Weekly Market Update, March 29, 2021

Presented by Mark Gallagher

General Market News
• Inflation fears have increased recently, and yet inflation remains muted, growing at just 1.4 percent year-over-year, according to the core personal consumption expenditures (PCE) price index. In August, the Federal Reserve agreed to let the PCE price index run hot to get average inflation closer to the targeted 2 percent level, so this data is worth watching. On Monday morning, the 10-year Treasury yield opened at 1.65 percent, a decline of 12 basis points (bps) from last Monday’s open of 1.73 percent. The 30-year yield opened at 2.36 percent, down from last week’s open of 2.44 percent. There was a slight increase on the shorter end of the curve, with the 2-year rising 0.2 bps to Monday’s open of 0.14 percent.
• The S&P 500 and Dow Jones Industrial Average led the way for domestic indices last week. The Nasdaq Composite lost roughly half a percent, as investors stuck with staples- and energy-focused indices. REITs, consumer staples, and energy were among the top-performing sectors. Despite lower prices, the energy sector moved higher after the closure of the Suez Canal forced energy tankers to take the long route around Africa. The worst-performing sectors included communication services, consumer discretionary, and financials.
• On Monday, the February existing home sales report was released. The pace of existing home sales fell by 6.6 percent during the month against forecasts for a more modest 3 percent decline. This larger-than-expected drop is likely due, in large part, to inclement weather during the month. Year-over-year, existing home sales are up 9.1 percent, highlighting the rebound in sales we’ve seen since initial lockdowns were lifted last year. That increase has been largely driven by record-low mortgage rates and shifting home buyer preferences due to the pandemic; however, looking ahead, low levels of supply and rising mortgage rates and prices may serve as a headwind for significantly faster levels of existing home sales.
• Tuesday saw the release of the February new home sales report. The pace of new sales fell 18.2 percent during the month, which was a much larger decline than the 5.7 percent drop that was forecasted. As with existing home sales, new home sales were hampered by winter storms that reduced home buyer foot traffic. New home sales are a smaller and often more volatile portion of the housing market compared with existing home sales. This decline brought the pace of new home sales to a nine-month low. Even with the larger-than-expected decline in February, the pace of new home sales is up 8.2 percent year-over-year. We may be poised for a rebound in housing sales in the coming months given moderating weather, but rising mortgage rates and low supply levels could continue to pressure notably faster sales growth.
• On Wednesday, the preliminary estimate of February’s durable goods orders report was released. Durable goods orders fell 1.1 percent during the month, following an upwardly revised 3.5 percent increase in January. This was below economist estimates for a 0.5 percent increase during the month and was likely due, in large part, to winter weather. The decline was widespread, as core durable goods orders, which strip out the impact of volatile transportation orders, fell 0.9 percent against calls for a 0.5 percent rise. These declines in headline and core durable goods orders echo similar weather-related declines we saw in manufacturing output. Business confidence remains at high levels, and, with a return to more normal weather in March, durable goods orders are expected to rebound next month, which would be a good sign for overall business spending in the quarter.
• On Friday, the February personal income and personal spending reports were released. Personal spending fell 1 percent during the month, partially offsetting the upwardly revised 3.4 percent increase in spending in January. This decline was slightly worse than economist estimates for a 0.8 percent drop but echoed a similar decline in retail sales during the month. Personal income fell 7.1 percent, which was slightly better than economist estimates for a 7.2 percent decline. Personal income has been very volatile on a month-to-month basis since the start of the pandemic, driven by shifting federal stimulus and unemployment payments. The decline in February is due to a lack of stimulus after a round of $600 checks caused income to surge 10.1 percent in January. Looking ahead, income and spending are expected to rebound in March due to the tailwind from the recent $1.9 trillion stimulus bill.
• We finished the week with Friday’s second and final release of the University of Michigan consumer sentiment survey for March. The initial estimate, released earlier in the month, saw this widely followed measure of consumer confidence increase from 76.8 in February to 83 in March; the second estimate showed further improvement, with the index finishing the month at 84.9. Better than economist estimates for an increase to 83.6, this represents a new post-pandemic high for the index. The intramonth improvement was driven by improving consumer views on current economic conditions and future expectations. The most recent stimulus bill and continued public health improvements likely contributed to the better-than-expected result. This is a very good sign for a potential consumer spending rebound in March, as improved confidence and another round of stimulus checks reaching bank accounts should help support a swift recovery for spending. Overall, this was an encouraging report that points toward a faster-than-expected recovery as we enter the spring.

