Presented by Mark Gallagher

General Market News
• The yield curve moved modestly higher on the week as inflationary data came in above economists’ expectations. The 10-year Treasury yield opened Monday morning slightly higher than 1.64 percent, up from last week’s open of 1.58 percent. The 30-year opened at 2.35 percent, up 7.2 basis points (bps) from last week’s open of 2.28 percent. On the shorter end of the curve, the 2-year opened at 0.15 percent. just 0.6 bps more than last week’s open.
• The markets were down after a week of volatile trading. The April Consumer Price Index data gave us a comparison between prices in April 2021 and April 2020. The data came in higher than expected and led to a sell-off on Wednesday. Technology, consumer discretionary, and communication services led the market downward due to concerns that the Federal Open Market Committee (FOMC) will need to raise rates sooner than initially expected. Financials, consumer staples, and materials were among the top-performing sectors. Markets recovered toward the end of the week as investors realized that inflation is here, but we need to determine how long it will stay at higher levels.
• On Wednesday, the April Consumer Price Index report was released. Consumer prices rose by more than expected, increasing 0.8 percent against forecasts for a more modest 0.2 percent increase. This brought the pace of year-over-year consumer inflation to 4.2 percent, higher than the 3.6 percent annual increase that was expected. The increase in inflationary pressure was widespread, as core consumer prices, which strip out the impact of volatile food and energy prices, also rose more than expected. Core consumer prices increased 0.9 percent during the month and 3 percent year-over-year compared with economist estimates for a 0.3 percent and 2.3 percent increase, respectively. Although some of the year-over-year increase in core and headline prices is due to base effects caused by sharp price declines last April, the report indicates inflationary pressure is increasing. This marks six consecutive months with headline consumer price growth accelerating.
• Thursday saw the release of the April Producer Price Index report. Producer prices increased 0.6 percent during the month and 6.2 percent year-over-year against calls for more modest 0.3 percent growth during the month and 5.8 percent growth year-over-year. Once again, base effects are partially to blame for the large year-over-year surge in inflation. With that being said, producer prices have seen upward pressure recently due to rising material costs and supply chain disruptions. The Federal Reserve (Fed) continues to closely monitor inflation; however, board members largely view rising inflationary pressure as transitive, and the central bank is expected to keep monetary policy supportive given the continued stress on the labor market.
• On Friday, the April retail sales report was released. Sales remained flat after an upwardly revised 10.7 percent surge in sales in March, coming in below economist estimates for a 1 percent increase. Core retail sales, which strip out the impact of volatile auto and gas sales, fell 0.8 percent during the month against calls for a 0.6 percent increase. The most recent round of federal stimulus checks caused retail sales to increase at the second-fastest level on record, so the pullback in April is understandable. Despite the miss against expectations for overall sales growth, there were still encouraging areas, including an increase in food and drink spending that indicates reopening efforts continue to support the economic recovery. Looking forward, high levels of consumer confidence and a swiftly reopening economy are expected to serve as tailwinds for a return to spending growth in the months ahead.
• Friday also saw the release of the April industrial production report. Industrial production increased 0.7 percent, slightly below estimates for a 0.9 percent increase. This is a step down form the upwardly revised 2.4 percent increase in production we saw in March, but it still represents two straight months with increased production. Manufacturing production rose 0.4 percent, slightly better than economist estimates for a 0.3 percent increase. Manufacturing was held back by a drop in auto production, which, in turn, was largely driven by the global semiconductor shorting that has slowed production. The producer side of the economy has been slower to recover compared with consumers; however, given high levels of consumer demand and continued progress with the pandemic and reopening the country, production is expected to continue to improve.
• We finished the week with Friday’s release of the preliminary estimate for the University of Michigan consumer sentiment survey for May. Consumer sentiment fell to start the month, dropping from 88.3 in April to 82.8 in May against calls for an increase to 90. This disappointing result was driven by rising consumer inflation expectations, which weighed on current conditions and future expectations. The report showed that one-year inflation expectations increased by more than expected during the month, from 3.4 percent to 4.6 percent against calls for a more modest increase to 3.5 percent. Despite the miss against expectations, this still marks the third-highest level for the index since the start of the pandemic, and it should support continued consumer spending growth.

