Presented by Mark Gallagher

General Market News
• The Treasury curve flattened slightly last week as investors geared up for this week’s Federal Reserve (Fed) meeting. The 10-year Treasury yield fell 5 basis points (bps) week-over-week, opening Monday morning at 1.57 percent. The 30-year dropped 12 bps to 1.95 percent, the 20-year fell 7 bps to 1.93 percent, the 2-year rose 6 bps to 0.43 percent, and the 5-year climbed 4 bps to 1.21 percent.
• Markets saw mixed performance, highlighted by a busy earnings week for tech names, with Facebook (renamed Meta on October 28), Microsoft, Google, Apple, and Amazon all reporting. Google and Microsoft beat expectations by 21 percent and 10 percent, respectively. Apple and Amazon were affected by supply chain constraints, with the former experiencing a $6 billion sales drop because of chip shortages and manufacturing disruptions. Amazon’s growth waned from pandemic highs as customers began to return to physical stores. That said, earnings reports continued to reflect strong demand, with consumer discretionary, communication services, and tech the week’s top performers. Financials, energy, and utilities underperformed.
• On Tuesday, the Conference Board Consumer Confidence Index for October was released. The report showed that confidence increased from an upwardly revised 109.8 in September to 113.8 against calls for a decline to 108. This was the first increase for the index since June, and it left confidence well above pre-pandemic levels. The improvement was likely driven in part by declining medical risks during the month, as the rise of the Delta variant weighed on confidence levels throughout much of the summer and start of the fall. Both the present situation and future expectation subindices improved, and consumers indicated they were more likely to buy big-ticket items, such as cars and houses, in October. Historically, improving consumer confidence has helped support faster consumer spending growth, so the modest improvement in October is a welcome development that may signal continued consumer spending growth.
• Wednesday saw the release of the preliminary estimate of the September durable goods orders report. Durable goods orders declined by less than expected, falling 0.4 percent against calls for a 1.1 percent decline. The drop in headline orders was primarily driven by a decline in volatile aircraft orders. Core durable goods orders, which strip out the impact of transportation orders, increased 0.4 percent in September, which was in line with economist estimates. Core durable goods orders are often viewed as a proxy for business investment, so the steady increase is an encouraging signal that businesses continued to spend in September. This now marks seven consecutive months with increasing core durable goods orders, as businesses have scrambled to meet a surge in pent-up consumer demand throughout much of the year.
• On Thursday, the advance estimate of third-quarter gross domestic product (GDP) growth was released. It showed that the economy grew at an annualized rate of 2 percent during the quarter, down from the 6.7 percent annualized growth rate in the second quarter and below economist estimates for a 2.6 percent annualized increase. Personal consumption slowed notably, declining from an annualized growth rate of 12 percent in the second quarter to 1.6 percent in the third quarter. Shortages, rising prices, and rising medical risks contributed to the slowdown, but it’s worth noting that slower growth is still growth. Looking forward, economists anticipate a pickup in growth in the fourth quarter and a strong 5.7 percent increase in GDP growth for the year.
• We finished the week with Friday’s release of the September personal income and personal spending reports. Personal income fell 1 percent, which was below economist estimates for a 0.3 percent decline. Personal income growth has been volatile throughout the course of the pandemic, as shifting federal stimulus and unemployment benefits have had an outsized impact on monthly income levels. The larger-than-expected decline in personal income in September was largely driven by the expiration of enhanced unemployment benefits at the start of the month. Personal spending, on the other hand, increased for the seventh consecutive month, rising 0.6 percent. This was down from the upwardly revised 1 percent spending growth we saw in August but in line with economist estimates. Personal spending has been supported throughout the year by improving public health data and pent-up consumer demand after a year of pandemic-related restrictions.

Source: Bloomberg, as of October 29, 2021

Source: Morningstar Direct, as of October 29, 2021

What to Look Forward To
Monday saw the release of the Institute for Supply Management (ISM) Manufacturing index for October. This widely followed measure of manufacturer confidence declined less than expected, falling from 61.1 in September to 60.8. (Forecasts were for a decline to 60.5.) This is a diffusion index, where values above 50 indicate expansion, so this result signals continued manufacturer growth despite the modest decline. Last year, manufacturer confidence increased notably after initial lockdowns ended, and the index has stayed in expansionary territory since June 2020. Despite healthy confidence levels, manufacturers have had to contend with rising headwinds throughout the year, most notably tangled global supply chains, labor shortages, and rising costs. Nonetheless, the continued strength of manufacturer confidence is an encouraging signal that producers view these obstacles as surmountable.

