Presented by Mark Gallagher

General Market News
• Last week saw a major pickup in Treasury yields following the news of the Pfizer and BioNTech vaccine results. The 10-year Treasury yield opened at 0.83 percent and closed just shy of 0.89 percent, hitting an intra-week high of 0.97 percent on Tuesday. The 1 percent mark remains an important level to watch, particularly with additional discussion of stimulus. The 30-year opened at 1.67 percent, gaining 3 basis points on the week, while the 2-year opened at 0.18 percent.
• The vaccine results also fueled a shift in equity market dynamics. The Dow Jones Industrial Average, which has lagged the technology-oriented Nasdaq Composite throughout the pandemic, outperformed week. The vaccine gave way to greater demand hopes for energy and industrial stocks and increased lending rate expectations for financials. These sectors posted sharp gains to begin the week, but as the week went on, technology, consumer discretionary, and communication services regained footing with the record number of coronavirus cases and stricter state-specific measures.
• On Thursday, October’s Consumer Price Index was released. This measure of consumer inflation came in below expectations for the month, as prices remained flat against calls for a 0.1 percent increase. Core consumer prices, which strip out the impact of volatile food and energy prices, also remained unchanged, against forecasts for 0.2 percent growth. On a year-over-year basis, headline prices rose by 1.2 percent while core prices increased by 1.6 percent. Inflation has remained largely constrained this year due to the deflationary pressure created by the pandemic, and this report showed a moderation in the modest upward price pressure we’ve seen since lockdowns ended.
• Friday saw the release of the Producer Price Index report for October. Headline producer prices rose by 0.3 percent against calls for a 0.2 percent increase. Core producer prices, which strip out the impact of food and energy prices, rose by a more modest 0.1 percent, against forecasts for 0.2 percent growth. These results brought year-over-year producer inflation up to 0.5 percent, while core producer prices rose by 1.1 percent on an annual basis. Overall, these two reports showed that inflation remains under control, as both consumer and producer inflation is well below the Federal Reserve’s (Fed’s) stated 2 percent inflation target. With the Fed’s current focus on supporting the ongoing labor market recovery, inflation is not expected to drive monetary policy for the time being.
• We finished the week with Friday’s release of the preliminary University of Michigan consumer sentiment survey for November. This first look at consumer confidence for the month showed an unexpected decline, from 81.8 in October to a three-month low of 77 to start November. This decline was driven by a notable drop in future expectations due to lowered Republican expectations for economic growth. The decline took Republican expectations to their lowest level since the start of the Trump presidency. Democrat expectations, on the other hand, rose modestly during the month, after increasing notably in October, presumably due to heightened expectations for a Biden presidency. Historically, improving consumer confidence has helped support faster spending growth, so this is a disappointing update that bodes poorly for consumer spending as we head into the holiday season.

Source: Bloomberg, as of November 13, 2020

Source: Morningstar Direct, as of November 13, 2020

What to Look Forward To
On Tuesday, the October retail sales report is set to be released. Sales are expected to show 0.5 percent growth during the month, following a 1.9 percent increase in September. Core retail sales, which strip out the impact of volatile auto and gas purchases, are expected to grow by 0.6 percent, following a 1.5 percent increase in September. The pace of sales growth is set to slow, however, following the better-than-expected September results, which were driven in part by a surge in clothing sales. With that said, we should see continued retail sales growth in October, supported by the later-than-normal Amazon Prime day. If estimates hold, this report would mark six straight months with sales growth, although the pace of growth has slowed notably since earlier in the summer. Looking forward, more moderate gains are expected, as retail sales have already rebounded well past pre-pandemic levels.

Tuesday will also see the release of the October industrial production report. Production is expected to show solid 1 percent growth during the month, following a disappointing 0.6 percent decline in September. The September result was due primarily to a drop in manufacturing output during the month. In October, economists expect manufacturing output to rebound and rise by 1 percent. If estimates hold, this report would mark a return to growth for this important sector of the economy. Nonetheless, the pace of recovery for producers would remain below that for consumers. Demand remains strong, which should serve as a tailwind for future production growth. We have, however, seen a gap between increased consumer demand and manufacturing output since lockdowns ended, as producers have been slower to adapt to the pandemic economy.

The third major data release on Tuesday will be the National Association of Home Builders Housing Market Index for November. This measure of home builder confidence is expected to remain unchanged at 85. If estimates hold, this release would tie the record high the index set in October. Home builder confidence has rebounded impressively following the end of lockdowns, as record-low mortgage rates have driven prospective home buyers into the market in droves. But supply has remained constrained in key markets, providing a boon for home builder confidence. Historically, an inverse relationship has existed between the supply of homes available for sale and home builder confidence. Accordingly, the low inventory levels should continue to serve as a tailwind for confidence and faster new home construction over the coming months.

Speaking of new home construction, Wednesday will see the release of the October building permits and housing starts reports. Both of these measures of new home construction are expected to show growth during the month. Permits are set to rise by 1.5 percent and starts are expected to show a 2.5 percent gain. Post-lockdown, housing starts have been boosted by high home builder confidence and low inventory in key regions. Single-family housing starts have been a highlight, hitting their highest level in 13 years in September. This rise in single-family homes has helped offset volatility in multifamily starts over the past few months. In the post-pandemic world, shifting home buyer demand has home builders favoring single-family homes over condominium or apartment buildings.

