 2007–Present

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Economy continues to grow, but risks remain
January showed how important it is to be aware that risks to financial markets can strike suddenly and without warning. The volatility we experienced at month-end was caused in large part by fear of the unknown, which can rock markets at any time.

From an economic perspective, the strong consumer surveys point to future spending growth. As long as consumers remain willing and able to spend, the economic expansion will likely continue, given the importance of the American consumer to overall economic health.

Remember, there is always the potential for suddenly emerging risks to affect markets, even when the economic environment is positive. That’s why a well-diversified portfolio that matches investor goals and time horizons remains the best path forward.

Co-authored by Brad McMillan, managing principal, chief investment officer, and Sam Millette, senior investment research analyst, at Commonwealth Financial Network.

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.

Market Update for the Quarter Ending December 31, 2019

Strong December caps off terrific year for markets
What a difference a year can make. At the end of 2018, markets were selling off due to political concerns, and the year finished on a sour note. But 2019 had a significantly better ending for investors. Markets experienced solid gains in December, capping off an impressive quarter and year. All three major U.S. indices were up for the month; the S&P 500 returned 3.02 percent, the Dow Jones Industrial Average (DJIA) gained 1.87 percent, and the Nasdaq Composite rose 3.63 percent. This positive performance led to a quarterly gain of 9.07 percent for the S&P 500, 6.67 percent for the DJIA, and 12.47 percent for the Nasdaq. The annual figures are even more impressive, with the S&P returning 31.49 percent, while the DJIA and Nasdaq grew by 25.34 percent and 36.69 percent, respectively.

This strong performance came despite weak fundamentals. Per Bloomberg Intelligence, earnings for the S&P 500 fell by 1.2 percent during the third quarter, which marks the second straight quarter with declining earnings. Although this result was disappointing, it was better than anticipated, as analysts originally forecasted a decline of 3.6 percent. Looking forward, analysts expect earnings to decline in the fourth quarter before returning to growth in the first quarter of 2020. Over the long term, fundamentals drive performance, so a return to earnings growth would be a boon for equity markets. From a technical perspective, markets were well supported, with all three indices spending the entire month and quarter above their respective 200-day moving averages.

International markets also had a strong month, quarter, and year, despite suffering from more volatility than their domestic counterparts. The MSCI EAFE Index gained 3.25 percent in December, which contributed to a quarterly gain of 8.17 percent and an annual return of 22.01 percent. The MSCI Emerging Markets Index had a very strong end to the year, gaining 7.53 percent for the month, 11.93 percent for the quarter, and 18.90 percent for the year. From a technical perspective, both the developed and emerging market indices spent time below their trendlines in October, but they recovered and spent November and December comfortably above their 200-day trend lines.

Fixed income had a more challenging month, as rising rates put a damper on returns. The 10-year Treasury yield ended November at 1.78 percent and fell as low as 1.72 percent during the month before finishing December at 1.92 percent. The volatile rate environment caused the Bloomberg Barclays U.S. Aggregate Bond Index to fall by 0.07 percent in December. The index returned 0.18 percent for the quarter and a more impressive 8.72 percent for the year, as long-term rates fell significantly in 2019.

High-yield bonds, which are typically less affected by changes in interest rates, had positive results over the past month, quarter, and year. The Bloomberg Barclays U.S. Corporate High Yield Index returned 2 percent in December, leading to a quarterly gain of 2.61 percent and an annual return of 14.32 percent. High-yield spreads tightened during the course of the year, falling from 5.35 percent at the start of January to 3.60 percent at the end of December.

Economic growth continues
December’s economic updates continued to paint a picture of steady growth for the economy. Third-quarter gross domestic product (GDP) showed the economy growing at an annualized rate of 2.1 percent, which was much better than initial economist estimates of 1.6 percent. This result was also an improvement on the second quarter, when GDP grew at a 2 percent annualized rate. Although third-quarter growth came in below the 3.1 percent growth rate we saw in the first quarter of 2019, this better-than-expected result helped calm concerns of a more serious slowdown for the economy.

The major driver of economic growth in the third quarter was consumer spending, with personal consumption growing at an annualized rate of 3.2 percent during the quarter. Although this is down from the 4.1 percent growth rate in the second quarter, it’s better than initial estimates of 2.9 percent annualized growth.

In addition, data released in December showed that consumer spending continued to grow in the fourth quarter. For example, November’s personal income and spending reports highlighted the strength in spending growth we saw in 2019. The 0.4 percent increase in November’s personal spending marked the ninth straight month of growth, including solid 0.3 percent growth in October. Consumer spending growth was well supported by personal income growth throughout the year as well, indicating that spending increases in 2019 are sustainable as we head into 2020. Spending growth was driven by high consumer confidence, which, in turn, was buoyed by a better-than-expected November jobs report and equity markets setting all-time highs throughout the month.

Looking forward, the three rate cuts from the Federal Reserve (Fed) in 2019 should help spur additional spending growth in the new year. Lowered interest rates allow consumers to spend more, especially on big-ticket items like cars and houses. We’ve already seen the positive effect lowered rates can have on the housing market, which experienced a rebound following a slowdown in 2018 and early 2019.

Rebound in housing marches on
The housing sector of the economy has been one of the bright spots in the current economic expansion over the past two quarters. High consumer confidence and lowered mortgage rates have drawn additional home buyers into the market, driving up sales of both existing and new homes. New home sales have been especially impressive; they hit their highest monthly level since 2007 in November, putting them up more than 18 percent on a year-over-year basis.

Home builders have benefited from the increased demand for housing, with home builder confidence rising to a 20-year high to end the year. As you can see in Figure 1, this is a very impressive rebound following a decline to a three-year low at the end of 2018. Home builders have backed up this increased confidence by building more, with November’s housing starts representing the second-highest monthly level since 2007.

Figure 1. NAHB Housing Market Index, 1999–Present

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Source: National Association of Home Builders

As we saw during the most recent recession, the housing sector can have an outsize effect on the overall economy. So, this turnaround in the second half of 2019 is very encouraging as we head into the new year.

Risks continue to shift
Despite the strength in consumer spending we saw in 2019, very real risks to economic expansion remain. Business confidence continued to disappoint, with both the Institute for Supply Management Manufacturing and Nonmanufacturing indices unexpectedly declining in November. Manufacturing confidence has been especially disappointing, with the index remaining in contractionary territory for the past four months. Business investment has also been weaker than expected, as evidenced by November’s durable goods orders, which fell by 2 percent against expectations for a 1.5 percent increase. Although business confidence and spending were disappointing throughout 2019, there is the potential for a rebound in 2020, given continued progress with the trade talks between the U.S. and China.

