Presented by Mark Gallagher

General Market News
• After little movement during the week of New Year’s, we saw significant steepening of the yield curve in the first week of 2021. The 10-year Treasury yield opened at 0.93 percent and closed just shy of 1.11 percent. This morning, the 10-year yield opened just above 1.13 percent—a pickup of 20 basis points (bps) in just one week. The 30-year yield opened at 1.9 percent—a gain of more than 23 bps from last week’s open of 1.66 percent. On the shorter end of the curve, the 2-year opened last week at 0.14 percent and fell just 1.2 bps at the opening this morning. The pickup in yields was predominantly driven by the results of the Georgia runoffs, as two additional senators for the Democratic Party increases the likelihood of additional stimulus.
• All three major U.S. indices were up by more than 1.6 percent last week. Emerging and international markets performed well due to the increased likelihood of future U.S. stimulus and a weaker dollar. Small-caps also rallied on the news of potential support for businesses that have fallen under heavy pressure due to the coronavirus.
• Financials, consumer discretionary, health care, and energy were among the top-performing sectors on the week. The strong performance of financials was due in part to the pickup in yields. Consumer staples, real estate, and utilities were among the worst performers, as higher yields pose a challenge for industries such as real estate, which will see an increase in loan rates.
• On Tuesday, the Institute for Supply Management (ISM) Manufacturing index for December was released. This gauge of manufacturer confidence rose from 57.5 in November to 60.7 in December against calls for a drop to 56.8. This is a diffusion index, where values above 50 indicate expansion, so this better-than-expected result signals continued growth for the manufacturing sector during the month despite the worsening public health situation. The index now sits at its highest level since 2018, highlighting the impressive recovery for manufacturers since initial lockdowns were lifted in April. This was an encouraging report, as it showed the continued resilience for the manufacturing recovery during the month and quarter, and it points toward continued healthy levels of business investment.
• Thursday saw the release of the ISM Services index for December. This measure of service sector confidence also came in above expectations, with the index rising from 55.9 in November to 57.2 in December against forecasts for a decline to 54.5. This broke a two-month streak of declining service sector confidence and brought the index to its highest level since September. This is another diffusion index, where values above 50 indicate expansion, so this was a positive development for the service sector, which accounts for the lion’s share of economic activity in the country. As was the case with manufacturing confidence, service sector confidence has rebounded notably since hitting a pandemic-induced low of 41.8 in April. Overall, this was another positive report, as it showed the service sector remained resilient despite the worsening public health situation and increased restrictions at the state and local level.
• We finished the week with Friday’s release of the December employment report. The report showed a loss of 140,000 jobs during the month, which was worse than estimates for a modest 50,000 increase. This marks the first month since April where the economy has experienced a net loss in jobs, driven primarily by increased restrictions at the state and local level that caused a sharp decline in leisure and hospitality jobs. Despite this decline, other sectors, such as professional and business services and retail sales, showed strong levels of hiring, which indicates that the headline job loss may be overstating the overall damage caused during the month. The unemployment rate remained unchanged at 6.7 percent, slightly better than estimates for an increase to 6.8 percent. Average hourly wages also rose by more than expected, increasing by 0.8 percent against calls for a 0.2 percent increase. While the headline rise in wages appears positive, this was largely due to lower wage leisure and hospitality job losses artificially increasing the average rather than by a widespread rise in wages. Overall, this was a concerning report that highlights the very real risks the current third wave of infections presents for the economic recovery.

Source: Bloomberg, as of January 8, 2021

Source: Morningstar Direct, as of January 8, 2021

What to Look Forward To
On Wednesday, the December Consumer Price Index is set to be released. Consumer prices are expected to rise by 0.4 percent during the month, up from a 0.2 percent increase in November. On a year-over-year basis, consumer inflation is expected to come in at 1.3 percent, slightly up from the 1.2 percent annual inflation rate we saw in November. Part of the anticipated increase is due to an 8 percent rise in gas prices in December. Core consumer prices, which strip out the impact of volatile food and energy prices, are expected to show a more modest 0.1 percent monthly increase and 1.6 percent annual growth. Even with these price increases, however, year-over-year consumer inflation will remain well below the pre-pandemic high of 2.5 percent recorded in January 2020. This fact highlights the deflationary pressures created by the pandemic and the initial lockdowns in March and April.

