Presented by Mark Gallagher

General Market News
• The yield curve moved higher across the board last week, and a noticeable shift across all maturities also occurred. The U.S. 2-year Treasury yield opened the week at 0.743 percent and closed 12.7 basis points (bps) higher at 0.870 percent. The U.S. 10-year Treasury yield increased 25.7 bps to 1.769 percent. Finally, the U.S. 30-year Treasury yield moved 21.2 bps higher, closing at 2.117 percent. Higher rates spooked equity market investors as the Federal Reserve’s (Fed’s) meeting minutes indicated it would be more aggressive with raising rates and tapering asset purchases.
• Global equity markets were down across the board last week as Treasury yield curve rates shifted higher. This resulted in high-flying technology and consumer discretionary names—including Microsoft (MSFT), NVIDIA (NVDA), Alphabet (GOOG/GOOGL), Amazon (AMZN), Netflix (NFLX), Adobe (ADBE), and SalesForce (CRM)—being sold off. Real estate, technology, health care, communication services, and consumer discretionary were among the hardest-hit sectors. Outperforming sectors included energy, financials, industrials, consumer staples, and materials. The market is punishing names that have benefited from the Fed’s actions during the pandemic, including the purchase of mortgage-backed securities, which have reduced mortgage and other interest rates and powered growth in technology and health care. The equity market appears to be playing with higher rates and inflation, which shows uncertainty over whether the Fed or inflation will win out in the short term and in 2022.
• On Tuesday, the Institute for Supply Management (ISM) Manufacturing survey for December was released. This widely monitored gauge of manufacturer confidence declined by more than expected during the month, as the index fell from 61.1 in November to 58.7 in December against calls for a more modest drop to 60. This is a diffusion index where values above 50 indicate expansion, so this result still signals growth for the manufacturing industry. Manufacturer confidence was supported in 2021 as lessened restrictions on business activity and the overall economic recovery allowed for increased factory production throughout the year. High levels of business confidence have historically supported faster levels of business spending growth, so December’s result is a good sign for business spending as we kick off the new year.
• Wednesday saw the release of the December Federal Open Market Committee meeting minutes. These minutes were highly anticipated due to the central bank’s announcement that it would be cutting the level of its monthly asset purchases by more than initially expected in the months ahead. This announcement signaled that the Fed is committed to normalizing monetary policy sooner than originally anticipated. Economists and investors were looking forward to the release of the minutes in order to gain insight into what factors caused the Fed to increase the pace of the asset purchase tapering. The minutes showed that Fed members were concerned about the high inflation rates throughout 2021, and the attempt to normalize monetary policy more quickly was due, in part, to fears about continued inflationary pressure in 2022. The minutes also contained preliminary discussion about the Fed’s balance sheet and potential steps to lower the Fed’s Treasury bond holdings in the years ahead. While it’s too early for any firm commitment for balance sheet reduction from the central bank, the preliminary discussions indicated that some Fed members viewed the end of 2022 as a potential start date for balance sheet reductions, which would be another step toward normalizing monetary policy.
• On Thursday, the November international trade balance report was released. The report showed that the trade deficit increased by less than expected, with the gap rising from a revised $67.2 billion in October to $80.2 billion in November against calls for further expansion to $81 billion. This brought the monthly trade deficit to its second-largest level on record, trailing only September’s $81.4 billion deficit. The increase in the deficit was driven by a surge in imports during the month, as retailers tried to stock up for the important holiday season. Imports increased 4.6 percent, which was more than enough to offset the 0.2 percent increase in exports. Trade was a net drag on economic growth in the third quarter, and the deficit in November indicates that the headwind may continue into the fourth quarter. Looking forward, global economic recovery is expected to help lead to a more normal trading environment.
• Thursday also saw the release of the ISM Services index for December. Service sector confidence dropped by more than expected, as the index fell from 69.1 in November down to 62 in December against calls for a more modest decline to 67. This larger-than-expected decline left the index in healthy expansionary territory, as this is another diffusion index where values above 50 indicate growth. That said, service sector business owners noted a slowdown in new orders, which was likely due to the uncertainty caused by the Omicron variant. Despite the decline in confidence during the month, the employment component of the report showed that service sector businesses continued to hire in December, which was an encouraging sign for future service sector growth.
• We finished the week with Friday’s release of the December employment report. The report showed that 199,000 jobs were added during the month, which was down from the upwardly revised 249,000 jobs that were added in November and below economist estimates for 450,000 jobs. While the miss against expectations was disappointing, the monthly job figures have been subject to high levels of revisions over the past few months, as the October and November job reports were revised up by a combined 141,000 jobs. Additionally, the underlying data showed further signs of improvement, as the unemployment rate fell from 4.2 percent to 3.9 percent against calls for a more modest drop to 4.1 percent. This marks an impressive improvement, as the unemployment rate fell from 6.7 percent in December 2020 to 3.9 percent in December 2021. Given the relatively low unemployment rate and continued wage growth, the report is expected to support the Fed’s decision to increase the pace of its asset purchase tapering in the months ahead.