Speaking of trade, the announcement of a preliminary “phase one” trade deal between the U.S. and China midmonth was a clear de-escalation in the ongoing trade war, even if the direct economic impact from the agreement may be minimal. At the very least, this agreement shows a willingness from both sides to continue to negotiate and makes additional tariffs seem unlikely for the time being. Although trade war-related risks may have decreased during the month, as we saw throughout 2019, these trade negotiations are a politically charged process that have the potential to affect markets at any time. The ongoing protests in Hong Kong and their increasing relevance in trade talks are an example of the unpredictable nature of this complex situation.

Another major political development in December was the general election in the U.K. Prime Minister Boris Johnson’s Conservative party consolidated power in advance of the January 31 deadline for the U.K.’s formal exit from the European Union. The ongoing negotiations on the terms of this exit will likely continue to serve as a potential source of volatility for international markets as we approach the latest deadline.

Finally, while they have not yet had a direct effect on markets, the ongoing impeachment proceedings in the U.S. still have the potential to create volatility. Previous impeachment proceedings have created short-term market disruptions, so this is certainly something to watch for—especially if a trial in the Senate becomes a drawn-out affair that creates uncertainty for market participants. For the time being, impeachment is not a major driver of volatility for markets, but it may become one in the future and should be monitored.

Better year than expected
All things considered, 2019 was a better year for markets and the economy than expected amid all the doom and gloom at the end of 2018. Strong consumer spending helped power further market gains here at home, even though lowered business investment and confidence remain areas of concern. Compared with where we were last year—with predictions of a recession and markets showing red for the year—2019 turned out much better than expected and puts us in a good position for growth in 2020.

Although we may have experienced a bit of a slowdown earlier in the year, slow growth is still growth and should be welcomed. Looking forward, continued support from the Fed, along with the anticipated return to earnings growth in 2020, should allow for continued market gains. With that being said, real risks to this outlook remain, especially politically. An unexpected result from the ongoing U.S.-China trade talks or further delays to the Brexit process could certainly lead to market volatility.

Despite the potential for future short-term market disruptions, the healthy economic fundamentals should support markets in the new year. Volatility has the potential to cause short-term pain for investors, but a well-diversified portfolio that matches investor goals and time horizons remains the best path forward.

Co-authored by Brad McMillan, managing principal, chief investment officer, and Sam Millette, senior investment research analyst, at Commonwealth Financial Network.

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.

Market Update

Market Update for the Month Ending November 30, 2019

A November to be thankful for
November was another positive month for markets, with each of the three major U.S. indices setting all-time highs on the back of trade optimism, encouraging economic updates, and improving fundamentals. The S&P 500 gained 3.63 percent during the month, and the Dow Jones Industrial Average rose by 4.11 percent. The Nasdaq Composite led the way with a 4.64 percent gain for the month. All three indices have now returned more than 20 percent for the year.

These positive results were supported by improving fundamentals. According to Bloomberg Intelligence, with 95 percent of companies reporting, the blended third-quarter earnings for the S&P 500 declined by 1.3 percent year-over-year. This is far better than initial estimates of a 3.6 percent decline. The positive results were widespread, with 9 of 11 sectors beating their initial estimates. Fundamentals ultimately drive performance over the long term, so this result for the third quarter was welcomed by market participants. Technicals were also supportive for markets, with all three indices spending the entire month comfortably above their respective 200-day moving averages.

Results were mixed internationally. The MSCI EAFE Index gained 1.13 percent during the month, but emerging markets did not fare as well. The MSCI Emerging Markets Index declined by 0.13 percent, as slowing growth in India and rising political risks in Latin America caused volatility. Both indices were well supported technically, spending the entire month above their respective trendlines. This marks the second straight month where the emerging market index finished above its 200-day moving average; it last did so in July.

Fixed income had a more challenging month, with rising rates hindering returns. The 10-year Treasury note finished October with a yield of 1.69 percent and rose as high as 1.94 percent in November before ending the month at 1.78 percent. The Bloomberg Barclays U.S. Aggregate Bond Index lost 0.05 percent. High-yield bonds, which are typically less closely tied to movements in interest rates, fared better, with the Bloomberg Barclays U.S. Corporate High Yield Index gaining 0.33 percent.

Solid month for economic updates
November’s economic updates largely came in better than expected, painting a picture of steady economic growth. The month started on a positive note with the October employment report, which showed 128,000 new jobs against expectations for 85,000. This was an impressive result, given the headwinds from the General Motors strike. September’s results were also revised upward. Despite the positive results over the past couple of months, however, the pace of new job creation sits well below levels seen in 2018.

This slowdown in job growth was one of the primary factors that led the Federal Reserve (Fed) to cut interest rates by 25 basis points at its October meeting. This marked the third straight meeting where the Fed cut interest rates in a bid to lower borrowing costs and spur faster economic growth. The rebound in the housing market and solid consumer spending growth provide evidence that the Fed’s actions have begun to positively affect economic growth.

Housing has been a bright spot for the economy over the past few months, as declining mortgage rates have drawn more potential buyers into the market. Existing home sales increased by 1.9 percent in October, marking the fourth straight month of year-over-year growth. New home sales were just as impressive, reaching a post-recession high over the past two months, as shown in Figure 1. Housing was in an extended rut for much of 2018 and early 2019, so the pickup we’ve seen lately is very encouraging, given the importance of the housing market to the overall economy.

Figure 1. New Home Sales, November 2007–Present

chart

The strength in housing sales is encouraging on its own, but consumers were also willing to spend more in general during the month. Personal spending rose by 0.3 percent in October, up from 0.2 percent growth in September and 0.1 percent in August. This marks the eighth straight month of personal spending growth. October’s retail sales also grew by 0.3 percent, rebounding from a disappointing decline in September. This spending acceleration is a good sign for fourth-quarter growth, as consumer spending has been one of the major drivers of overall economic growth during the year.

Speaking of economic growth, the second estimate of third-quarter gross domestic product growth was released in November. This update showed that the economy grew at an annualized rate of 2.1 percent during the quarter, which is up from the initial estimate of 1.9 percent. This result beats the 2 percent growth rate we saw in the second quarter, with personal consumption remaining the major contributor overall.

