Presented by Mark Gallagher

General Market News
• With coronavirus cases continuing to fall globally, we saw significant steepening of the yield curve. The 10-year Treasury yield opened last week at 1.07 percent and closed just below 1.14 percent. This morning, the 10-year opened at 1.18 percent, up 11 basis points (bps) week-over-week. The 30-year opened just shy of 1.98 percent, up 14.5 bps from last week. On the shorter end of the curve, the 2-year opened last week at 0.11 percent and lost less than one-half of a basis point to open this morning.
• The steepening of the yield curve in fixed income markets led to increased confidence for equity investors as global markets roared back last week. Poised to benefit from likely additional stimulus and a continued accommodative policy from Federal Reserve (Fed) officials, equities rallied. The energy sector was the top performer, as Fed policy continues to focus on driving inflation higher than 2 percent. Other sectors that performed well included communication services, financials, and consumer discretionary. Banks benefited from the steepening of the yield curve. Underperforming sectors were health care, utilities, and consumer staples.
• We started last week with Monday’s release of the Institute for Supply Management (ISM) Manufacturing index for January. This measure of manufacturer confidence dropped by more than expected, falling from an upwardly revised 60.7 in December to 58.7 in January against calls for a more modest decline to 60. This result still represents a healthy level of manufacturer confidence, as the index sits well above last year’s pre-pandemic high of 51.1 in January. This is a diffusion index, where values greater than 50 indicate expansion, so the manufacturing industry continued to grow in January. The index has shown an impressive rebound since hitting a lockdown-induced low of 41.7 in April 2020. This marks eight consecutive months in which the index has stayed in expansionary territory, which is a good sign for manufacturing output and business spending to start the year.
• Wednesday saw the release of the ISM Services index for January. Service sector confidence rose from 57.7 in December to 58.7 in January against calls for a decline to 56.7. This is another diffusion index, where values greater than 50 indicate expansion, so this strong result indicates service sector businesses continued to successfully adapt to the pandemic to start the year. This brought the index to its highest level since February 2019, highlighting the impressive rebound in service sector confidence since initial lockdowns were lifted last April. The improvement for service sector confidence in January likely reflected the positive effects from increased federal stimulus and lowered restrictions at the state and local level during the month.
• On Friday, January’s employment report was released. The report showed that 49,000 jobs were added during the month, which was below economist estimates for 105,000 new jobs. This result is a step in the right direction following December’s downwardly revised loss of 227,000 jobs that marked the first month of net job losses since last April. The return to job growth in January is a positive sign that the federal stimulus and the diminishing restrictions at the state and local level are starting to lead to faster economic growth. The underlying data also showed signs of improvement, as the unemployment rate fell by more than expected, declining from 6.7 percent in December to 6.3 percent in January against forecasts for no change. Given the improving public health situation during the month and the prospect for even more federal stimulus in the near future, it’s quite possible we will see job growth continue to rebound throughout the year, especially once mass vaccination efforts allow for a return to more normal economic conditions.

Source: Bloomberg, as of February 5, 2021

Source: Morningstar Direct, as of February 5, 2021

What to Look Forward To
On Wednesday, the January Consumer Price Index report is set to be released. Headline consumer prices are expected to increase by 0.3 percent during the month, a modest decline from December’s 0.4 percent increase. Core consumer inflation, which strips out the impact of volatile food and energy prices, is expected to show 0.2 percent growth in January, up from a 0.1 percent increase in December. On a year-over-year basis, headline and core consumer prices are expected to rise by 1.5 percent. The annual consumer inflation rate has picked up since hitting a pandemic-induced low of 0.1 percent in May 2020. If estimates hold, however, the pace of consumer inflation would remain well below the 2.5 percent year-over-year growth rate we saw in January 2020. Despite the anticipated increases in headline and core consumer prices, consumer inflation remains well constrained below the Fed’s stated 2 percent inflation target, indicating modest overall inflationary pressure.

