Presented by Mark Gallagher

General Market News
• Rates continued to rise last week, with the 5-year Treasury yield increasing 19 basis points (bps). On Monday morning, the 10-year opened just shy of 1.40 percent, which was only 6 bps higher than last week’s open. The 10-year hit a high of 1.61 percent last Thursday, however, which demonstrates the recent volatility in Treasuries. The 30-year opened on Monday at 2.15 percent, up from last week’s open of 2.14 percent. There was a slight increase in yields on the shorter end of the curve as well, with the 2-year hitting a high of 0.19 percent last Thursday.
• Last Saturday morning, the House passed the $1.9 trillion American Rescue Plan, which included the $15 minimum wage. While the minimum wage hike will likely be scrutinized in the Senate, it will be interesting to see how rates and the Federal Reserve react to this round of stimulus.
• Equity markets sold off globally as the rise in Treasury yields led to concerns over future financing costs. Yields have risen significantly over the past month as coronavirus cases have fallen and vaccinations have been distributed. While this has been a positive for equity markets, as bonds have sold off on the more optimistic outlook, the cost of debt and financing has risen significantly. This led investors to seek out sectors that would benefit from rising prices, as the higher cost of financing could be passed onto consumers, depending on price sensitivity. The top-performing sectors were energy, industrials, financials, real estate, and materials, which benefit from rising prices or yields. Sectors that underperformed were technology, consumer discretionary, and health care. Apple, Tesla, Amazon, Microsoft, and NVIDIA were all among the top detractors on the week for the S&P 500 index.
• On Tuesday, the Conference Board Consumer Confidence Index for February was released. Consumer confidence rose from 88.9 in January to 91.3 in February against forecasts for a more modest increase to 90. This marks two consecutive months with increasing consumer confidence, which is a good sign for consumer spending growth. This result helped bring the index well above the pandemic-induced low of 85.7 in April 2020. Much of the rise in February was driven by improving consumer views on current economic conditions, as the present situation index rose to its highest level since November. This improvement likely reflects the positive effects from the improved public health situation during the month as well the tailwind from the stimulus passed at the end of December. Looking forward, there’s hope that another round of federal stimulus spending and continued positive change on the public health front will lead to a swift rebound in confidence.
• On Wednesday, the January new home sales report was released. New home sales increased by more than expected, rising by 4.3 percent against calls for a more modest 1.7 percent increase. December’s report was also revised up to show 5.5 percent growth at the end of the year. These results brought the pace of new home sales to its highest level in three months, signaling continued strong demand in the housing market. New home sales have rebounded well past pre-pandemic levels, and sales are up by 19.3 percent on a year-over-year basis. Much of the growth in new home sales over the past year has been driven by record-low mortgage rates that have helped bring additional homebuyers into the market. Looking forward, rising mortgage rates and low levels of supply could serve as headwinds for significantly faster new home sales growth, but if sales remain near current levels, it would signal strong homebuyer demand and a healthy housing market.
• Thursday saw the release of the preliminary estimate of the January durable goods orders report. Durable goods orders increased by 3.4 percent during the month against calls for a 1.1 percent increase. This was a strong result, as it brought the overall level of durable goods orders well above pre-pandemic levels. Business confidence has remained resilient throughout the third wave of infections, and this shows the positive effects that high levels of confidence can have on spending. Core durable goods orders, which strip out the impact of volatile transportation orders, increased by 1.4 percent, better than economist estimates for 0.7 percent growth. Core durable goods orders are often viewed as a proxy for business investment, so this strong result to start the year is a good sign for business spending in the first quarter.
• On Friday, the January personal income and personal spending reports were released. Personal spending rose by 2.4 percent to start the year, slightly below economist estimates for 2.5 percent growth. Despite the modest miss against estimates, this was a very strong result, as it marks the highest monthly spending gain since last June. The personal spending growth was largely driven by the improved public health situation and the federal stimulus passed at the end of December. Personal income rose by 10 percent, slightly above economist estimates for 9.5 percent growth. Income has been very volatile on a month-to-month basis throughout the pandemic, driven in large part by shifting federal stimulus and unemployment payments. The surge in January reflects the effects from the onetime $600 payments included in the December stimulus bill. This echoes the 12.4 percent increase in income last April when the initial round of stimulus checks were released.
• We finished the week with Friday’s second and final estimate of the University of Michigan consumer sentiment survey for February. Sentiment improved throughout the month, as the preliminary reading of 76.2 was revised up to 76.8 at month-end. This was better than economist estimates for a more modest increase to 76.5. The report showed that consumers saw improved expectations for future economic conditions, as the expectations subindex increased from 69.8 to 70.7. As was the case with the Conference Board Consumer Confidence Index, the University of Michigan consumer sentiment survey now sits well above last year’s pandemic-induced low of 65.9, indicating consumers remain resilient. The lowered case counts and increased vaccinations throughout the month likely played a part in the improving confidence, as well as the positive impact from the December stimulus. Overall, this was an encouraging sign that consumer confidence has now likely stabilized following the third wave and could be set to accelerate as we see further improvements in public health.