Confidence improves in October
The better-than-expected results from the month were supported by rising confidence levels. Consumer confidence, as represented by the University of Michigan consumer sentiment survey, improved for the third straight month, after hitting a three-year low in August. Consumer confidence is driven largely by the strength of the job market and equity performance. So it’s not much of a surprise that we’ve seen improving confidence over the past few months, given the recent employment and equity market results.

Business confidence also improved during the month. The Institute for Supply Management composite index, which measures manufacturer and nonmanufacturer confidence, increased to 54 in October after falling to a three-year low of 52.1 in September. This rebound in October helped calm fears of a sudden drop in business confidence that could lead to a decline in business investment.

Both consumer and business confidence have experienced volatility this year, as political uncertainty has negatively affected confidence levels. Going forward, improving confidence would be a tailwind for future growth, as high confidence tends to support faster spending growth and investment.

Political risks remain real yet muted
Despite the positive results we saw for markets and economic updates last month, political risks have the potential to affect markets at any time. There were a handful of potentially important developments over the past month that should be monitored. Domestically, the continuing impeachment proceedings showcase the potential for political instability, even if markets have so far shrugged off any impact from the now-public hearings.

Internationally, risks remain as well. In the U.K., general elections are scheduled for midmonth. This election is set to dramatically affect Brexit negotiations ahead of the January 31 deadline to get a trade deal hashed out with the European Union. No matter who ultimately wins additional seats in Parliament, this election will serve as a potential source of uncertainty.

China continues to deal with riots in Hong Kong. Violence and rhetoric intensified following local elections that saw pro-democracy candidates dramatically outperforming establishment pro-China candidates. The U.S. added uncertainty in the region by passing a bill supporting pro-democracy protestors near month-end, against which China has pledged to retaliate. Given the new developments, the question of Hong Kong’s autonomy will likely play a large role in the ongoing U.S.-China trade negotiations, complicating an already politically complex situation.

As we saw last month, U.S. markets have recently shown themselves to be resilient against headline-related volatility. There is no guarantee this will last, however. These potential areas of concern will be important to monitor going forward, as an unexpected result could very easily cause further volatility.

Economy remains poised for growth
All things considered, economic fundamentals remain positive, and, in many ways, they improved during the month. Current growth levels suggest the economy is on track for a slow and steady year of growth, with the pickup in third-quarter growth showing the resiliency of the current expansion. The combination of improving confidence and continued support from the Fed helped drive additional consumer spending, which was a major driver of growth earlier in the year. The improvements we saw in business confidence could indicate a rebound in business spending is set to follow, which would be a tailwind for additional growth as we finish out the year.

With that being said, very real risks to markets remain. The ongoing uncertainty from political developments, both at home and abroad, has the potential to cause market volatility. Although markets have shown themselves to be largely resilient to headlines, it is quite possible we will experience some market turbulence if there are negative political developments.

Despite the possibility of future volatility, the strong fundamentals should help support markets, as has been the case for most of the year. Whatever short-term turmoil we may encounter, however, a well-diversified portfolio matched to your risk tolerance remains the best way to meet your financial goals over the long term.

Co-authored by Brad McMillan, managing principal, chief investment officer, and Sam Millette, senior investment research analyst, at Commonwealth Financial Network.

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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Market Update for the Month Ending October 31, 2019

More treats than tricks for markets in October
October was another positive month for markets. Diminishing risks helped drive equity markets near all-time highs. The S&P 500 gained 2.17 percent in October and finished the month at a new record high. The Dow Jones Industrial Average grew by 0.59 percent in October, while the Nasdaq Composite led the way with a 3.71 percent return.

These positive results were supported by better-than-expected earnings during the month. According to Bloomberg Intelligence, the anticipated third-quarter earnings decline for the S&P 500 is 2.1 percent, with 60 percent of companies reporting as of October 31. This is up from estimates of a 3.2 percent decline at the end of September. Further, improvements are widespread, with 8 of the 11 sectors performing better than expected. Fundamentals drive long-term market performance, so this improving third-quarter earnings picture is encouraging. Technicals were also supportive for U.S. markets. All three major indices spent the month above their respective 200-day moving averages, despite some early volatility.

Results were also strong internationally, as receding risk of a “no deal” Brexit buoyed markets. The MSCI EAFE Index increased by a strong 3.59 percent during the month. Emerging markets fared even better, as the MSCI Emerging Markets index climbed 4.23 percent. Technical factors were mixed, however. The MSCI EAFE spent the beginning of October below its 200-day moving average before breaking above the trend line for the rest of the month. Emerging markets took longer to break above the trend but managed to finish the month above this important technical level for the first time since July.

Even fixed income had a solid month, as the Federal Reserve (Fed) cut the federal funds rate by 25 basis points at its October meeting. This marks the third straight meeting where the Fed has cut interest rates, as concerns surrounding lackluster job growth and slowing global trade continue to weigh on board members’ minds. Interest rates rose slightly on the long end of the curve. The 10-year Treasury yield started the month at 1.65 percent and ended at 1.69 percent. The Bloomberg Barclays U.S. Aggregate Bond Index increased by 0.30 percent during the month, and the Bloomberg Barclays U.S. Corporate High Yield Index gained 0.28 percent.

Economic data points to slower growth
The positive returns we saw in October came despite recent data releases that painted a picture of slower overall growth. Annualized third-quarter gross domestic product growth came in at 1.9 percent. This result was down from the 2 percent growth seen in the second quarter and the 3.1 percent growth seen in the first quarter. While slowing overall growth is disappointing, economists had forecast a larger drop to 1.6 percent, so there is some reason for optimism here. This result was driven by stronger-than-expected consumer spending, which offset a slowdown in government spending and business investment.

Consumer spending will likely be the major driver of economic growth in the fourth quarter, as business confidence and spending continue to disappoint. Manufacturer confidence has declined sharply throughout the year, hitting a 10-year low in September. We also saw a decline in the nonmanufacturing sector, which accounts for the lion’s share of economic output. After rebounding in August, the Institute for Supply Management (ISM) Nonmanufacturing index fell to 52.6 in September. The ISM composite index, which aggregates the manufacturing and nonmanufacturing indices, has fallen sharply since reaching a high point in September 2018, as uncertainty from trade wars and various political developments have weighed on business-owner confidence.