Equity Index Week-to-Date Month-to-Date Year-to-Date 12-Month
S&P 500 1.58% 4.40% 6.20% 59.08%
Nasdaq Composite –0.57% –0.35% 2.11% 76.53%
DJIA 1.36% 7.06% 8.58% 56.19%
MSCI EAFE –0.55% 2.54% 3.72% 46.27%
MSCI Emerging Markets –2.16% –2.22% 1.55% 58.47%
Russell 2000 –2.88% 1.01% 12.71% 98.61%

Source: Bloomberg, as of March 26, 2021

Fixed Income Index Month-to-Date Year-to-Date 12-Month
U.S. Broad Market 0.35% –3.28% 1.28%
U.S. Treasury 0.40% –3.96% –4.08%
U.S. Mortgages 0.16% –1.06% –0.04%
Municipal Bond 0.41% –0.35% 5.12%

Source: Morningstar Direct, as of March 26, 2021

What to Look Forward To
On Tuesday, the Conference Board Consumer Confidence Index for March will be released. Confidence is expected to increase from 91.3 in February to 96 in March, echoing the improvement we saw in the University of Michigan consumer sentiment survey during the month. If the estimates hold, this release would mark three straight months with improving confidence. In addition, it would bring the index to its highest level since October 2020. This was largely driven by improving consumer views on current economic conditions during the month, which in turn was likely due to the positive impact of federal stimulus payments and the improving public health situation. If we continue to see similar improvements in confidence in March, they would be a good sign for a potential rebound in consumer spending. Improving confidence typically supports faster spending growth.

On Thursday, the initial jobless claims report for the week ending March 27 is set to be released. Economists expect to see the number of initial unemployment claims decline modestly from 684,000 to 678,000. This result would bring the pace of weekly layoffs to its lowest level since the start of the pandemic, bettering the previous post-lockdown low from the week before. The improvement we’ve seen recently for initial claims is likely due in large part to easing state and local restrictions put in place to slow the third wave of infections. With this and the anticipated tailwind from the recent stimulus bill, we may be set for accelerated improvement for the labor market over the coming weeks. This would be a good sign for the pace of the overall economic recovery.

Thursday will also see the release of the Institute for Supply Management Manufacturing index for March. This widely followed gauge of manufacturer confidence is expected to increase from 60.8 in February to 61 in March. If the estimates hold, the index would sit at its highest level since 2004, highlighting the impressive rebound in manufacturer confidence seen since initial lockdowns were lifted last year. In February, manufacturer confidence was supported by high levels of buyer demand and low levels of business inventory. These trends are expected to remain supportive in March. This is a diffusion index, where values above 50 indicate growth. Manufacturing confidence near current levels would support continued healthy levels of spending and growth for the industry, which in turn would be a good sign for overall economic growth.

We’ll finish the week with Friday’s release of the March employment report. Economists expect to see 623,000 jobs added during the month, which would be a notable increase from the 379,000 jobs gained in February. If the estimates prove accurate, this report would represent the most jobs added in a month since October 2020. This would be an encouraging signal that improvements on the public health front and the associated easing of state and local restrictions are driving an accelerating labor market recovery. The underlying data is also expected to show improvement, with the unemployment rate set to fall from 6.2 percent to 6 percent. This decline would bring the report to a new post-lockdown low. Ultimately, a lot of work must be done to get employment back to pre-pandemic levels. Nonetheless, given the improvements on the public health front and the tailwind from the recent stimulus bill, we may be set for a faster recovery for the job market over the next few months.

