Presented by Mark Gallagher

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

  Source: Bloomberg

  Source: Morningstar Direct

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

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

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

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

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

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

Presented by Mark Gallagher

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

Source: Bloomberg

Source: Morningstar Direct

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

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

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

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

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

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

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

Presented by Mark Gallagher

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

  Source: Bloomberg

  Source: Morningstar Direct

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

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

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

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

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

Presented by Mark Gallagher

General Market News
• The Treasury yield curve climbed following last week’s Federal Reserve (Fed) meeting, during which the central bank indicated tapering asset purchases may be warranted before year-end. The 10-year yield was up 17 basis points (bps), opening at 1.48 percent on Monday morning. The 30-year rose 15 bps to 2 percent, the 5-year gained 15 bps to 0.97 percent, and the 2-year was 6 bps higher at 0.28 percent.
• Domestic equities were slightly higher last week as the market shook off concerns surrounding the impact of Chinese real estate developer Evergrande and potential surprises from the Fed surrounding tapering. Equities began the week sharply lower as investors were concerned Evergrande’s default on its loans would yield a contagion effect across global financial markets for institutions with exposure to Chinese real estate. As the week progressed, equities rebounded as investors waited to see whether the company would find a way to make an $84 million interest payment within the allotted 30-day grace period. The current consensus is that the Chinese government will not bail out the firm but would prefer to limit surprises or a disorderly collapse. The Fed offered little surprise in its midweek meeting, stating only that tapering of the $120 billion per month in asset purchases may be necessary soon (though it did not specify how soon that might be). Energy, financials, and technology were among the top performers with REITs, utilities, and communications services among the laggards.
• On Monday, the National Association of Home Builders Housing Market Index for September was released. This gauge of home builder confidence increased modestly from 75 in August to 76 against calls for a decline to 74. This is a diffusion index, where values above 50 indicate expansion, so this better-than-expected result indicates home builder confidence remained at levels that signal continued growth. Home builder confidence rebounded swiftly last year once initial lockdowns were lifted, as record-low mortgage rates, high levels of home buyer demand, and limited existing homes for sale helped support a surge in new home construction. Since then, home builder confidence has declined from the record highs at the end of 2020, due in large part to rising costs for materials and labor. Although lumber prices have started to normalize, input costs for home builders remain high due to supply chain disruptions and labor shortages. Looking forward, still-high levels of home buyer demand should keep home builder confidence in expansionary territory; however, high costs are expected to remain a headwind for home builders in the short term.
• On Tuesday, the August building permits and housing starts reports were released. These measures of new home construction increased by more than expected. Permits increased 6 percent against calls for a 1.8 percent decline, while starts increased 3.9 percent against calls for a 1 percent increase. Although permits and starts can be volatile on a month-to-month basis, they remained at levels that signal a healthy pace of construction. The increase in starts was largely driven by a 20.6 percent increase in multifamily homes, as the pace of single-family starts declined during the month. The increase in permits was also due to increased builder interest in getting multifamily units permitted. Rising housing costs and a return to more normal economic conditions are expected to support continued new home construction in the months ahead.
• On Wednesday, the August existing home sales report was released. Sales of existing homes fell 2 percent, slightly more than the expected 1.7 percent decline. Existing home sales increased notably at the end of 2020; however, so far this year, we’ve seen the pace of home sales pull back. With that being said, sales remain above pre-pandemic levels, as low mortgage rates and high levels of prospective home buyer demand continue to support the housing sector. The major headwind for the housing market is a lack of available homes for sale; the supply of homes for sale in August was 13.4 percent lower than one year ago. The lack of homes for sale and high levels of demand have also caused housing prices to rise throughout the year, which is another headwind for faster sales growth. Looking forward, we’ll likely need to see a noted increase in the number of homes for sale to see notably faster levels of sales growth.
• Wednesday also saw the release of the Federal Open Market Committee rate decision from the Fed’s September 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, as expected. Instead, the major focus was on the Fed’s asset purchase program, which currently consists of $120 billion per month in purchases of Treasury and mortgage-backed securities. While these quantitative easing measures helped support markets throughout the worst of the pandemic, some board members have recently started to discuss tapering asset purchases in the future. The news release from the meeting indicated that the Fed may be prepared to announce tapering plans as soon as its November meeting, provided the economic recovery continues. Although the full timing of the tapering plan remains unknown, this strong hint from the Fed that we may see asset purchases decline by the end of the year was a sign that its members believe the economy continues to recover and a gradual return to more normal monetary policy may be appropriate.

