Presented by Mark Gallagher

General Market News
• Rates moved higher last week but at a more muted pace, with the 10-year Treasury yield opening just shy of 1.58 percent and closing at 1.64 percent, where it remained through Monday’s open. The 30-year yield opened at almost 2.40 percent, up from last week’s open of 2.30 percent. There was a slight increase in yields on the shorter end of the curve as well, with the 2-year opening Monday at 0.15 percent.
• On Thursday, President Biden signed the American Rescue Plan Act of 2021. The $1.9 trillion stimulus plan will help vaccine distribution and testing, while providing aid to state and local governments, individuals, and businesses. Markets rallied, with the Russell 2000 Index leading the way and posting a weekly gain of more than 7 percent. The aid for small businesses, combined with rising interest rates, supports this index, as it provides exposure to regional banking. The top-performing sectors, which supported a cyclical recovery theme, were real estate, consumer discretionary, utilities, materials, industrials, and financials. The worst-performing sectors were communication services, energy, health care, and technology. Communication services was hit as investors questioned how reopening the economy will affect companies such as Netflix, Facebook, and Disney.
• On Wednesday, the February Consumer Price Index report was released. Consumer prices increased by 0.4 percent, which was in line with economist estimates and slightly higher than the 0.3 percent increase in January. On a year-over-year basis, consumer inflation rose from 1.4 percent in January to 1.7 percent in February. Part of this increase was due to rising gas prices. Core consumer prices, which strip out the impact of volatile food and energy prices, rose by a modest 0.1 percent during the month and 1.3 percent year-over-year. Consumer inflation has largely remained constrained throughout the pandemic and, even with the rise in prices in January and February, year-over-year it remains well below the pre-pandemic high of 2.5 percent from last January.
• Friday saw the release of the February Producer Price Index report. Producer prices increased by 0.5 percent and 2.8 percent year-over-year. This was largely in line with economist estimates for 0.5 percent and 2.7 percent growth, respectively. As was the case with consumer inflation, rising gas prices played a role in the increased inflation rate during the month. Core producer inflation, which strips out volatile food and energy prices, showed a more muted 0.2 percent monthly increase and a 2.5 percent year-over-year growth rate. The rise in prices brought the rate of producer inflation to its fastest level since late 2018, driven in large part by increased raw material and transportation costs for producers.
• We finished the week with Friday’s release of the preliminary estimate of the University of Michigan Consumer Sentiment survey for March. This widely followed gauge of consumer sentiment beat expectations, rising from 76.8 in February to 83 in March against forecasts for a more modest improvement to 78.5. This better-than-expected result, which brought the index to its highest level in a year, was driven by improvements to consumer views on the present situation as well as future expectations, likely reflecting the improving public health situation and the anticipated tailwind from the most recent federal stimulus bill. Historically, higher levels of consumer confidence have translated into faster consumer spending growth, so this is a good sign for consumer spending in the upcoming months.

Source: Bloomberg, as of March 12, 2021

Source: Morningstar Direct, as of March 12, 2021

What to Look Forward To
On Tuesday, the February retail sales report is set to be released. Retail sales are expected to decline by 0.3 percent during the month. This would follow a 5.3 percent increase in January, which was driven in large part by the December stimulus checks hitting bank accounts. With that impact fading, a drop in sales in February is understandable. The winter storms throughout much of the country are also expected to serve as a headwind for faster sales growth. Core retail sales, which strip out volatile auto and gas sales, should show a similar 0.4 percent decline in February following a strong 6.1 percent increase in January. Looking forward, a return to faster retail sales growth is expected in the next month or two. The impetus for growth should come from recent improvements in consumer confidence and the anticipated tailwind from the recently passed federal stimulus bill that will send another round of checks to American bank accounts.

Tuesday will also see the release of the February industrial production report. Industrial production is expected to increase by 0.4 percent during the month, following a 0.9 percent increase in January. This anticipated slowdown is partially due to a drop in oil refining in February, caused by the negative effects of winter storms in key production states. Industrial production has rebounded well since initial lockdowns were lifted last year, powered in part by improving manufacturing production. Manufacturing output is expected to show solid 0.5 percent growth during the month, following a 1 percent increase in January. If estimates prove accurate, they would mark 5 straight months with increased industrial production and 10 straight months with rising manufacturing output. Ultimately, this report is expected to show continued resilience for the manufacturing industry despite the weather-related headwinds in February.