Source: Bloomberg, as of February 26

Source: Morningstar Direct, as of February 26

What to Look Forward To
Monday saw the release of the Institute for Supply Management (ISM) Manufacturing index for February. This widely followed gauge of manufacturer confidence improved by more than expected during the month, rising from 58.7 in January to 60.8 in February. Forecasts were for a more modest increase to 58.9. Manufacturer confidence rose to a three-year high, as factory orders, production, and employment all saw faster growth during the month. This is a diffusion index, where values above 50 indicate expansion, so this result signals healthy levels of growth for the manufacturing industry. Manufacturer confidence has rebounded well since initial lockdowns were lifted last year, as the index sits well above the pre-pandemic high of 51.1 it hit in January 2020. Business confidence and spending have remained resilient throughout the third wave of the pandemic, and this strong result bodes well for continued strong levels of manufacturing output and spending.

On Wednesday, the ISM Services index for February is set to be released. Service sector confidence is expected to remain unchanged at 58.7 during the month, following a surprise increase in January that brought the index close to a two-year high. As was the case with manufacturer confidence, service sector confidence has rebounded well since initial lockdowns were lifted last year. The index remains well above the pre-pandemic high of 56.7 it set in February 2020. The lowered case counts throughout February 2021 caused many state and local governments to lift restrictions, which should support continued high levels of service sector confidence. This trend should be especially beneficial for leisure and hospitality businesses, as higher-frequency data showed an uptick in business activity once restrictions were eased. Looking forward, additional improvements on the public health front and another round of federal stimulus should continue to support strong levels of business confidence and spending.

Thursday will see the release of the initial jobless claims report for the week ending February 27. Economists expect to see the number of initial claims rise from 730,000 to 793,000 during the week, likely reflecting the impact of weather-delayed claims the week before. Initial claims have been volatile on a week-to-week basis throughout the pandemic. If estimates hold, however, the four-week average of initial claims would reach its lowest level since the first week of December 2020. The improvement from the week before, as well as the general improvement in February compared with much of December and January, indicates that the pressure on the labor market may be starting to ease. This is likely due in large part to the lifting of state and local restrictions driven by the improving public health situation. Overall, however, the number of weekly initial claims remains high compared with historically normal levels. Accordingly, this weekly report will continue to be widely monitored until we see significant progress for the ongoing labor market recovery.

Speaking of the labor market, Friday will see the release of the February employment report. Economists expect to see 145,000 new jobs added during the month, in an improvement from the 49,000 jobs added in January. The pace of the labor recovery slowed during the third wave of the pandemic, but, if estimates hold, this release would mark two consecutive months with positive job growth. Following a net decline in jobs in December, this outcome would be a step in the right direction. Given the improved public health situation and the easing of local restrictions, the leisure and hospitality jobs that were most pressured during the third wave are expected to show signs of improvement in February. This would signal that the labor market recovery is poised to accelerate. Meeting the estimate would be an encouraging sign that the worst impact from the third wave is behind us and the economic recovery picked up steam in February.

