Presented by Mark Gallagher

General Market News
• The yield curve continued to flatten last week as inflationary data lifted the front end of the curve. The 2-year Treasury yield opened last Monday at 0.405 percent and closed the week more than 11 basis points (bps) higher at 0.522 percent. The 10-year increased roughly 13 bps, with yields moving from 1.455 percent to 1.584 percent, and the 30-year rose roughly 7 bps from 1.888 percent to 1.955 percent. The front end of the curve continues to come under pressure as the Federal Reserve (Fed) attempts to separate tapering from rate hikes.
• Global markets (excluding emerging markets) were down slightly, in part due to inflationary pressure and the recent winning streak for markets. The S&P 500 came into the week boasting a five-week winning streak and finished last Monday up for the eighth consecutive trading day, marking the longest streak of all-time closing highs since 1997. But producer and consumer price information released midweek led to concerns over the effect of inflationary pressures on global growth. Concerns over consumer comfort entering the holiday season were shared by investors, with the consumer discretionary sector faring worst. Other underperforming sectors included energy, which moved lower because of easing prices in Europe, and utilities. Top-performing sectors were materials, health care, and industrials.
• On Tuesday, October’s Producer Price Index was released, showing that producer prices increased 0.6 percent, which was in line with economist estimates and slightly higher than the 0.5 percent increase in prices we saw in September. On a year-over-year basis, producer inflation increased 8.6 percent, which was also in line with estimates. Core producer prices, which strip out the impact of volatile food and energy prices, rose 0.4 percent for the month and 6.8 percent year-over-year. Producer prices have faced upward pressure throughout most of the year because of tangled global supply chains and rising material costs. Labor shortages have also prompted this increased inflationary pressure. While the pace of monthly price increases slowed from earlier in the year, the large year-over-year increase in prices is a reminder that producers face high levels of inflationary pressure.
• Wednesday saw the release of the October Consumer Price Index. Consumer prices rose 0.9 percent against calls for a modest 0.6 percent increase. On a year-over-year basis, consumer prices increased 6.2 percent, which was higher than economist estimates for a 5.9 percent increase and brought consumer inflation to its highest annualized level in more than 30 years. Core consumer prices, which strip out the impact of volatile food and energy prices, increased 0.6 percent for the month and 4.6 percent year-over-year. Core producer prices increased more than expected on both a monthly and annual basis. Consumer prices have seen upward pressure this year due to supply chain troubles and high levels of pent-up demand. The Fed’s recent decision to start tapering asset purchases was expected due to increasing inflationary pressure.
• On Friday, the preliminary estimate for November’s University of Michigan consumer sentiment survey was released. The index fell from 71.7 in October to 66.8 to start the month against calls for an increase to 72.5. This disappointing result brought the index to its lowest level in 10 years, as consumer views soured on present economic conditions and future expectations. The sharp drop in sentiment was due in large part to rising fear over inflation and its potential impact on the current economic recovery. Consumer 1-year inflation expectations increased to 4.9 percent during the month, the highest they have been since 2008. Consumer buying conditions for household goods fell notably and sit at their second-lowest level since 1978. Historically, improving confidence has helped support faster sales growth, so this disappointing result may signal a slowdown in consumer spending growth.

Source: Bloomberg, as of November 12, 2021

Source: Morningstar Direct, as of November 12, 2021

What to Look Forward To
Tuesday will see the release of the October retail sales report. Sales are expected to increase 1.1 percent, a healthy step up from their 0.7 percent gain in September. The strong expectations are partly due to a rebound in auto and gas sales in October. Core retail sales, which strip out volatile auto and gas sales, are expected to show a more modest 0.5 percent increase after rising 0.7 percent in September. If estimates hold, this report would mark three consecutive months with retail sales growth. Given the importance of consumer spending to the economy, such a result would be encouraging. In September, we saw widespread increases in spending, with 11 of 13 categories showing growth. If strong retail sales growth continues in October, it would be a good sign for the pace of overall economic growth heading into the end of the year.