Thursday will see the release of the initial jobless claims report for the week ending January 6. Economists expect to see 773,000 initial unemployment claims filed during the week, a modest improvement from the 779,000 initial claims filed the prior week. If the estimate holds, this report would mark four consecutive weeks with declining initial unemployment claims, following their rise throughout parts of December and early January. Continuing unemployment claims, which are reported with a one-week lag to initial claims, are also expected to show further declines during the week. Overall, however, claims remain at a high level. Continued improvement to start February would be a sign the stimulus and improving health situation are supporting faster economic growth. Given the continued high level of initial and continuing unemployment claims, this weekly report will continue to be closely monitored. It gives economists a relatively up-to-date look at the health of the labor market.

On Friday, the preliminary estimate of the University of Michigan consumer sentiment survey for February will be released. The index is forecasted to rise from 79 in January to 80.9 to start February. If the estimate holds, the index would show consumer sentiment at its highest level in four months, near the post-lockdown peak of 81.8 in October 2020. Given positive tailwinds from the improving public health picture and the prospect of increased federal stimulus spending in the near term, we may see notable improvements to consumer confidence over the next few months. This would be a positive sign for consumer spending growth, as improving confidence has historically been linked to increased spending. Ultimately, if the index does improve to start February, it would be another positive signal the economic recovery is heading in the right direction, spurred on by increased stimulus and progress in combating the third wave of the pandemic.

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

General Market News
• We saw mixed trading in the fixed income markets last week, with purchases ticking up on the shorter and longer ends of the curve. The 10-year Treasury yield opened last week at 1.09 percent and closed at 1.07 percent. It opened this morning at 1.09 percent. The 30-year opened this morning at 1.84 percent, a gain of 1 basis point from last week’s opening. On the shorter end of the curve, we saw a sizable move; the 2-year opened last week at 0.13 percent and dropped to 0.11 percent at the opening this morning.
• In what was a wild week, markets posted their largest losses since October. Retail investors flooded into beaten-up retail stocks, clashing with hedge funds and other investors, resulting in significant gains for GameStop, AMC Entertainment Holdings, Nokia, BlackBerry, Bed Bath & Beyond, and Naked Brand Group. These “meme stocks” gained momentum as the week progressed. The idea of purchasing highly shorted stocks grew from the subreddit community r/wallstreetbets. At one point, GameStop became the largest holding in the Russell 2000 Index and saw its weight pick up substantially in several thematic and small-cap exchange-traded funds. The rest of the market sold off, with technology and consumer discretionary leading the way despite strong earnings reports from Apple and Microsoft. Financials also were among the top three detractors, as gross domestic product (GDP) growth came in slightly lower than expected. Top-performing sectors were bond proxies in real estate, utilities, and consumer staples.
• On Tuesday, the Conference Board Consumer Confidence Index for January was released. The index rose by more than expected, from a downwardly revised 87.1 in December to 89.3 in January. This positive result was a step in the right direction after the index reached a four-month low in December. Historically, improving confidence helps support faster consumer spending growth, so this was a welcome development. With that being said, the index still sits well below October’s high of 101.4, likely reflecting the negative effects from the worsening public health picture. With mass vaccination efforts picking up steam and signs of slowing localized outbreaks in many states, the public health situation looks likely to show improvement in the upcoming months, which, in turn, could support further improvements in consumer confidence.
• Wednesday saw the preliminary release of the December durable goods orders report. Durable goods orders rose by 0.2 percent, down from 1.2 percent growth in November and below economist expectations for a 1 percent increase. The slowdown was largely due to a decrease in volatile aircraft orders, as evidenced by strong core durable goods orders during the month. Core durable goods orders, which strip out the impact of volatile transportation orders, rose by 0.7 percent, which was better than economist expectations for 0.5 percent growth. Core durable goods orders are often used as a proxy for business investment, so the continued healthy growth in core orders in December is further evidence of healthy levels of business spending in the fourth quarter.
• Wednesday also saw the release of the Federal Open Market Committee rate decision from the Federal Reserve’s (Fed’s) January meeting. As expected, there were no changes to the federal funds rate, which was lowered to virtually zero last March to help stimulate the economy through the pandemic. Economists do not anticipate any changes to the federal funds rate until at least 2023, given the continued headwinds for economic growth. Much of the focus at this meeting was on Fed Chair Jerome Powell’s post-meeting news conference, at which the head of the central bank continued to emphasize the Fed’s commitment to providing supportive monetary policy for the foreseeable future. The news release also showed that the Fed saw the pace of the economic recovery moderate slightly between its December and January meetings, which indicates further supportive policy from the central bank is expected.
• On Thursday, the advance estimate of fourth-quarter GDP growth was released. The economy grew at an annualized pace of 4 percent during the quarter, down from 33.4 percent in the third quarter and below economist estimates for 4.2 percent. Although the slowdown from the third quarter was expected, the growth in the fourth quarter was still modestly disappointing. Personal consumption, which accounts for the majority of economic activity, slowed from an annualized growth rate of 41 percent in the third quarter to 2.5 percent in the fourth quarter, against forecasts for 3.1 percent annualized growth. Over the next few quarters, low- to mid-single-digit economic growth is likely, given continued headwinds created by the pandemic. There is hope that an improving public health picture will lead to more normal economic conditions and steady growth by the end of the year.
• On Friday, December’s personal income and spending reports were released. Personal spending fell by 0.2 percent, following a downwardly revised 0.7 percent decline in November. This result was slightly better than economist estimates for a 0.4 percent decline in December and marks the first two months of spending declines since March and April of last year. With that being said, the recent decline pales in comparison to April’s 12.7 percent drop in spending, which indicates consumers have adapted and are handling the current wave of the pandemic with more resiliency. Personal income has been quite volatile on a month-to-month basis due to shifting levels of federal income support and stimulus. The report showed that personal income rose by 0.6 percent, which was a solid rebound from the 1.3 percent drop in November and well past economist estimates for 0.1 percent growth. This is the first increase for personal income since September, and the stimulus passed at the end of 2020 should help propel further income growth.
• We finished the week with Friday’s release of the second and final reading of the University of Michigan consumer sentiment survey for January. The initial estimate for this index showed confidence falling to start the month, from 80.7 in December to 79.2 in January, and this final report showed a further decline to 79 at month-end against forecasts for a modest increase to 79.4. This was driven by a modest drop in consumer views on current economic conditions, with the subindex falling to a three-month low in January. The future expectations subindex improved modestly during the month, however, revealing that consumers remain optimistic. As was the case with the Conference Board measure, confidence remains above previous lows caused by initial lockdowns in March and April, but much work remains to return confidence to pre-pandemic levels.