Source: Bloomberg, as of May 14, 2021

Source: Morningstar Direct, as of May 14, 2021

What to Look Forward To
On Monday, the National Association of Home Builders Housing Market Index for May was released. Home builder sentiment remained healthy during the month, as the May index was unchanged at 83, in line with economist estimates. This strong result left home builder confidence near the record high of 90 set in November 2020, signaling robust levels of confidence. Home builder sentiment rebounded swiftly following the end of initial lockdowns last year, as low mortgage rates and high home buyer demand sparked a rally for the housing sector. Supply of homes for sale remains low across much of the country, which has served as another tailwind for increased home builder confidence and construction over the past year. This release was a positive signal that home builders remain confident in the current housing market expansion despite rising material and construction costs. This is a good sign for construction growth in the months ahead.

Speaking of construction, Tuesday will see the release of the April building permits and new home sales reports. Permits are expected to increase by 0.7 percent during the month, following a 2.3 percent increase in March. Starts are expected to decline by 2 percent, after seeing a 19.4 percent rise in March. The pace of housing starts hit its highest level since 2006 in March, so a modest decline in April would be understandable. These measures of new home construction can be volatile on a month-to-month basis. Nonetheless, both have rebounded well past pre-pandemic levels, driven by low supply of homes for sale and high levels of home buyer demand. The fast pace of new home construction this year has been especially impressive given rising lumber and construction costs. If estimates prove accurate, these reports would be another signal that housing remains one of the bright spots in the current economic recovery.

On Wednesday, the FOMC meeting minutes from the April meeting will be released. The Fed cut interest rates to virtually zero at the start of the pandemic last March, and no changes to interest rates were made at this meeting, as expected. Additionally, the Fed did not make any changes to its current pace of $120 billion a month in asset purchases. Still, despite the meeting’s lack of major announcements regarding monetary policy, economists will be looking at the minutes closely in order to get a better understanding of the Fed’s view on the ongoing economic recovery. Given that recent inflation reports have come in above expectations, any mention of rising inflationary pressure and potential Fed responses will be examined. As Fed board members have indicated they view the current rise in inflation as largely transitory, no surprises are expected. Still, any hints about the Fed’s view on the pace of the recovery and long-term monetary policy will be closely monitored.

Thursday will see the release of the initial jobless claims report for the week ending May 15. Economists expect to see the number of initial unemployment claims fall from 473,000 to 460,000. If estimates hold, this report would bring the pace of weekly layoffs to its lowest level since the start of the pandemic, indicating that the labor market recovery has continued. While we have seen noted improvement this year in getting weekly jobless claims down, they are still high on a historical basis. Given this fact and the recent slowdown in the pace of hiring in April, the weekly initial jobless claims report will continue to be a widely monitored release. It gives economists a relatively up-to-date look into the heath of the labor market.

We’ll finish the week with Friday’s release of the existing home sales report for April. Existing home sales are expected to rise by 0.9 percent during the month, following a 3.7 percent decline in March. The March drop was largely driven by low levels of supply of homes available for sale, as well as rising mortgage rates and housing prices. A return to sales growth in April would indicate that housing demand remains strong. Despite the March results, the pace of existing home sales remains well above pre-pandemic levels. Sales were up by 14 percent on a year-over-year basis during April. Low mortgage rates have supported the housing market over the past year. Notably, however, we saw rates rise in February and March, which contributed to the slowdown in sales during those two months. With that said, mortgage rates declined in April, which should support a return to sales growth for the month.

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

Mark Gallagher is a financial advisor located at Gallagher Financial Services at 2586 East 7th Ave. Suite #304, North Saint Paul, MN 55109. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 651-774-8759 or at mark@markgallagher.com.
Authored by the Investment Research team at Commonwealth Financial Network.
© 2020 Commonwealth Financial Network®

