Presented by Mark Gallagher

General Market News
• There was minimal flattening in the yield curve during the holiday-shortened week. The 10-year Treasury yield opened at 1.09 percent and closed at 1.05 percent. This morning, the 10-year yield opened just below 1.07 percent—a loss of approximately 2 basis points (bps) since last week’s open. The 30-year opened at 1.82 percent, a loss of 2 bps from last week’s open of 1.84. On the shorter end of the curve, the 2-year opened last week at 0.14 percent and lost 1 bp at the opening this morning.
• The biggest news last week was obviously the change in administrations in Washington, DC, and it helped push markets higher across the board. The Nasdaq Composite led the way, up by more than 4 percent ahead of technology earnings announcements (i.e., Apple, Facebook, Microsoft, and Tesla). After the Nasdaq, U.S. small-caps were the next best domestic performer as Janet Yellen pushed for large stimulus in her testimony. Despite the rollout of the vaccines and a decline in hospitalizations, the Dow Jones Industrial Average lagged, possibly due to concerns regarding the new COVID-19 variant. The top-performing sectors were communication services, technology, and consumer discretionary; technology benefited from a more than 9 percent gain in Facebook, following recent pressure on the stock. The worst-performing sectors included financials, energy, and materials, which struggled due to concerns that the new administration may propose additional regulation and changes to both the energy and banking sector.
• On Wednesday, the National Association of Home Builders Housing Market Index for January was released. Home builder confidence fell from 86 in December to 83 in January against expectations for no change during the month. Despite the decline, the index still sits near the all-time high of 90 it hit in November, signaling continued high levels of home builder confidence. Home builders cited a lack of available lots to build on and rising lumber prices as headwinds toward faster construction. With that being said, home builder confidence has rebounded notably since the index hit a pandemic-induced low of 30 in April. High levels of home builder confidence typically support faster new home construction, so this report bodes well for new home construction to start the new year.
• Thursday saw the release of the December building permits and housing starts reports, which both came in well above expectations. Permits rose by 4.5 percent during the month against calls for a 1.7 percent decline. Starts increased by 5.8 percent, which was notably better than economist forecasts for a 0.8 percent increase. These results brought permits and starts to their fastest pace since 2006, highlighting the continued strength of the housing market. As was the case with home builder confidence, both permits and starts have increased notably since initial lockdowns ended last year. Given the low supply of homes for sale and the continued high levels of home builder confidence, the pace of new home construction is expected to remain robust for the time being.
• We finished the week with Friday’s release of the December existing home sales report. Sales of existing homes beat expectations, rising by 0.7 percent against forecasts for a 1.9 percent decline. This capped off the strongest year for existing home sales since 2006, further evidence of the health of the housing market. Record-low mortgage rates and shifting homebuyer preference for larger spaces helped lead to a surge in homebuyer demand throughout the year. On a year-over-year basis, existing home sales grew by 22.2 percent in December. While the rebound in housing demand was a positive development, significantly faster sales growth will be hard to come by in the future, as supply is very low and prices continue to rise. If sales remain near current levels, however, it would still represent a very strong level of homebuying activity.

Source: Bloomberg, as of January 22, 2021

Source: Morningstar Direct, as of January 22, 2021

What to Look Forward To
On Tuesday, the Conference Board Consumer Confidence Index for January will be released. Economists expect to see this gauge of consumer sentiment rise modestly from 88.6 in December to 89.1 in January. Following the four-month low set by the index in December, this result would be a step in the right direction. Still, it would leave confidence well below the post-lockdown high of 101.4 recorded in October 2020. Historically, improving consumer confidence has supported faster consumer spending growth, so any improvement for the index would certainly be welcome. With that said, however, we’ll likely have to make significant progress in combatting the third wave of the pandemic before we see a large jump in consumer confidence. With mass vaccination efforts picking up steam, the public health situation looks set to improve over the upcoming months. This would likely bolster consumer confidence and spending.