Tuesday’s third major release will be the release of the National Association of Home Builders Housing Market Index for March. This widely followed measure of home builder confidence is expected to remain unchanged at 84, leaving it close to the record high of 90 recorded in November 2020. This is a diffusion index, where values above 50 indicate expansion, so the anticipated result would signal continued strong growth for the housing sector. Home builder confidence has been buoyed over the past year by record-low mortgage rates and shifting homebuyer preferences that have led to a surge in prospective home buyers. The supply of homes available for sale is near record lows, which also supports higher levels of home builder confidence. Overall, if estimates prove accurate, this release would be a sign that home builders continue to see a healthy housing sector.

On Wednesday, the February building permits and housing starts reports are set to be released. Permits and starts are expected to fall by 7.2 percent and 0.6 percent, respectively, during the month. These gauges of new home construction can be quite volatile on a month-to-month basis, although both have rebounded notably since initial lockdowns were lifted. Building permits hit their highest level since 2006 in January, and starts also remain well above pre-pandemic levels. Once again, the weather likely served as a headwind for faster growth in some regions of the country, which could contribute to the anticipated declines for new home building activity. Looking forward, rising labor and material costs may prevent significantly faster levels of new home construction. If the pace of construction remains near current levels, however, it would continue to signal a strong housing sector.

Wednesday will also see the release of the Federal Open Market Committee rate decision from the Federal Reserve’s (Fed’s) March meeting. This meeting will mark one year since the Fed cut the federal funds rate to virtually zero at the start of the lockdowns. Economists do not expect any rate changes at this meeting. Instead, the Fed is expected to continue its easy monetary policy in support of the ongoing economic recovery. The passage of the recent $1.9 trillion stimulus bill will likely be reflected in higher growth and inflation expectations from the central bank. But with the labor market recovery lagging, the Fed is not expected to raise rates for the foreseeable future. Fed Chairman Jerome Powell should continue to provide supportive statements at his post-meeting press conference, which will likely also include discussion about the recent increase in long-term rates. Currently, the Fed has no plans to address rising long-term rates, so any information on how it views this development will be interesting. It’s an open question whether the Fed will signal any plans for a policy change to rein in longer-term rates.

We’ll finish the week with Thursday’s release of the initial jobless claims report for the week ending March 13. Economists expect to see a modest decline in the number of initial weekly unemployment claims during the week. Economists are calling for a drop from 712,000 initial claims to 703,000. If estimates prove accurate, they would represent the lowest number of weekly initial claims reported since initial lockdowns were lifted, beating the 711,000 claims made in the week ending November 6, 2020. As previously mentioned, initial claims have been volatile on a week-to-week basis. Notably, however, we have seen a decline in initial claims over the past month as state and local restrictions have been eased. If similar levels of improvements continue over the next few weeks, they would signal an accelerating job market recovery. They would also be a welcome indication that improvements on the public health front are spurring the overall economic recovery.

Disclosures: Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. All indices are unmanaged and are not available for direct investment by the public. Past performance is not indicative of future results. The S&P 500 is based on the average performance of the 500 industrial stocks monitored by Standard & Poor’s. The Nasdaq Composite Index measures the performance of all issues listed in the Nasdaq Stock Market, except for rights, warrants, units, and convertible debentures. The Dow Jones Industrial Average is computed by summing the prices of the stocks of 30 large companies and then dividing that total by an adjusted value, one which has been adjusted over the years to account for the effects of stock splits on the prices of the 30 companies. Dividends are reinvested to reflect the actual performance of the underlying securities. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a market capitalization-weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index. The Bloomberg 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 10-year Treasury yield opening at almost 1.41 percent and closing at 1.59 percent. On Monday morning, the 10-year opened just shy of 1.60 percent, and the 30-year opened at 2.32 percent, up from last week’s open of 2.16 percent. There was a slight increase in yields on the shorter end of the curve as well, with the 2-year yield opening at 0.15 percent. Last week, Federal Reserve (Fed) Chairman Jerome Powell said he expects some transient inflation in the near term. There is a rumor that the Fed may relaunch Operation Twist, which was last launched in 2011 and involved the Fed selling short-term Treasuries and purchasing longer-dated ones to mitigate rising financing costs.
• We saw mixed trading in equity markets last week. Technology was again the largest detractor, and the tech-oriented Nasdaq Composite continued its recent downturn. The Dow Jones Industrial Average posted a gain of 1.85 percent, however, with financials, energy, and industrials all among the top contributors. Energy was supported by an increase of 7.5 percent in West Texas Intermediate crude oil prices. The increase in yields on the shorter end of the curve remains supportive of financials, leading Exxon Mobil, Berkshire Hathaway, Bank of America, Chevron, and JPMorgan Chase to be top performers.
• 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, rising from 58.7 in January to 60.8 in February against forecasts for a more modest increase to 58.9. This brought manufacturer confidence 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; the index sits well above its pre-pandemic high of 51.1 from January 2020. Business confidence and spending have remained resilient throughout the third wave, and this result bodes well for continued strong levels of manufacturing output and spending.
• On Wednesday, the ISM Services index for February was released. Service sector confidence fell more than expected, dropping from 58.7 in January to 55.3 in February against forecasts for no change. This decline was partially due to inclement weather throughout much of the country that disrupted supply chains and caused shipping delays. This is another diffusion index, where values above 50 indicate expansion, so this result still signals healthy levels of service sector confidence, which has rebounded well since initial lockdowns were lifted. Underlying data pointed toward faster growth in the future, as the backlog of orders for service sector businesses hit a six-month high in February. Ultimately, though the index’s decline was disappointing compared with estimates, service sector confidence remains healthy and may be poised for further improvements in the coming months.
• We finished the week with Friday’s release of the February employment report. The report showed the economy added 379,000 jobs during the month, an improvement from the upwardly revised 166,000 jobs added in January and above economist estimates for a more modest 200,000 jobs. This better-than-expected result was largely due to the easing of state and local restrictions that allowed businesses to reopen. Leisure and hospitality jobs accounted for most of the jobs added, as this hard-hit industry gained 355,000 new jobs in February. The underlying data was positive as well, as the unemployment rate dropped from 6.3 percent to 6.2 percent. Overall, this was an encouraging report that showed the pace of the labor market recovery has improved to start the year. Although work remains in returning employment to pre-pandemic levels, this was a positive step that could signal faster job growth ahead.