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®

Weekly Market Update, March 22, 2021

Presented by Mark Gallagher

General Market News
• Rates continued to rise last week. On Monday morning, the 10-year Treasury yield opened just below 1.71 percent, an increase of 8.5 basis points from last week’s open of 1.63 percent. The 30-year opened just above 2.41 percent, up from last week’s open of 2.36 percent. Finally, on the shorter end of the curve, the 2-year opened last week at 0.15 percent and remained flat through Monday morning’s open. Despite comments from Federal Reserve (Fed) Chair Jerome Powell, rates did not rise based on inflation concerns. Powell continued to highlight the Fed’s stance of keeping rates low for some time amid uncertainty in its economic forecasts.
• Markets were down modestly last week. The exception was the developed international space (predominantly Eurozone and Japan). Although rising yields weigh on future growth prospects, these stocks rallied after the AstraZeneca vaccine was reapproved for use by the European Medicines Agency following concerns regarding blood clots. The Eurozone economy, which has fewer big technology names than the U.S., also benefited from its lack of exposure to growth.
• In the U.S., small-caps were among the hardest hit when the Fed announced that its policy of easing bank leverage restrictions would expire at the end of March. Small-caps have close to 16 percent exposure to financials, while the S&P 500 has only 11.5 percent.
• On Tuesday, the February retail sales report was released. Retail sales fell 3 percent, well below economist estimates for a more modest 0.5 percent decline. This decline offset some of the upwardly revised 7.6 percent rise in sales in January. The January spending surge was driven in large part by the stimulus checks that hit bank accounts during the month, and the February pullback is partially explained by the lack of recurring stimulus payments. In addition, winter storms that hit much of the country during the month served as a temporary headwind for consumer spending growth. Core retail sales, which strip out the impact of volatile auto and gas sales, fell 3.3 percent after rising 8.5 percent in January. Looking forward, the most recent round of stimulus checks and a return to more normal weather patterns are expected to serve as a tailwind for faster sales growth in March.
• Tuesday also saw the release of the February industrial production report. Industrial production fell 2.2 percent, which was below economist estimates for a 0.3 percent increase. Manufacturing output declined 3.1 percent during the month against economist estimates for a 0.2 percent increase. This marks the first month with declining manufacturing output since last April, when lockdowns shut factories across the country. As was the case with February’s retail sales report, industrial production was seriously hampered by winter storms, with mining and chemicals output seeing sharp weather-related declines. Despite the declines, industrial production and manufacturing output have recovered well since initial lockdowns were lifted last year, and economists expect to see a rebound in production with more temperate weather in March.
• Also on Tuesday, the National Association of Home Builders Housing Market Index for March was released. This widely followed measure of home builder confidence fell from 84 in February to 82, which was below economist estimates for no change. This result still leaves the index above the pre-pandemic high of 76 from December 2019, highlighting the impressive increase in home builder confidence over the past year. That confidence has been buoyed by record-low mortgage rates and shifting home buyer preferences, leading to a surge in prospective home buyers. The report showed that prospective home buyer foot traffic remains strong; however, home builders cited rising lumber costs as a challenge during the month. Looking forward, rising construction costs and mortgage rates may serve as a headwind for significantly higher levels of home builder confidence. Nonetheless, if confidence remains near current levels, it would still support the continued strong pace of new home construction.
• On Wednesday, the February building permits and housing starts reports were released. Starts fell 10.3 percent against calls for a 1.3 percent decline, while permits fell 10.8 percent against forecasts for a 7.2 percent decline. These gauges of new home construction can be quite volatile on a month-to-month basis; however, both have rebounded notably since initial lockdowns were lifted last year. Permits, which are a proxy for future construction, hit a 14-year high in January and are up 17 percent year-over-year, indicating continued strong levels of new home construction are expected. Starts were negatively affected by winter storms during the month but should rebound in the upcoming months, given continued high levels of home builder confidence and moderating weather.