Wednesday will see the preliminary release of the December durable goods orders report. Durable goods orders are expected to rise by 1 percent during the month, in line with November’s 1 percent increase. Unlike consumer spending, business spending held up well in the fourth quarter of 2020, despite rising coronavirus case counts and restrictions at the state and local levels. Core durable goods orders, which strip out the impact of volatile transportation orders, are expected to rise by 0.5 percent in December, up from a 0.4 percent increase in November. If estimates hold, this report will mark eight straight months with growth in both headline and core durable goods orders. These indicators are often viewed as a proxy for business investment, so continued growth would be a positive sign that business spending remained healthy in the fourth quarter of 2020.

Wednesday will also see the release of the Federal Open Market Committee (FOMC) rate decision from the Federal Reserve’s (Fed’s) January meeting. The central bank lowered the federal funds rate to virtually zero in March of last year, and economists do not anticipate any changes to this rate until at least 2023. Given the ongoing environment of low interest rates, economists will be largely focused on the potential for changes to the Fed’s asset purchase programs over the next few FOMC meetings. No plans are in place to decrease the monthly purchases of Treasury and mortgage-backed bonds. But, given the impact that Fed buying has on the market, any mentions of future changes to asset purchase plans will be closely monitored. There may also be some discussion on how Fed members view the current and expected public health situation, especially now that vaccine rollout is underway.

On Thursday, the advance estimate of fourth-quarter gross domestic product (GDP) growth will be released. Economists expect to see the economy grow by an annualized rate of 4.4 percent during the quarter, down from the 33.4 percent annual growth rate in the third quarter. The surge in third-quarter growth was largely due to the weakness in the second quarter and a rebound in spending once initial lockdowns were lifted. The anticipated slowdown heading into the fourth quarter is due to a sharp decline in consumer spending growth, which was the major driver of third-quarter GDP growth. Personal consumption grew at an annualized rate of 41 percent in the third quarter, but economists expect to see this growth rate fall to an annualized 3.2 percent in the fourth quarter. Over the next few quarters, low to mid-single-digit economic growth is the most likely path forward, given the continued headwinds created by the pandemic. Nonetheless, we can hope that an improving public health picture will get us back to more normal economic conditions by the end of 2021.

Thursday will also see the release of the initial jobless claims report for the week ending January 23. Forecasts call for a drop in weekly initial unemployment claims, from 900,000 to 875,000. While this decline would be a positive development, the number of initial claims would remain high on a historical basis if estimates hold. The number of weekly initial claims has dropped notably since peaking at 6.87 million in March 2020, but initial claims have remained largely range bound since September. Given the high level of overall claims on a weekly basis, this lack of continued improvement is a concern. It signals that the labor market is still facing considerable stress due to the pandemic. With claims at historically high levels, this weekly report will continue to serve as an important barometer for the overall health of the labor market.

The third major data release on Thursday will be the release of the December new home sales report. The pace of new home sales is expected to rise by 1.3 percent during the month, following an 11 percent decline in November. New home sales are a smaller and often more volatile portion of the housing market compared with existing home sales. If estimates hold, this report would bring new home sales to their fourth-highest monthly level since 2008, highlighting the healthy rebound seen since initial lockdowns were lifted. As was the case with existing home sales, record low mortgage rates and shifting buyer preferences led to an encouraging resurgence in new home sales last year. Looking forward, low supply and rising prices are expected to serve as a headwind for significantly faster growth for this segment. Still, if the pace of new home sales remains near current levels, it would signal a noted increase compared with recent years.

On Friday, December’s personal income and personal spending reports are set to be released. Forecasts call for a 0.2 percent increase for personal income, while spending is set to fall by 0.5 percent. Personal spending has been hard-hit by the third wave of infections, as well as the increased state and local restrictions associated with the pandemic. A decline in personal spending in December would mark the first two months with consecutive spending declines since the initial lockdowns in March and April 2020. With that said, the anticipated decline in December is much more modest than the 12.7 percent decline in spending we saw in April. This fact indicates that consumers are dealing with the third wave with much more resiliency than they did with the first wave. Personal income has been very volatile on a month-to-month basis, due in large part to shifting levels of federal income support and stimulus. The anticipated rise in income in December is encouraging, as it would be the first increase since September 2020. Looking forward, the additional stimulus passed at the end of 2020 should support faster income and spending growth. Nonetheless, we’ll have to wait to see the results as they feed through in January’s data.

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. Basis points (bps) is a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 1/100th of 1 percent, or 0.01 percent.