Source: Bloomberg, as of January 29, 2021

Source: Morningstar Direct, as of January 29, 2021

What to Look Forward To
We started the week with Monday’s release of the Institute for Supply Management (ISM) Manufacturing index for January. This measure of manufacturer confidence dropped by more than expected to start the year. It fell from an upwardly revised 60.7 in December to 58.7 in January, against calls for a more modest decline to 60. Despite the drop, the January result represents a healthy level of manufacturer confidence, as the index sits well above the pre-pandemic high of 51.1 it reached in January 2020. This is a diffusion index, where values above 50 indicate expansion, so this report indicates continued growth for manufacturing in January. The index has shown an impressive rebound since hitting a lockdown-induced low of 41.7 in April 2020. The January result marks eight consecutive months with the index in expansionary territory, which is a good sign for manufacturing output and business spending to start 2021.

Wednesday will see the release of the ISM Services index for January. As was the case with manufacturer confidence, service sector confidence is expected to moderate slightly during the month. Economists expect to see the index fall from a post-lockdown high of 57.7 in December to 56.7 in January. This is another diffusion index, where values above 50 indicate expansion, so the anticipated result would be in expansionary territory. It would also be in line with the 56.7 reading we saw in February 2020, before the pandemic was a major concern. Business confidence has remained impressively resilient throughout the third wave of infections, demonstrating the successful adaptation of businesses to the post-pandemic environment. Looking forward, the continued lifting of state and local restrictions as the public health situation improves should support stronger business confidence and spending figures.

On Thursday, the initial jobless claims report for the week ending January 30 is set to be released. Economists expect to see the number of initial unemployment claims fall from 847,000 to 840,000. Although a decline would certainly be welcome, it would leave the number of initial weekly claims at a very high level compared with historical norms. For reference, the highest level of initial weekly claims during the great financial crisis was 665,000. The numbers for this report have remained above this record high every week since initial lockdowns were enacted in March 2020. Progress has been made, however, in getting initial claims down from the one-week high of more than 6.8 million we saw at the end of last March. Still, the continued high level of weekly claims indicates we must do quite a bit of work to get the labor market back to more normal levels.