Presented by Mark Gallagher

General Market News
• The 10-year Treasury yield opened Monday morning at 1.59 percent—just 3.4 basis points higher than last week’s open of 1.56 percent. The 30-year yield opened at 2.27 percent, up from last week’s open of 2.24 percent. On the shorter end of the curve, the 2-year remained flat at 0.16 percent.
• The market was flat to slightly down last week. Investors continued to take some profits from their investments due to concerns regarding a potential tax increase and current market valuations. The S&P 500 and Russell stocks held up better than the MSCI Emerging Markets and EAFE as the eurozone lagged in its vaccine rollout and Germany kept restrictions in place. Emerging markets are hampered by the current outbreak in India and the fact that China already started its reopening in 2020. Communication services, financials, and consumer discretionary were the top performers, supported by strong earnings from Amazon and Alphabet. Technology, health care, and consumer staples were the worst performers, largely due to Twitter and ServiceNow’s lower-than-expected future guidance.
• Monday saw the release of the preliminary estimate of March’s durable goods orders report. Durable goods orders rose 0.5. percent, which was below economist estimates for a 2.3 percent increase. This miss against expectations was primarily due to a slowdown in volatile aircraft orders during the month. Core durable goods orders, which strip out the impact of transportation orders, rose a solid 1.6 percent, which was in line with economist estimates. Core durable goods orders are often viewed as a proxy for business spending, so this return to growth following a weather-related lull in February was a positive sign for business spending during the month and quarter. Business confidence surged in March, largely driven by improvements on the public health front and the recent stimulus bill. High levels of business confidence should help support further spending growth as we head into the summer.
• On Tuesday, the Conference Board Consumer Confidence Index for April was released. The report showed confidence increased by more than expected, with the index rising from 109 in March to 121.7 in April against calls for a more modest increase to 113. This larger-than-expected increase brought the index to a new post-pandemic high. It was driven by improving consumer views on the present economic situation, as stimulus checks, increased vaccinations, and the continued easing of state and local restrictions continued during the month. Improving confidence has historically supported faster consumer spending growth, so this strong report is a very encouraging sign for consumer spending to start the second quarter. Although work remains before the index can approach the pre-pandemic high of 131 we saw in February 2020, the recent improvement over the past few months has been encouraging and indicates we may be heading back to normal sooner than expected.
• Wednesday saw the release of the Federal Open Market Committee (FOMC) rate decision from the Federal Reserve’s (Fed’s) April meeting. The Fed cut the federal funds rate to virtually zero last March, and, as expected, there were no changes to interest rates at this meeting. In addition, there were no changes to the Fed’s current $120 billion per month asset purchase program. Overall, there were no major surprises at this meeting, as the Fed continued to remain broadly supportive of the ongoing economic recovery. Fed officials noted that the pace of the economic recovery has accelerated recently, especially for sectors that were hardest hit during the worst of the pandemic. Despite the accelerating recovery, Fed members continued to indicate they view the pandemic as a public health crisis that presents a risk to the recovery and that accommodative policy will remain in place until substantial progress is made in getting people back to work. Economists will continue to closely monitor future FOMC meetings for hints of potential future policy changes as the economic recovery continues.
• Thursday saw the release of the advanced estimate for first-quarter gross domestic product (GDP) growth. The report showed the economy grew at an annualized rate of 6.4 percent during the quarter, which was up from the 4.3 percent annualized growth rate in the prior quarter but below economist estimates for a 6.7 percent annualized growth rate. This faster growth compared with the fourth quarter was due in large part to a surge in personal consumption to start the year. Personal consumption grew at an annualized rate of 10.7 percent during the quarter, up from a 2.3 percent annualized growth rate in the fourth quarter and better than economist estimates for a 10.5 percent annualized growth rate. Personal consumption was supported by multiple rounds of federal stimulus payments during the period, as well as rising consumer confidence driven by the improved public health and economic situations. Although headline growth came in slightly below economist estimates during the quarter, this was still a strong overall report that showed the economic recovery accelerated to start the year. Given continued improvements on the public health front and the easing of state and local restrictions, economists expect to see continued growth throughout the rest of the year.
• We finished the week with Friday’s release of the March personal income and personal spending reports. Personal spending rose 4.2 percent during the month, which was slightly better than economist estimates for 4.1 percent growth following a 1 percent decline in spending in February. This result was driven by the additional round of federal stimulus checks that hit bank accounts during the month, as well as the tailwind from rising consumer confidence amid the improving public health situation. After a weather-related lull in spending in February, this return to spending growth echoes a similar rise in retail sales in March and indicates consumers remain willing and able to spend more. Personal income also increased by more than expected during the month, rising 21.1 percent against calls for a 20.3 percent increase. Personal income has been very volatile on a month-to-month basis during the pandemic, driven by shifting federal stimulus payments. The larger-than-expected increase in March was due to the impact of $1,400 stimulus checks that were largely distributed during the month.