On Thursday, the initial jobless claims report for the week ending January 9 will be released. Economists expect to see 785,000 initial unemployment claims filed during the week, marking a modest improvement from the 787,000 initial claims filed the week before. As a result, in line with last week’s report, this number would likely be seen as a positive development. It should help calm concerns regarding a potential surge in initial claims due to states catching up on reporting following holiday-related delays. Continuing claims, which are reported with a one-week lag to initial claims, are also expected to show a modest decline during the week. If estimates hold, this report would be moderately encouraging. Nonetheless, it would indicate that the labor market is facing headwinds created by the pandemic to start the year.

Friday will see the release of the December Producer Price Index report. Headline producer prices are expected to rise by 0.4 percent during the month, up from the 0.1 percent increase in November. On a year-over-year basis, headline prices are slated to rise by 0.7 percent in a small decrease from November’s 0.8 percent annual producer inflation rate. Core producer prices, which strip out energy and food prices, are expected to rise by 0.1 percent in December and 1.3 percent on a year-over-year basis. If estimates prove accurate, this week’s two inflation reports would show that inflation remains well constrained below the Federal Reserve’s (Fed’s) stated 2 percent long-term target. Given continued weakness in the job market and the risks presented by the pandemic, the Fed is not expected to react to modest rising inflationary pressure in the foreseeable future.

On Friday, we’ll also get December’s retail sales report. Sales are expected to remain flat during the month, which would be an improvement from their 1.1 percent decline in November. Headline retail sales fell in both October and November, so a flat month in December would be a positive sign that the recent declines did not begin a long-term trend. Economists expect to see rising auto sales and gas prices supporting headline retail sales growth during the month. Core retail sales, which strip out the impact of volatile auto and gas sales, are expected to fall by 0.6 percent. This result would be a modest improvement from the 0.8 percent decline in November but would be concerning given the importance of consumer spending to the overall economy. We can hope that the new round of federal stimulus announced at the end of December will spur faster sales growth. But given the timing of the stimulus, we will have to wait to see any effects from a potential tailwind on spending data.

Friday will also see the release of the December industrial production report. Industrial production is expected to grow by 0.5 percent during the month, marking a slight increase from the 0.4 percent rise in November. Some of this growth is anticipated because of the rebound in utility output in December, following an unseasonably warm November that saw output fall and drag down overall production. Manufacturing output is expected to grow by 0.4 percent in December, down from the 0.8 percent growth in November. As we saw with December’s manufacturing confidence numbers, the manufacturing sector has remained impressively resilient in the face of the third wave of infections. This fact supports the expectations for continued production growth. In addition, most factories have not been subject to the new set of lockdowns at the state and local levels. So, manufacturers should be able to withstand the third wave of infections better than in March and April, when many factories were forced to close. If estimates hold, this report would represent an encouraging highlight on the continued strength of manufacturing the sector.

We’ll finish the week with the preliminary estimate of the University of Michigan consumer sentiment survey for January. This widely followed measure of consumer confidence is expected to decline modestly from 80.7 in December to 80 in January. Given the worsening public health picture and the deteriorating employment situation during the month, a decline is understandable. Following November’s unexpected surge in confidence, the anticipated result would be slightly disappointing. Still, it would leave the index well above the pandemic-induced low of 71.8 it hit in April, indicating that consumers are showing more resiliency during the third wave of infections compared with the first. Nonetheless, even if the index remains well above the pandemic lows, it will be far from the pre-pandemic high of 101 recorded in February 2020. Consumer confidence will continue to be a widely followed economic indicator, as rising confidence typically supports 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. 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
• Last week saw minimal movement in the yield curve due to light trading and the holiday. The 10-year Treasury yield opened at 0.93 percent and closed the week just shy of 0.92 percent. This morning, the 10-year yield opened at almost 0.93 percent. The 30-year opened at 1.66 percent—a loss of less than 1 basis point from last week’s open of 1.67 percent. On the shorter end of the curve, the 2-year opened last week at 0.12 percent and fell just three-tenths of a basis point this morning.
• All three major U.S. indices were up despite softness in the small-cap space. Emerging and international markets performed well, as China and the EU closed in on the Comprehensive Agreement on Investment. These markets have cheaper valuations than their U.S. counterparts and so have more potential for growth fueled by positive news. Technology and consumer discretionary were the top-contributing sectors for the week, wrapping up a strong year. Despite a rebound in recent months, energy, materials, and real estate closed out a difficult year as the week’s worst performers. We look forward to finding out whether those sectors that outperformed will carry their strength into 2021 or if we will see more of the recent rotation in the market, which has supported those industries hit hardest by the coronavirus.