Speaking of the labor market, on Friday, January’s employment report is set to be released. Economists expect to see 55,000 jobs added during the month, following a loss of 140,000 jobs in December. December’s decline, which marked the first month with net job losses since April 2020, was driven in large part by a sharp drop in leisure and hospitality jobs. With restrictions starting to loosen at the state and local levels, these jobs may be poised for a relatively swift recovery over the next few months. Outside of leisure and hospitality, December’s employment report showed surprising strength for hiring in the professional and business services and retail sales sectors of the economy. This strength is expected to continue. Looking forward, the improving public health situation and a boost from additional federal stimulus are expected to support faster job growth. Nonetheless, we have quite a way to go to return to pre-pandemic employment levels. The 6.7 percent unemployment rate, which remains elevated, is not expected to change to start the year.

We’ll finish the week with Friday’s release of the December international trade report. Economists expect to see the trade deficit narrow from $68.1 billion in November to $65.8 billion in December. November’s result marked the second-widest monthly trade deficit on record. The anticipated narrowing in December would bring the deficit closer to the levels seen in September and October of last year. The widening in the overall trade deficit in November was largely caused by an increase in the deficit for the trade of goods, which hit a record high during the month. In December, a surge in goods exports caused the deficit for the trade of goods to narrow, which is expected to be reflected in the overall trade balance numbers. Exports have been slower to recover from initial lockdowns than imports. Still, with domestic consumption slowing to end the year and high levels of producer confidence, exports have a chance to make up ground in December.

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

General Market News
• There was minimal flattening in the yield curve during the holiday-shortened week. The 10-year Treasury yield opened at 1.09 percent and closed at 1.05 percent. This morning, the 10-year yield opened just below 1.07 percent—a loss of approximately 2 basis points (bps) since last week’s open. The 30-year opened at 1.82 percent, a loss of 2 bps from last week’s open of 1.84. On the shorter end of the curve, the 2-year opened last week at 0.14 percent and lost 1 bp at the opening this morning.
• The biggest news last week was obviously the change in administrations in Washington, DC, and it helped push markets higher across the board. The Nasdaq Composite led the way, up by more than 4 percent ahead of technology earnings announcements (i.e., Apple, Facebook, Microsoft, and Tesla). After the Nasdaq, U.S. small-caps were the next best domestic performer as Janet Yellen pushed for large stimulus in her testimony. Despite the rollout of the vaccines and a decline in hospitalizations, the Dow Jones Industrial Average lagged, possibly due to concerns regarding the new COVID-19 variant. The top-performing sectors were communication services, technology, and consumer discretionary; technology benefited from a more than 9 percent gain in Facebook, following recent pressure on the stock. The worst-performing sectors included financials, energy, and materials, which struggled due to concerns that the new administration may propose additional regulation and changes to both the energy and banking sector.
• On Wednesday, the National Association of Home Builders Housing Market Index for January was released. Home builder confidence fell from 86 in December to 83 in January against expectations for no change during the month. Despite the decline, the index still sits near the all-time high of 90 it hit in November, signaling continued high levels of home builder confidence. Home builders cited a lack of available lots to build on and rising lumber prices as headwinds toward faster construction. With that being said, home builder confidence has rebounded notably since the index hit a pandemic-induced low of 30 in April. High levels of home builder confidence typically support faster new home construction, so this report bodes well for new home construction to start the new year.
• Thursday saw the release of the December building permits and housing starts reports, which both came in well above expectations. Permits rose by 4.5 percent during the month against calls for a 1.7 percent decline. Starts increased by 5.8 percent, which was notably better than economist forecasts for a 0.8 percent increase. These results brought permits and starts to their fastest pace since 2006, highlighting the continued strength of the housing market. As was the case with home builder confidence, both permits and starts have increased notably since initial lockdowns ended last year. Given the low supply of homes for sale and the continued high levels of home builder confidence, the pace of new home construction is expected to remain robust for the time being.
• We finished the week with Friday’s release of the December existing home sales report. Sales of existing homes beat expectations, rising by 0.7 percent against forecasts for a 1.9 percent decline. This capped off the strongest year for existing home sales since 2006, further evidence of the health of the housing market. Record-low mortgage rates and shifting homebuyer preference for larger spaces helped lead to a surge in homebuyer demand throughout the year. On a year-over-year basis, existing home sales grew by 22.2 percent in December. While the rebound in housing demand was a positive development, significantly faster sales growth will be hard to come by in the future, as supply is very low and prices continue to rise. If sales remain near current levels, however, it would still represent a very strong level of homebuying activity.

