Presented by Mark Gallagher

General Market News
• Treasury yields steepened again last week. The 10-year opened at 0.75 percent and reached an intraday high of 0.87 percent on Friday before closing at 0.84 percent. It gave back 3 basis points (bps) this morning, opening at 0.81 percent. (The 30-year opened at 1.61 percent and the 2-year opened at 0.15 percent.) The 30-year gained 11 bps last week as the potential of stimulus packages near the election continued to be discussed.
• U.S. large-cap indices sold off as we saw underwhelming earnings reports from Intel and IBM. Intel shares came under pressure, with analysts continuing to express concerns over the firm’s production for its next generation 7-nanometer chipset, an issue first raised last quarter. IBM reported a spin-off of its managed infrastructure services business as it looks to focus on cloud services. The two stocks were down 11 percent and 7.9 percent, respectively. Other technology stocks, such as Apple and Microsoft, also underperformed. The worst-performing sectors were technology, consumer staples, and real estate investment trusts. The top-performing sectors were communication services, utilities, and financials as a steepening of the yield curve, supported by potential stimulus, showed a chance of brighter days ahead for banks hurt by lower rates.
• On Tuesday, September’s Consumer Price Index report was released. Consumer prices rose by 0.2 percent, in line with economist expectations and down from a 0.4 percent increase in August. Year-over-year, consumer inflation rose by 1.4 percent, as expected. Core consumer prices, which strip out the impact of volatile food and energy prices, rose by the expected 0.2 percent during the month and 1.7 percent year-over-year. Although lockdowns created deflationary pressure earlier in the year, reopening efforts led to an uptick in inflationary pressure throughout the summer. Despite the tailwind created by increased consumer demand, overall prices remain constrained, and the slowdown in September’s consumer inflation indicates the tailwind appears to have faded.
• The Producer Price Index for September was released Wednesday. Unlike consumer prices, producer prices increased by more than expected, albeit at a slower pace than consumer inflation. Producer prices rose by 0.4 percent, against calls for a 0.2 percent increase. This brought the year-over-year rate of producer inflation up to 0.4 percent, marking the first time producer inflation has been positive year-over-year since March. Core producer inflation, which strips out food and energy prices, also rose by more than expected, up 0.4 percent during the month and 1.2 percent for the year, against forecasts for more modest 0.2 percent and 1 percent growth, respectively. Despite the moderate pickup in inflation since reopening efforts began, inflation still remains well below the Federal Reserve’s (Fed’s) stated 2 percent target, and the Fed is not expected to react to rising inflation by raising rates until and unless the job market improves considerably.
• We finished the week with Friday’s release of the September retail sales report. Sales impressed, rising by 1.9 percent against calls for a more modest 0.8 percent increase. This marks the best month of sales since June and signals consumers were willing and able to continue spending despite expired government stimulus. Core retail sales, which strip out the impact of volatile auto and gas sales, also impressed, with a 1.5 percent increase against calls for a 0.5 percent increase. The gains were widespread, with traditional back-to-school categories and recreational goods showing notable strength. This strong report bodes well for third-quarter growth, given the importance of consumer spending on the overall economy.

  Source: Bloomberg, as of October 23, 2020

  Source: Morningstar Direct, as of October 23, 2020

What to Look Forward To
On Monday, September’s new home sales report was released. The pace of new home sales declined by 3.5 percent, from an annualized rate of 994,000 in August to 959,000 in September, against estimates for an increase to 1.03 million. Despite the modest decline, the pace of new home sales is up more than 33 percent year-over-year and remains well above pre-pandemic levels. The September slowdown in sales was likely due in large part to inventory being near record lows. New home sales are a smaller and often more volatile portion of the overall market compared with existing home sales. Accordingly, the modest pullback is nothing to worry about, especially given the strong rebound in overall housing sales since reopening efforts took hold.

September’s durable goods orders report is set to be released on Tuesday. Durable goods orders are expected to rise by 0.6 percent during the month, following a 0.5 percent increase in August. Core durable goods, which strip out the impact of volatile transportation orders, are set to rise by 0.3 percent. Core durable goods are often used as a proxy for business investment, so continued growth here would be a positive sign during the quarter. Although durable goods orders have recovered since reopening efforts took hold, work remains to return to pre-pandemic levels. The overall level of orders was down more than 5 percent in August compared with the most recent high reached in February. If estimates hold, this report would signal that business investment during the quarter was a net positive for overall third-quarter economic growth.