On Wednesday, the ISM Services index for October will be released. Service sector confidence is expected to remain unchanged at 61.9. This is another diffusion index, where values above 50 indicate expansion, so the projected result would be a sign of steady growth for the service sector. As this sector accounts for the lion’s share of economic activity in the country, continued growth would also be a positive indicator of overall economic growth. As was the case with manufacturing confidence, service sector confidence rebounded swiftly following the expiration of initial lockdowns last year and has remained in healthy expansionary territory since. Earlier in the year, service sector confidence was boosted by declining medical risks and the easing of state and local restrictions, allowing consumers to go out and spend heavily, especially in the first half of the year.

Wednesday will also see the release of the Federal Open Market Committee rate decision from the Fed’s scheduled November meeting. The Fed cut interest rates to virtually zero at the start of the pandemic, and economists don’t anticipate interest rate changes this year. Instead, economists are focused on the Fed’s asset purchase program, with an announcement regarding tapering purchases expected at the meeting. The Fed has been purchasing $120 billion per month in Treasury and mortgage-backed securities throughout the pandemic, but a tapering program is widely expected. Most economists anticipate a reduction of $15 billion in purchases per month, which could lead to the end of the current quantitative easing program by next summer. This announcement will be widely monitored, as the removal of this supportive policy could cause market volatility. Still, given widespread expectation of this action, the market impact should be relatively muted unless there are surprises in the size and speed of the tapering efforts.

On Thursday, the September international trade report will be released. The trade deficit is expected to increase from $73.3 billion in August to $74.8 billion. If estimates hold, this report would mark the largest monthly trade deficit on record, breaking the record set in August. Because of a 4.7 percent drop in exports, the advance report showed that the goods trade deficit expanded from $88.2 billion to $96.3 billion. The fall in exports was largely due to the impact from Hurricane Ida early in the month, but September also saw a 0.5 percent increase in goods imports. The trade deficit has expanded throughout much of the year due to high domestic consumer demand and the uneven pace of the global economic recovery. International trade has been a drag on the pace of overall economic growth throughout the year. So, until we see a meaningful increase in exports, this dynamic is expected to continue.

We’ll finish the week with Friday’s release of the October employment report. Economists expect to see 400,000 jobs added during the month, in a notable step up from the relatively disappointing 194,000 jobs gained in September. If estimates hold, this report would mark the 10th consecutive month with job growth. Nonetheless, the expected pace of job growth is slated to come in below the recent highs recorded during the summer. The underlying data is expected to show improvements in October. The unemployment rate is set to fall from 4.8 percent to 4.7 percent, while average hourly earnings are expected to show solid growth. We’ve made notable progress throughout the year in getting people back to work, but the recent hiring slowdown highlights headwinds for the labor market recovery. A lack of available workers has led to labor shortages in some markets. This, in turn, has slowed the overall pace of hiring, despite job openings being at or near all-time highs.