Equity Index Week-to-Date Month-to-Date Year-to-Date 12-Month
S&P 500 –0.74% 2.78% 4.55% 72.71%
Nasdaq Composite –0.77% 0.22% 2.70% 93.64%
DJIA –0.45% 5.62% 7.12% 73.88%
MSCI EAFE 0.59% 3.11% 4.29% 63.59%
MSCI Emerging Markets –0.81% –0.06% 3.79% 69.98%
Russell 2000 –2.76% 4.00% 16.04% 128.37%

Source: Bloomberg, as of March 19, 2021

Fixed Income Index Month-to-Date Year-to-Date 12-Month
U.S. Broad Market –0.28% –3.61% 3.61%
U.S. Treasury –0.30% –4.34% –2.84%
U.S. Mortgages –0.36% –1.21% 1.71%
Municipal Bond –0.51% –0.76% 12.92%

Source: Morningstar Direct, as of March 19, 2021

What to Look Forward To
On Monday, the February existing home sales report was released. The pace of existing home sales fell by more than expected, declining by 6.6 percent during the month against forecasts for a more modest 3 percent drop. This result is likely due in large part to the inclement weather in February. Still, despite the drop in sales reported, existing home sales are up by 9.1 percent on a year-over-year basis. This result highlights the segment’s rebound since initial lockdowns were lifted last year. Over the past year, the rising pace of existing home sales has been largely driven by record-low mortgage rates and shifting home buyer preference due to the pandemic. Looking forward, however, low supply and rising mortgage rates and prices may serve as a headwind for significant growth to continue. With that said, sales near the current levels do represent a notable increase compared with pre-pandemic levels and signal a healthy housing market.

Tuesday will see the release of the February new home sales report. The pace of new home sales is expected to fall by 4.6 percent during the month, following a 4.3 percent increase in January. This segment is a smaller and often more volatile portion of the housing market compared with existing home sales. Still, if the estimate holds, new home sales would be up 23 percent year-over-year, highlighting continued high levels of home buyer demand. Economists expect that the winter weather will have hindered growth for new home sales, but low supply and rising prices also likely served as headwinds. Looking forward, supply constraints and rising prices may restrain significantly faster levels of growth in new home sales. Nonetheless, as the anticipated year-over-year figures demonstrate, sales near current levels would represent a strong housing market compared with pre-pandemic levels.

On Wednesday, the preliminary estimate of February’s durable goods orders report is set to be released. Orders are expected to rise by 0.9 percent during the month, following a 3.4 percent increase in January. Core durable goods orders, which strip out the impact of volatile transportation orders, are expected to increase by 0.6 percent. If estimates hold, this report would mark 10 straight months with increased core durable goods orders. As these orders are often viewed as a proxy for business investment, they signal steady business spending. Business confidence and spending have remained impressively resilient since initial lockdowns were lifted last year. Durable goods orders growth in February would demonstrate continued business investment despite the inclement weather throughout much of the country.

Thursday will see the release of the initial jobless claims report for the week ending March 20. Economists expect to see initial unemployment claims fall from 770,000 to 735,000 for the week. This result would lower the four-week moving average for initial claims but would leave claims relatively range bound. Compared with December and January results, we have seen notable improvement in this report, but the number of weekly claims remains high on a historical basis. This signals continuing labor market stress, but the recent stimulus bill may serve as a tailwind. In addition, continued progress on implementing vaccinations should lead to an accelerated recovery for the labor market over the next few months. But until we see further progress in the weekly and monthly employment data, this report will continue to be widely monitored.

On Friday, the February personal income and personal spending reports are set to be released. Spending is expected to fall by 0.8 percent, following a 2.4 percent increase in February. Economists expect this result to be similar to the pattern in retail sales, which saw a stimulus-induced surge in January partially reversed in February. Incomes have been very volatile on a month-to-month basis since the start of the pandemic, driven by shifts in federal stimulus and unemployment payments. Incomes are expected to fall by 7 percent in February, which is understandable given the 10 percent increase recorded in January. Looking forward, the recent $1.9 trillion stimulus bill is expected to serve as a tailwind for a return to growth for both personal income and spending in March. The stimulus checks have already started to hit bank accounts. So, while the anticipated declines in February’s personal spending and income figures may be disappointing, the potential for a swift recovery in March is a good sign that the weakness may be transitory.