Tuesday will also see the release of the Conference Board Consumer Confidence Index for October. This widely followed measure of consumer confidence is expected to remain flat at 101.8. The index saw its largest increase in 17 years in September, so a neutral month in October would be understandable. Historically, improving consumer confidence levels support faster spending growth, so any improvement here would certainly be welcome. Despite the rebound in confidence we’ve seen since reopening efforts kicked off, we have a long way to go to return confidence to the pre-pandemic high of 132.6 recorded in February.

On Thursday, we’ll receive our first look at third-quarter gross domestic product growth. Economists are forecasting a 32 percent annualized increase in economic output during the quarter, following a 31.4 percent annualized decline in the second quarter. Rising personal consumption is expected to be the major driver of this growth. Predictions are for consumption to rise by 38.9 percent on an annualized basis, after declining by 33.2 percent in the second quarter. Business investment and government spending are expected to contribute to economic growth, while foreign trade should serve as a minor headwind. Although a rebound in economic activity would certainly be welcome, it’s important to note that this report looks backward. The anticipated growth in the third quarter would not be enough to offset the declines in activity seen in the second quarter.

Thursday will also see the release of the weekly initial jobless claims report for the week ending October 24. Economists expect to see an additional 788,000 initial unemployment claims filed during the week, which would be a slight increase from the 787,000 initial claims recorded the week before. After peaking in late March, the pace of layoffs has shown signs of improvement over the course of the pandemic; nonetheless, claims remain stubbornly high. Given the continued high level of weekly claims and the slowing pace of new job creation, we could see a drop in overall employment in October, which would mark the first monthly decline since April. With the labor market lagging other sectors in the recent recovery, these weekly releases will continue to be closely monitored by economists.

September’s personal income and personal spending reports will be released Friday. Personal spending is expected to rise by 1 percent during the month, following a 1 percent increase in August. Previously released retail sales data for September showed surprising strength in spending on goods, which should offset weak spending on services. Incomes are expected to rise by 0.3 percent during the month, following a 2.7 percent decline in August. Personal incomes have been very volatile throughout the pandemic, driven in large part by shifting government stimulus and unemployment benefit payments. Overall, if estimates hold, this update would be a solid confirmation of the resilience of consumer spending in September.

Finally, we’ll finish the week with Friday’s release of the second and final reading of the University of Michigan consumer sentiment survey. The preliminary estimate released earlier in the month showed the index rising by more than expected, from 80.4 in September to 81.2 in October, against calls for a move to 80.4. Economists expect the index to remain unchanged from the preliminary estimate, which would mark the third consecutive month with increased confidence. Still, despite expectations for the index to stay at a seven-month high in October, it will be far from the high of 101 it reached in February. This fact highlights the work that needs to be done to get consumer sentiment back to pre-pandemic levels.

Disclosures: Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. All indices are unmanaged and are not available for direct investment by the public. Past performance is not indicative of future results. The S&P 500 is based on the average performance of the 500 industrial stocks monitored by Standard & Poor’s. The Nasdaq Composite Index measures the performance of all issues listed in the Nasdaq Stock Market, except for rights, warrants, units, and convertible debentures. The Dow Jones Industrial Average is computed by summing the prices of the stocks of 30 large companies and then dividing that total by an adjusted value, one which has been adjusted over the years to account for the effects of stock splits on the prices of the 30 companies. Dividends are reinvested to reflect the actual performance of the underlying securities. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a market capitalization-weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index. The Bloomberg Barclays US Aggregate Bond Index is an unmanaged market value-weighted performance benchmark for investment-grade fixed-rate debt issues, including government, corporate, asset-backed, and mortgage-backed securities with maturities of at least one year. The U.S. Treasury Index is based on the auctions of U.S. Treasury bills, or on the U.S. Treasury’s daily yield curve. The Bloomberg Barclays US Mortgage Backed Securities (MBS) Index is an unmanaged market value-weighted index of 15- and 30-year fixed-rate securities backed by mortgage pools of the Government National Mortgage Association (GNMA), Federal National Mortgage Association (Fannie Mae), and the Federal Home Loan Mortgage Corporation (FHLMC), and balloon mortgages with fixed-rate coupons. The Bloomberg Barclays US Municipal Index includes investment-grade, tax-exempt, and fixed-rate bonds with long-term maturities (greater than 2 years) selected from issues larger than $50 million.