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
• Treasury yields moved higher across the curve last week as equity markets rallied, and Federal Reserve (Fed) Chairman Jerome Powell reiterated that the central bank still plans on tapering asset purchases sooner rather than later. The 10-year yield picked up 6 basis points (bps) week-over-week to open Monday morning at 1.66 percent. The 30- and 20-year yields each climbed about 7 bps to 2.11 percent and 2.01 percent, respectively. The 2-year yield was up 3 bps to 0.42 percent, and the 5-year yield climbed 4 bps to 1.17 percent.
• Global equity markets were up again last week as earnings drove the moves in stocks. Financials continued to rally following last week’s bank earnings and were further supported by the Fed’s ongoing discussion regarding potential upside inflation risks. Despite this, the Fed has continued to attempt to separate the difference between starting to taper asset purchases, which are expected to begin at the next meeting, and potential future rate hikes. Additionally, earnings calls and reports continue to highlight supply chain constraints, higher input costs on manufacturers, and strong demand from the consumer. As a result, REITs, health care, and financials were among the top performers on the week. The underperforming sectors were communication services, consumer staples, materials, and energy.
• On Monday, the September industrial production report was released. Production declined by 1.3 percent, which was well below economist estimates for a 0.1 percent increase. The surprisingly weak result was caused by a weather-driven slowdown in utilities and mining production as well as a drop in manufacturing output. Manufacturing output declined by 0.7 percent against calls for a 0.1 percent increase. August’s industrial production and manufacturing output reports were also revised from modest gains to declines of 0.1 percent and 0.4 percent, respectively. These disappointing results highlight the very real challenges that manufacturers are currently facing, with tangled supply chains, labor shortages, and rising costs serving as headwinds for faster output growth over the past few months. Motor vehicle manufacturing has been a major drag on overall manufacturing growth as the global semiconductor chip shortage and a shutdown of large parts of the auto industry during the month led to a sharp drop in motor vehicle production in September. While high levels of demand are expected to support additional manufacturing growth in the medium to long term, this report indicates manufacturers were not immune to the recent economic slowdown and that there may be more turbulence in the months ahead.
• Monday also saw the release of the National Association of Home Builders Housing Market Index for October. The report showed that home builder confidence improved during the month, with the index rising from 76 in September to 80 in October against calls for a modest decline to 75. The better-than-expected result brought home builder confidence to its highest level in three months and signaled faster expansion for new home building activity. The improvement was widespread as each of the four geographic regions saw improvements and was also supported by an increase in prospective home buyer foot traffic. The housing sector has been one of the bright spots in the post-lockdown economic recovery, as shifting home buyer preference for more space and low mortgage rates continue to support high levels of home construction and sales. While home builders have had to contend with supply chain issues and rising costs throughout the year, high levels of home buyer demand and low inventory of existing homes for sale have helped support a surge in new home construction since initial lockdowns expired last year.
• Speaking of new home construction, on Tuesday, the September builder permits and housing starts reports were released. Starts declined by 1.6 percent against calls to remain unchanged while permits dropped 7.7 percent against forecasts for a 2.4 percent decline. Despite the declines during the month, both permits and starts remain well above the pandemic-era lows and signal healthy levels of new home construction. The slowdown in new home construction was driven by a decline in multi-family construction, as the pace of single-family starts remained unchanged. New home construction rebounded swiftly following the expiration of initial lockdowns last year, driven in large part by a surge in single-family construction. Large home builder backlogs, continued high levels of prospective home buyer demand, and a lack of existing homes for sales are all expected to support further new home construction in the months ahead.
• On Thursday, the September existing home sales report was released. The pace of existing home sales surged by 7 percent during the month, which was notably higher than economist estimates for a 3.7 percent increase following a 2 percent decline in August. This result marked the largest monthly increase for existing home sales in over a year and brought the pace of existing home sales to its highest level since January. The pace of existing home sales increased notably late last year; however, sales growth had largely declined throughout most of 2021 due to a lack of supply of homes for sale and rising prices. We’ve started to see the pace of year-over-year price growth moderate in the past few months, which has helped support additional sales growth. With that said, the supply of existing homes available for sale remains very low on a historical basis, which could constrain further sales growth in the months ahead.

  Source: Bloomberg

  Source: Morningstar Direct

What to Look Forward To
On Tuesday, the Conference Board Consumer Confidence Index for October will be released. Economists expect to see confidence decline modestly, from 109.3 in September to 108 in October. If estimates hold, this report would bring the index to its lowest level since February, signaling rising consumer concern about the economic recovery. The previously released University of Michigan consumer sentiment survey showed a drop in sentiment during the month, driven by rising fears of inflation and a souring view on the economy. Historically, improving consumer confidence has supported consumer spending growth, so the recent weakness in the two major confidence reports is concerning. That said, consumer spending growth remained solid in September, even for big-ticket items such as houses, so the recent declines in confidence have not been enough to derail the recovery. Given the importance of consumer spending to the economy, this monthly report will continue to be widely monitored.

Wednesday will see the release of the preliminary estimate of the September durable goods orders report. Durable goods orders are set to decline by 1 percent, following a 1.8 percent increase in August. This anticipated drop in headline orders is primarily due to a slowdown in volatile aircraft orders. Core durable goods orders, which strip out the impact of transportation orders, are set to increase by 0.4 percent, following a 0.3 percent gain in August. If estimates hold, this report would mark five straight months with core durable goods orders growth. Core durable goods orders are often viewed as a proxy for business investment, so growth would be a positive sign that businesses have continued to spend. Throughout the year, improving public health statistics and high consumer demand for goods and services have supported business spending.