We’ll finish the week with Friday’s second and final release of the University of Michigan consumer sentiment survey for March. The initial estimate saw this widely followed measure of consumer confidence increase by more than expected. It rose from 76.8 in February to 83 in March, against calls for a more modest increase to 78.5. Economists expect the index to record a further rise to 83.5 at month-end. If the estimate holds, it would represent a new post-pandemic high for the index, demonstrating improving consumer confidence as we head into the spring. The improvement on the public health front and recent passage of another federal stimulus bill are expected to support higher levels of intramonth confidence. Historically, higher levels of consumer confidence have translated into faster levels of consumer spending growth. Accordingly, any improvement for the index throughout the month would be another positive signal for March’s spending figures.

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®

Weekly Market Update, March 15, 2021

Presented by Mark Gallagher

General Market News
• Rates moved higher last week but at a more muted pace, with the 10-year Treasury yield opening just shy of 1.58 percent and closing at 1.64 percent, where it remained through Monday’s open. The 30-year yield opened at almost 2.40 percent, up from last week’s open of 2.30 percent. There was a slight increase in yields on the shorter end of the curve as well, with the 2-year opening Monday at 0.15 percent.
• On Thursday, President Biden signed the American Rescue Plan Act of 2021. The $1.9 trillion stimulus plan will help vaccine distribution and testing, while providing aid to state and local governments, individuals, and businesses. Markets rallied, with the Russell 2000 Index leading the way and posting a weekly gain of more than 7 percent. The aid for small businesses, combined with rising interest rates, supports this index, as it provides exposure to regional banking. The top-performing sectors, which supported a cyclical recovery theme, were real estate, consumer discretionary, utilities, materials, industrials, and financials. The worst-performing sectors were communication services, energy, health care, and technology. Communication services was hit as investors questioned how reopening the economy will affect companies such as Netflix, Facebook, and Disney.
• On Wednesday, the February Consumer Price Index report was released. Consumer prices increased by 0.4 percent, which was in line with economist estimates and slightly higher than the 0.3 percent increase in January. On a year-over-year basis, consumer inflation rose from 1.4 percent in January to 1.7 percent in February. Part of this increase was due to rising gas prices. Core consumer prices, which strip out the impact of volatile food and energy prices, rose by a modest 0.1 percent during the month and 1.3 percent year-over-year. Consumer inflation has largely remained constrained throughout the pandemic and, even with the rise in prices in January and February, year-over-year it remains well below the pre-pandemic high of 2.5 percent from last January.
• Friday saw the release of the February Producer Price Index report. Producer prices increased by 0.5 percent and 2.8 percent year-over-year. This was largely in line with economist estimates for 0.5 percent and 2.7 percent growth, respectively. As was the case with consumer inflation, rising gas prices played a role in the increased inflation rate during the month. Core producer inflation, which strips out volatile food and energy prices, showed a more muted 0.2 percent monthly increase and a 2.5 percent year-over-year growth rate. The rise in prices brought the rate of producer inflation to its fastest level since late 2018, driven in large part by increased raw material and transportation costs for producers.
• We finished the week with Friday’s release of the preliminary estimate of the University of Michigan Consumer Sentiment survey for March. This widely followed gauge of consumer sentiment beat expectations, rising from 76.8 in February to 83 in March against forecasts for a more modest improvement to 78.5. This better-than-expected result, which brought the index to its highest level in a year, was driven by improvements to consumer views on the present situation as well as future expectations, likely reflecting the improving public health situation and the anticipated tailwind from the most recent federal stimulus bill. Historically, higher levels of consumer confidence have translated into faster consumer spending growth, so this is a good sign for consumer spending in the upcoming months.