Mark Gallagher is a financial advisor located at Gallagher Financial Services at 2586 East 7th Ave. Suite #304, North Saint Paul, MN 55109. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 651-774-8759 or at mark@markgallagher.com.
Authored by the Investment Research team at Commonwealth Financial Network.

© 2020 Commonwealth Financial Network ®

Presented by Mark Gallagher

General Market News
• Treasury yields experienced heightened volatility during the shortened holiday week. The 10-year opened at 0.76 percent, dropped to as low as 0.68 percent by Wednesday, and spiked right back up to 0.76 percent this Monday morning. (The 30-year opened at 1.56 percent and the 2-year at 0.14 percent.) Many factors are affecting yield markets, including supply, governmental spending, the upcoming election, and a possible stimulus package. Other factors are in play, too, including the economy, the Federal Reserve (Fed), and COVID-19 and its related repercussions.
• Large-cap U.S. indices posted modest gains last week. Trading was largely specific to stimulus talks and individual leader performance in certain sectors. Top-performing sectors were industrials, communication services, utilities, technology, and consumer staples. Lagging sectors were real estate investment trusts, energy, financials, and health care. Examples of the mixed trading included an uptick in machinery (Caterpillar) and parcel and logistics (FedEx), offset by weakness in airlines. Communication services and technology were supported by gains in Google and Apple. Consumer staples also saw a pickup in big box retailers Costco and Walmart. The travel and leisure segment moved lower as United Airlines posted greater losses than expected. In addition, we saw lack of enthusiasm from the House of Representatives for a stand-alone airline stimulus package. Health care underperformed as Eli Lilly and Johnson & Johnson paused their coronavirus drug trials.
• On Tuesday, September’s Consumer Price Index report was released. Consumer prices rose by 0.2 percent, in line with economist expectations and down from a 0.4 percent increase in August. Consumer inflation rose by 1.4 percent year-over-year, as expected. Core consumer prices, which strip out the impact of volatile food and energy prices, rose by the expected 0.2 percent during the month and 1.7 percent year-over-year. The lockdowns created deflationary pressure earlier in the year, but reopening efforts led to an uptick in inflationary pressure throughout the summer. Despite the tailwind created by increased consumer demand, however, overall prices remain constrained, and the slowdown in consumer inflation indicates the tailwind may have faded.
• The Producer Price Index for September was released on Wednesday. Producer prices increased by more than expected—albeit at a slower pace than consumer inflation—rising by 0.4 percent against calls for a 0.2 percent increase. This brought the year-over-year rate of producer inflation up to 0.4 percent, marking the first time producer inflation has been positive on a year-over-year basis since March. Core producer inflation, which strips out food and energy prices, also rose by more than expected, up 0.4 percent during the month and 1.2 percent for the year against forecasts for more modest 0.2 percent and 1 percent growth, respectively. Despite the moderate pickup in inflation we’ve seen since reopening efforts began, inflation remains well below the Fed’s stated 2 percent target, and the Fed is not expected to react to rising inflation by raising rates until the job market improves considerably.
• We finished the week with Friday’s release of the September retail sales report. Sales impressed, rising by 1.9 percent against calls for a more modest 0.8 percent increase. This result marks the best month of sales since June and signals that consumers were willing and able to continue spending despite expired government stimulus. Core retail sales, which strip out the impact of volatile auto and gas sales, also impressed, with a 1.5 percent increase during the month against calls for a 0.5 percent increase. The gains were widespread, with traditional back-to-school categories and recreational goods showing notable strength. This strong report bodes well for third-quarter growth, given the importance of consumer spending on the overall economy.