Finally, we’ll finish the week with Friday’s release of the January international trade report. The trade deficit is forecasted to widen during the month, with economist estimates calling for a $67.5 billion deficit in January compared with $66.6 billion in December. The advance report on the trade of goods showed that the goods deficit widened from $83.2 billion in December to $83.7 billion in January. This result was driven by a 1.1 percent increase in imports that offset a rise in exports during the month. If estimates hold, they would bring the overall trade deficit to its second widest level since the financial crisis, trailing only the $69 billion monthly deficit recorded in November 2020. Despite the anticipated widening of the deficit, we have seen a notable rise in exports since initial lockdowns were lifted. Accordingly, trade is not expected to serve as a major headwind for GDP growth in the first quarter.

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
• Rates continued to rise last week, with the 5- and 10-year Treasuries shifting the most. This follows an increase in 10- and 20-year Treasuries the previous week. It’s unknown when or if the short end of the curve will follow with action from the Federal Reserve (Fed), which is committed to driving inflation before raising interest rates. The 10-year Treasury yield opened last week near 1.21 percent, closing just shy of 1.38 percent to end the week. It opened this morning at 1.36 percent, 15 basis points (bps) higher than last week’s open. The 30-year Treasury opened at 2.15 percent, a gain of 14 bps from last week’s open of 2.01 percent. Finally, on the shorter end of the curve, the 2-year Treasury opened last week at 0.11 percent and has remained flat through Monday’s open.
• Markets were mixed during the holiday-shortened week. The Dow Jones Industrial Average led domestic indices, as investors continued to seek new opportunities after the recent increase in rates. The financial sector was the top performer, as better-than-expected retail sales, likely stimulus, and falling coronavirus cases led some investors to wonder if the economy is closer to holding its own without significant Fed support. Other cyclical sectors benefiting from that theme included energy, industrials, and materials stocks. Technology and communication services sectors lagged, with coronavirus darlings Apple, Microsoft, Tesla, Facebook, and Amazon among the largest detractors. Health care and coronavirus plays, such as Thermo Fisher Scientific and Johnson & Johnson, were down due to the drop in cases and testing over the past month.
• On Wednesday, the January Producer Price Index report was released. Producer prices rose 1.3 percent against calls for a 0.4 percent increase. The rise was widespread as core consumer prices, which strip out the impact of volatile food and energy prices, also came in above expectations, rising 1.2 percent against forecasts for a 0.2 percent increase. Despite the increase in producer prices in January, producer inflation remains reasonable year-over-year; headline producer prices rose 1.7 percent and core producer prices increased 2 percent to start the year.
• Wednesday also saw the release of the January retail sales report. Retail sales blew past expectations, rising 5.3 percent against calls for a more modest 1.1 percent increase for the best month of sales growth since June 2020, an encouraging result after three months of declining sales. The strong results, driven by $600 stimulus checks and loosened state and local restrictions, could indicate pent-up consumer demand will continue to power spending growth. Consumer spending accounts for most economic activity in the country, so this is a good sign.
• Wednesday’s third major release was the National Association of Home Builders Housing Market Index for February. This widely followed gauge of home builder confidence rose from 83 in January to 84 in February against forecasts for no change. Home builders cited continued low mortgage rates and subsequent prospective home buyer foot traffic as a primary reason for the increase. Home builder confidence has rebounded notably since the index hit a pandemic-induced low of 30 in April; the index remains well above the pre-pandemic high of 76 reached in December 2019. Looking forward, home builders see rising construction costs as a headwind for significantly faster growth, but for the time being, low mortgage rates and high levels of home buyer demand support healthy levels of home builder confidence and new home construction.
• On Thursday, January building permits and housing starts reports were released. These measures of new home construction were mixed; housing starts fell 6 percent, while permits rose 10.4 percent. Economists had forecasted a 0.5 percent decline for starts and a 1.4 percent drop for permits. Permits are at their highest level since 2006, while housing starts are in line with pre-pandemic levels after rising for five straight months. A slowdown in single-family housing starts is largely responsible for the decline, which is understandable because they hit a 14-year high in December. Rising construction costs will likely serve as a headwind for significantly faster construction growth, but activity near current levels would still signal a healthy housing market.
• We finished the week with Friday’s release of the January existing home sales report. Existing home sales beat expectations, rising 0.6 percent against calls for a 2.4 percent decline. This brought the pace of existing home sales to its second-highest level since 2006, highlighting the impressive rebound in housing demand since initial lockdowns were lifted last year. Year-over-year, existing home sales were up 23.6 percent in January, further emphasizing the strength of the housing sector. Looking forward, the major headwind for faster sales growth is the low supply of existing homes for sale. The number of homes available for sale in January was down 25.7 percent year-over-year. Given the low supply and high demand, prices have increased notably over the past year, which is also expected to serve as a headwind for significantly faster sales growth. All that being said, sales near current levels are still a sign of a strong housing market.