The October industrial production report will be released Tuesday. Industrial production is expected to increase 0.9 percent after a weather-driven 1.3 percent drop in September. Manufacturing production is also expected to rebound, with economists calling for a 0.9 percent gain in October, following a 0.7 percent drop in the previous month. Although the September downturn in industrial production and manufacturing output was partially due to Hurricane Ida, producers have also faced headwinds created by rising costs and material and labor shortages. Auto manufacturing has seen notable weakness lately, falling 7.2 percent in September, due in large part to the global semiconductor shortage. Looking ahead, high demand should support industrial production and manufacturing output growth, but producers are facing very real impediments to notably faster growth.

Tuesday will also see the release of the National Association of Home Builders Housing Market Index for October. Home builder confidence is expected to remain unchanged at 80. This is a diffusion index, where values above 50 indicate growth, so the anticipated result would show the sector’s strength. Home builder confidence has remained strong since the expiration of initial lockdowns last year. During this period, consumer preferences for large single-family homes, along with low mortgage rates, have boosted the housing market. Historically, high levels of home builder confidence have supported new home construction, so a strong November reading for the index would bode well for the pace of construction during the month. The number of homes available for sale remains very low on a historical basis, so any acceleration in building new homes would be welcome.

Speaking of new home construction, Wednesday will see the release of the October building permits and housing starts reports. Both measures of new home construction are expected to show growth after experiencing a slowdown in September. Permits are expected to increase 3 percent, while housing starts are set for a 1.6 percent gain. Given the lack of houses for sale, the estimated results would mark an encouraging rebound in construction. Permits currently sit well above pre-pandemic levels, and housing starts remain very strong on a historical basis. Still, both indicators can be volatile from month to month. The strength in new home construction during the year is impressive, especially given the headwinds created by tangled supply chains and relatively high material costs. Overall, if estimates hold, these reports would signal the continued health of the housing industry and bode well for the overall economic recovery.

Disclosures: Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. All indices are unmanaged and are not available for direct investment by the public. Past performance is not indicative of future results. The S&P 500 is based on the average performance of the 500 industrial stocks monitored by Standard & Poor’s. The Nasdaq Composite Index measures the performance of all issues listed in the Nasdaq Stock Market, except for rights, warrants, units, and convertible debentures. The Dow Jones Industrial Average is computed by summing the prices of the stocks of 30 large companies and then dividing that total by an adjusted value, one which has been adjusted over the years to account for the effects of stock splits on the prices of the 30 companies. Dividends are reinvested to reflect the actual performance of the underlying securities. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a market capitalization-weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index. The Bloomberg 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
• Yields fell across the Treasury curve last week as the Federal Reserve (Fed) announced plans to begin tapering the pace of asset purchases this month. The central bank will cut back on Treasury buying by $10 billion per month. The 10-year fell 8 basis points (bps) week-over-week to open Monday morning at 1.48 percent. The 30-year dropped 5 bps to 1.90 percent, the 20-year fell 7 bps to 1.91 percent, the 2-year was down 6 bps to 0.42 percent, and the 5-year shed 9 bps to 1.08 percent.
• Markets continued their recent rally as the Fed, as expected, announced it would begin tapering total asset purchases by $15 billion per month. Overall, the meeting signaled cautious confidence in the U.S. economy. Continued strong earnings pushed markets higher, with consumer discretionary, technology, and materials among the top-performing sectors. Amazon, Ford, and General Motors were strong standouts in the consumer discretionary space. Technology was supported by solid earnings from Qualcomm, which experienced strong demand for phone chips. Materials were boosted by Chemours and Kronos Worldwide. The worst performers were health care, financials, and utilities. Health care was hindered by Moderna, which recently lowered its forecast for COVID-19 vaccinations. In addition, it was announced that Medicare would negotiate prices for high-cost prescription drugs under the Build Back Better Plan.
• Monday saw the release of the Institute for Supply Management (ISM) Manufacturing index for October. This widely followed measure of manufacturer confidence declined by less than expected, falling from 61.1 in September to 60.8 against forecasts for a decline to 60.5. This is a diffusion index, where values above 50 indicate expansion, so this better-than-expected result still signals continued manufacturer growth despite the modest decline. Manufacturer confidence increased notably following the expiration of initial lockdowns last year, and the index has stayed in expansionary territory since June 2020. While manufacturers have had to contend with rising headwinds throughout the year—most notably tangled global supply chains, labor shortages, and rising costs—the still-high level of manufacturer confidence in October is an encouraging signal that producers continue to view these obstacles as challenges that can be overcome.
• On Wednesday, the ISM Services index for October was released. Service sector confidence increased more than expected, rising from 61.9 in September to 66.7 against calls for an increase to 62. This better-than-expected result brought the index to its highest recorded level since 1997. This is another diffusion index, where values above 50 indicate expansion, so this strong result indicates service sector activity picked up notably. Service sector businesses have been supported throughout the year by improving public health data, allowing consumers to go out and spend freely. High levels of business confidence tend to support higher levels of business investment, so this was an encouraging report that bodes well for business spending and hiring.
• Wednesday also saw the release of the Federal Open Market Committee (FOMC) rate decision from the Fed’s November meeting. The Fed cut interest rates to virtually zero at the start of the pandemic, and there were no changes to interest rates at this meeting; instead, the focus was on the Fed’s tapering announcement. Provided the economic recovery continues as expected, the Fed’s current quantitative easing program could end by next summer. Once the Fed completes winding down purchases, many economists believe interest rate hikes are possible next year.
• We finished the week with Friday’s release of the October employment report. The report showed that 531,000 jobs were added during the month, higher than estimates for an additional 450,000 jobs. September’s results were also revised up from an initial report of 194,000 jobs to 312,000 jobs. This better-than-expected result was very encouraging because the recent slowdown in new job creation was a potential sign of a slowing recovery. Although the high number of job openings indicates we still face a labor shortage, the accelerated hiring is a positive sign that businesses are finding ways to get people back to work. Underlying data was encouraging, too, as the unemployment rate fell from 4.8 percent to 4.6 percent against forecasts for a decline to 4.7 percent. The labor force participation rate remained unchanged; however, the rate for workers ages 25–54 increased.