Source: Bloomberg, as of October 16, 2020

Source: Morningstar Direct, as of October 16, 2020

What to Look Forward To
We started the week with Monday’s release of the National Association of Home Builders Housing Market Index for October. This measure of home builder confidence increased by more than expected, rising from 83 in September to 85 in October against calls to remain unchanged. This gain brought the index to a record high, breaking the previous mark set in September. Home builder confidence has rebounded notably since reopening efforts took hold, aided by record-low mortgage rates that have driven additional prospective home buyers into the market. Confidence was further supported by falling timber prices during the month. Previously, the pace of new home sales hit its highest level in 14 years in August. Historically, higher levels of home builder confidence have supported faster building of new homes, so this report bodes well for October’s new home construction reports.

Speaking of new home construction, the September building permits and housing starts reports are set to be released on Tuesday. Both measures are expected to show growth, with permits and starts slated to increase by 3.2 percent and 2.4 percent, respectively. As noted above, home builder confidence set a new all-time high in September, which helps explain the anticipated increases in new home construction. Furthermore, lumber prices have dropped considerably compared with prices earlier in the summer, which should serve as an additional tailwind for new construction. Driven by rising home builder confidence, falling mortgage rates, and limited supply, building permits and housing starts have improved markedly since hitting a pandemic-induced low in April.

On Thursday, the weekly initial jobless claims report for the week ending October 17 will be released. Economists expect to see an additional 848,000 initial claims filed during the week, down from the 898,000 claims filed the previous week but still very high on a historical basis. If estimates hold, this report would mark seven consecutive weeks in which initial claims have hovered around 850,000 per week, roughly four times the average we saw in 2019. Continuing unemployment claims are also expected to decline, but some of the anticipated drop can be attributed to claimants exhausting their state benefits and going on federal emergency pandemic aid rather than returning to the workforce. Given the continued stress on the labor market, this weekly update will continue to be widely followed.

We’ll finish the week with Thursday’s release of the September existing home sales report. Existing home sales are expected to rise by 3 percent, following a 2.4 percent increase in August. The pace of existing home sales has already surpassed pre-pandemic levels, and, if the estimate holds, would be up more than 14 percent compared with last September. September would mark the best month for existing home sales since December 2006, highlighting the impressive rebound we’ve seen in the housing sector over the past few months. Looking forward, the low level of available inventory may start to serve as a headwind for existing home sales, as the supply of existing homes for sale was down 18.6 percent on a year-over-year basis in August.

Disclosures: Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. All indices are unmanaged and are not available for direct investment by the public. Past performance is not indicative of future results. The S&P 500 is based on the average performance of the 500 industrial stocks monitored by Standard & Poor’s. The Nasdaq Composite Index measures the performance of all issues listed in the Nasdaq Stock Market, except for rights, warrants, units, and convertible debentures. The Dow Jones Industrial Average is computed by summing the prices of the stocks of 30 large companies and then dividing that total by an adjusted value, one which has been adjusted over the years to account for the effects of stock splits on the prices of the 30 companies. Dividends are reinvested to reflect the actual performance of the underlying securities. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a market capitalization-weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index. The Bloomberg Barclays US Aggregate Bond Index is an unmanaged market value-weighted performance benchmark for investment-grade fixed-rate debt issues, including government, corporate, asset-backed, and mortgage-backed securities with maturities of at least one year. The U.S. Treasury Index is based on the auctions of U.S. Treasury bills, or on the U.S. Treasury’s daily yield curve. The Bloomberg Barclays US Mortgage Backed Securities (MBS) Index is an unmanaged market value-weighted index of 15- and 30-year fixed-rate securities backed by mortgage pools of the Government National Mortgage Association (GNMA), Federal National Mortgage Association (Fannie Mae), and the Federal Home Loan Mortgage Corporation (FHLMC), and balloon mortgages with fixed-rate coupons. The Bloomberg Barclays US Municipal Index includes investment-grade, tax-exempt, and fixed-rate bonds with long-term maturities (greater than 2 years) selected from issues larger than $50 million.

Mark Gallagher is a financial advisor located at Gallagher Financial Services at 2586 East 7th Ave. Suite #304, North Saint Paul, MN 55109. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 651-774-8759 or at mark@markgallagher.com.
Authored by the Investment Research team at Commonwealth Financial Network.