Source: Bloomberg, as of April 30, 2021

Source: Morningstar Direct, as of April 30, 2021

What to Look Forward To
On Monday, the Institute for Supply Management (ISM) Manufacturing index for April was released. This widely monitored gauge of manufacturer confidence fell by more than expected during the month. The index dropped from 64.7 in March to 60.7 in April, against calls for an increase to 65. Manufacturers largely cited supply chain constraints as the major factor in the slowdown during the month. The global shortage of semiconductor chips served as a headwind for faster overall output growth in key industries. This is a diffusion index, where values above 50 indicate expansion. So, despite the miss against forecasts, the manufacturing industry is set for further growth ahead. Demand has been strong this year, and it’s expected to remain strong as we continue to reopen the economy. In the short term, however, supply chain constraints may serve as a headwind for significantly higher levels of manufacturing output until the issues are resolved.

On Tuesday, the March international trade report is set to be released. The trade deficit is expected to widen during the month, from $71.1 billion in February to $74 billion in March. If estimates prove accurate, this report would bring the trade deficit to its widest monthly level on record. Both imports and exports are expected to show growth, following a weather-related slump in February, but imports should increase more than exports. The previously reported advance trade of goods report showed that exports of goods increased by 8.6 percent in March, while imported goods rose by 6.8 percent. Nonetheless, the dollar value of imports growth was larger than that of exports growth. Looking forward, a return to more normal economic conditions across the globe is expected to drive additional export growth throughout much of the year. The pace of this export recovery will likely depend in large part on the overall global economic recovery.

Wednesday will see the release of the ISM Services index for April. This widely monitored measure of service sector confidence is expected to increase from 63.7 in March to 64.1 in April. If estimates hold, the index would sit at its highest level since records began in 1997, breaking the record just set in March. This is another diffusion index, where values above 50 indicate expansion, so any further improvement would be a positive signal for service sector growth in April. As has been the case with manufacturer confidence, high consumer demand has served as a tailwind for service sector confidence since initial lockdowns were lifted. At the start of the year, we saw some pressure to service sector confidence due to the third wave of infections. Subsequently, improvements on the public health front in the first quarter spurred a resurgence in confidence as we head into the spring.

On Thursday, the initial jobless claims report for the week ending May 1 is set to be released. Economists expect to see 540,000 initial unemployment claims filed during the week, in a modest improvement from the 553,000 initial claims filed the prior week. If estimates hold, this report would mark four straight weeks with initial claims coming in under 600,000. This would be an encouraging sign that the labor market recovery has turned a corner following the containment of the pandemic’s third wave. Claims at current levels would likely support a return to faster overall hiring in May, and any further improvement would be a sign that the labor market recovery continues to accelerate. Much of the recent progress in cutting the number of weekly layoffs has been focused on the hard-hit service sector jobs. Improvements on the public health front and the continued easing of state and local restrictions have driven this progress.

We’ll finish the week with Friday’s release of the April employment report. Economists expect to see 950,000 jobs added to the economy during the month, in a step up from the 916,000 jobs added in March. If estimates hold, this report would mark four straight months with accelerated hiring, likely reflecting the tailwind from public health improvements and the associated reopening of businesses. The underlying data is also expected to show improvements, with the unemployment rate set to fall from 6 percent to 5.8 percent. A rise in the labor force participation rate from 61.5 percent to 61.7 percent is also expected. While very real work must be done to get back to pre-pandemic levels of employment, we can hope to see a continued acceleration in the pace of hiring over the next few months. Additional progress will depend on the mass vaccination programs and continued easing of state and local restrictions.

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

Mark Gallagher is a financial advisor located at Gallagher Financial Services at 2586 East 7th Ave. Suite #304, North Saint Paul, MN 55109. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 651-774-8759 or at mark@markgallagher.com.
Authored by the Investment Research team at Commonwealth Financial Network.
© 2020 Commonwealth Financial Network®