Source: Bloomberg, as of January 4, 2021

Source: Morningstar Direct, as of January 4, 2021

What to Look Forward To
On Tuesday, the Institute for Supply Management (ISM) Manufacturing index for December is set to be released. This measure of manufacturer confidence is expected to fall from 57.5 in November to 56.5 in December. This is a diffusion index, where values above 50 indicate expansion, so even with a modest decline, the result would be a sign of a continued recovery for the manufacturing sector. If estimates prove accurate, the index would sit at its third-highest level since the end of the initial lockdowns. This would highlight the continued resilience for manufacturer confidence, despite the worsening public health situation as we finished out last year. Historically, higher levels of confidence have supported faster business investment. So, if estimates hold, this index would send a positive signal for fourth-quarter business spending.

Wednesday will see the release of the Federal Open Market Committee meeting minutes from the Federal Reserve’s (Fed’s) December meeting. As expected, no changes to the federal funds rate were made at this meeting, as Fed members largely do not expect to raise short-term rates for the foreseeable future. The meeting’s primary focus was on the change in the Fed’s language surrounding its asset purchasing program. The Fed reemphasized its commitment to the current pace of purchasing at least $120 billion in assets each month. This will not change until “substantial further progress” is made on the Fed’s employment and inflation goals. Economists will look to the minutes to get a better idea of what constitutes substantial further progress and for hints regarding the future path of the bond buying program. Ultimately, no major surprises are expected from the release of these minutes, but any additional insights into the central bank’s policies are worth monitoring.

On Thursday, the initial jobless claims report for the week ending January 2 will be released. Economists expect to see the pace of initial layoffs rise during the week, with forecasts calling for an increase from 787,000 initial claims to 803,000. This result would break a two-week streak of declining initial claims, but it should be noted that the year-end data likely faced holiday-related volatility. Despite the modest anticipated increase, this forecast would lower the rolling four-week average for initial claims, which would be a positive sign. Continuing unemployment claims, which are reported with a one-week lag to initial claims, are also expected to show improvement. The forecasts call for a decline from 5.22 million to 5.15 million. Ultimately, this report is expected to show that initial and continuing unemployment claims remain elevated compared with historically normal levels. As such, it would highlight the stress on the labor market created by the pandemic.

Thursday will also see the release of the November international trade report. Economists expect to see the trade deficit widen during the month, from $63.1 billion in October to $64.5 billion in November. This result would bring the trade deficit to its second-widest point since 2008, trailing only the $64.9 billion deficit in August. The advance report on the trade of goods during the month showed the deficit widening by more than expected, from $80.4 billion in October to $84.8 billion in November, against calls for a move to $81.5 billion. This result brought the trade deficit for goods to its highest level on record, driven by a 2.6 percent rise in imports that more than offset a 0.8 percent increase in exports. With service-related trade well below pre-pandemic levels, the widening of the goods trade deficit is expected to cause the overall trade gap to widen.

The third major data release on Thursday will be the release of the ISM Services index for December. This gauge of service sector confidence is expected to decline from 55.9 in November to 54.5 in December. This is another diffusion index, where values above 50 indicate expansion, so this result would signal continued recovery for service sector businesses. That said, if the estimate holds, it would mark three straight months with declining service sector confidence and bring the index to its lowest level since initial lockdowns ended. The index has rebounded notably since hitting a lockdown-induced low of 41.8 in April. With rising case counts and additional restrictions at the state and local levels, however, the strength of this recovery will likely be tested over the coming months. Given that the service sector accounts for the lion’s share of economic activity, monitoring it will be important, especially as we continue to get the pandemic’s third wave under control.

We’ll finish the week with Friday’s release of the December employment report. Economists expect to see 68,000 jobs added during the month, down from 245,000 in November. This result would mark the lowest number of jobs added in a month since April, representing a concerning slowdown in net hiring. The unemployment rate is expected to increase modestly, from 6.7 percent in November to 6.8 percent in December. This would be the first increase for the unemployment rate since it spiked to 14.7 percent in April. Although we have certainly made progress in getting folks back to work following the end of the initial lockdowns, the slowdown in the pace of hiring is concerning given the large number of unemployed Americans. The economy lost roughly 22.1 million jobs in March and April. Since May, we have only added approximately 12.3 million jobs, highlighting the very real work that needs to be done to get employment back to pre-pandemic levels. Ultimately, a full economic recovery will rely on a healthy jobs market, so this report will continue to be widely followed.