© 2020 Commonwealth Financial Network ®

Presented by Mark Gallagher

General Market News
• There was a pickup in yields last week in the wake of stimulus talks. The 10-year Treasury yield stood at 0.70 percent 10 days ago before spiking to 0.81 percent on Wednesday and dipping to 0.79 percent on Friday. (The 30-year Treasury yield rose 10 basis points last week.) The spike on Wednesday was supported by Federal Reserve (Fed) Chairman Jerome Powell, who said the economy has a “long way to go” and there is “low risk of overdoing it.” The 10-year’s minor tick down came as President Trump closed the gap on a potential stimulus deal with Congress.
• A risk-on rally developed last week as enthusiasm grew behind a stimulus deal. The small-cap Russell 2000 led the way for the week. The Nasdaq was the top-performing domestic large-cap index, followed by the S&P 500 and the Dow Jones. Materials, energy, utilities, technology, and health care were among the top performing sectors. Technology benefited from a stronger-than-expected earnings preannouncement from NXP Semiconductors (NXPI) and news that AMD had made an offer to acquire Xilinx (XLNX) for $30 billion. Health care was supported by names such as Johnson & Johnson, which agreed to provide the EU with 400 million doses of its coronavirus vaccine, currently in stage three testing. Thermo Fisher Scientific (TMO) saw its stock rise over news of an expansion of COVID-19 testing operations and laboratory plastics production. Underperforming sectors included real estate investment trusts, communication services, and consumer staples.
• On Monday, the Institute for Supply Management (ISM) Services index for September was released. This measure of service sector confidence rose from 56.9 in August to 57.8, against calls for a decline to 56.2. This better-than-expected result brought the index near its post-pandemic high of 58.1 from July, helping calm concerns about wavering business confidence after the index fell by more than expected in August. Service sector confidence now sits above the pre-pandemic high of 57.3 set in February, highlighting the impressive rebound in business confidence we’ve seen since reopening efforts began. This is a diffusion index, where values above 50 indicate expansion, so this is a positive sign for service sector confidence and spending during September.

Source: Bloomberg, as of October 9, 2020

Source: Morningstar Direct, as of October 9, 2020

What to Look Forward To
On Tuesday, the Consumer Price Index for September will be released. Consumer prices are expected to rise by 0.2 percent during the month, down from a 0.4 percent increase in August. On a year-over-year basis, consumer inflation is slated to increase by 1.4 percent, up modestly from the 1.3 percent annual inflation rate we saw in August. Core consumer prices, which strip out the impact of volatile food and energy prices, are expected to rise by 0.2 percent during the month and 1.7 percent year-over-year. Inflationary pressure picked up during the summer as low inventories and rising demand led to modest increases in consumer prices; nonetheless, the deflationary pressures created by the lockdown measures are expected to keep inflation constrained for the time being.

Speaking of inflation, the Producer Price Index for September will be released Wednesday. This measure of producer inflation is expected to show a modest 0.2 percent gain in producer prices during the month, down from a 0.3 percent increase in August. On a year-over-year basis, producer prices are expected to rise by 0.2 percent. Core consumer prices, which strip out volatile food and energy prices, are expected to go up by 0.2 percent during the month. On an annual basis, core producer inflation is expected to increase by 0.9 percent, compared with a 0.6 percent increase in August. As was the case with consumer inflation, the deflationary pressure created by anti-coronavirus measures earlier in the year is expected to keep producer inflation moderate for the time being. Despite the pickup in inflation we’ve seen since reopening efforts kicked off, inflation remains well below the Fed’s stated 2 percent target. Accordingly, the central bank is not expected to react to rising inflation by raising rates until the job market improves considerably.

On Thursday, the initial jobless claims report for the week ending October 10 will be released. Economists expect to see an additional 823,000 initial claims filed during the week. If estimates hold, initial claims will have plateaued around 850,000 per week over the past six weeks, a pace roughly four times the average for weekly initial claims in 2019. The continued high number of layoffs is a concerning sign that the labor market still faces significant headwinds well after lockdowns ended. Given the current stress on the job market, this important weekly release will continue to be monitored as a gauge of the health of the labor market.