Presented by Mark Gallagher

General Market News
• We saw mild flattening of the yield curve last week as longer-dated yields declined. Despite positive economic data, the drop occurred as foreign buyers, particularly from Japan, purchased bonds and drove yields down. The 10-year Treasury yield remained flat, opening the week at 1.66 percent and closing 9 basis points (bps) lower at 1.57 percent. The 10-year opened just shy of 1.61 percent on the 19th, eroding part of last week’s move. The 30-year opened at 2.29 percent, down roughly 5 bps from last week’s open. On the shorter end of the curve, the 2-year Treasury opened at 0.16 percent, increasing just two-tenths of a basis point.
• Last week was the first week of earnings season, and several large banks, including JPMorgan, Wells Fargo, and Goldman Sachs, kicked it off with reports on Wednesday. Despite significant earnings surprises from each, financials fell near the middle of the pack for weekly sector performance. The decline in rates supported growth in the health care, technology, and consumer discretionary sectors. The worst-performing sectors included communication services, energy, and industrials.
• On Tuesday, the Consumer Price Index report for March was released. Consumer prices rose 0.6 percent, higher than economist estimates for a 0.5 percent increase. This brought year-over-year growth in consumer prices to 2.6 percent, which was also slightly above economist estimates for a 2.5 percent increase. Part of this was due to gas prices rising 9.1 percent in March. Core consumer prices, which strip out the impact of volatile food and energy prices, increased 0.3 percent during the month and 1.6 percent year-over-year. Inflation remained muted throughout much of last year—due in large part to the deflationary pressures created by the pandemic—but we’ve seen an increase in inflationary pressure as the economic recovery has accelerated.
• Thursday saw the release of the March retail sales report. Retail sales grew by 9.8 percent, surpassing economist estimates for a more modest 5.8 percent increase. This result, which followed February’s weather-driven decline in sales, was an encouraging development and signaled continued high levels of consumer demand. It was also the second-highest level of monthly sales growth on record. Sales growth was widespread, as the core retail sales figure that strips out the impact of volatile auto and gas sales rose by a strong 8.2 percent against forecasts for a 6.4 percent increase. Sales growth was supported by a return to more normal weather in March and another round of federal stimulus checks. Consumer spending at bars and restaurants showed solid improvement during the month, likely due to the easing of state and local restrictions that allowed more in-person dining. Overall, this was a very strong report that bodes well for the pace of the economic recovery during the month and quarter.
• Thursday also saw the release of the National Association of Home Builders Housing Market Index for April. This gauge of home builder sentiment increased from 82 in March to 83, which was in line with economist estimates. The index rebounded swiftly after hitting a lockdown-induced low of 30 last April, as low mortgage rates and shifting home buyer preferences fueled a rally for the housing sector over the past year. The improvement in April was driven by continued high levels of home buyer demand, and the report’s measure of prospective home buyer foot traffic hit its highest point since November. The continued strong prospective home buyer demand is encouraging, as mortgage rates have started to increase following a year at or near record lows. Looking forward, home builders remain confident they will be able to sell newly built units due to a shortage of available homes for sale, but rising lumber and construction costs may serve as a headwind for significantly higher levels of home builder confidence.
• On Friday, March’s building permits and housing starts reports were released. These two measures of new home construction rebounded after weather-related declines in February. Building permits rose 2.7 percent against forecasts for a 1.7 percent increase. Housing starts soared 19.4 percent, which was much better than economist estimates for a 13.5 percent increase. This brought the pace of housing starts to its highest level since 2006. Although starts and permits have been volatile on a month-to-month basis, both have rebounded well since initial lockdowns were lifted last year. High levels of home builder confidence and low levels of available homes have helped spur a surge in new home construction over the past year, with single-family housing starts seeing a significant increase over that period. Overall, this encouraging report revealed that home builders are increasing construction despite the headwinds created by rising lumber prices and mortgage rates during the month.
• We finished the week with Friday’s release of the preliminary estimate of the University of Michigan consumer sentiment survey for April. This widely followed measure of consumer confidence increased from 84.9 in March to 86.5, against forecasts for a further increase to 89. This marks two consecutive months with improving confidence, bringing the index to its highest level since the start of the pandemic. The most recent round of federal stimulus payments and accelerating job growth likely contributed to the improved consumer sentiment in April. The gauge of current economic conditions rose to a new post-pandemic high to start the month, while expectations for the future remained unchanged. Despite the miss against forecasts, this was a positive report, as improving consumer confidence has historically supported faster consumer spending growth. There is still real work to be done to return the index to its pre-pandemic high of 101 in February 2020, but we are heading in the right direction, and further improvements are expected as long as we continue to make progress on the mass vaccination and public health fronts.