  Source: Bloomberg, as of January 7, 2022

  Source: Morningstar Direct, as of January 7, 2022

What to Look Forward To
Wednesday will see the release of the Consumer Price Index for December. Consumer prices are expected to increase 0.4 percent during the month, down from a 0.8 percent jump in November. On a year-over-year basis, the estimates are for 7.1 percent growth, up from a 6.8 percent rise in November. Core consumer prices, which strip out volatile food and energy prices, are expected to go up 0.5 percent during the month and 5.4 percent year-over-year. Tangled supply chains, lean business inventories, and high levels of pent-up consumer demand led to higher-than-anticipated consumer inflation throughout much of 2021. These inflationary pressures are expected to remain in play toward the end of the year. Given the recent actions and commentary from the Fed, many economists believe the central bank will move more swiftly to combat inflation in 2022. We may see a more hawkish Fed than currently expected.

On Thursday, the Producer Price Index for December is set to be released. Producer prices are also expected to increase 0.4 percent, following a 0.8 percent rise in November. As for headline year-over-year producer inflation, the calls are for a rise of 9.8 percent in December, slightly higher than November’s 9.6 percent year-over-year gain. Core producer prices, which strip out food and energy prices, are expected to go up 0.4 percent during the month and 8 percent year-over-year. As was the case with consumer prices, producer prices were pressured throughout 2021 due to supply chain constraints. Additionally, rising material and labor costs contributed to rising inflationary pressure felt by producers throughout 2021. If estimates prove accurate, this report would support the Fed’s anticipated plans for more aggressive policy in 2022.
Friday will see the release of the December retail sales report. Retail sales are expected to decline 0.1 percent during the month, following a 0.3 percent increase in November. If estimates hold, this report would mark the first drop for sales since July 2021. It would be a sign that rising medical risks in December weighed on consumer spending. Throughout most of last year, consumer spending growth was positive, supported by improvements on the public health front that allowed the easing of state and local restrictions. Although widespread shutdowns are not anticipated at this time, it’s possible the recent rise in case growth will negatively affect consumer spending in the short term. Given the importance of consumer spending to economic growth, this release will be widely monitored. Economists will use it to gauge the impact of recent case growth on spending and the overall economic recovery.

Friday will also see the release of the December industrial production report. Industrial production is expected to increase 0.3 percent during the month, following a 0.5 percent gain in November. If estimates hold, this report would mark three consecutive months with improved production. November’s solid result was supported by an increase in factory production and manufacturing output. Manufacturing production rose 0.7 percent in November, and economists expect that result to be followed by a 0.4 percent uptick in December. Capacity utilization in November reached the highest level since December 2018, and further improvements are expected in December’s report. Throughout the pandemic, producers have been slower to recover compared with consumers. Still, we’ve seen steady progress in getting production back to pre-pandemic levels. Overall, if estimates prove accurate, this report would mark a solid result. It would show that production continued to recover to end the year, supported by high levels of consumer and business demand.