Source: Bloomberg, as of November 5, 2021

Source: Morningstar Direct, as of November 5, 2021

What to Look Forward To
On Tuesday, the October Producer Price Index is set to be released. Producer prices are expected to increase 0.6 percent after rising 0.5 percent in September. Year-over-year, producer inflation should remain unchanged at 8.6 percent. Core producer prices, which strip out the impact of volatile food and energy prices, are expected to increase 0.5 percent during the month and 6.8 percent year-over-year. This year, producer prices have seen upward pressure due to tangled global supply chains and rising material costs. Labor shortages have also played a part in driving up prices. The pace of monthly price increases has declined this year, but producers must contend with high inflationary pressure compared with pre-pandemic levels.

Wednesday will see the release of the October Consumer Price Index. Consumer prices are expected to increase 0.6 percent during the month, up from their 0.4 percent rise in September. On a year-over-year basis, consumer prices are expected to show 5.8 percent growth, up from a 5.4 percent gain in September. Core consumer prices, which strip out volatile food and energy prices, are expected to show a 0.4 percent and 4.3 percent increase on a monthly and year-over-year basis, respectively. As with producer prices, consumer prices have seen upward pressure this year due to supply chain constraints and high demand. The anticipated increase in headline and core consumer prices is due in part to declining medical risks, which allowed consumers to go out and spend freely. The Fed continues to view much of the rising inflationary pressure as a consequence of the reopening and economic recovery efforts this year. Notably, the recent tapering announcement is the first step in tightening monetary policy.

Finally, on Friday, the preliminary estimate for the University of Michigan consumer sentiment survey will be released. Economists expect to see consumer sentiment improve during the month. Estimates call for a modest increase from 71.7 at the end of October to 72.3 to start November. If estimates hold, the result would represent a partial rebound for the index, which was at 72.8 in September. Over the past few months, confidence has been muted, largely due to rising concerns about inflation and the Delta variant; however, with medical risks declining over the past two months, we may see a larger increase in sentiment than expected. Such a result would echo the improvements recorded in the Conference Board Consumer Confidence Index. Historically, improving consumer sentiment has supported consumer spending growth. Accordingly, any improvement for the index in November would be welcome, even if the path back to pre-pandemic levels is long.

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 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.

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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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