On Thursday, the advance estimate of third-quarter gross domestic product (GDP) growth will be released. The report is expected to show that the economy grew at an annualized rate of 2.4 percent during the quarter, down from the 6.7 percent annualized growth in the second quarter. The anticipated slowdown is due in large part to an expected drop in the personal consumption growth. That indicator is slated to fall from a 12 percent annualized growth rate in the second quarter to a 1.2 percent growth rate in the third quarter. The Delta variant and rising inflationary pressure caused a slowdown in real consumer spending growth, following a surge in spending in the second quarter as public health restrictions were lifted. Still, despite the anticipated slowdown, the economy is expected to grow by a strong 5.7 percent during the year due to the spending surge in the first two quarters.

We’ll finish the week with Friday’s release of the September personal income and personal spending reports. Personal income is expected to decline by 0.1 percent, while personal spending is expected to increase by 0.5 percent. Throughout the course of the pandemic, incomes have been volatile. The anticipated drop is primarily due to the expiration of enhanced unemployment benefits in September. Looking forward, labor shortages should support continued wage growth, helping personal incomes to remain at a healthy level despite the expiring federal stimulus payments. Throughout the year, personal spending growth has been boosted by improving public health and pent-up consumer demand. If spending growth comes in as expected, this report would echo a similar improvement in retail sales during the month, signaling that consumers remain willing and able to spend despite lower confidence.

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
• Treasury yields rose last week as investors weighed a flurry of news from Capitol Hill and economic data releases. The 10-year picked up 13 basis points (bps) week-over-week to open Monday at 1.61 percent, the 30-year rose 12 bps to open at 2.16 percent, and the 20-year also gained 12 bps to open at 2.11 percent. The 2-year was up 4 bps to 0.31 percent while the 5-year climbed 11 bps to 1.06 percent. The front-end of the curve mostly normalized due to Congress reaching a deal to raise the debt ceiling, though 2-month bills moved relatively higher on a new December deadline.
• The three major U.S. indices increased last week, driven by a temporary solution to the debt ceiling issue. The Dow Jones Industrial Average led the way and was supported by moves in energy, financial, and industrial sectors. The Russell 2000 lagged as health care, consumer discretionary, and technology weighed on the index. REITs also struggled as investors now expect the Federal Reserve (Fed) to reduce its purchases of mortgage-backed securities, which should send mortgage rates higher. Despite a weaker-than-expected September employment report, the bar is expected to be low for the Fed to begin tapering these purchases. Meanwhile, the debt ceiling issue is set to come up again in December and leaves much to be determined surrounding the resolution method and implications for fiscal spending in the near term.
• On Tuesday, the ISM Services index for September was released. This widely followed measure of service sector confidence improved by more than expected during the month, rising from 61.7 in August to 61.9 in September against calls for a decline to 59.9. This is a diffusion index where values above 50 indicate expansion, so this result is a sign of faster growth for the service sector. High levels of pent-up consumer demand continue to support business confidence, and businesses have been scrambling to meet this demand through additional investment and hiring. Business confidence remains well above pre-pandemic levels and should help support continued business spending throughout the rest of the year. This strong result was especially impressive given the headwinds that businesses are facing due to rising input costs and labor shortages in some areas.
• On Friday, the September employment report was released. The report showed that 194,000 jobs were added during the month, down from the upwardly revised 366,000 jobs that were added in August and well below economist estimates for 500,000 additional jobs. This marks two consecutive months with slowing job growth and represents the fewest jobs added in a month since last December. Part of the slowdown in September was due to a relative lack of local government education hiring, as the sector lost 144,000 jobs on a seasonally adjusted basis. We also saw upward revisions to the July and August reports that added an additional 169,000 jobs over those two months; however, the continued slowdown in hiring in September is concerning. The underlying data was a bit more encouraging, as the unemployment rate fell from 5.2 percent to 4.8 percent and average hourly earnings increased notably. The unemployment rate improvement was partially due to folks leaving the workforce as the labor force participation rate fell. Overall, this was a relatively disappointing result that signals labor market recovery continued to slow despite declining public health risks.