Equity Index Week-to-Date Month-to-Date Year-to-Date 12-Month
S&P 500 2.69% 3.55% 5.33% 47.98%
Nasdaq Composite 3.12% 1.00% 3.50% 70.52%
DJIA 4.17% 6.10% 7.60% 44.47%
MSCI EAFE 3.00% 2.50% 3.68% 53.22%
MSCI Emerging Markets 0.70% 0.75% 4.64% 54.56%
Russell 2000 7.36% 6.95% 19.33% 96.94%

Source: Bloomberg, as of March 12, 2021

Fixed Income Index Month-to-Date Year-to-Date 12-Month
U.S. Broad Market –0.43% –3.35% 1.51%
U.S. Treasury –0.51% –4.06% –2.27%
U.S. Mortgages –0.19% –0.86% 1.94%
Municipal Bond 0.42% –0.24% 6.05%

Source: Morningstar Direct, as of March 12, 2021

What to Look Forward To
On Tuesday, the February retail sales report is set to be released. Retail sales are expected to decline by 0.3 percent during the month. This would follow a 5.3 percent increase in January, which was driven in large part by the December stimulus checks hitting bank accounts. With that impact fading, a drop in sales in February is understandable. The winter storms throughout much of the country are also expected to serve as a headwind for faster sales growth. Core retail sales, which strip out volatile auto and gas sales, should show a similar 0.4 percent decline in February following a strong 6.1 percent increase in January. Looking forward, a return to faster retail sales growth is expected in the next month or two. The impetus for growth should come from recent improvements in consumer confidence and the anticipated tailwind from the recently passed federal stimulus bill that will send another round of checks to American bank accounts.

Tuesday will also see the release of the February industrial production report. Industrial production is expected to increase by 0.4 percent during the month, following a 0.9 percent increase in January. This anticipated slowdown is partially due to a drop in oil refining in February, caused by the negative effects of winter storms in key production states. Industrial production has rebounded well since initial lockdowns were lifted last year, powered in part by improving manufacturing production. Manufacturing output is expected to show solid 0.5 percent growth during the month, following a 1 percent increase in January. If estimates prove accurate, they would mark 5 straight months with increased industrial production and 10 straight months with rising manufacturing output. Ultimately, this report is expected to show continued resilience for the manufacturing industry despite the weather-related headwinds in February.

Tuesday’s third major release will be the release of the National Association of Home Builders Housing Market Index for March. This widely followed measure of home builder confidence is expected to remain unchanged at 84, leaving it close to the record high of 90 recorded in November 2020. This is a diffusion index, where values above 50 indicate expansion, so the anticipated result would signal continued strong growth for the housing sector. Home builder confidence has been buoyed over the past year by record-low mortgage rates and shifting homebuyer preferences that have led to a surge in prospective home buyers. The supply of homes available for sale is near record lows, which also supports higher levels of home builder confidence. Overall, if estimates prove accurate, this release would be a sign that home builders continue to see a healthy housing sector.

On Wednesday, the February building permits and housing starts reports are set to be released. Permits and starts are expected to fall by 7.2 percent and 0.6 percent, respectively, during the month. These gauges of new home construction can be quite volatile on a month-to-month basis, although both have rebounded notably since initial lockdowns were lifted. Building permits hit their highest level since 2006 in January, and starts also remain well above pre-pandemic levels. Once again, the weather likely served as a headwind for faster growth in some regions of the country, which could contribute to the anticipated declines for new home building activity. Looking forward, rising labor and material costs may prevent significantly faster levels of new home construction. If the pace of construction remains near current levels, however, it would continue to signal a strong housing sector.

Wednesday will also see the release of the Federal Open Market Committee rate decision from the Federal Reserve’s (Fed’s) March meeting. This meeting will mark one year since the Fed cut the federal funds rate to virtually zero at the start of the lockdowns. Economists do not expect any rate changes at this meeting. Instead, the Fed is expected to continue its easy monetary policy in support of the ongoing economic recovery. The passage of the recent $1.9 trillion stimulus bill will likely be reflected in higher growth and inflation expectations from the central bank. But with the labor market recovery lagging, the Fed is not expected to raise rates for the foreseeable future. Fed Chairman Jerome Powell should continue to provide supportive statements at his post-meeting press conference, which will likely also include discussion about the recent increase in long-term rates. Currently, the Fed has no plans to address rising long-term rates, so any information on how it views this development will be interesting. It’s an open question whether the Fed will signal any plans for a policy change to rein in longer-term rates.