Figure 1. ISM Composite Index, 2009–Present

chart

With business confidence declining, it’s no surprise that spending was lackluster as well. Durable goods orders fell by 1.1 percent in September, against expectations for a more moderate decline of 0.7 percent. Industrial production fell 0.4 percent, and manufacturing output fell 0.5 percent. The General Motors strike may be to blame for some of this decline. But the overall trend points toward continued weakness in business confidence and spending for the immediate future.

Consumer confidence rebounds as spending continues
With markets near or at all-time highs and the unemployment rate near a 50-year low, it is not surprising consumer confidence rebounded in October. The University of Michigan consumer sentiment index increased from 93.2 in September to 95.5 in October. Overall, things are going pretty well for consumers, and higher confidence levels should help drive continued spending growth.

In fact, consumer spending increased by 0.2 percent in September, marking the seventh straight month of growth. This result was supported by a 0.3 percent increase in personal income, which has grown in each of the past 12 months. Solid income growth indicates that the personal spending growth we have experienced this year is sustainable.

The housing sector, likewise, has shown positive momentum following a weak start to the year. Existing home sales fell slightly in September. On a year-over-year basis, however, they rose by a healthy 3.9 percent. We have seen year-over-year growth in housing sales for the past 3 months, following 16 straight months of year-over-year declines. The continued growth in housing is encouraging given the effect it can have on other sectors of the economy. And while high consumer confidence and strong balance sheets are certainly factors in this housing turnaround, the Fed deserves some credit too. Mortgage rates have dropped near two-year lows, as the central bank continues to cut rates and support the ongoing economic expansion.

Political risks shift in October
We entered October with concerns about the escalating trade war between the U.S. and China, as well as the risk of a “no-deal” Brexit. Both of these risks receded during the month, however. Plans for a preliminary U.S.-China trade deal are now on the table, and another extension of the Brexit deadline was announced, this time to January 31, 2020. Markets reacted favorably to these receding risks, but new concerns have emerged to take their place.

Domestically, the impeachment inquiry highlights the very real risk impeachment presents to markets. With public hearings set to begin this month, growing uncertainty may cause volatility. Earlier in the month, a surprise withdrawal of U.S. troops from portions of Syria also seized headlines. Markets quickly shrugged off this development, however.

Internationally, new risks have emerged as well. The British elections are now set for mid-December, as the U.K. and the European Union continue to hammer out a Brexit deal. And if trade war tensions ratchet back up or the protests in Hong Kong increase in intensity, we may see additional market volatility.

Short-term risks remain, but fundamentals are solid
Despite politically driven uncertainty, economic fundamentals remain solid in the U.S. While growth appears to be slowing from earlier in the year, slower growth is still growth. Rebounding consumer confidence and continued strong consumer spending indicate the economy is in a better place than the headlines suggest. If business confidence and spending can follow suit, the economy would be poised for accelerated growth.

There are still very real risks out there, however—the ongoing impeachment inquiry in particular. While short-term volatility may be likely given the political risks, the strong fundamentals should continue to support markets. As always, a well-diversified portfolio that matches investors’ goals can provide the best path forward in these uncertain times.

Co-authored by Brad McMillan, managing principal, chief investment officer, and Sam Millette, senior investment research analyst, at Commonwealth Financial Network.

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.

Market Update for the Quarter Ending September 30, 2019

Positive month for markets caps off turbulent quarter

U.S. markets had a positive September, which helped offset volatility earlier in the quarter. The S&P 500 returned 1.87 percent in September and 1.70 percent for the quarter. The Dow Jones Industrial Average performed better, with a 2.05 percent monthly gain and quarterly growth of 1.83 percent. The Nasdaq Composite lagged, with a 0.54 percent monthly gain, taking the index to a 0.18 percent gain for the quarter.

These positive results for the month came despite worsening fundamentals. According to Bloomberg Intelligence (as of September 30, 2019), the S&P 500 is expected to show a year-over-year earnings decline of 3.2 percent for the third quarter. This result is down from the 3 percent decline forecast at the end of August. Although the estimates are negative, earnings season will kick off in earnest midmonth. As such, we’ll have a better picture of the actual results next month. Looking forward, analysts expect 3.3 percent growth in the fourth quarter. This growth could likely help support further market gains. From a technical perspective, all three major U.S. indices were supported, spending the entire month above their respective 200-day trend lines.

International stocks had a strong September. But the month’s positive results did not offset volatility seen earlier in the quarter. The MSCI EAFE Index gained a solid 2.87 percent in September but still had a quarterly loss of 1.07 percent. Emerging markets also gained during the month, at 1.94 percent, but showed a drop of 4.11 percent for the quarter. In both developed and emerging markets, rising political concerns and slowing growth figures weighed on investors.

Technicals were mixed for international stocks. The MSCI EAFE Index for developed international markets fell below its trend line at the start of the month. Still, it recovered and spent the rest of the month above trend. Emerging markets were another story. Here, the index spent the majority of the month below the trend line. September marks the second straight month in which technicals for emerging markets have been a headwind.

Finally, fixed income markets had a tough month. Whipsawing interest rates created volatility, despite the Federal Reserve’s move to cut the federal funds rate by 25 basis points at its September meeting. The 10-year Treasury yield started the month at 1.47 percent. It then rose to a midmonth high of 1.90 percent and finished the period at 1.67 percent. This result is down from the 2.03 percent yield seen at the beginning of the quarter.

The Bloomberg Barclays U.S. Aggregate Bond Index declined by 0.53 percent during the month, on higher rates during that time period. But it rose by 2.27 percent during the quarter, as rates went down. High-yield bonds, which are less affected by interest rate changes, had a better month with a gain of 0.36 percent. This move led the high-yield index to a 1.33 percent gain for the quarter.

Headlines hit markets, but not much
In September, there were many headline-grabbing events. For example, the drone attack on Saudi Arabian oil facilities took out an estimated half of Saudi production capacity. It was a major news story that touched on many sensitive geopolitical concerns. Still, there was no sustained impact on U.S. equity markets. Oil prices did spike as high as 20 percent immediately following the attack. But they ended September well below midmonth highs, as the U.S. and Saudi governments committed to tapping reserves and prioritizing repairs at the damaged facilities. Further, oil prices remain well below levels seen a year ago, and markets seemed to shrug off this event.