Friday will see the release of September’s retail sales report. Sales are expected to rise by 0.8 percent during the month, taking a step up from August’s 0.6 percent increase. Part of this anticipated increase is due to the more than 7 percent rise in car sales in September. Core retail sales, which strip out the impact of volatile auto and gas sales, are expected to show a more modest 0.5 percent increase during the month, down from a 0.7 percent gain in August. The pace of retail sales growth has slowed notably since the summer, when reopening efforts and heightened government stimulus supported faster growth. Still, the overall level of sales has rebounded above pre-pandemic levels. Looking forward, we are unlikely to see double-digit gains in sales. Nonetheless, continued growth at the forecasted level would be a positive sign that consumers remain willing and able to spend despite expired government stimulus payments.

September’s industrial production report will also be released on Friday. Production is expected to increase by 0.6 percent during the month, up from a 0.4 percent gain in August. Manufacturing production is expected to rise by 0.7 percent during the month, marking a slight decline from August’s 1 percent growth. The pace of industrial production growth has slowed since the summer, when reopening efforts provided a tailwind for producers. Despite the anticipated increase during the month, industrial production remains well below pre-pandemic levels, highlighting the divergent pace of the economic recovery for domestic production compared with consumption since lockdowns ended.

We’ll finish the week with Friday’s release of the preliminary estimate for the University of Michigan consumer sentiment survey. The index is expected to show a modest rise from 80.4 in September to 80.5 in October. Consumer confidence rebounded in September to its highest level since the pandemic began, and any further improvement in October would be another step in the right direction. Increased consumer confidence typically leads to faster consumer spending growth, so this report has been widely followed throughout the pandemic. Despite the increase in confidence in September and the anticipated rise in October, the index sits well below the high of 101 it set in February. A lot of work remains to get consumer confidence back to pre-pandemic levels.

Disclosures: Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. All indices are unmanaged and are not available for direct investment by the public. Past performance is not indicative of future results. The S&P 500 is based on the average performance of the 500 industrial stocks monitored by Standard & Poor’s. The Nasdaq Composite Index measures the performance of all issues listed in the Nasdaq Stock Market, except for rights, warrants, units, and convertible debentures. The Dow Jones Industrial Average is computed by summing the prices of the stocks of 30 large companies and then dividing that total by an adjusted value, one which has been adjusted over the years to account for the effects of stock splits on the prices of the 30 companies. Dividends are reinvested to reflect the actual performance of the underlying securities. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a market capitalization-weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index. The Bloomberg Barclays US Aggregate Bond Index is an unmanaged market value-weighted performance benchmark for investment-grade fixed-rate debt issues, including government, corporate, asset-backed, and mortgage-backed securities with maturities of at least one year. The U.S. Treasury Index is based on the auctions of U.S. Treasury bills, or on the U.S. Treasury’s daily yield curve. The Bloomberg Barclays US Mortgage Backed Securities (MBS) Index is an unmanaged market value-weighted index of 15- and 30-year fixed-rate securities backed by mortgage pools of the Government National Mortgage Association (GNMA), Federal National Mortgage Association (Fannie Mae), and the Federal Home Loan Mortgage Corporation (FHLMC), and balloon mortgages with fixed-rate coupons. The Bloomberg Barclays US Municipal Index includes investment-grade, tax-exempt, and fixed-rate bonds with long-term maturities (greater than 2 years) selected from issues larger than $50 million.

Mark Gallagher is a financial advisor located at Gallagher Financial Services at 2586 East 7th Ave. Suite #304, North Saint Paul, MN 55109. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 651-774-8759 or at mark@markgallagher.com.
Authored by the Investment Research team at Commonwealth Financial Network.