Source: Bloomberg, as of April 16, 2021

Source: Morningstar Direct, as of April 16, 2021

What to Look Forward To
On Thursday, the initial jobless claims report for the week ending April 17 will be released. Economists expect to see 625,000 initial unemployment claims filed during the week, an increase from the 576,000 initial claims made the week before. Even with the anticipated rise in weekly claims, this report would represent the second-lowest number of initial claims since the start of the pandemic. It would also bring the four-week moving average of claims to a new post-lockdown low. Despite the progress in reducing the number of weekly initial claims, however, work remains to return to pre-pandemic levels. For reference, in 2019 we saw an average of 218,000 weekly initial claims throughout the year. Given the relatively high level of weekly initial jobless claims, this report will continue to be widely monitored.

Thursday will also see the release of the March existing home sales report. Sales of existing homes are expected to decline 0.3 percent, following a 6.6 percent decline in February. Despite the anticipated decline, the pace of existing home sales has increased notably over the past year. If estimates prove accurate, existing home sales in March would be up 15.9 percent year-over-year. Home sales have been buoyed by low mortgage rates and shifting home buyer preferences due to the pandemic. Looking forward, a low supply of existing homes for sale, rising prices, and rising mortgage rates are expected to serve as headwinds for significantly faster sales growth. With that said, sales near current levels would represent a marked increase from the pre-pandemic pace of home sales, signaling continued high levels of home buyer demand.

On Friday, the March new home sales report is set to be released. The pace of new home sales is expected to increase 12.9 percent. (In February, an 18.2 percent decline in new home sales reduced the pace to a nine-month low.) Compared with existing home sales, new home sales are a smaller and often more volatile component of total sales. If estimates hold, the pace of existing home sales would be up 42.9 percent year-over-year. Home builders have increased the pace of construction over the past year to meet rising demand. In addition, newly constructed units have been quick to sell since initial lockdowns were lifted last year. Ultimately, this report is expected to show continued high levels of home buyer demand, representing another sign the housing market remains strong.

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

Mark Gallagher is a financial advisor located at Gallagher Financial Services at 2586 East 7th Ave. Suite #304, North Saint Paul, MN 55109. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 651-774-8759 or at mark@markgallagher.com.
Authored by the Investment Research team at Commonwealth Financial Network.
© 2020 Commonwealth Financial Network®

Presented by Mark Gallagher

Solid Month Caps Positive Quarter for Markets
U.S. stock markets saw gains for the month and quarter, but not all stocks did well. Higher interest rates led to some volatility, especially for growth and technology companies. The Nasdaq Composite gained 0.48 percent during March, with the heavy technology weighting dragging down the index’s performance. The S&P 500 and Dow Jones Industrial Average (DJIA) saw stronger results, up by 4.38 percent and 6.78 percent, respectively. On a quarterly basis, the Nasdaq Composite gained 2.95 percent, and the S&P 500 managed a 6.18 percent gain. The DJIA led the way with an 8.29 percent return.

These positive results coincided with better-than-expected earnings growth. According to Bloomberg Intelligence, as of March 30 with 99 percent of companies having reported, fourth-quarter earnings for the S&P 500 were up by 5.8 percent. This result is much better than analysts’ initial expectations for an 8.8 percent drop. It marks the first quarter with earnings growth since the fourth quarter of 2019. Analysts are currently forecasting continued earnings growth for U.S. companies throughout the rest of the year.

Technical factors were also supportive for markets. Despite some volatility along the way, all three major indices remained well above their 200-day moving averages. This marks three straight quarters where the indices finished above their respective trend lines. The 200-day moving average is an important technical indicator. Prolonged breaks above or below this level can signal a shift in investor sentiment for an index.

International markets had a similar month and quarter, with riskier assets seeing more volatility. The MSCI EAFE Index increased by 2.30 percent during the month and 3.48 percent during the quarter. The MSCI Emerging Markets Index declined by 1.49 percent in March but managed a 2.34 percent return for the quarter. Both international indices were supported technically during the month and quarter, remaining well above their respective 200-day moving averages throughout the entire period.

Fixed income markets had a more challenging time, driven by rising long-term interest rates. The 10-year Treasury yield ended the month at 1.74 percent, up from 1.45 percent at the start of the month and 0.93 percent at the start of the quarter. Long-term rates rose throughout the quarter due to increased expectations for growth and inflation as the economic recovery continues. The Bloomberg Barclays U.S. Aggregate Bond Index fell by 1.25 percent during the month. This contributed to a 3.37 percent decline for the index during the quarter.