Thursday will see the release of the weekly initial jobless claims report for the week ending November 14. Economists expect to see 710,000 initial unemployment claims were filed during the week, which would be a slight increase from the 709,000 filed the week before. Continuing unemployment claims are expected to show steady decline. Still, despite the very real progress we have made in lowering initial and continuing unemployment claims since lockdowns ended, they remain high on a historical basis. The fact demonstrates the continued stress on the labor market. For context, if the estimates for November 14 prove accurate, initial claims would still be more than three times higher than the weekly average from 2019. These weekly releases will continue to be widely monitored until initial and continuing claims are back down to historically normal levels.

We’ll finish the week with Friday’s release of the October existing home sales report. Sales of existing homes are expected to decline by 1.6 percent during the month, following a much better-than-expected 9.4 percent increase in September. Nonetheless, if estimates hold, this report would represent the second-best month for existing home sales since 2006, highlighting the impressive rebound in sales since lockdowns ended. On a year-over-year basis, existing home sales are expected to show a 19.2 percent increase from October of 2019, demonstrating the strength of the housing market recovery. Looking forward, the major headwind for housing sales is expected to be a lack of available inventory. At the end of September, inventory was down more than 19 percent on a year-over-year basis. Given the low level of available inventory and the strong rise in home sales this year, the anticipated modest decline in sales in October is understandable and nothing to worry about for the time being.

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
• Last week, the pickup in Treasury yields continued, despite a drop in equities. The 10-year Treasury yield opened at 0.84 percent and hit an intra-week high just shy of 0.87 percent on Friday before closing at 0.86 percent. The 10-year gained almost 2 basis points on the week. The 30-year opened at 1.64 percent and stayed mostly flat, and the 2-year opened at 0.16 percent. The pickup in yields is surprising, as investors moved out of short- and intermediate-term Treasuries in the second half of the week. This move may be supported by additional expected near-term stimulus.
• Equities sold off last week as new coronavirus restrictions were implemented in France, Germany, Spain, and the U.K. U.S. small-cap stocks, which benefited from a recent reopening trade, were among the hardest hit. The technology sector was among the biggest detractor—down 6.42 percent for the week, followed by health care and consumer discretionary. Among the largest detractors were Microsoft, Apple, Amazon, Facebook, Mastercard, Visa, and NVIDIA. Despite beating earnings expectations, Microsoft fell on softer-than-expected future revenue and earnings guidance. Apple also beat on both revenue and earnings, but low iPhone sales led investors to wonder if consumers are holding out for the newly released 5G models or if this is a trend.
• The top-performing sectors were real estate, energy, and materials. Additional stimulus from the federal government may lead to higher inflation expectations, from which these sectors are best positioned to benefit.
• On Monday, September’s new home sales report was released. The pace of new home sales declined by 3.5 percent during the month, 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 slowdown in sales is likely due in large part to low inventory, as the level of available homes for sale at the current sales pace remains near record lows. New home sales are a smaller and often more volatile portion of the overall market compared with existing home sales, so the modest pullback in September is nothing to worry about, especially given the strong rebound in overall sales since reopening efforts took hold.
• Tuesday saw the release of the September durable goods orders report. Durable goods orders rose by more than expected during the month—to 1.9 percent against calls for a more modest 0.5 percent increase. Core durable goods orders, which strip out the impact of volatile transportation orders, also beat expectations, rising by 0.8 percent against calls for 0.4 percent growth. Core durable goods orders are often used as a proxy for business investment, so this is a positive sign for business investment during the quarter. With the better-than-expected result in September, the level of durable goods orders is now approaching pre-pandemic levels.
• Tuesday also saw the release of the Conference Board Consumer Confidence Index for October. This widely followed measure of consumer confidence fell slightly during the month, from 101.3 in September to 100.9 in October. Economists had previously forecast a modest increase to 102. Confidence improved notably in September, and this slight moderation is understandable, given the uncertainty created by rising case counts and the upcoming election. Typically, improving consumer confidence supports faster spending growth, so this will continue to be a widely followed monthly report. The index still sits well below this year’s pre-pandemic high of 132.6 set in February, highlighting the work necessary to get back to pre-pandemic levels.
• On Thursday, the first estimate for third-quarter gross domestic product (GDP) growth was released. The report showed the economy growing at a 33.1 percent annualized rate during the quarter, which was better than economist estimates for 32 percent. This marks the best quarter for growth on record, as activity rebounded swiftly following the 31.4 percent annualized decline we saw in the second quarter. As expected, increased personal consumption was the major driver of this strong rebound in economic activity, with consumption growing at a 40.7 percent annualized rate against forecasts for 38.9 percent. Rising business investment also contributed to the growth in the quarter, while trade served as a headwind. Despite the better-than-expected results, the overall size of the economy remains roughly 3.5 percent down from the recent peak, highlighting the damage caused in the second quarter. Economists expect to see the economy remain smaller than its pre-crisis size for a number of quarters.
• Friday saw the release of September’s personal income and personal spending reports. Both came in above expectations, with spending up 1.4 percent during the month against forecasts for 1 percent growth, while income rose by 0.9 percent against calls for 0.4 percent. These results were quite welcome and show the continued resilience of the American consumer in the third quarter, as we saw with the personal consumption growth in the GDP report. Incomes were boosted by additional supplemental jobless payments authorized in August, but the growth was not enough to offset a 2.5 percent decline in incomes in August. Income growth has been very volatile throughout the pandemic, with shifting government stimulus and support leading to large swings in monthly income levels. Spending, on the other hand, has seen consistent growth since reopening efforts began, increasing in each of the past five months. Overall, this was a strong report that highlighted the continued resilience in consumer spending at the end of the third quarter.
• We finished 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. The final report showed additional improvement throughout the month, with the index finishing October at 81.8 against forecasts to remain unchanged from the preliminary estimate. This result was likely driven in part by rising expectations for a Biden presidency, as the gauge of Democrat expectations surged to levels last seen before the pandemic, while Republican expectations remain muted. Despite these results, the index still sits well below the pre-pandemic high of 101 it hit in February.