Source: Bloomberg, as of January 22, 2021

Source: Morningstar Direct, as of January 22, 2021

What to Look Forward To
On Tuesday, the Conference Board Consumer Confidence Index for January will be released. Economists expect to see this gauge of consumer sentiment rise modestly from 88.6 in December to 89.1 in January. Following the four-month low set by the index in December, this result would be a step in the right direction. Still, it would leave confidence well below the post-lockdown high of 101.4 recorded in October 2020. Historically, improving consumer confidence has supported faster consumer spending growth, so any improvement for the index would certainly be welcome. With that said, however, we’ll likely have to make significant progress in combatting the third wave of the pandemic before we see a large jump in consumer confidence. With mass vaccination efforts picking up steam, the public health situation looks set to improve over the upcoming months. This would likely bolster consumer confidence and spending.

Wednesday will see the preliminary release of the December durable goods orders report. Durable goods orders are expected to rise by 1 percent during the month, in line with November’s 1 percent increase. Unlike consumer spending, business spending held up well in the fourth quarter of 2020, despite rising coronavirus case counts and restrictions at the state and local levels. Core durable goods orders, which strip out the impact of volatile transportation orders, are expected to rise by 0.5 percent in December, up from a 0.4 percent increase in November. If estimates hold, this report will mark eight straight months with growth in both headline and core durable goods orders. These indicators are often viewed as a proxy for business investment, so continued growth would be a positive sign that business spending remained healthy in the fourth quarter of 2020.

Wednesday will also see the release of the Federal Open Market Committee (FOMC) rate decision from the Federal Reserve’s (Fed’s) January meeting. The central bank lowered the federal funds rate to virtually zero in March of last year, and economists do not anticipate any changes to this rate until at least 2023. Given the ongoing environment of low interest rates, economists will be largely focused on the potential for changes to the Fed’s asset purchase programs over the next few FOMC meetings. No plans are in place to decrease the monthly purchases of Treasury and mortgage-backed bonds. But, given the impact that Fed buying has on the market, any mentions of future changes to asset purchase plans will be closely monitored. There may also be some discussion on how Fed members view the current and expected public health situation, especially now that vaccine rollout is underway.

On Thursday, the advance estimate of fourth-quarter gross domestic product (GDP) growth will be released. Economists expect to see the economy grow by an annualized rate of 4.4 percent during the quarter, down from the 33.4 percent annual growth rate in the third quarter. The surge in third-quarter growth was largely due to the weakness in the second quarter and a rebound in spending once initial lockdowns were lifted. The anticipated slowdown heading into the fourth quarter is due to a sharp decline in consumer spending growth, which was the major driver of third-quarter GDP growth. Personal consumption grew at an annualized rate of 41 percent in the third quarter, but economists expect to see this growth rate fall to an annualized 3.2 percent in the fourth quarter. Over the next few quarters, low to mid-single-digit economic growth is the most likely path forward, given the continued headwinds created by the pandemic. Nonetheless, we can hope that an improving public health picture will get us back to more normal economic conditions by the end of 2021.

Thursday will also see the release of the initial jobless claims report for the week ending January 23. Forecasts call for a drop in weekly initial unemployment claims, from 900,000 to 875,000. While this decline would be a positive development, the number of initial claims would remain high on a historical basis if estimates hold. The number of weekly initial claims has dropped notably since peaking at 6.87 million in March 2020, but initial claims have remained largely range bound since September. Given the high level of overall claims on a weekly basis, this lack of continued improvement is a concern. It signals that the labor market is still facing considerable stress due to the pandemic. With claims at historically high levels, this weekly report will continue to serve as an important barometer for the overall health of the labor market.