Source: Bloomberg

Source: Morningstar Direct

What to Look Forward To
On Monday, the August durable goods orders report was released. Headline durable goods orders increased by more than expected, going up by 1.8 percent against calls for a 0.7 percent increase. This result was largely driven by a rise in volatile commercial aircraft orders. Core durable goods orders, which strip out the impact of transportation orders, increased by 0.2 percent against forecasts for a 0.5 percent gain. Core durable goods orders are often viewed as a proxy for business investment, so August’s continued growth was welcome despite the miss against expectations. Following the 0.8 percent increase in core durable goods orders seen in July, this report marks six consecutive months with core orders growth. Overall, the August report was relatively encouraging; it showed that businesses continue to spend and invest, which is a good sign for overall economic growth in the month and quarter.

On Tuesday, the Conference Board Consumer Confidence Index for September is scheduled for release. Consumer confidence is expected to increase modestly, with the index set to rise from 113.8 to 114.2. If estimates hold, the index would remain well above last year’s lockdown-induced lows, signaling healthy levels of consumer confidence. That said, we saw confidence decline in August due to rising medical risks, a slowdown in hiring, and rising inflationary pressure. Still, there is some evidence that consumer inflation started to cool in August, including the Consumer Price Index slowdown. Historically, higher levels of consumer confidence have supported faster spending growth. Any improvement for the index would be welcome, even if it’s only the modest uptick expected by economists.

Thursday will see the release of the initial jobless claims report for the week ending September 25. Economists expect to see 330,000 initial claims filed during the week, which would be an improvement from the 351,000 initial claims filed the week before (but slightly higher than the low of 310,000 initial claims recorded earlier in the month). Although we’ve made solid progress in getting initial claims down this year, the labor market recovery may be tested soon by less-supportive Fed policy. With many economists expecting the Fed to start tapering its asset purchases by year-end, the tailwinds from supportive Fed policies are set to diminish over the months ahead. Given the large number of folks still out of the labor force and the relatively high unemployment rate compared with pre-pandemic levels, employment and initial claims reports will continue to be closely monitored.

Friday will see the release of August personal income and spending reports. Spending is expected to increase by 0.7 percent, following a surprise 0.3 percent increase in July. The previously released August retail sales report showed spending on goods beat expectations, which helps explain the anticipated acceleration in spending growth. Personal income is expected to have increased by 0.2 percent in August following a 1.1 percent rise in July. Personal income growth has been highly volatile throughout the pandemic as shifting federal government payments have caused large monthly income swings. Strong wage growth is expected to offset the impact of more states pulling out from federal unemployment programs in August. Looking forward, labor shortages and high levels of job openings should support continued wage growth and increased spending.

We’ll finish the week with Friday’s release of the ISM Manufacturing index for September. This widely monitored gauge of manufacturer confidence is expected to decline from 59.9 in August to 59.5 in September. This is a diffusion index, where values above 50 indicate expansion, so this result would signal continued growth for the manufacturing industry. Last year, manufacturer confidence rebounded swiftly once initial lockdowns were lifted; even with a modest decline in September, the index should remain well above pre-pandemic levels. High levels of buyer demand supported manufacturing confidence throughout the year despite headwinds raised by supply shortages and higher prices. If estimates hold, this release will represent an encouraging signal that manufacturers remain confident despite industry headwinds. As is the case with consumer confidence, higher levels of business confidence have historically supported spending growth. If we get the high level of manufacturer confidence expected in September, this result will signal that manufacturing recovery remains on track.

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