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 major steepening last week, there has been little movement in the yield curve. The 10-year Treasury yield opened at 1.12 percent and closed the week at 1.11 percent. This morning, the 10-year yield opened just above 1.10 percent—a loss of approximately 2 basis points (bps). The 30-year opened at 1.85 percent, which was a loss of roughly 2 bps from last week’s open of 1.88 percent. On the shorter end of the curve, the 2-year opened last week at 0.14 percent and added 0.6 bps at the opening this morning. Bond investors seem to be caught in between the Biden team’s $1.9 trillion stimulus proposal and lackluster economic data.
• U.S. large-cap and international markets were down last week, as weaker-than-expected economic data and new variants of the coronavirus led to a pause. Emerging markets and small-caps performed well after the incoming Biden administration proposed its $1.9 trillion stimulus package. The package seeks to provide additional $1,400 stimulus checks, expanded unemployment relief, and funding for local governments, vaccinations, and the reopening of schools. The U.S. dollar saw a modest increase in strength, but it is still unclear if this proposed package will be approved by the Senate in its current form and if additional stimulus will be needed. In an interview with Princeton, Federal Reserve (Fed) Chair Jerome Powell said he expects rates to remain low for some time and addressed concerns over an early exit from the Fed’s bond purchasing program.
• The top-performing sectors during what was largely a risk-off week were energy, real estate, utilities, and financials. The sectors that underperformed were technology, communication services, and consumer discretionary.
• On Wednesday, the December Consumer Price Index report was released. Consumer prices rose by 0.4 percent during the month, which is up from 0.2 percent growth in November and in line with economist expectations. On a year-over-year basis, consumer inflation rose by 1.4 percent, which was slightly higher than forecasts for 1.3 percent growth. Core consumer prices, which strip out the impact of volatile food and energy prices, showed a more subdued 0.1 percent increase during the month, which translated to a 1.6 percent increase in core consumer prices on a year-over-year basis. Despite the increase in inflationary pressure during the month, on a year-over-year basis, headline inflation remains below the Fed’s 2 percent target and well below the January 2020 high of 2.5 percent. Looking forward, rising gas prices and a potential return to normalcy as vaccination programs take effect are expected to serve as a tailwind for moderately faster price growth, but for the time being, inflation remains constrained.
• Friday saw the release of the December Producer Price Index report. Headline producer prices rose by 0.3 percent during the month, which was up from the 0.1 percent growth in November but below economist estimates for 0.4 percent growth. On a year-over-year basis, headline producer prices rose by 0.8 percent, which was in line with November’s annual inflation rate and economist forecasts. Core producer prices, which strip out energy and food prices, rose by 0.1 percent during the month and 1.2 percent on a year-over-year basis. As was the case with consumer inflation, producer inflation remains well constrained and below the Fed’s stated 2 percent target. While it’s quite possible we will continue to see modest increases in inflationary pressure during the year, given the continued weakness for the job market and the risks presented by the pandemic, the Fed is not expected to react to modest rising inflationary pressure for the foreseeable future.
• On Friday, December’s retail sales report was released. Retail sales came in below expectations, falling by 0.7 percent against forecasts for no change. This marks three straight months with declining retail sales. Core retail sales, which strip out the impact of volatile auto and gas sales, fell even further, with a 2.1 percent decline against forecasts for a more modest 0.3 percent drop. The weakness in sales was widespread and likely highlights the negative effects that rising case counts and restrictions at the state and local level have had on retail sales. This is a concerning report, as it indicates that consumer spending in the fourth quarter was likely weaker than expected—a bad sign for overall economic growth, given the fact that consumer spending accounts for the majority of economic activity in the country. There is hope that a new round of federal stimulus announced at the end of December will help spur faster sales growth in the future, but the decline in retail sales in the fourth quarter is a concerning sign that the economic recovery slowed to end the year.
• We finished the week with the release of the preliminary estimate of the University of Michigan consumer sentiment survey for January. This widely followed measure of consumer confidence fell by more than expected during the month, declining from 80.7 in December to 79.2 to start January against calls for a more modest decline to 79.5. While this result was slightly disappointing, the index is still well above the pandemic-induced low of 71.8 in April, indicating that consumers are reacting to the third wave of infections with more resiliency compared with earlier waves. With that being said, the index sits well below the pre-pandemic high of 101 last February. This will continue to be a widely monitored report, as improving consumer confidence has historically been linked to faster consumer spending growth.