We’ll finish the week with Thursday’s release of the initial jobless claims report for the week ending March 13. Economists expect to see a modest decline in the number of initial weekly unemployment claims during the week. Economists are calling for a drop from 712,000 initial claims to 703,000. If estimates prove accurate, they would represent the lowest number of weekly initial claims reported since initial lockdowns were lifted, beating the 711,000 claims made in the week ending November 6, 2020. As previously mentioned, initial claims have been volatile on a week-to-week basis. Notably, however, we have seen a decline in initial claims over the past month as state and local restrictions have been eased. If similar levels of improvements continue over the next few weeks, they would signal an accelerating job market recovery. They would also be a welcome indication that improvements on the public health front are spurring the overall 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®

Weekly Market Update, March 8, 2021

Presented by Mark Gallagher

General Market News
• Rates continued to rise last week, with the 10-year Treasury yield opening at almost 1.41 percent and closing at 1.59 percent. On Monday morning, the 10-year opened just shy of 1.60 percent, and the 30-year opened at 2.32 percent, up from last week’s open of 2.16 percent. There was a slight increase in yields on the shorter end of the curve as well, with the 2-year yield opening at 0.15 percent. Last week, Federal Reserve (Fed) Chairman Jerome Powell said he expects some transient inflation in the near term. There is a rumor that the Fed may relaunch Operation Twist, which was last launched in 2011 and involved the Fed selling short-term Treasuries and purchasing longer-dated ones to mitigate rising financing costs.
• We saw mixed trading in equity markets last week. Technology was again the largest detractor, and the tech-oriented Nasdaq Composite continued its recent downturn. The Dow Jones Industrial Average posted a gain of 1.85 percent, however, with financials, energy, and industrials all among the top contributors. Energy was supported by an increase of 7.5 percent in West Texas Intermediate crude oil prices. The increase in yields on the shorter end of the curve remains supportive of financials, leading Exxon Mobil, Berkshire Hathaway, Bank of America, Chevron, and JPMorgan Chase to be top performers.
• Monday saw the release of the Institute for Supply Management (ISM) Manufacturing index for February. This widely followed gauge of manufacturer confidence improved by more than expected, rising from 58.7 in January to 60.8 in February against forecasts for a more modest increase to 58.9. This brought manufacturer confidence to a three-year high, as factory orders, production, and employment all saw faster growth during the month. This is a diffusion index, where values above 50 indicate expansion, so this result signals healthy levels of growth for the manufacturing industry. Manufacturer confidence has rebounded well since initial lockdowns were lifted last year; the index sits well above its pre-pandemic high of 51.1 from January 2020. Business confidence and spending have remained resilient throughout the third wave, and this result bodes well for continued strong levels of manufacturing output and spending.
• On Wednesday, the ISM Services index for February was released. Service sector confidence fell more than expected, dropping from 58.7 in January to 55.3 in February against forecasts for no change. This decline was partially due to inclement weather throughout much of the country that disrupted supply chains and caused shipping delays. This is another diffusion index, where values above 50 indicate expansion, so this result still signals healthy levels of service sector confidence, which has rebounded well since initial lockdowns were lifted. Underlying data pointed toward faster growth in the future, as the backlog of orders for service sector businesses hit a six-month high in February. Ultimately, though the index’s decline was disappointing compared with estimates, service sector confidence remains healthy and may be poised for further improvements in the coming months.
• We finished the week with Friday’s release of the February employment report. The report showed the economy added 379,000 jobs during the month, an improvement from the upwardly revised 166,000 jobs added in January and above economist estimates for a more modest 200,000 jobs. This better-than-expected result was largely due to the easing of state and local restrictions that allowed businesses to reopen. Leisure and hospitality jobs accounted for most of the jobs added, as this hard-hit industry gained 355,000 new jobs in February. The underlying data was positive as well, as the unemployment rate dropped from 6.3 percent to 6.2 percent. Overall, this was an encouraging report that showed the pace of the labor market recovery has improved to start the year. Although work remains in returning employment to pre-pandemic levels, this was a positive step that could signal faster job growth ahead.