High-yield fixed income, which is less tied to interest rates and more aligned with equity markets, saw more positive results. The Bloomberg Barclays U.S. Corporate High Yield Index gained 0.15 percent during the month and 0.85 percent during the quarter. High-yield spreads continued to compress, ending the month at their lowest level since the start of the pandemic.

Medical Risks Back in Play
We saw the end of the pandemic’s third wave during the first quarter of the year, but case counts started to creep up in March. Although case growth is lower than it was during the past few months and vaccinations are likely to constrain further growth, the combination of the economy reopening and the spread of more contagious variants of the virus has increased risks again. Testing also raised concerns. The number of tests fell and the positive test rate increased, which indicates we have less visibility into the current spread of COVID-19.

Despite the rise in short-term risks, longer-term risks remain constrained with vaccination efforts improving in March. We finished the month with 16 percent of the population fully vaccinated and an impressive 29 percent of the population having received at least one dose. The average number of daily vaccinations increased notably throughout the month. This was due to greater supply and improved processes at the state and local levels. Looking forward, vaccinations are expected to bring the virus largely under control over the next several months. While we are not yet out of the woods yet—and people need to remain cautious until we get there—we are moving in the right direction.

Economic Improvement Continues
Despite the rise in medical risks during the month, the economic data continued to improve. March’s jobs report showed that 916,000 jobs were added during the month, up sharply from February’s 379,000 and well above expectations. Much of the job gains were concentrated in the leisure and hospitality sectors, which have been hit hardest by the pandemic. We also saw a noted decline in the average number of weekly unemployment claims in March. These results indicate that the reopening of many states has started to accelerate the labor market recovery.

Consumers have noted the improved public health and economic conditions during the quarter. As you can see in Figure 1, the Conference Board Consumer Confidence Index hit a new post-lockdown high in March. This indicates consumers are starting to see a light at the end of the tunnel. While there is still work to be done to get back to pre-pandemic levels, the improvements in March are a positive signal for the pace of the economic recovery.

Figure 1. Conference Board Consumer Confidence, 2011–Present

Consumer spending did see a dip in February. It was largely due to the inclement winter weather during the month, however, as well as the fading impact from the December stimulus package. With a return to more normal weather in March and the tailwinds from increased hiring and confidence—as well as another round of federal stimulus checks—we should see spending recover.

Business confidence and spending also showed signs of potential faster growth. Manufacturer confidence finished the month at its highest level since 1983 due to strong buyer demand and low business inventory. As was the case with consumer spending, business spending saw a modest weather-related decline in February. Given the high levels of confidence and the boost from the recent stimulus bill, however, we can expect to see a swift return to business spending growth reflected in upcoming data reports.

The Progress Is Real, but Risks Remain
We made real progress with vaccinations and the economy during the month. But even so, the rising case counts toward month-end served as a reminder that the medical risks are still out there. The potential for more infectious strains to cause faster case growth on a national level is a risk we need to keep an eye on.

Economically, risks have diminished with the recovery in hiring and confidence. The passage of the most recent stimulus bill in March will also help support spending. While the medical risks may worsen in the short term, the economy looks to have enough momentum to ride them out until the pandemic is brought under full control.

There is still uncertainty surrounding the pace and path of the expected recovery, and that could lead to more market volatility. A well-diversified portfolio that matches investor goals and timelines represents the best path forward for most. If concerns remain, contact your financial advisor to discuss your financial plan.

All information according to Bloomberg, unless stated otherwise.

Disclosure: Certain sections of this commentary contain forward-looking statements 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. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets. All indices are unmanaged and investors cannot invest directly into an index. The Dow Jones Industrial Average is a price-weighted average of 30 actively traded blue-chip stocks. The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. 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 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. It excludes closed markets and those shares in otherwise free markets that are not purchasable by foreigners. The Bloomberg Barclays Aggregate Bond Index is an unmanaged market value-weighted index representing securities that are SEC-registered, taxable, and dollar-denominated. It covers the U.S. investment-grade fixed-rate bond market, with index components for a combination of the Bloomberg Barclays government and corporate securities, mortgage-backed pass-through securities, and asset-backed securities. The Bloomberg Barclays U.S. Corporate High Yield Index covers the USD-denominated, non-investment-grade, fixed-rate, taxable corporate bond market. Securities are classified as high-yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below.

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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