The continuing U.S.-China trade war and the slow and steady march toward Brexit also made news in September. The escalated trade war hurt markets in August, but neither story had much influence on markets in September. On the trade war front, new negotiations between the U.S. and China are scheduled for October. This announcement helped drive up equity markets at the beginning of the month. Unfortunately, this bump didn’t last long, as the S&P 500 ended the month below post-announcement highs.

Threats of a no-deal Brexit from British Prime Minister Boris Johnson drove international market volatility in August. But in September? The impact of Brexit on international markets was minimal. Here, developments have moved swiftly over the past month. The British Parliament and Johnson are trying to negotiate a trade deal with the European Union before the October 31 deadline. This situation may be a source of future volatility, especially for internationally developed markets.

Economic fundamentals withstand the risks
The political risks continued to draw attention in September. Nonetheless, many economic releases came in better than expected, with consumer spending continuing to play a key role. August’s retail sales figures beat expectations. Here, we saw 0.4 percent growth against expectations for a 0.2 percent increase. This result marks the sixth straight month of retail sales growth. Consumers have been driving the economic expansion for the past two quarters.

Much of this spending growth appears to be sustainable, which is encouraging. Personal income grew by 0.4 percent in August, which marks the eighth straight month of income growth. There is also some evidence that the tight jobs market is leading to faster wage growth. Indeed, August’s employment report showed wages up 0.4 percent on a monthly basis. Wage growth over the trailing three months is currently at its highest annualized rate in 11 years. This growth bodes well for future consumer spending.

Another key area of strength was the housing sector. It showed solid growth for the second straight month. In September, homebuilder confidence increased to an 11-month high. Here, strong homebuyer demand and low mortgage rates boosted sales. In fact, both new and existing home sales grew by more than expected in August. Existing home sales were especially impressive, with August marking the second straight month of year-over-year growth. As illustrated in Figure 1, existing home sales have struggled to show any year-over-year growth over the past two years. So, these back-to-back solid months are very encouraging.

Figure 1. Existing Home Sales, September 2014–August 2019

chart

Now, let’s move from the consumer to the business side of the economy. Nonmanufacturer confidence saw a solid rebound in August. The service sector accounts for the lion’s share of economic output. So, this result helped calm fears of a slowdown in the service sector and was a very good development. There was even a positive surprise for the manufacturing sector. Manufacturing output rose by a strong 0.5 percent in August, despite a drop in manufacturer confidence during that time.

Beware the risks ahead
Despite the positive fundamentals, risks remain that could have a dramatic effect on markets. Domestically, the beginning of impeachment proceedings at month-end will likely lead to a contentious election cycle. Of course, the direct economic impact from impeachment proceedings is difficult to forecast. But the uncertainty of this situation will likely weigh on consumer and business confidence and spending. Slowing job growth and declining consumer confidence figures are also areas to watch. Both could lead to lowered spending and economic growth.

Abroad, the ongoing U.S.-China trade war and Brexit have the potential to affect markets. As we saw in September, there is no telling what will happen with these politically sensitive issues. Plus, there is no guarantee that markets will react to new developments as expected.

Risks can hit markets at any time. When looking at the sheer number of them, it seems likely that one or more of the recent stories will disrupt markets in the near future. October is known to be a difficult month for markets, which has elevated the concerns.

Even if we do see a pullback, there is still a lot to like about the U.S. economy. These economic strengths should help cushion any market downturn. Consumer spending growth has been healthy this year, and there are few signs of a slowdown in the immediate future. The rebound in service sector confidence and manufacturing output also indicates that the fundamentals may be more resilient than they seem. Again, this strength could help protect against any short-term disruptions.

Ultimately, volatility is possible and may even be likely over the next few months. But the healthy U.S. economic background should help calm fears of a sustained downturn if and when we face market turbulence. As always, a well-diversified portfolio combined with a long-term view toward investing remains the best way forward in an uncertain world.

Co-authored by Brad McMillan, managing principal, chief investment officer, and Sam Millette, senior investment research analyst, at Commonwealth Financial Network.

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.

Market Update for the Month Ending August 31, 2019

Turbulent month for markets
August was a rough one for stocks, with all three major U.S. indices declining during the month. The Dow Jones Industrial Average (DJIA) fell by 1.32 percent, while the S&P 500 lost 1.58 percent. The Nasdaq Composite suffered the heaviest losses, finishing the month down 2.46 percent. Still, things could have been worse. With periods during the month where markets fell by as much as 4 percent to 6 percent, a bounce back at month-end helped stave off larger declines.

Despite the volatility, fundamentals improved in August. According to Bloomberg Intelligence, S&P 500 earnings grew by 2.2 percent in the second quarter. This result was up from the 0.8 percent estimated growth rate on July 31 and was driven by strong earnings growth in the health care and communication sectors. As we know, fundamentals drive long-term performance. So, the growth in the second quarter is encouraging.

From a technical perspective, all three major U.S. indices finished the month above their respective 200-day moving averages. The S&P 500 and Nasdaq Composite both spent the month above their trend lines. But this was not the case with the DJIA. It fell below its 200-day moving average for two days midmonth. The index recovered, although it came close to breaching its trend line again the following week. A sustained drop below the 200-day moving average could mean a shift in investor sentiment for an index. As such, it was a positive sign that the DJIA was able to recover both times it neared its trend line.

International markets also had a volatile August, as political concerns weighed on investors. The MSCI EAFE Index fell by 2.59 percent. Here, negative developments surrounding Brexit and a slowdown in key eurozone countries caused uncertainty. Emerging markets had an even worse month. The MSCI Emerging Markets Index fell 4.85 percent. Slowing growth figures from China and political uncertainty in South America contributed to the index’s decline. Technicals were also not supportive for international stocks. Both indices spent most of the month below their 200-day moving averages.

On a brighter note, investment-grade fixed income had a strong month. Investors flocked to the relative safety of high-quality bonds, driving prices up and yields down. The 10-year Treasury yield started the month at 1.90 percent and declined to 1.50 percent by month-end. This drop helped the Bloomberg Barclays U.S. Aggregate Bond Index return 2.59 percent for the month. High-yield bonds also had a solid month. The Bloomberg Barclays U.S. Corporate High Yield Index returned 0.40 percent in August.