Equity Index Week-to-Date Month-to-Date Year-to-Date 12-Month
S&P 500 0.84% 0.84% 2.57% 31.54%
Nasdaq Composite –2.05% –2.05% 0.37% 51.91%
DJIA 1.85% 1.85% 3.29% 24.48%
MSCI EAFE –0.49% –0.49% 0.66% 21.46%
MSCI Emerging Markets 0.05% 0.05% 3.91% 35.19%
Russell 2000 –0.38% –0.38% 11.15% 53.20%

Source: Bloomberg, as of March 5, 2021

Fixed Income Index Month-to-Date Year-to-Date 12-Month
U.S. Broad Market –0.80% –2.93% –1.28%
U.S. Treasury –0.83% –3.56% –3.67%
U.S. Mortgages –0.08% –0.67% 0.92%
Municipal Bond 0.31% –0.66% 1.11%

Source: Morningstar Direct, as of March 5, 2021

What to Look Forward To
On Wednesday, the February Consumer Price Index is set to be released. Economists expect to see consumer prices increase by 0.4 percent during the month, following a 0.3 percent increase in January. On a year-over-year basis, consumer inflation will likely rise to 1.7 percent from 1.4 percent in January. Part of the anticipated uptick is due to rising gas prices, which went up by 6.6 percent in February. Core consumer prices, which strip out the impact of volatile food and energy prices, are expected to show a more modest 0.2 percent monthly increase and a 1.4 percent gain year-over-year. Throughout the pandemic, consumer inflation has largely remained constrained. So, even with an increase in February, it’s expected to remain below the 2.5 percent year-over-year growth rate recorded in January 2020. With that said, rising demand and supply constraints may lead to faster price growth in the upcoming months.

On Thursday, the initial jobless claims report for the week ending March 6 will be released. Economists expect to see the number of initial unemployment claims fall from 745,000 to 725,000. If estimates hold, the report for the first week of March would represent the lowest number of weekly initial claims since November 2020. Throughout December 2020 and January 2021, claims increased notably, but this was largely due to increased state and local restrictions. Accordingly, the improvement in February and March is a good sign that the easing of the restrictions has supported the labor market recovery. Still, despite the anticipated decline in initial claims and recent progress in lowering claims, the overall number of initial filers remains high on a historical basis. This weekly report will continue to be widely monitored until we see substantial progress in reducing the number of weekly initial unemployment claims.

Friday will see the release of the February Producer Price Index. Producer prices are expected to show 0.4 percent growth during the month, down from the 1.3 percent increase in January. On a year-over-year basis, producer prices should rise by 2.7 percent from the 1.7 percent gain in January. Core producer inflation, which strips out food and energy prices, is forecasted to show a 0.2 percent and 2.6 percent increase, respectively, on a monthly and year-over-year basis. If estimates prove accurate, this report would bring the pace of producer inflation to its highest level since 2018. Producer prices have seen widespread upwards pressure recently, driven by increasing demand and continued supply chain constraints. Although this trend has led to faster inflation to start the year, the Fed remains committed to keeping monetary policy supportive.

We’ll finish the week with Friday’s release of the preliminary estimate of the University of Michigan consumer sentiment survey for March. This widely followed gauge of consumer sentiment is expected to increase from 76.8 in February to 78 in March. If estimates hold, this release would leave the index well above the pandemic-induced low of 71.8 we saw last April, signaling continued consumer resilience throughout the third wave of COVID-19. The index would approach the post-lockdown high of 81.8 it hit in October, signaling an improvement in sentiment due in large part to better news on the public health front. Historically, higher levels of consumer confidence have translated into faster consumer spending growth. Any improvement for the index would be a positive signal for continued consumer spending growth in March.

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®