We’ll finish the week with Friday’s release of the preliminary estimate of the University of Michigan consumer sentiment survey for January. Consumer sentiment is expected to decline slightly from 70.6 in December to 70 to start the new year. If estimates hold, this report would bring the index close to the recent low of 67.4 recorded in November 2021. Consumer sentiment dropped toward the end of last summer and remained well below pre-pandemic levels throughout the year. Consumers cited rising inflationary pressure as the major driver of the collapse in sentiment. The survey has, however, taken on a notable partisan split. Republican respondents expect significantly higher levels of inflation in the short and intermediate term compared with democrats. These disparate inflation expectations have caused overall confidence levels to diverge. Republican consumers had an overall sentiment level of 45.6 in December 2021, while democrats registered 90.8, marking one of the largest gaps on record. Looking forward, further progress in getting inflation under control will likely be needed before we see a notable improvement in overall consumer sentiment.

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 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 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 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
• The yield curve moved modestly higher last week with a majority of the move taking place on the short end of the curve. The 2-year U.S. Treasury yield opened the week at 0.693 percent and closed the week 4.1 basis points (bps) higher at 0.734 percent. The U.S. 10-year Treasury increased 1.9 bps to 1.513 percent. Finally, the 30-year Treasury was flat, opening and closing at 1.905 percent. The front end of the curve rose as more persistent inflation forced it to reduce its asset purchases at a faster clip, and rates could potentially follow if we continue to see lingering, elevated inflation.
• The U.S. equity markets were mixed last week as trends from 2021 started to reverse following the December Federal Open Market Committee (FOMC) meeting. The meeting, which stated the Federal Reserve (Fed) would speed up the rate at which it reduces its asset purchases, led investors to question whether rate hikes would shortly follow the taper, which is expected to end in March. As a result, the Dow Jones Industrial Average and International MSCI EAFE Index began to outperform as communication services, energy, and consumer discretionary struggled. Health care, consumer staples, industrials, and financials started to gain some appetite from investors as high-flying tech and communication services have underperformed after a strong 2020 and 2021.
• There were no major economic data releases last week.

  Source: Bloomberg

  Source: Morningstar Direct

What to Look Forward To
On Tuesday, the ISM Manufacturing index for December is set to be released. This widely monitored gauge of manufacturer confidence is expected to decline modestly from 61.1 in November to 60.2 in December. This is a diffusion index, where values above 50 indicate expansion. So, if the estimates hold, this report would signal continued growth for the manufacturing industry despite the anticipated decline. Throughout 2021, manufacturer confidence was supported by the easing of state and local restrictions, which allowed for more factory production. Historically, high manufacturing confidence has supported business investment and faster production growth, so the anticipated strong reading for December would be an encouraging signal. It would demonstrate that manufacturing output has continued to grow, despite the headwinds created by tangled global supply chains and the worsening public health situation.

On Wednesday, the December FOMC meeting minutes are set to be released. The minutes are expected to give economists and investors a closer look into the deliberations from the FOMC’s December meeting. At that meeting, the Fed announced it would reduce its secondary market asset purchases by more than expected in the months ahead. This was a signal that the Fed is moving to normalize monetary policy sooner than originally anticipated. While this announcement was widely expected, the minutes should give additional information on the factors contributing to the Fed’s change of heart. Looking forward, the Fed is expected to support maximum employment and stable prices. The Fed will also ease off the supportive policies put in place to combat the economic impact of the pandemic. We’ve seen notable progress for the labor market recovery since the expiration of initial lockdowns. As we kick off the new year, high levels of inflationary pressure will likely be the Fed’s primary concern.

On Thursday, the November international trade balance report is set to be released. The trade deficit is expected to increase from $67.1 billion in October to $74.1 billion in November. If estimates hold, this result would offset some of the recent decline in the monthly deficit. Still, the monthly deficit would remain well below the record $81.4 billion recorded in September. Throughout the pandemic, this deficit has increased notably, as the uneven global recovery and high consumer demand in the U.S. caused a surge in imports without a similar increase in exports. The previously released advanced estimate of the trade of goods showed that exports fell 2.1 percent in November, while imports increased 4.7 percent. Looking ahead, the continued global economic recovery is expected to lead to further normalization of trade. Still, we’ll likely need continued progress on the medical front before seeing a full return to normal trade levels.