Source: Bloomberg, as of February 19, 2021

Source: Morningstar Direct, as of February 19, 2021

What to Look Forward To
On Tuesday, the Conference Board Consumer Confidence Index for February will be released. This widely followed measure of consumer confidence is expected to increase modestly from 89.3 in January to 90 in February. If estimates are accurate, this release would mark two consecutive months with improving confidence after rising case counts and political uncertainty caused the index to decline in November and December 2020. The drop in confidence due to the third wave of the pandemic brought the index near its initial lockdown-induced low of 85.7 from April 2020, so further improvement would be welcome. There is hope that increased federal stimulus and more control over the pandemic will lead to a swift rebound in consumer confidence and spending this year. For the time being, however, consumer confidence levels indicate work is needed to return to more normal economic conditions.

On Wednesday, the January new home sales report is set to be released. New home sales are forecasted to rise 2 percent during the month after a 1.6 percent increase in December. Compared with existing home sales, new home sales are a smaller and often more volatile portion of the market. After initial lockdowns were lifted last year, new home sales rebounded sharply and have remained well above pre-pandemic levels since June 2020. Looking forward, as with existing home sales, tight supply is expected to be a headwind for significantly faster levels of sales growth. If estimates are accurate, the January report would be another sign the housing market carried its 2020 momentum into the new year.

On Thursday, the initial jobless claims report for the week ending February 20 will be released. Economists expect to see the number of initial claims fall from 861,000 to 750,000. If estimates hold, this report would bring the pace of weekly unemployment claims to its lowest level since December 2020. The number of weekly initial claims would be close to the post-lockdown low of 711,000 from the first week of November. Although any decline in weekly unemployment claims would be positive, disappointing results so far this month indicate we might be in for a weak February jobs report. Given the relatively slower pace of recovery for the job market over the past year, the Fed is expected to continue to keep monetary policy supportive until we see significant progress in getting folks back to work.

Thursday will also see the release of the preliminary estimate of the January durable goods orders report. Durable goods orders are expected to rise 1.2 percent after a 0.5 percent increase in December. Unlike consumer confidence, producer confidence remained resilient throughout the third wave of the pandemic, and durable goods orders showed continued growth throughout the second half of the year. If estimates hold, this report would be a sign that business spending continued into the start of the new year. Core durable goods orders, which strip out the impact of volatile transportation orders, are expected to grow 0.7 percent in January. Core durable goods orders are often viewed as a proxy for business investment, so continued growth would be another positive sign for overall business activity in January.

On Friday, the January personal income and personal spending reports are set to be released. Personal spending is expected to rise 0.7 percent during the month after a 0.2 percent decline in December. Accurate estimates would signal a welcome return to spending growth following two months of declines, echoing the increase in retail sales we saw during the month. Throughout the pandemic, personal income has been very volatile on a month-to-month basis, driven by shifting federal stimulus and unemployment payments. Economists have forecasted a 10 percent increase in personal income in January, due to additional federal stimulus checks and enhanced unemployment insurance announced at the end of December. If the estimate holds, the income increase would be similar to the 12.4 percent surge in income in April 2020, when the initial round of stimulus checks reached American bank accounts.

We’ll finish the week with Friday’s second and final release of the University of Michigan consumer sentiment survey for February. The preliminary report released earlier in the month showed a surprise decline in sentiment, with the index falling from 79 in January to 76.2 to start February. Economists don’t expect to see any changes to the index in the final report. The decline was primarily driven by a sharp drop in consumer expectations, as the expectations index hit a six-month low in February. The initial report continued to show a partisan divide in responses; Independent and Republican respondents had lowered confidence to start the month, while Democrats saw confidence improve. Given the political nature of the responses, it’s unlikely the drop in sentiment will have a material effect on consumer spending data during the month. Nonetheless, this survey will continue to be widely monitored, given the historical relationship between improving confidence and faster consumer spending growth.