© 2020 Commonwealth Financial Network ®

Presented by Mark Gallagher

General Market News
• After a few weeks of almost no movement, there was heightened volatility in the rates market last week. The 10-year Treasury yield swung from 0.63 percent to 0.72 percent and then back to 0.65 percent, opening at 0.72 percent Monday. With the ambiguity behind President Trump’s health since he contracted the coronavirus and the election less than 30 days away, there has been a lot of uncertainty in the markets. Given the way rates have been trading, we may see some additional stimulus from the federal government.
• Last week, markets moved up across the board, with the S&P 500 breaking its four-week streak of declines. The Russell 2000 outperformed, as the small-cap index has a larger weighting for financials, which were among the top three sectors for the week. The Federal Reserve (Fed) extended its restriction on share buybacks and dividend increases for the largest banks through the end of 2020. While this was expected, it provides clarity on a potential deadline. Additionally, we saw a modest pickup in stimulus hopes as Treasury Secretary Steven Mnuchin plans to discuss a deal.
• Other top-performing sectors were REITs and utilities, although both saw a slight sell-off on Friday following the announcement of President Trump’s coronavirus diagnosis. The sole sector to post a loss for the week was energy. Other laggards included technology and communication services.
• On Tuesday, the Conference Board Consumer Confidence Index for September was released. The index rose from 86.3 in August to 101.8 in September, against economist estimates for a more modest increase to 90. This marks the largest single-month increase for the index in more than 17 years, and it brought confidence to its highest level since the pandemic hit. The index peaked at 132.6 in February, so there is still a lot of work to be done to get back to pre-pandemic confidence levels; however, this was a step in the right direction following a disappointing July and August. Historically, improving consumer confidence levels support faster spending growth, so this was a good sign for September’s consumer spending reports.
• On Thursday, August’s personal income and personal spending reports were released. Spending came in above estimates, growing by 1 percent against calls for a 0.8 percent increase. This follows a downwardly revised 1.5 percent increase in spending in July. Personal spending has improved since reopening efforts began; however, the pace of improvement has started to cool. On the other hand, personal income disappointed, falling by 2.7 percent against calls for a 2.5 percent decline. Incomes have been volatile during the pandemic, as large-scale layoffs and shifting government stimulus measures have led to swings in monthly averages. This larger-than-expected decline was driven by the expiration of the supplemental unemployment benefits at the end of July.
• The Institute for Supply Management (ISM) Manufacturing index for September was also released on Thursday. This gauge of manufacturer confidence declined slightly during the month, from 56 in August to 55.4 in September, against calls for an increase to 56.5. Despite the modest decline, the index still sits at its second-highest level in more than a year. This is a diffusion index, where values above 50 indicate expansion, so this is still a strong result for the manufacturing industry. Manufacturing confidence and output have rebounded well since reopening efforts began, and this report is another sign that the manufacturing industry continued to recover at the end of the third quarter, driven by a rebound in demand once reopening efforts began.
• On Friday, September’s employment report was released. This was a disappointing update, as 661,000 jobs were added during the month, well below economist estimates for 859,000. This is down considerably from the 1.3 million jobs added in August and marks the smallest number of additional jobs since reopening efforts began. The unemployment rate fell from 8.4 percent to 7.9 percent against forecasts for a more modest decline to 8.2 percent. Although the unemployment rate fell by more than expected, it was largely due to people dropping out of the workforce, as the labor force participation rate unexpectedly declined during the month. This report is yet another indication that the pace of the economic recovery has slowed, which is concerning given the large amount of work still to be done to get employment back to pre-pandemic levels. Ultimately, a full economic recovery will require significant improvement on the jobs front, so these monthly releases will continue to be closely monitored.
• We finished the week with Friday’s release of the second and final reading of the University of Michigan consumer sentiment survey for September. This measure of consumer confidence increased by more than expected, rising from an initial mid-month estimate of 78.9 up to 80.4 at month-end. This result represents a solid improvement after the index hit 74.1 in August and brings the index to its highest level since the start of the pandemic. There is still a long way to go to reach the pre-pandemic high of 101 set in February, however.

Source: Bloomberg, as of October 2, 2020

Source: Morningstar Direct, as of October 2, 2020

What to Look Forward To
On Monday, the ISM Services index for September was released. This measure of service sector confidence came in above estimates, rising from 56.9 in August to 57.8 in September against calls for a decline to 56.2. This result brought the index near its post-pandemic high of 58.1 from July and helped calm concerns about wavering business confidence after the index fell by more than expected in August. Service sector confidence now sits above the pre-pandemic high of 57.3 set in February, highlighting the impressive rebound in business confidence we’ve seen since reopening efforts began. This is another diffusion index, where values above 50 indicate expansion. Accordingly, this strong September reading is a positive sign for service sector confidence and spending during the month, which is welcome given that the service sector accounts for the majority of economic activity.