Source: Bloomberg, as of January 15, 2021

Source: Morningstar Direct, as of January 15, 2021

What to Look Forward To
On Wednesday, the National Association of Home Builders Housing Market Index for January will be released. This measure of home builder confidence is expected to remain unchanged at 86. If estimates hold, this result would be strong, tying December for the second-highest reading for the index on record and trailing only November’s all-time high of 90. Home builder confidence has rebounded notably since hitting a pandemic-induced low of 30 in April. In large part, this trend has been driven by low mortgage rates that have spurred an increase in buyer demand. In addition, home builder confidence has been bolstered by the low level of homes available for sale, which gives builders confidence that newly built homes will be quickly purchased. High home builder confidence supports faster new home construction, so continued strength for this index would be a good sign for the health of the overall housing market.

Speaking of new home construction, Thursday will see the release of the December building permits and housing starts reports. Permits are expected to fall by 2.1 percent during the month, following a 6.2 percent increase in November. Starts are expected to increase by 1 percent, following a 1.2 percent increase in the prior month. If estimates prove accurate, this report would mark the second-highest monthly level of permits since 2006. Starts would set a new post-lockdown high, remaining well above levels seen throughout most of 2019 and 2020. As was the case with home builder confidence, permits and starts have increased notably since initial lockdowns were lifted last year. Given the low levels of houses available for sale and their rising prices, the pace of new home construction is expected to remain high for the immediate future, especially if home builder confidence remains near record levels.

Thursday will also see the release of the initial jobless claims report for the week ending January 16. Economists expect to see 830,000 initial unemployment claims filed during the week, marking a solid decline from the 965,000 initial claims the week before. Still, despite the anticipated drop, this weekly report would represent a concerningly high level of initial claims on a historical basis. Although initial claims have declined notably since last March and April, the current claims signal that the labor market is still facing significant stress due to the pandemic and increasing restrictions at the state and local levels. Ultimately, a full economic recovery will depend on further improvements for labor market conditions. Accordingly, this weekly release, which gives economists a timely look at the health of the labor market, will continue to be widely followed.

We’ll finish the week with Friday’s release of the December existing home sales report. Existing home sales are expected to fall by 2.2 percent during the month, following a 2.5 percent decline in November. October saw the pace of existing home sales hit its highest level since 2005, so the anticipated decline would leave sales at healthy levels. Since initial lockdowns ended, existing home sales have increased notably. If the December estimates prove accurate, sales would be up 18.4 percent on a year-over-year basis, despite the monthly drop. Looking forward, significantly faster sales growth is unlikely given the supply constraints and rising prices. If sales remain near current levels, however, they would represent a healthy level of home-buying activity and continued strength for the housing sector, which has been a bright spot in the recent economic recovery.

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. Basis points (bps) is a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 1/100th of 1 percent, or 0.01 percent.