Political risks take center stage
Political developments dominated the headlines in August. Let’s start with the continued escalation of the U.S.-China trade war. The month started with an announcement from President Trump of a new 10 percent tariff on $300 billion of imports from China. Then, the U.S. labeled China a “currency manipulator.” This move was in response to the yuan-dollar exchange rate climbing above 7 yuan to the dollar for the first time since 2008. China answered by announcing its own tariffs on select U.S. goods and halting all purchases of U.S. agriculture by Chinese companies.

The escalation of the U.S.-China trade war was a big story, but it wasn’t the only one. President Trump continued his attacks on the Federal Reserve (Fed) and Chairman Jerome Powell. The president questioned whether the Fed should be more aggressive in cutting interest rates. Further, markets were rattled when President Trump tweeted that American companies should remove themselves from China. He also asked whether Powell or Chinese President Xi Jinping was a “bigger enemy.” Finally, there were growing Brexit risks to consider. The prospect of Great Britain crashing out of the European Union without a deal hit international markets hard. Of course, this move would affect Europe the most. But markets around the world sagged on fears of what this departure might mean for global growth.

Economy continues to grow
To be sure, political headlines knocked down markets in August. Still, the U.S. economic picture remained positive, driven by continued strength in consumer spending. July’s retail sales figures came in much better than anticipated. Here, we saw 0.7 percent growth against expectations for 0.3 percent. Core sales came in even better, with 0.9 percent monthly growth. After suffering a slowdown at the end of 2018, consumer spending was a major driver for second-quarter growth. As such, these strong results are encouraging for economic growth in the third quarter.

Strong consumer spending in the second quarter led to economic growth that was better than expected. The first estimate of second-quarter gross domestic product growth came in at 2.1 percent on an annualized basis. This result is down from the 3.1 percent pace we saw in the first quarter, but it is higher than consensus estimates for a 1.8 percent growth rate. Personal consumption, which grew at a 1.1 percent annualized rate in the first quarter, jumped to a 4.3 percent growth rate in the second quarter.

Spending was supported by high consumer confidence levels. The Conference Board Consumer Confidence Index fell from 135.8 in July to 135.1 in August. Given market volatility, this result was better than economists expected. Plus, it is a very high level historically. As you can see in Figure 1, consumers were especially optimistic over the current state of the economy. The present situation part of the index hit levels last seen in the boom of the late 1990s.

Figure 1. Consumer Confidence Present Situation Index, 1999–2019

chart

Another positive sign could be found in consumer sentiment and spending. Strength here was enough to bring back signs of life to the housing market. For the past two years, housing growth has been disappointing. Rising prices and lack of supply in some regions have limited sales. But July’s existing home sales report provided some hope for housing growth. It showed sales increased on a year-over-year basis for the first time since February 2018. Lower rates likely played a part in this increase in sales, as mortgage applications jumped in June when rates fell in May.

Of course, it is too early to say whether housing growth is here to stay. But this increase was a positive development. Housing is an area of the economy that has a large effect on growth, due to the spending related to buying a home. Going forward, we may be poised for further housing growth. Indeed, we saw another spike in mortgage applications in August as rates fell.

Business data a mixed bag
Consumer data was strong for the month, but businesses were not as confident. The Institute for Supply Management (ISM) Manufacturing and Nonmanufacturing indices declined during the month. Here, trade-related uncertainty weighed on business confidence. July’s industrial production report highlighted manufacturers’ worries over trade. Manufacturing output fell by 0.4 percent during the month. This drop led industrial production to a 0.2 percent loss, against expectations for a slight gain. Unless trade tensions diminish and international demand for U.S. goods returns, it may be difficult for manufactures to grow at higher rates.

Confidence and production were down during the month, but durable goods orders were better than expected. This proxy for business investment came in with 2.1 percent month-over-month growth in July. Still, this news wasn’t as positive as it appears. Much of this growth was due to an increase in volatile aircraft orders. Core durable goods orders, which strip out transportation orders, fell by 0.4 percent. This result indicates that the month’s decline in business confidence may have slowed business spending and investment.

Risks remain but fundamentals are solid
As we saw in August, politics and headlines can hurt markets in the short term. But a solid economy can cushion those declines, and there is a lot to like about the U.S. economy. Despite the uncertainty created by volatile trade developments, consumer confidence and spending levels remain high. At more than two-thirds of the economy, consumer spending is the most powerful factor in the economy. It can continue to power the economic expansions here at home. The return to year-over-year growth in existing home sales is just one example of this.

Looking forward, one of the primary areas of concern will be the unresolved nature of the U.S.-China trade war. We will want to keep a close eye on the impact that uncertainty may have on business confidence and spending. Recently, consumers have been able to keep the economy rolling. But there may be a limit to how much they can do, especially if we see a large drop in consumer confidence. So, an acceleration in business spending would be a welcome development.

Abroad, the looming Brexit deadline and slowing growth in the eurozone could lead to volatility. British Prime Minister Boris Johnson’s attempts to shut down Parliament highlight the type of contentious developments we can expect from that process.

Here at home, the 2020 presidential cycle continues. The Democratic field is being narrowed down before the Democratic primary elections. Given the polarized nature of political discourse in this country, these elections may become a source of future volatility.

As we’ve seen many times this year, volatility can strike suddenly and be caused by a variety of factors. Given the risks discussed here, it is likely that we will see further volatility this year. But even if we do, the fact that the fundamentals of the economy remain solid should help serve as a cushion against any stumbles. As always, a well-diversified portfolio and a long-term view toward investing remain the best way forward in a volatile world.

Co-authored by Brad McMillan, managing principal, chief investment officer, and Sam Millette, senior investment research analyst, at Commonwealth Financial Network.

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.

Market Update for the Month Ending July 31, 2019

Positive July for U.S. markets
Markets had a solid start to the third quarter, with all three major U.S. indices showing gains for July. The S&P 500 returned 1.44 percent during the month, the Dow Jones Industrial Average rose by 1.12 percent, and the Nasdaq Composite gained 2.15 percent.

This positive performance was supported by better-than-expected earnings results. According to Bloomberg Intelligence, companies in the S&P 500 have been outperforming analyst estimates for the second quarter. As of July 31, with 60 percent of companies reporting, year-over-year earnings growth sits at 0.8 percent for the quarter. This result is much stronger than the 2.2 percent decline that was forecast at the start of earnings season in mid-July. Ultimately, fundamentals drive long-term market performance, so this positive surprise for the second quarter is encouraging.

Technicals for all three major U.S. indices were supportive during the entire month of July. All three indices stayed well above their respective 200-day moving averages.