Tuesday will see the release of the international trade report for August. The trade deficit is expected to widen from $63.6 billion in July to $66.3 billion in August. The deficit grew to its widest level in more than 12 years in July, and, if the estimates hold, the deficit would move close to the modern low of $67 billion recorded in July 2008. Previously announced data on the trade of goods during August showed the trade deficit for goods widened to its largest level on record, as a 2.8 percent rise in exports could not offset a 3.1 percent increase in imports of foreign goods. Despite the increased trade in goods during the month, overall trade volume is about 15 percent below pre-pandemic levels, indicating there’s a long way to go to restore pre-pandemic global trade.

On Wednesday, the Federal Open Market Committee minutes from the Fed’s September meeting will be released. This release will be interesting, due to the recent Fed policy changes that will allow inflation to rise above 2 percent for an extended period of time if the job market remains weak. Economists expect these minutes will give us a better idea of how committed the Fed is to keeping rates low to support a job market recovery if inflation rises before the return of full employment. Interestingly, two voters dissented at this meeting, one of whom argued the Fed’s new policy was too supportive, while the other thought that more support should have been committed. These minutes will give us a chance to learn more about the debate surrounding the Fed’s new inflation target and get an idea of what kind of overshoot the central bank would be comfortable with going forward. Other than the inflation target change, economists will be looking for mentions of future asset purchases and hints about potential changes to purchase plans.

Finally, we’ll finish the week with Thursday’s release of the initial jobless claims report for the week ending October 3. Economists expect to see an additional 820,000 initial filings during the week, which would be a modest improvement from the 837,000 initial claims the week before. Despite the anticipated decline, initial claims would remain significantly higher than historical norms if estimates prove to be accurate. Over the past five weeks, initial claims have largely plateaued around 850,000 per week, which is nearly four times the average from 2019. We’ll continue to monitor this important weekly update until initial and continuing unemployment claims return closer to historically normal levels.

Disclosures: Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. All indices are unmanaged and are not available for direct investment by the public. Past performance is not indicative of future results. The S&P 500 is based on the average performance of the 500 industrial stocks monitored by Standard & Poor’s. The Nasdaq Composite Index measures the performance of all issues listed in the Nasdaq Stock Market, except for rights, warrants, units, and convertible debentures. The Dow Jones Industrial Average is computed by summing the prices of the stocks of 30 large companies and then dividing that total by an adjusted value, one which has been adjusted over the years to account for the effects of stock splits on the prices of the 30 companies. Dividends are reinvested to reflect the actual performance of the underlying securities. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a market capitalization-weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index. The Bloomberg Barclays US Aggregate Bond Index is an unmanaged market value-weighted performance benchmark for investment-grade fixed-rate debt issues, including government, corporate, asset-backed, and mortgage-backed securities with maturities of at least one year. The U.S. Treasury Index is based on the auctions of U.S. Treasury bills, or on the U.S. Treasury’s daily yield curve. The Bloomberg Barclays US Mortgage Backed Securities (MBS) Index is an unmanaged market value-weighted index of 15- and 30-year fixed-rate securities backed by mortgage pools of the Government National Mortgage Association (GNMA), Federal National Mortgage Association (Fannie Mae), and the Federal Home Loan Mortgage Corporation (FHLMC), and balloon mortgages with fixed-rate coupons. The Bloomberg Barclays US Municipal Index includes investment-grade, tax-exempt, and fixed-rate bonds with long-term maturities (greater than 2 years) selected from issues larger than $50 million.

Mark Gallagher is a financial advisor located at Gallagher Financial Services at 2586 East 7th Ave. Suite #304, North Saint Paul, MN 55109. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 651-774-8759 or at mark@markgallagher.com.

Authored by the Investment Research team at Commonwealth Financial Network.
© 2020 Commonwealth Financial Network ®