Source: Bloomberg, as of October 30, 2020

Source: Morningstar Direct, as of October 30, 2020

What to Look Forward To
We started the week with Monday’s release of the Institute for Supply Management (ISM) Manufacturing index for October. This gauge of manufacturer confidence rose by more than expected, going from 55.4 in September to 59.3 in October, against calls for an increase to 56. This result calmed fears that the index’s decline in September might have been the start of a negative trend. Manufacturer confidence has increased notably since hitting a lockdown-imposed low of 41.5 in April, and the index now sits well above pre-pandemic levels. This is a diffusion index, where values above 50 indicate expansion, and this result showed manufacturing expanding at the fastest pace since 2018. Ultimately, this strong report demonstrated manufacturing’s continued recovery in October despite rising case counts.

Wednesday will see the release of the international trade report for September. Economists expect to see the trade deficit narrow from a 14-year low of $67.1 billion in August to $63.9 billion in September. Nonetheless, if estimates hold, this report would represent the second-largest monthly trade deficit since 2006. The previously released advance goods trade report showed the trade deficit for goods narrowing during the month, with exports of goods rising by 2.7 percent and imports declining by 0.2 percent. On the whole, trade volumes remain low, but imports have rebounded more quickly than exports. Looking forward, this indicates there may be room for additional export growth. If we do see such continued growth, it may be enough to serve as a tailwind for the fourth-quarter economy.

Also on Wednesday, the ISM Services index for October is set to be released. This measure of service sector confidence is expected to show a modest decline from 57.8 in September to 57.5 in October. This is another diffusion index, where values above 50 indicate expansion, so this drop would leave the index in expansionary territory. In addition, the anticipated result would put the index above the pre-pandemic high of 57.3 it hit in February and at a level that has historically signaled 4 percent annualized GDP growth. Strong business confidence often supports additional business investment, and we saw the positive impact that increased business investment can have in the third-quarter GDP report. If estimates prove to be accurate, October would represent another strong month for service sector confidence, which would be all the more impressive given the rising case counts.

On Thursday, the initial jobless claims report for the week ending October 31 is set to be released. Economists expect to see the number of initial filers decline from 751,000 the week before to 738,000 for the final week of October. This result would represent the lowest level of weekly initial claims since the pandemic began, but it would be more than three times higher than 2019’s weekly average. Continuing unemployment claims are also expected to decline, but it should be noted that some of the drop seen in October has likely been due to claimants exhausting their benefits rather than finding new employment. Ultimately, even with the anticipated improvement for the week, the high level of initial and continuing claims continues to indicate stress on the labor market months after lockdowns were lifted.

Thursday will also see the release of the Federal Open Market Committee (FOMC) rate decision from its November meeting. In March, the Federal Reserve cut rates to virtually zero as a response to the pandemic, and economists do not expect rates to be raised for the foreseeable future. Accordingly, the focus will be largely on the Fed’s statement and Fed Chair Jerome Powell’s press conference following the release. Market participants will be interested in seeing how the central bank reacts to rising case counts in October. Previously released Fed minutes showed a widespread concern among FOMC members that the pandemic presents a continued risk to the ongoing economic recovery. Given the rising medical risks since the Fed last met in September, continued supportive monetary policy is expected.

Finally, we’ll finish the week with Friday’s release of the October employment report. Economists expect to see 600,000 jobs added during the month, down from 661,000 in September. September’s report was disappointing, coming in below expectations and marking the weakest month for job growth since the lockdowns ended. The unemployment rate is expected to have declined slightly during the past month, from 7.9 percent in September to 7.7 percent in October. While certain areas of the economy have been able to recover to or above pre-pandemic levels, employment growth is lagging in the recovery. We have recovered only about half of the 22 million jobs lost in March and April. The slowdown in the pace of hiring is concerning given the amount of people who are still unemployed. It highlights the very real work that still needs to be done in order to get the economy 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 ®