The third major data release on Thursday will be the release of the December new home sales report. The pace of new home sales is expected to rise by 1.3 percent during the month, following an 11 percent decline in November. New home sales are a smaller and often more volatile portion of the housing market compared with existing home sales. If estimates hold, this report would bring new home sales to their fourth-highest monthly level since 2008, highlighting the healthy rebound seen since initial lockdowns were lifted. As was the case with existing home sales, record low mortgage rates and shifting buyer preferences led to an encouraging resurgence in new home sales last year. Looking forward, low supply and rising prices are expected to serve as a headwind for significantly faster growth for this segment. Still, if the pace of new home sales remains near current levels, it would signal a noted increase compared with recent years.

On Friday, December’s personal income and personal spending reports are set to be released. Forecasts call for a 0.2 percent increase for personal income, while spending is set to fall by 0.5 percent. Personal spending has been hard-hit by the third wave of infections, as well as the increased state and local restrictions associated with the pandemic. A decline in personal spending in December would mark the first two months with consecutive spending declines since the initial lockdowns in March and April 2020. With that said, the anticipated decline in December is much more modest than the 12.7 percent decline in spending we saw in April. This fact indicates that consumers are dealing with the third wave with much more resiliency than they did with the first wave. Personal income has been very volatile on a month-to-month basis, due in large part to shifting levels of federal income support and stimulus. The anticipated rise in income in December is encouraging, as it would be the first increase since September 2020. Looking forward, the additional stimulus passed at the end of 2020 should support faster income and spending growth. Nonetheless, we’ll have to wait to see the results as they feed through in January’s data.

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
• After major steepening last week, there has been little movement in the yield curve. The 10-year Treasury yield opened at 1.12 percent and closed the week at 1.11 percent. This morning, the 10-year yield opened just above 1.10 percent—a loss of approximately 2 basis points (bps). The 30-year opened at 1.85 percent, which was a loss of roughly 2 bps from last week’s open of 1.88 percent. On the shorter end of the curve, the 2-year opened last week at 0.14 percent and added 0.6 bps at the opening this morning. Bond investors seem to be caught in between the Biden team’s $1.9 trillion stimulus proposal and lackluster economic data.
• U.S. large-cap and international markets were down last week, as weaker-than-expected economic data and new variants of the coronavirus led to a pause. Emerging markets and small-caps performed well after the incoming Biden administration proposed its $1.9 trillion stimulus package. The package seeks to provide additional $1,400 stimulus checks, expanded unemployment relief, and funding for local governments, vaccinations, and the reopening of schools. The U.S. dollar saw a modest increase in strength, but it is still unclear if this proposed package will be approved by the Senate in its current form and if additional stimulus will be needed. In an interview with Princeton, Federal Reserve (Fed) Chair Jerome Powell said he expects rates to remain low for some time and addressed concerns over an early exit from the Fed’s bond purchasing program.
• The top-performing sectors during what was largely a risk-off week were energy, real estate, utilities, and financials. The sectors that underperformed were technology, communication services, and consumer discretionary.
• On Wednesday, the December Consumer Price Index report was released. Consumer prices rose by 0.4 percent during the month, which is up from 0.2 percent growth in November and in line with economist expectations. On a year-over-year basis, consumer inflation rose by 1.4 percent, which was slightly higher than forecasts for 1.3 percent growth. Core consumer prices, which strip out the impact of volatile food and energy prices, showed a more subdued 0.1 percent increase during the month, which translated to a 1.6 percent increase in core consumer prices on a year-over-year basis. Despite the increase in inflationary pressure during the month, on a year-over-year basis, headline inflation remains below the Fed’s 2 percent target and well below the January 2020 high of 2.5 percent. Looking forward, rising gas prices and a potential return to normalcy as vaccination programs take effect are expected to serve as a tailwind for moderately faster price growth, but for the time being, inflation remains constrained.
• Friday saw the release of the December Producer Price Index report. Headline producer prices rose by 0.3 percent during the month, which was up from the 0.1 percent growth in November but below economist estimates for 0.4 percent growth. On a year-over-year basis, headline producer prices rose by 0.8 percent, which was in line with November’s annual inflation rate and economist forecasts. Core producer prices, which strip out energy and food prices, rose by 0.1 percent during the month and 1.2 percent on a year-over-year basis. As was the case with consumer inflation, producer inflation remains well constrained and below the Fed’s stated 2 percent target. While it’s quite possible we will continue to see modest increases in inflationary pressure during the year, given the continued weakness for the job market and the risks presented by the pandemic, the Fed is not expected to react to modest rising inflationary pressure for the foreseeable future.
• On Friday, December’s retail sales report was released. Retail sales came in below expectations, falling by 0.7 percent against forecasts for no change. This marks three straight months with declining retail sales. Core retail sales, which strip out the impact of volatile auto and gas sales, fell even further, with a 2.1 percent decline against forecasts for a more modest 0.3 percent drop. The weakness in sales was widespread and likely highlights the negative effects that rising case counts and restrictions at the state and local level have had on retail sales. This is a concerning report, as it indicates that consumer spending in the fourth quarter was likely weaker than expected—a bad sign for overall economic growth, given the fact that consumer spending accounts for the majority of economic activity in the country. There is hope that a new round of federal stimulus announced at the end of December will help spur faster sales growth in the future, but the decline in retail sales in the fourth quarter is a concerning sign that the economic recovery slowed to end the year.
• We finished the week with the release of the preliminary estimate of the University of Michigan consumer sentiment survey for January. This widely followed measure of consumer confidence fell by more than expected during the month, declining from 80.7 in December to 79.2 to start January against calls for a more modest decline to 79.5. While this result was slightly disappointing, the index is still well above the pandemic-induced low of 71.8 in April, indicating that consumers are reacting to the third wave of infections with more resiliency compared with earlier waves. With that being said, the index sits well below the pre-pandemic high of 101 last February. This will continue to be a widely monitored report, as improving consumer confidence has historically been linked to faster consumer spending growth.