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
• Rates picked up across the yield curve last week, especially with 10- and 20-year Treasury maturities. The primary focus remains on a potential stimulus package and near-term uncertainty with respect to market inflation expectations and future Federal Reserve (Fed) policy. The 10-year Treasury yield opened last week just below 1.17 percent, closing the week at 1.20 percent; it opened at 1.23 percent this morning. The 30-year opened this morning just below 2.03 percent after opening last week at 1.99 percent. On the shorter end of the curve, we saw a slight increase in yields. The 2-year opened last week at 0.105 percent, ticking up to 0.113 percent this morning.
• Markets continued their risk-on rally from the previous week, with small caps and emerging markets representing top-performing pockets of the equity market. In large-cap domestic markets, the tech-oriented Nasdaq Composite Index led the way, with a global semiconductor shortage bolstering NVIDIA, Applied Materials, Intel, Lam Research, Texas Instruments, and Broadcom. Other top-performing sectors last week included financials and health care. Underperforming sectors included consumer discretionary, utilities, and consumer staples. Amazon, Tesla, and Apple fell in the discretionary space as consumer confidence has dropped recently. Staples such as Procter & Gamble fell as case counts and hospitalizations continued to drop.
• On Wednesday, the January Consumer Price Index report was released. Headline consumer prices rose by 0.3 percent, which was in line with expectations and a slight increase from December’s downwardly revised 0.2 percent rise. Core consumer inflation, which strips out the impact of volatile food and energy prices, showed no change, which was below economist estimates for a 0.2 percent increase. On a year-over-year basis, both headline and core consumer prices rose by 1.4 percent in January, below the forecasted 1.5 percent annual inflation rate. The pace of consumer inflation remains well below the 2.5 percent year-over-year rate seen in January 2020. Despite the modest increase in headline consumer prices to start the year, consumer inflation remains well constrained and below the Fed’s stated 2 percent inflation target.
• On Friday, the preliminary estimate of the University of Michigan consumer sentiment survey for February was released. This widely followed measure of consumer sentiment unexpectedly fell from 79 in January to 76.2 to start February, against forecasts for an increase to 80.9. This was largely driven by a decline in the future expectations index, which fell from 74 to 69.8, its lowest level since August. Responses remained split based on political party, as Republican and Independent respondents saw lowered sentiment and expectations, while Democrats saw both increase in February. Overall, this was a disappointing report that highlights the continued headwinds for the ongoing economic recovery.

Source: Bloomberg, as of February 12, 2021

Source: Morningstar Direct, as of February 12, 2021

What to Look Forward To
Wednesday will see the release of the January Producer Price Index. Producer prices are expected to rise by 0.4 percent during the month, up from a 0.3 percent increase in December. Core producer prices, which strip out the impact of volatile food and energy prices, are expected to show a more modest 0.2 percent monthly increase. On a year-over-year basis, headline producer prices and core producer prices are expected to rise by 0.8 percent and 1.1 percent, respectively. As was the case with consumer inflation, producer inflation has picked up moderately since initial lockdowns were lifted last year. Still, overall inflation remains relatively low due to the deflationary pressures created by the pandemic. Ultimately, this report is expected to show continued low levels of producer price pressure to start the year.

Wednesday will also see the release of the January retail sales report. Retail sales are expected to grow by 1 percent during the month, following a 0.7 percent decline in December. If estimates hold, this report would mark the first month with retail sales growth since September 2020. Some of the anticipated growth in January is due to rising gas prices. Core retail sales, which strip out volatile auto and gas sales, are expected to show a more modest 0.5 percent increase. Retail sales are expected to benefit from the additional federal stimulus passed at the end of December and the improving public health situation, which led to a decline in state and local government restrictions. As stimulus checks hit bank accounts, the higher-frequency consumer spending data showed a noted uptick in activity toward month-end, which should support the return to sales growth. Given the importance of consumer spending to the overall economic recovery, retail sales growth to start the new year would be a positive signal for growth during the first quarter.