Source: Bloomberg, as of March 5, 2021

Source: Morningstar Direct, as of March 5, 2021

What to Look Forward To
On Wednesday, the February Consumer Price Index is set to be released. Economists expect to see consumer prices increase by 0.4 percent during the month, following a 0.3 percent increase in January. On a year-over-year basis, consumer inflation will likely rise to 1.7 percent from 1.4 percent in January. Part of the anticipated uptick is due to rising gas prices, which went up by 6.6 percent in February. Core consumer prices, which strip out the impact of volatile food and energy prices, are expected to show a more modest 0.2 percent monthly increase and a 1.4 percent gain year-over-year. Throughout the pandemic, consumer inflation has largely remained constrained. So, even with an increase in February, it’s expected to remain below the 2.5 percent year-over-year growth rate recorded in January 2020. With that said, rising demand and supply constraints may lead to faster price growth in the upcoming months.

On Thursday, the initial jobless claims report for the week ending March 6 will be released. Economists expect to see the number of initial unemployment claims fall from 745,000 to 725,000. If estimates hold, the report for the first week of March would represent the lowest number of weekly initial claims since November 2020. Throughout December 2020 and January 2021, claims increased notably, but this was largely due to increased state and local restrictions. Accordingly, the improvement in February and March is a good sign that the easing of the restrictions has supported the labor market recovery. Still, despite the anticipated decline in initial claims and recent progress in lowering claims, the overall number of initial filers remains high on a historical basis. This weekly report will continue to be widely monitored until we see substantial progress in reducing the number of weekly initial unemployment claims.

Friday will see the release of the February Producer Price Index. Producer prices are expected to show 0.4 percent growth during the month, down from the 1.3 percent increase in January. On a year-over-year basis, producer prices should rise by 2.7 percent from the 1.7 percent gain in January. Core producer inflation, which strips out food and energy prices, is forecasted to show a 0.2 percent and 2.6 percent increase, respectively, on a monthly and year-over-year basis. If estimates prove accurate, this report would bring the pace of producer inflation to its highest level since 2018. Producer prices have seen widespread upwards pressure recently, driven by increasing demand and continued supply chain constraints. Although this trend has led to faster inflation to start the year, the Fed remains committed to keeping monetary policy supportive.

We’ll finish the week with Friday’s release of the preliminary estimate of the University of Michigan consumer sentiment survey for March. This widely followed gauge of consumer sentiment is expected to increase from 76.8 in February to 78 in March. If estimates hold, this release would leave the index well above the pandemic-induced low of 71.8 we saw last April, signaling continued consumer resilience throughout the third wave of COVID-19. The index would approach the post-lockdown high of 81.8 it hit in October, signaling an improvement in sentiment due in large part to better news on the public health front. Historically, higher levels of consumer confidence have translated into faster consumer spending growth. Any improvement for the index would be a positive signal for continued consumer spending growth in March.

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-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.
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