Source: Bloomberg, as of January 15, 2021

Source: Morningstar Direct, as of January 15, 2021

What to Look Forward To
On Wednesday, the National Association of Home Builders Housing Market Index for January will be released. This measure of home builder confidence is expected to remain unchanged at 86. If estimates hold, this result would be strong, tying December for the second-highest reading for the index on record and trailing only November’s all-time high of 90. Home builder confidence has rebounded notably since hitting a pandemic-induced low of 30 in April. In large part, this trend has been driven by low mortgage rates that have spurred an increase in buyer demand. In addition, home builder confidence has been bolstered by the low level of homes available for sale, which gives builders confidence that newly built homes will be quickly purchased. High home builder confidence supports faster new home construction, so continued strength for this index would be a good sign for the health of the overall housing market.

Speaking of new home construction, Thursday will see the release of the December building permits and housing starts reports. Permits are expected to fall by 2.1 percent during the month, following a 6.2 percent increase in November. Starts are expected to increase by 1 percent, following a 1.2 percent increase in the prior month. If estimates prove accurate, this report would mark the second-highest monthly level of permits since 2006. Starts would set a new post-lockdown high, remaining well above levels seen throughout most of 2019 and 2020. As was the case with home builder confidence, permits and starts have increased notably since initial lockdowns were lifted last year. Given the low levels of houses available for sale and their rising prices, the pace of new home construction is expected to remain high for the immediate future, especially if home builder confidence remains near record levels.

Thursday will also see the release of the initial jobless claims report for the week ending January 16. Economists expect to see 830,000 initial unemployment claims filed during the week, marking a solid decline from the 965,000 initial claims the week before. Still, despite the anticipated drop, this weekly report would represent a concerningly high level of initial claims on a historical basis. Although initial claims have declined notably since last March and April, the current claims signal that the labor market is still facing significant stress due to the pandemic and increasing restrictions at the state and local levels. Ultimately, a full economic recovery will depend on further improvements for labor market conditions. Accordingly, this weekly release, which gives economists a timely look at the health of the labor market, will continue to be widely followed.

We’ll finish the week with Friday’s release of the December existing home sales report. Existing home sales are expected to fall by 2.2 percent during the month, following a 2.5 percent decline in November. October saw the pace of existing home sales hit its highest level since 2005, so the anticipated decline would leave sales at healthy levels. Since initial lockdowns ended, existing home sales have increased notably. If the December estimates prove accurate, sales would be up 18.4 percent on a year-over-year basis, despite the monthly drop. Looking forward, significantly faster sales growth is unlikely given the supply constraints and rising prices. If sales remain near current levels, however, they would represent a healthy level of home-buying activity and continued strength for the housing sector, which has been a bright spot in the recent 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 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.

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