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 little movement during the week of New Year’s, we saw significant steepening of the yield curve in the first week of 2021. The 10-year Treasury yield opened at 0.93 percent and closed just shy of 1.11 percent. This morning, the 10-year yield opened just above 1.13 percent—a pickup of 20 basis points (bps) in just one week. The 30-year yield opened at 1.9 percent—a gain of more than 23 bps from last week’s open of 1.66 percent. On the shorter end of the curve, the 2-year opened last week at 0.14 percent and fell just 1.2 bps at the opening this morning. The pickup in yields was predominantly driven by the results of the Georgia runoffs, as two additional senators for the Democratic Party increases the likelihood of additional stimulus.
• All three major U.S. indices were up by more than 1.6 percent last week. Emerging and international markets performed well due to the increased likelihood of future U.S. stimulus and a weaker dollar. Small-caps also rallied on the news of potential support for businesses that have fallen under heavy pressure due to the coronavirus.
• Financials, consumer discretionary, health care, and energy were among the top-performing sectors on the week. The strong performance of financials was due in part to the pickup in yields. Consumer staples, real estate, and utilities were among the worst performers, as higher yields pose a challenge for industries such as real estate, which will see an increase in loan rates.
• On Tuesday, the Institute for Supply Management (ISM) Manufacturing index for December was released. This gauge of manufacturer confidence rose from 57.5 in November to 60.7 in December against calls for a drop to 56.8. This is a diffusion index, where values above 50 indicate expansion, so this better-than-expected result signals continued growth for the manufacturing sector during the month despite the worsening public health situation. The index now sits at its highest level since 2018, highlighting the impressive recovery for manufacturers since initial lockdowns were lifted in April. This was an encouraging report, as it showed the continued resilience for the manufacturing recovery during the month and quarter, and it points toward continued healthy levels of business investment.
• Thursday saw the release of the ISM Services index for December. This measure of service sector confidence also came in above expectations, with the index rising from 55.9 in November to 57.2 in December against forecasts for a decline to 54.5. This broke a two-month streak of declining service sector confidence and brought the index to its highest level since September. This is another diffusion index, where values above 50 indicate expansion, so this was a positive development for the service sector, which accounts for the lion’s share of economic activity in the country. As was the case with manufacturing confidence, service sector confidence has rebounded notably since hitting a pandemic-induced low of 41.8 in April. Overall, this was another positive report, as it showed the service sector remained resilient despite the worsening public health situation and increased restrictions at the state and local level.
• We finished the week with Friday’s release of the December employment report. The report showed a loss of 140,000 jobs during the month, which was worse than estimates for a modest 50,000 increase. This marks the first month since April where the economy has experienced a net loss in jobs, driven primarily by increased restrictions at the state and local level that caused a sharp decline in leisure and hospitality jobs. Despite this decline, other sectors, such as professional and business services and retail sales, showed strong levels of hiring, which indicates that the headline job loss may be overstating the overall damage caused during the month. The unemployment rate remained unchanged at 6.7 percent, slightly better than estimates for an increase to 6.8 percent. Average hourly wages also rose by more than expected, increasing by 0.8 percent against calls for a 0.2 percent increase. While the headline rise in wages appears positive, this was largely due to lower wage leisure and hospitality job losses artificially increasing the average rather than by a widespread rise in wages. Overall, this was a concerning report that highlights the very real risks the current third wave of infections presents for the economic recovery.

Source: Bloomberg, as of January 8, 2021

Source: Morningstar Direct, as of January 8, 2021

What to Look Forward To
On Wednesday, the December Consumer Price Index is set to be released. Consumer prices are expected to rise by 0.4 percent during the month, up from a 0.2 percent increase in November. On a year-over-year basis, consumer inflation is expected to come in at 1.3 percent, slightly up from the 1.2 percent annual inflation rate we saw in November. Part of the anticipated increase is due to an 8 percent rise in gas prices in December. Core consumer prices, which strip out the impact of volatile food and energy prices, are expected to show a more modest 0.1 percent monthly increase and 1.6 percent annual growth. Even with these price increases, however, year-over-year consumer inflation will remain well below the pre-pandemic high of 2.5 percent recorded in January 2020. This fact highlights the deflationary pressures created by the pandemic and the initial lockdowns in March and April.

On Thursday, the initial jobless claims report for the week ending January 9 will be released. Economists expect to see 785,000 initial unemployment claims filed during the week, marking a modest improvement from the 787,000 initial claims filed the week before. As a result, in line with last week’s report, this number would likely be seen as a positive development. It should help calm concerns regarding a potential surge in initial claims due to states catching up on reporting following holiday-related delays. Continuing claims, which are reported with a one-week lag to initial claims, are also expected to show a modest decline during the week. If estimates hold, this report would be moderately encouraging. Nonetheless, it would indicate that the labor market is facing headwinds created by the pandemic to start the year.

Friday will see the release of the December Producer Price Index report. Headline producer prices are expected to rise by 0.4 percent during the month, up from the 0.1 percent increase in November. On a year-over-year basis, headline prices are slated to rise by 0.7 percent in a small decrease from November’s 0.8 percent annual producer inflation rate. Core producer prices, which strip out energy and food prices, are expected to rise by 0.1 percent in December and 1.3 percent on a year-over-year basis. If estimates prove accurate, this week’s two inflation reports would show that inflation remains well constrained below the Federal Reserve’s (Fed’s) stated 2 percent long-term target. Given continued weakness in the job market and the risks presented by the pandemic, the Fed is not expected to react to modest rising inflationary pressure in the foreseeable future.