Thursday will also see the release of the ISM Services index for December. This index, which monitors service sector confidence, is expected to decline modestly from a record high of 69.1 in November to 67.1 in December. As was the case with the manufacturing index, this is a diffusion index where values above 50 indicate growth, so the anticipated result would be a good sign. Service sector confidence spent much of 2021 at or near record highs. Contributing factors were the pent-up consumer demand and successful reopening efforts that led to a surge in service spending. The service sector accounts for the vast majority of economic activity in the country. Throughout 2021, strong levels of confidence and spending in this sector helped drive the overall economic recovery.

We’ll finish the week with Friday’s release of the December employment report. Economists expect to see 400,000 jobs added during the month, a solid increase from the 210,000 jobs added in November. Earlier in the year, hiring increased notably, due to the improving medical statistics and easing restrictions, as well as pent-up consumer demand. By year-end, however, the pace of improvements slowed a bit. With that said, if estimates hold, this report would mark 12 consecutive months with job growth, signaling further recovery for the labor market. The underlying data is also expected to show some improvements. The unemployment rate is set to fall from 4.2 percent in November to 4.1 percent in December. This would mark a decline from the December 2020 unemployment rate of 6.7 percent, highlighting the progress made in getting folks back to work in 2021.

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 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 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 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
• The yield curve moved modestly last week, with slight flattening on the back half as future growth projections continued to come down. The increased rate of tapering by the Federal Open Market Committee on Wednesday did little to surprise bond markets; this doubling was widely expected and the short end of the curve was not impacted by the news. The 2-year yield curve fell 1.3 basis points (bps), closing the week at 0.642 percent. The U.S. 10-year Treasury gave up 8 bps, closing at 1.402 percent. The U.S. 30-year gave up 6.5 bps, closing at 1.817 percent.
• U.S. equity markets were down last week as the Federal Reserve (Fed)’s decision to double the pace at which it reduced its asset purchases took some steam out of the market and high-flying growth names. Wednesday’s meeting saw Fed Chairman Jerome Powell focus on the price control mandate amid historically elevated inflationary data. This move represents a shift from the Fed—which had been primarily focused on its second mandate of full employment—and led investors to believe that this was a post-pandemic inflection point because the Fed will be less accommodative toward financial markets going forward. The names that sold off last week included cyclical and growth sectors in energy, consumer discretionary, and technology. The sectors that held up well were those less prone to inflation, such as health care, real estate, utilities, and consumer staples. We will see if this trend will continue as the Build Back Better plan looks to be shelved for the time being.
• On Friday, the Consumer Price Index for November was released. The report showed that consumer prices increased slightly more than expected, rising 0.8 percent against calls for a 0.7 percent increase. On a year-over-year basis, consumer prices rose 6.8 percent in November, which was up from the 6.2 percent year-over-year growth rate in October but in line with economist estimates. This marks the fastest pace in year-over-year headline consumer inflation since 1982 and signals continued high levels of price pressure on consumers. Core consumer prices, which strip out the impact of volatile food and energy prices, increased 0.5 percent during the month and 4.9 percent year-over-year, which was expected. This report served as a reminder that inflationary pressure remains high throughout the economy, which was one of the factors that drove the Fed to announce tighter monetary policy at its November meeting.
• Friday also saw the release of the preliminary estimate for the University of Michigan consumer sentiment index for December. Sentiment increased to start the month, rising from 67.4 in November to 70.4 to start December against calls for a more modest improvement to 67. The improvement for the headline index was driven by improving consumer views on current economic conditions and future expectations. November marked the lowest level for the index in a decade, so the modest improvement still left the index at potentially concerning levels. Consumer confidence has soured over the past few months, as rising concerns about inflation have weighed on sentiment. With that being said, consumer spending growth has remained strong despite the declining confidence, so rising concerns have not yet derailed the overall economic recovery.

Source: Bloomberg

Source: Morningstar Direct

What to Look Forward To
Wednesday will see the release of the Conference Board Consumer Confidence survey for December. This widely followed measure of consumer confidence is expected to increase modestly during the month, from 109.5 in November to 110.6 in December. If estimates hold, this would represent a partial rebound for the index after confidence slumped in November. But it would still leave the index well below the high of 128.9 we saw in June. Confidence has declined over the past few months, from summer highs—due in large part to rising concerns about inflation—as well as rising health risks—due to the Delta and Omicron variants. Historically, improving confidence has helped support increased consumer spending growth, so this will continue to be a widely monitored monthly data release due to the importance of consumer spending to the overall economy.