Although U.S. markets had a positive July, international markets pulled back. The MSCI EAFE Index declined by 1.27 percent. Here, concerns surrounding a slowdown in global trade worried investors. The story was much the same for emerging markets. The MSCI Emerging Markets Index was down 1.14 percent for the month. Technicals for both developed and emerging markets remained supportive. In fact, July marks the second straight month that both indices finished the month above their respective 200-day moving averages.

Fixed income had a solid month. The Bloomberg Barclays U.S. Aggregate Bond Index returned 0.22 percent in July. Interest rates declined on the short and long ends of the curve during the month, driving this appreciation. The 1-month Treasury started the month at 2.17 percent and fell to 2.01 percent by month-end. The 10-year Treasury, on the other hand, started July at 2.03 percent and finished with a yield of 2.02 percent.

These declines were driven by the Federal Reserve’s (Fed’s) decision to cut the federal funds rate from a high of 2.50 percent to a high of 2.25 percent at its July meeting. This marks the first time the Fed has cut rates since December 2008. At his postmeeting press conference, Fed Chairman Jerome Powell indicated that future rate cuts are possible—but not guaranteed.

High-yield fixed income also had a positive month. The Bloomberg Barclays U.S. Corporate High Yield Index returned 0.56 percent in July. High-yield spreads declined slightly during the month. Still, they remain well above the lows we saw for much of 2018. As the Fed shifts to a more supportive role for risk assets, there is a chance that spreads could continue to decline going forward.

Consumer spending drives economic growth
In general, the economic data released in July came in better than expected. It showed growth picking up in key areas of the economy. Consumer spending data was especially positive, with 0.7 percent growth in June’s core retail sales. This result capped off a strong quarter for consumer spending, which helped calm fears of a slowdown in economic growth.

Strong consumer spending in the second quarter led to economic growth that was better than expected. The first estimate of second-quarter gross domestic product growth came in at 2.1 percent on an annualized basis. This result is down from the 3.1 percent pace we saw in the first quarter, but it is higher than consensus estimates for a 1.8 percent growth rate. Personal consumption, which grew at a 1.1 percent annualized rate in the first quarter, jumped to a 4.3 percent growth rate in the second quarter.

Increasing consumer confidence supported consumer spending during the month. The Conference Board Consumer Confidence Index was especially impressive. It jumped from 124.3 to 135.7 in July. This is the single largest monthly increase in more than seven years. The index now sits near highs last seen in late 2018, as you can see in Figure 1.

Figure 1. Conference Board Consumer Confidence Index, 1999–2019

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A combination of factors was behind this increase in consumer confidence, but one of the primary drivers was the strong June jobs report. There were 224,000 new jobs added in June, against expectations for 160,000. The underlying data was solid as well. Annual wage growth came in at 3.1 percent, and unemployment remained near 50-year lows.

Potential areas of concern remain
Although consumer confidence and spending growth data came in stronger than expected, it was a different story for businesses. The Institute for Supply Management Manufacturing and Nonmanufacturing indices both declined during the month. In fact, the Manufacturing index fell to two-year lows. These drops show slowing global trade is starting to affect business owner confidence. Despite the declines, both indices remain in expansionary territory. Going forward, we are unlikely to see accelerated manufacturing growth in the second half of the year, unless trade picks up notably.

Although business confidence declined during the month, business spending data was a bit more mixed. Durable goods orders rose by 2 percent in June, beating expectations for 0.7 percent growth. This surprising increase was welcome, but it follows a 1.3 percent decline in orders in May. Despite the uptick in June, business investment declined for the quarter. As such, this will be an important area of the economy to watch going forward.

Another key area of the economy to keep an eye on is housing. Existing home sales fell by 1.7 percent in June, against expectations for a more modest decline of 0.4 percent. This marks the 16th straight month of year-over-year declines in existing home sales. There had been some hope for faster sales growth due to declining mortgage rates and a surge of mortgage applications in May. Unfortunately, those hopes failed to materialize in the face of rising prices and lack of supply in some regions.

Shifting policy risks
There were many policy and political updates in July. Here in the U.S., the major story was the Fed’s decision to cut the federal funds rate by 25 basis points at the end of the month. This measure, combined with the early end of the Fed’s balance sheet reduction plan, indicates that the Fed is becoming more supportive of the economy. With lowered interest rates, borrowing costs should decrease for individuals and businesses. In turn, reduced costs should lead to faster growth going forward.

Another key development was the compromise reached by Congress and the White House to pass a budget increasing government spending and suspending the debt ceiling for the next two years. The passage of this bill was a positive outcome for markets as it eliminated a potential source of politically motivated uncertainty for the time being. Further, it prevented another government shutdown as we head toward the 2020 election cycle.

Internationally, the risk of the UK leaving the European Union without a trade deal increased. Theresa May stepped down as leader of the British government. She was replaced by Boris Johnson. A vocal proponent for Brexit, Prime Minister Johnson has stated that he will lead the British exit from the EU by the October 31 deadline, whether there is a trade deal in place or not. Currently, neither side is showing signs of backing down, so this could be an ongoing source of volatility for international markets over the next few months.

Steady economic growth in the face of global slowdown
Risks remain both abroad and at home, but the economic picture is positive. Better-than-expected economic data released during the month shows that American consumers are still willing and able to spend, despite a slowdown in global economic activity. With improving fundamentals, a supportive Fed, and the passage of the budget and debt limit compromise bill, markets could continue on the upward march that we’ve seen for much of the year.

With that being said, there are still potential areas of concern that should be watched. The slowdown in global trade is starting to affect business confidence and could have an even larger effect on markets going forward. Political risks can also pop up at any time. As always, a well-diversified portfolio that pairs an investor’s goals and time horizon is the best path forward in this uncertain world.

Co-authored by Brad McMillan, managing principal, chief investment officer, and Sam Millette, senior investment research analyst, at Commonwealth Financial Network.

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.

Market Update for the Quarter Ending June 30, 2019

Strong June leads to positive quarter for markets
June was a great month for stocks, as all major equity markets saw positive returns. The S&P 500 gained 7.05 percent for the month, the Dow Jones Industrial Average (DJIA) returned 7.31 percent, and the Nasdaq Composite rose by 7.51 percent. Further, June’s gains offset May’s declines, leading to positive quarterly performance of 4.30 percent for the S&P 500, 3.21 percent for the DJIA, and 3.87 percent for the Nasdaq.