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

Strong December caps off solid year for markets
Markets continued to rally in the final month of 2020. The Nasdaq Composite led the way with a 5.71 percent gain for the month. The S&P 500 gained 3.84 percent, and the Dow Jones Industrial Average (DJIA) rose by 3.41 percent. These results contributed to a strong quarter for markets. The Nasdaq once again led with a 15.63 percent quarterly return. The S&P 500 gained 12.15 percent while the DJIA managed a 10.73 percent return. Despite the market volatility in March and April, all three major indices finished the year in positive territory. The DJIA gained 9.72 percent for the year, and the S&P 500 returned 18.40 percent. The Nasdaq, with its heavy technology weighting, ended the year with a 44.92 percent gain.

These strong results coincided with improving fundamentals to end the year. According to Bloomberg Intelligence, as of December 24 with 99 percent of companies having reported, the blended third-quarter earnings decline for the S&P 500 came in at 6.9 percent. This result is significantly better than the initial forecast for a 21.5 percent decline. It shows businesses were willing and able to adapt to the ongoing pandemic with more success than anticipated. This is a good sign for the economy overall and points to a potential return to earnings growth as soon as the first quarter of 2021.

Technical factors were also supportive during the month and quarter. All three major indices remained above their respective 200-day moving averages, despite some volatility at the end of October that brought the DJIA close to its trend line. The 200-day moving average is a widely followed technical signal. Prolonged breaks above or below this trend line can signal shifting investor sentiment for an index. This marks six consecutive months where all three major indices finished the month above trend, indicating strong technical support for markets throughout the second half of the year.

International markets also finished the year strong, capping off a solid 2020. The MSCI EAFE Index gained 4.65 percent in December, which contributed to the 16.05 percent increase during the quarter. Volatility earlier in the year served as a headwind for overall performance, limiting the index to a 7.82 percent annual gain. Performance for developed international markets was muted compared with U.S. markets. The MSCI EAFE Index spent much of the year below pre-pandemic levels before a 15.50 percent surge in November brought it into positive territory. Emerging markets fared better, with the MSCI Emerging Markets Index gaining 7.40 percent during the month, 19.77 percent for the quarter, and 18.69 percent for the year. Technicals were supportive for international markets at year-end, with both indices finishing December well above their respective 200-day moving averages.

Fixed income markets also ended the year with positive results. The Bloomberg Barclays U.S. Aggregate Bond Index gained 0.14 percent during the month, 0.67 percent for the quarter, and an impressive 7.51 percent for the year. These strong results were driven by falling rates, especially on the short end of the curve. The 3-month U.S. Treasury yield fell from 1.54 percent at the start of the year to 0.09 percent at year-end. This decline reflects the impact of the Federal Reserve’s decision to cut the federal funds rate to virtually zero. Long-term rates also fell, with the 10-year moving from 1.88 percent at the start of the year to 0.93 percent at year-end.

High-yield fixed income returned a solid 1.88 percent during the month, 6.45 percent for the quarter, and 7.11 percent for the year. High-yield credit spreads continued to fall throughout the month and quarter, finishing the year at 3.87 percent. This is an improvement from the pandemic-induced high of 10.87 percent in March, highlighting continued investor willingness to accept lower yields for higher-risk securities throughout the recovery.

Signs of pandemic progress
We saw signs of progress on the public health front during the month. New cases per day showed improvement at month-end, although it’s likely the holidays contributed to a lull in reporting that may have distorted the data. If case growth is in fact slowing, we could see a peak in the next few weeks.

Testing also showed some improvement during the month. A slowdown in testing around the holidays led to the positive test rate increasing modestly at month-end, however. The positive test rate finished the month below the recent highs we’ve seen during the third wave, which is a good sign.

Another positive development was the start of the public vaccination process during the month. The number of vaccinations was relatively low at year-end, but the pace should pick up as state and local governments build out the necessary public health infrastructure.

Economic headwinds remain
There are very real reasons for hope on the public health front, but the third wave still represents a risk to the ongoing economic recovery. Rising case counts had a negative effect on the consumer economy during the quarter, with slowing job growth leading to softening consumer confidence and spending figures.