Wednesday will also see the release of the November existing home sales report. Existing home sales are expected to increase 3.3 percent during the month, following a better-than-expected 0.8 percent increase in October. If estimates prove to be accurate, this would bring the pace of existing home sales to their highest level since January and would signal continued strength for the housing market. Home sales growth has picked up notably compared to pre-pandemic levels, as low mortgage rates and shifting home buyer preference for more space due to the pandemic have spurred a surge in sales growth. This year’s sales growth has been especially impressive given the lack of existing homes for sale as well as rising prices and mortgage rates. If we do see continued sales growth in November, it would be a reminder that the housing sector remains a highlight of the current economic recovery.

On Thursday, the preliminary estimate for the November durable goods orders report is set to be released. Durable goods orders are expected to increase 1.8 percent during the month, following a 0.4 percent decline in October. The anticipated rebound in headline orders is partially due to a rebound in volatile commercial aircraft orders. Core durable goods orders, which strip out the impact of transportation orders, are set to increase 0.6 percent following a solid 0.5 percent increase in October. If estimates hold, this would mark nine straight months with core durable goods orders growth. Core durable goods orders are often viewed as a proxy for overall business investment, so this anticipated increase in November would be a positive sign that businesses continued to spend and invest to meet high levels of demand.

We’ll finish the week with Thursday’s release of the November personal spending and personal income reports. Both personal income and personal spending are expected to increase 0.5 percent during the month. If estimates hold, this would mark nine straight months of personal spending growth. Spending growth throughout much of the year has been supported by improvements on the public health front, which have allowed for an easing of state and local restrictions that supports steady spending growth. Personal income growth has been more volatile this year as shifting federal unemployment and stimulus payments have led to high levels of monthly volatility in average income. With that said, if estimates prove to be accurate, this would mark two consecutive months with rising personal income after the expiration of enhanced unemployment benefits in September caused income to decline.

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 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 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 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. 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
• The yield curve continued to rise on the front end and flatten beyond the 5-year Treasury note last week. Near-term inflationary concerns drove the short end of the curve higher and flattened the back end of the curve due to lower future growth expectations amid concerns from the Omicron variant as well as slower global growth. The 10-year Treasury yield opened last week at 1.482 percent and closed the week at 1.341 percent, a drop of 14.1 basis points (bps). The 30-year opened last week at 1.827 percent and closed at 1.676 percent, falling 15.1 bps. The front end of the curve moved higher following Federal Reserve (Fed) Chair Jerome Powell’s suggestion that the central bank may accelerate its taper. The 2-year rose 8.3 bps over the course of the week, closing at 0.591 percent.
• Global equity markets fell this week as the Omicron variant took the wind out of high-flying technology names. An additional factor in underperformance for sectors such as financials, real estate, and consumer staples was the news of a potentially faster cut in Fed purchases of mortgage-backed securities and treasuries. This news saw the short end of the Treasury yield curve move higher because it illustrated that the Fed has become more concerned about broadening inflation. This bodes well for financials as it widens spread on short-term loans and leads to expanding margins for the industry. The only market in positive territory was emerging markets, which rebounded following its strong sell-off. The week did end on a volatile note, however, with the announcement that Chinese rideshare company DiDi would go through a planned delisting once its shares were listed on the Hong Kong exchange.
• The Conference Board Consumer Confidence Index for November was released on Tuesday. Confidence declined by more than expected, as the index fell from a downwardly revised 111.6 in October to 109.5 against calls for a more modest drop to 110.9. This decline, which brought the index back in line with September’s 109.8 result, signals continued consumer unease. Although confidence remains well above the lockdown-induced lows we saw last year, rising medical risks and concerns about inflation have challenged consumer sentiment over the past few months. The discovery of the Omicron variant of the coronavirus in November likely contributed to the slightly larger-than-expected decline in confidence. Historically, improving confidence has helped support faster consumer spending growth, so the recent declines are worth monitoring. Nonetheless, consumer spending growth has remained strong despite declining confidence levels, as pent-up demand continues to power spending growth.
• Wednesday saw the release of the Institute for Supply Management (ISM) Manufacturing index for November. This widely followed measure of manufacturer confidence improved, rising from 60.8 in October to 61.1 against forecasts for 61.2. This is a diffusion index, where values above 50 indicate expansion, so the improvement was an encouraging sign that the manufacturing industry recovery continued to gain momentum. This strong result marks a seven-month high for the index, which has remained in expansionary territory since June 2020. Manufacturing confidence has been supported by high levels of buyer demand throughout the year, but tangled supply chains and high prices remain a headwind. The index improvement was driven in part by increased hiring growth, as manufacturers continue to spend and invest in their businesses to meet high levels of buyer demand.
• On Friday, the November employment report was released. The report showed that headline job growth slowed notably, with only 210,000 jobs added against forecasts for 550,000. While the September and October job reports were revised upward by 82,000 jobs, the headline job number for November was disappointing after a hiring surge in October. With that being said, the underlying data showed more encouraging results, as the unemployment rate fell from 4.6 percent in October to 4.2 percent against calls for a more modest decline to 4.5 percent. The monthly job report consists of two surveys, one of employers and the other of households. The headline job number comes from the employer report, while the unemployment rate comes from the household survey. The household survey in November showed a notable increase in hiring, which helps calm concerns about the slowdown in headline job growth.
• We finished the week with Friday’s release of the ISM Services index for November. This measure of service sector confidence improved by more than expected, increasing from 66.7 in October to a record-high 69.1 against calls for a decline to 65. This signals continued high levels of service sector confidence. As was the case with the ISM Manufacturing index, this is a diffusion index, where values above 50 indicate growth. The better-than-expected result was driven by high levels of consumer demand, as current activity and new orders showed improvement. The strong results were widespread, with all 18 service industry sectors reporting growth. Historically, high levels of business confidence have supported additional business spending, so this result bodes well for business spending during the month.