Source: Bloomberg

Source: Morningstar Direct

What to Look Forward To
Wednesday will see the release of the September Consumer Price Index. This measure of consumer inflation is expected to show a 0.3 percent increase during the month and a 5.3 percent increase year-over-year. If estimates hold, the report would be in line with August’s headline consumer inflation growth. It would also represent a slowdown in month-over-month price growth when compared with data from earlier in the summer. Core consumer prices, which strip out the impact of volatile food and energy prices, are set to increase by 0.2 percent in September and 4.1 percent year-over-year. Throughout the year, consumer prices have seen upward pressure, as tangled supply chains and limited business inventories—combined with pent-up consumer demand—drive up prices. Although the Fed contends that much of the recent inflationary pressure will prove transitory, this monthly release will continue to be closely monitored given rising concerns.

Wednesday will also see the release of Federal Open Market Committee (FOMC) minutes from the Fed’s September meeting. Although no major changes to monetary policy were made at this meeting, the post-meeting press release and Fed Chairman Jerome Powell’s post-meeting press conference indicated the Fed is considering tapering asset purchases this year. The minutes are expected to give economists a better idea of the timing and pace of potential tapering efforts, which may be announced as soon as the Fed’s meeting in November. Currently, the Fed is purchasing $120 billion a month in Treasury and mortgage-backed securities to provide liquidity for the market. With the anticipated taper, however, these supportive measures are set to be reversed in the months ahead as the Fed moves to normalize monetary policy. Given the potential for a taper to cause market volatility, this release will be widely monitored.

On Thursday, the September Producer Price Index is set to be released. Producer prices are expected to increase by 0.6 percent during the month, down slightly from the 0.7 percent monthly increase recorded in August. On a year-over-year basis, producer prices are expected to increase by 8.8 percent in September, up from the 8.3 percent annual growth rate seen in August. Core producer prices, which strip out the impact of volatile food and energy prices, are expected to rise by 0.5 percent during the month and 7.1 percent year-over-year. As is the case with consumer prices, producer prices have seen upward pressure this year due to high levels of demand and problems with supply. Producers have also had to contend with increased labor costs over the past few months as the shortage of available workers has led to increased wage growth.

On Friday, the September retail sales report is set to be released. Forecasts are for headline retail sales to decline by 0.3 percent during the month, following a better-than-expected 0.7 percent increase in August. Much of the anticipated slowdown is due to decreasing auto sales in September. Core retail sales, which strip out the impact of auto and gas sales, are expected to increase by 0.2 percent. If estimates hold, this report would mark two consecutive months with core retail sales growth, signaling that consumers continued to fuel the economic recovery despite lowered confidence in August and September. The total level of sales is well above pre-pandemic levels. Accordingly, any further growth in the months ahead would be a sign that consumers remain willing and able to spend and support ongoing economic recovery.

Finally, we’ll finish the week with Friday’s release of the preliminary estimate of the University of Michigan consumer sentiment survey for October. Confidence should increase modestly to start the month, as the index is expected to rise from 72.8 in September to 73.5 in October. If estimates hold, this survey would mark two consecutive months with improving confidence. Still, it would leave the index well below the post-lockdown high of 88.3 that we saw in April. Confidence fell sharply in August due to rising consumer concerns about the pandemic, higher inflation, and a slower economic recovery. While we’ve seen public health risks decline since August, inflation remains above normal levels and job growth continued to slow in September. Given these headwinds, it is unlikely we will see a swift boost in confidence until further progress is made in getting people back to work and reining in inflationary pressure.