On Friday, we’ll also get December’s retail sales report. Sales are expected to remain flat during the month, which would be an improvement from their 1.1 percent decline in November. Headline retail sales fell in both October and November, so a flat month in December would be a positive sign that the recent declines did not begin a long-term trend. Economists expect to see rising auto sales and gas prices supporting headline retail sales growth during the month. Core retail sales, which strip out the impact of volatile auto and gas sales, are expected to fall by 0.6 percent. This result would be a modest improvement from the 0.8 percent decline in November but would be concerning given the importance of consumer spending to the overall economy. We can hope that the new round of federal stimulus announced at the end of December will spur faster sales growth. But given the timing of the stimulus, we will have to wait to see any effects from a potential tailwind on spending data.

Friday will also see the release of the December industrial production report. Industrial production is expected to grow by 0.5 percent during the month, marking a slight increase from the 0.4 percent rise in November. Some of this growth is anticipated because of the rebound in utility output in December, following an unseasonably warm November that saw output fall and drag down overall production. Manufacturing output is expected to grow by 0.4 percent in December, down from the 0.8 percent growth in November. As we saw with December’s manufacturing confidence numbers, the manufacturing sector has remained impressively resilient in the face of the third wave of infections. This fact supports the expectations for continued production growth. In addition, most factories have not been subject to the new set of lockdowns at the state and local levels. So, manufacturers should be able to withstand the third wave of infections better than in March and April, when many factories were forced to close. If estimates hold, this report would represent an encouraging highlight on the continued strength of manufacturing the sector.

We’ll finish the week with the preliminary estimate of the University of Michigan consumer sentiment survey for January. This widely followed measure of consumer confidence is expected to decline modestly from 80.7 in December to 80 in January. Given the worsening public health picture and the deteriorating employment situation during the month, a decline is understandable. Following November’s unexpected surge in confidence, the anticipated result would be slightly disappointing. Still, it would leave the index well above the pandemic-induced low of 71.8 it hit in April, indicating that consumers are showing more resiliency during the third wave of infections compared with the first. Nonetheless, even if the index remains well above the pandemic lows, it will be far from the pre-pandemic high of 101 recorded in February 2020. Consumer confidence will continue to be a widely followed economic indicator, as rising confidence typically supports faster consumer spending growth.

Disclosures: Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. All indices are unmanaged and are not available for direct investment by the public. Past performance is not indicative of future results. The S&P 500 is based on the average performance of the 500 industrial stocks monitored by Standard & Poor’s. The Nasdaq Composite Index measures the performance of all issues listed in the Nasdaq Stock Market, except for rights, warrants, units, and convertible debentures. The Dow Jones Industrial Average is computed by summing the prices of the stocks of 30 large companies and then dividing that total by an adjusted value, one which has been adjusted over the years to account for the effects of stock splits on the prices of the 30 companies. Dividends are reinvested to reflect the actual performance of the underlying securities. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a market capitalization-weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index. The Bloomberg Barclays US Aggregate Bond Index is an unmanaged market value-weighted performance benchmark for investment-grade fixed-rate debt issues, including government, corporate, asset-backed, and mortgage-backed securities with maturities of at least one year. The U.S. Treasury Index is based on the auctions of U.S. Treasury bills, or on the U.S. Treasury’s daily yield curve. The Bloomberg Barclays US Mortgage Backed Securities (MBS) Index is an unmanaged market value-weighted index of 15- and 30-year fixed-rate securities backed by mortgage pools of the Government National Mortgage Association (GNMA), Federal National Mortgage Association (Fannie Mae), and the Federal Home Loan Mortgage Corporation (FHLMC), and balloon mortgages with fixed-rate coupons. The Bloomberg Barclays US Municipal Index includes investment-grade, tax-exempt, and fixed-rate bonds with long-term maturities (greater than 2 years) selected from issues larger than $50 million. Basis points (bps) is a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 1/100th of 1 percent, or 0.01 percent.

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®