The third major release on Wednesday will be the January industrial production report. Industrial production is slated to rise by 0.4 percent during the month, following a 1.6 percent increase in December. The better-than-expected result in December was largely driven by increased manufacturing output, as manufacturing production rose by 0.9 percent to end the year. Economists have forecasted a 0.7 percent increase for manufacturing production in January. This anticipated growth for industrial and manufacturing production in January is supported by high levels of business confidence. The anticipated gap between industrial and manufacturing production is due to unseasonably warm weather in January, which likely held back energy and overall industrial production. If estimates hold, this report would signal that the manufacturing recovery we saw throughout much of last year continued into the new year.

Wednesday will also see the release of the National Association of Home Builders Housing Market Index for February. This widely followed gauge of home builder confidence is expected to remain unchanged at 83 during the month. If estimates hold, this result would leave the index near the all-time high of 90 it hit in November 2020. Home builder confidence has rebounded notably since the index hit a pandemic-induced low of 30 in April 2020. The index is expected to remain well above the pre-pandemic high of 76 it reached in December 2019. Home builder confidence has been boosted by record-low mortgage rates, which have driven additional buyers into a market with a low supply of existing homes for sale. Given the continued low levels of supply and the high demand for housing, home builder confidence is expected to remain strong for the foreseeable future. This should support continued healthy levels of new home construction.

Wednesday’s final major data release will be the release of the Federal Open Market Committee (FOMC) minutes from the Fed’s January meeting. No major changes to monetary policy were made, so the minutes are not expected to contain substantial new information. We’ll likely get some discussion between Fed members regarding the Fed’s asset purchase program, but the central bank indicated at the meeting there would be no changes to the current program for the foreseeable future. The minutes are expected to show additional conversation focusing on the Fed’s evolving view of the pandemic and mass vaccination efforts, which were picking up steam when the FOMC last met. Ultimately, these minutes are likely to reinforce the Fed’s continued commitment to providing supportive monetary policy until we see further substantial progress in combating the pandemic and getting people back to work.

On Thursday, the January building permits and housing starts reports are set to be released. During the month, permits and starts are expected to fall by 2 percent and 0.7 percent, respectively. Both of these measures of new home construction grew by more than expected in December, so a modest pullback is understandable. December’s strong results brought permits and starts up to their highest levels since 2006, so the anticipated decline in January is nothing to worry about for the time being. Looking forward, however, rising timber prices and fewer available lots for building could be headwinds for significantly faster levels of new home construction. Single-family housing construction has been especially impressive over the past year, as starts for this segment saw eight straight months of growth to finish out 2020. If estimates for permits and starts prove to be accurate, this report would be another signal that the housing market entered 2021 with healthy levels of growth.

Thursday will also see the release of the initial jobless claims report for the week ending February 13. Economists expect to see 760,000 initial unemployment claims filed during the week, which would be a modest improvement from the 793,000 initial claims filed the week before. If this estimate proves accurate, the number of weekly claims would hit its lowest level since November 2020, likely reflecting the positive impact from diminishing state and local restrictions. Still, though we have made progress in reducing unemployment claims from the record highs established during the initial lockdowns, the level of weekly initial claims remains very high on a historical basis. This indicates continued stress for the labor market. Given the high levels of initial claims, this weekly report will continue to be widely monitored, as it gives economists a relatively up-to-date look at the health of the job market.

We’ll finish the week with Friday’s release of the January existing home sales report. Sales of existing homes are expected to fall by 3 percent during the month, following a 0.7 percent increase in December. Existing home sales have already rebounded well past pre-pandemic levels. If the estimate holds, their pace would remain near the 14-year high recorded in October 2020. In January, existing home sales are expected to grow by 21 percent on a year-over-year basis. This result would highlight the impressive surge in home buyer demand we experienced over the past year. Housing was one of the best-performing sectors of the economy once initial lockdowns were lifted. Continued sales growth near current levels would indicate the continuing health of the housing market to start the new year, despite low levels of supply and rising prices.

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
• 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®