Source: Bloomberg

Source: Morningstar Direct

What to Look Forward To
On Tuesday, the international trade report for October is set to be released. Economists expect to see the trade deficit decline sharply, forecasting for it to narrow from $80.9 billion in September to $66.8 billion. If estimates prove accurate, this report would mark the smallest monthly deficit since April. The advanced report on the trade of goods in October, which was previously released, showed a notable decline in the deficit for this segment. Exports of goods surged 10.7 percent in October, while imports saw a 0.5 percent rise. Throughout 2021, the uneven pace of the global economic recovery and high levels of domestic consumer demand caused the monthly trade deficit to increase notably, so the anticipated narrowing in October is a good sign. We may be starting to see a normalization of international trade, which could support faster overall economic growth to finish out the year.

Friday will see the release of the Consumer Price Index for November. The forecasts call for consumer prices to increase 0.6 percent during the month, in a step down from October’s 0.9 percent gain. On a year-over-year basis, consumer inflation is expected to rise from 6.2 percent in October to 6.7 percent in November. If estimates hold, this report would mark the highest level of year-over-year headline consumer inflation since 1982. Economists expect core consumer prices, which exclude volatile food and energy prices, to go up 0.5 percent for the month and 4.9 percent year-over-year. Throughout the year, consumer prices have been pressured by pent-up consumer demand as well as low supplies due to tangled global supply chains and depleted business inventories. Looking forward, relatively high levels of consumer inflation are likely to continue. In the short term, however, falling energy prices may mitigate consumer price pressure in December.

Friday will also see the release of the preliminary estimate for the University of Michigan consumer sentiment survey for December. Sentiment is expected to improve modestly, with the index set to increase from 67.4 in November to 68. November’s sentiment report marked the lowest level for the index since 2011, so any improvement would be welcome. Still, challenges to consumer sentiment have grown this year and sentiment is expected to remain well below the 2021 high of 88.3 recorded in April. Consumer concerns over rising prices have caused the index to plummet to well below levels seen in April 2020, when initial lockdowns were implemented. Over the past few months, there has been a divergence between the University of Michigan consumer sentiment survey and the Conference Board Consumer Confidence Index. The former report is more highly affected by consumer views on inflation, while the latter report focuses on the health of the labor market. Both reports do point to continued consumer unease, which should be monitored in the months ahead.

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 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 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 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. 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®