This positive performance came despite weakening fundamentals. According to FactSet (as of June 28, 2019), the estimated earnings decline for the S&P 500 in the second quarter is 2.6 percent. This estimate is down from the 0.5 percent decline projected at the start of the quarter. Keep in mind that earnings declined in the first quarter for the first time since 2016. As such, this projected earnings decline for the second quarter in a row is concerning. Analysts project further declines in the third quarter before a return to growth in the fourth quarter. Ultimately, fundamentals drive long-term performance, so this is an area that deserves attention going forward.

Although fundamental support worsened during the month, technical factors were another story. In May, all three major U.S. indices dropped below their respective 200-day moving averages. But they bounced back in June to close the month well above that trend line. This bounce was an important development, as long periods spent below the 200-day moving average could show that investors are becoming less confident in U.S. equities. In turn, this lack of confidence could be a headwind to future performance.

The international story in June was much the same. The MSCI EAFE Index returned 5.93 percent, and the MSCI Emerging Markets Index returned 6.32 percent. Once again, these gains offset losses in May, bringing the MSCI EAFE Index to a 3.68 percent gain for the quarter. The MSCI Emerging Markets Index, which fell further than the developed markets in May, ended the quarter with a 0.74 percent gain.

Technicals for international stocks were supportive during the month. The developed and emerging market indices finished June above their respective 200-day moving averages. These indices had ended May below their trend lines, so this rise was a very positive development, like what we saw in U.S. equity markets.

Even fixed income had a positive June, driven by falling interest rates. The Bloomberg Barclays U.S. Aggregate Bond Index returned 1.26 percent, as the 10-year U.S. Treasury yield went from 2.14 percent at the end of May to 2 percent at the end of June. In fact, rates fell throughout the quarter, as the 10-year yielded 2.49 percent at the start of April. These declining rates led the index to a quarterly gain of 3.08 percent.

High-yield bonds also had a strong month and quarter. The Bloomberg Barclays U.S. Corporate High Yield Index returned 2.28 percent in June and 2.50 percent for the quarter. High-yield spreads ended the quarter unchanged despite a large increase in May, as the rally in June helped drive spreads lower.

Economic growth: Slowing but still growing
The fall in yields was due in large part to rising worries about economic growth. Only 75,000 new jobs were added in May. This result was below expectations of 175,000 and below the 2018 average of 215,000 new jobs per month. This disappointing number suggests that job growth is slowing.

Workers have begun to notice that new jobs are not as plentiful as they have been in years past. We saw this recognition in the declines in both major measures of consumer confidence in June. Positive market returns and a strong jobs market support consumer confidence. A decline in confidence—despite the strong market returns—indicates that workers may be starting to worry. That said, confidence remains at high levels, so this month’s drop is not an immediate concern.

Although confidence may be down, it has not yet hit actual behavior or economic growth. In fact, consumers kept earning and spending. Personal income and personal spending were up by 0.5 percent and 0.4 percent, respectively, in May. Retail sales also grew by a healthy 0.5 percent.

Businesses had a similar quarter, with some spending growth despite mixed confidence indicators. The Institute for Supply Management (ISM) Manufacturing index declined during the quarter. This drop reflects manufacturers’ growing concerns over a prolonged trade war. As you can see in Figure 1, the index is now at its lowest level in more than two years.

Figure 1. ISM Manufacturing Index, 2014–Present

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Despite the decline in sentiment, business investment and output continued to show steady growth. May’s industrial production report showed a 0.4 percent gain. This result was better than economist expectations. Core durable goods orders, a proxy for business investment, showed solid 0.3 percent growth in May. These results suggest the sector may be doing better than the sentiment indicates. The ISM Nonmanufacturing index was also positive. It held on to a higher level, suggesting that manufacturing was not a reflection of weakness in the economy as a whole.

The mixed confidence data was disappointing, but business investment continues and should have a positive impact on economic growth.

Fed continues to support economic expansion
Another tailwind came from monetary policy. In a press conference after the Federal Reserve’s June meeting, Chairman Jerome Powell indicated that the Fed would continue to watch for any negative economic impacts from the ongoing trade war. Further, he said the Fed would step in with stimulative measures if necessary.

Powell stopped short of saying that the Fed would cut rates at its next meeting. Still, market participants interpreted his comments as confirming the likelihood of a cut this year. At the start of the quarter, markets priced in a 65 percent chance of one rate cut during the year. Now, at the end of the quarter, the market has priced in a 100 percent chance of a rate cut at the Fed’s July meeting. Further, a second rate cut in either October or December is anticipated.

Inflation remains stuck below the Fed’s stated 2 percent target. But with slowing job growth and the rising concern around trade, a rate cut is certainly possible—and could be another tailwind for stocks.

Political risks remain
Although the economy continued to chug along, politics remained a concern, especially around trade. This impact was clear in May, when a couple of events rattled markets. First, we saw escalations in the China-U.S. trade war. Second, we had the surprise announcement of a blanket 5 percent tariff on all Mexican goods, although they never went into effect. On a more positive note, the G20 meeting at the end of June was drama free. World leaders toned down political rhetoric leading up to and during the meeting. This relative lack of political drama, along with a commitment for further trade negotiations between the U.S. and China, helped calm investor concerns and paved the way for June’s positive performance.

Economic growth poised to continue
All in all, this was a positive quarter for the U.S. economy. Despite concerns over international trade, the economy continues to grow at a solid clip. Consumers continue to show that they are willing and able to spend, and businesses are doing the same. Earnings declined in the first quarter and will likely do so again in the second quarter, but a return to growth by year-end should help support long-term performance.

Lower interest rates should support faster growth going forward, as lowered borrowing costs spur economic activity. We saw a surge in mortgage applications once rates fell in June. If rates remain low, there is a possibility that we could see housing growth return in the second half of the year.

Despite the very real political risks, the U.S. economy continues to grow. Markets have had a great start to 2019. Equities saw positive returns in five of the first six months of the year. These strong returns led all three major indices to double-digit year-to-date returns. There is a good chance that trend will continue. That said, the declines in May show that despite the positive tailwind from a growing economy, market volatility can come at any time. Thus, a well-diversified portfolio that matches your goals and risk tolerance remains the best way forward in a volatile world.

Co-authored by Brad McMillan, managing principal, chief investment officer, and Sam Millette, senior investment research analyst, at Commonwealth Financial Network.

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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