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 Treasury yield curve steepened last week as investors weighed the possibility of longer-term elevated inflation. The 10-year yield was unchanged week-over-week, opening on Monday morning at around 1.48 percent. The 30-year yield rose about 5 basis points (bps) to open at 2.05 percent, while the 20-year yield gained 4 bps to around 1.98 percent. The 2-year yield was unchanged at 0.27 percent, and the 5-year yield lost about 5 bps to 0.94 percent. The 4-week Treasury bills sold off on Friday as investors eye a late October deadline for Congress to raise the debt ceiling.
• Global equities were lower on the week with domestic growth and international among the hardest hit. A slew of factors led stocks downward, but the largest appeared to be the increase in bond yields, which hurt growth sectors such as health care and technology. The top-performing sectors were energy, financials, and materials. These sectors benefited from rising rates and potential longer-lasting inflation.
• Domestically, uncertainty came from Washington regarding the path for future fiscal policy and raising the debt ceiling. Elsewhere, logistical problems at ports and a lack of drivers in the U.K. have led to rising energy prices globally. Should these issues persist, investors may have to contend with threats to both future earnings and stagflation. In the wake of these rising prices, OPEC will meet this week to discuss potentially raising output.
• On Monday, the August durable goods orders report was released. Headline durable goods orders increased by more than expected during the month, with the report showing a 1.8 percent increase in orders against calls for a 0.7 percent increase. This result was largely driven by an increase in volatile commercial aircraft orders. Core durable goods orders, which strip out the impact of transportation orders, increased by 0.2 percent against forecasts for a 0.5 percent increase. Core durable goods orders are often viewed as a proxy for business investment, so the continued growth in August was welcome despite the miss against expectations. This follows a 0.8 percent increase in core durable goods orders in July and now marks six consecutive months with core orders growth. Overall, this was a relatively encouraging report as it showed businesses continue to spend and invest—which is a good sign for overall economic growth in the month and quarter.
• Friday saw the release of the August personal income and spending reports. Spending increased by more than expected during the month, with the report showing a 0.8 percent increase in spending against calls for a 0.7 percent increase. This echoed the better-than-expected result for retail sales growth that we saw earlier in the month and was encouraging as it indicated consumers remained willing and able to go out and spend despite lowered consumer confidence levels. Personal income increased by 0.2 percent in August, which was in line with expectations. Personal income has been very volatile on a month-to-month basis throughout the pandemic, as shifting federal stimulus and unemployment payments have led to large monthly swings in average income. Looking forward, labor shortages and high levels of job openings should help support continued wage growth in the months ahead, which may support faster spending growth as well.
• We finished the week with Friday’s release of the ISM Manufacturing report for September. This widely monitored gauge of manufacturer confidence improved by more than expected during the month, with the index rising from 59.5 in August to 61.1 in September against calls for a decline to 59.5. This is a diffusion index where values above 50 indicate expansion, so this result indicates faster expansion for manufacturers than anticipated and left the index at a four-month high. Manufacturer confidence has remained well above pre-pandemic levels since the expiration of initial lockdowns last year and is a signal that manufacturing recovery continues in earnest (despite headwinds created by tangled supply chains and rising costs). High levels of consumer demand are expected to help support continued manufacturing growth in the months ahead, which would be a good sign for overall economic growth.

  Source: Bloomberg

  Source: Morningstar Direct

What to Look Forward To
On Tuesday, the August international trade report is set to be released. Economists expect the trade deficit to widen slightly from $70.1 billion in July to $70.5 billion in August. The previously reported advanced trade deficit for goods increased from $86.9 billion in July to $87.6 billion in August, so the anticipated widening of the overall trade deficit is understandable. The 0.8 percent increase in imports of goods drove the deficit for the goods trade, which offset a 0.7 percent increase in exports of goods. If estimates hold, this report would mark the third-largest monthly trade deficit on record, highlighting strong demand from the American consumer and the uneven global economic recovery from the pandemic. In the second quarter, trade served as a headwind to overall growth. Even if we get the anticipated, modest widening of the deficit, trade is expected to have a small, positive impact on overall economic growth in the third quarter.

Tuesday will see the release of the ISM Services index for September. This gauge of service sector confidence is expected to decline slightly, from 61.7 in August to 59.8 in September. This is another diffusion index, where values above 50 indicate expansion. So, if estimates prove accurate, this report would indicate continued expansion for the service sector. The service sector accounts for a large majority of overall economic activity in the country. Accordingly, even if the index falls modestly in September, the result would be a good sign for overall economic growth during the month and quarter. As has been the case with manufacturer confidence, service sector confidence has remained well above pre-pandemic levels since the lifting of initial lockdowns last year. Looking ahead, service sector confidence is expected to remain at levels that support continued growth.

We’ll finish the week with Friday’s release of the September employment report. Economists expect to see 513,000 jobs added during the month. This result would be a notable increase from the 235,000 jobs added in August but below the recent high of 1,053,000 jobs gained in July. We saw a steady acceleration in job growth between April and July of this year, driven by easing restrictions at the state and local level. In August, however, rising medical risks led to a slowdown in hiring. We saw medical risks start to decline in September, so a return to more robust job growth would be a welcome sign that the August slowdown was transitory. The underlying data should also show improvements, as the unemployment rate is expected to drop from 5.2 percent in August to 5 percent in September. This figure would represent the lowest unemployment rate since the start of the pandemic, demonstrating that the labor market recovery picked up steam in September.

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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.
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