The drop in consumer spending was especially notable. Retail sales and personal spending both fell in November, highlighting the headwinds created by increased shutdown measures. As you can see in Figure 1, this was the first monthly drop for personal spending since initial lockdowns were lifted in April. This is concerning given the importance of consumer spending for the economy. But the fact that the November decline pales in comparison to the spending declines we saw during the initial lockdowns indicates that consumer spending has remained much more resilient during the third wave. There is hope that the stimulus bill passed at the end of the year and continued public health progress will spur spending growth, but they’ll likely take some time to show up in the data.

Figure 1. Personal Consumer Expenditures, December 2018–Present

Businesses continued to show impressive resilience throughout the fourth quarter. Business confidence and spending held up well despite rising case counts during the period. Both manufacturer and service sector confidence remain near or above pre-pandemic levels, indicating continued recovery for businesses during the quarter. These strong confidence figures have translated into faster spending and output growth, as highlighted by better-than-expected industrial production and manufacturing output in November. Core durable goods orders, which are often used as a proxy for business investment, also showed solid growth in November. This is especially impressive given that they have already surpassed their pre-pandemic levels.

The solid data released during the month paints a picture of continued recovery for businesses. Given the slowdown in the consumer recovery that we saw over the same period, this resilience is encouraging and could help lessen the impact of slowing consumer spending growth in the fourth quarter.

Risks moderate to start 2021
December’s updates continued to highlight the risks presented by rising case counts and increased local restrictions. But there are reasons for optimism, especially if we see the pace of vaccinations improve. The economy remains far more resilient during this third wave than it was during the initial wave of infections. So, while we are not out of the woods with the pandemic, there is light at the end of the tunnel.

As we continue to monitor political risks, we have started to see signs of more stability. The additional stimulus at year-end was a positive development for markets and the economy. Internationally, risks decreased as well. A last-minute trade deal between the U.K. and EU helped avoid the potential for a disruptive no-deal Brexit. Although political risks remain, the updates at year-end were largely positive and helped decrease the immediate risk level.

The resilient economy, combined with the expected tailwinds from additional stimulus and further public health progress, indicates we are in a relatively good place to start the year. There is the possibility for further volatility in the short term, but continued recovery remains the most likely outcome. Given the possible short-term uncertainty, a well-diversified portfolio that matches investor goals and timelines remains the best path forward for most. But if concerns remain, contact your financial advisor to review your financial plan.

All information according to Bloomberg, unless stated otherwise.

Disclosure: Certain sections of this commentary contain forward-looking statements 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. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets. All indices are unmanaged and investors cannot invest directly into an index. The Dow Jones Industrial Average is a price-weighted average of 30 actively traded blue-chip stocks. The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. 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 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. It excludes closed markets and those shares in otherwise free markets that are not purchasable by foreigners. The Bloomberg Barclays Aggregate Bond Index is an unmanaged market value-weighted index representing securities that are SEC-registered, taxable, and dollar-denominated. It covers the U.S. investment-grade fixed-rate bond market, with index components for a combination of the Bloomberg Barclays government and corporate securities, mortgage-backed pass-through securities, and asset-backed securities. The Bloomberg Barclays U.S. Corporate High Yield Index covers the USD-denominated, non-investment-grade, fixed-rate, taxable corporate bond market. Securities are classified as high-yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below.

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
• Last week saw a moderate steepening of the yield curve as lawmakers moved closer to a potential stimulus package and the Moderna vaccine was approved. The 10-year Treasury yield opened the week at 0.93 percent and closed just shy of 0.95 percent. This morning, it opened just below 0.90 percent, down 3 basis points (bps) from last week’s open. The 30-year opened this morning at 1.64 percent, a loss of 3 bps from last week’s open of 1.67 percent. On the shorter end of the curve, we saw a sizable move as the 2-year opened last week at 0.121 percent and rose one-fifth of a basis point to 0.123 percent this morning. The bond market signals investors were cautiously optimistic heading into the weekend.
• All three major U.S. indices were up last week, with the Nasdaq leading the way, rising more than 3 percent. Investors sought out large-cap and technology-oriented stocks as case counts continued to rise, particularly in California. The market appeared to have taken a pause from the reopening rally on the large-cap side. Small-cap stocks performed roughly in line with their Nasdaq counterparts, as additional aid is expected with the impending stimulus package. Top-performing sectors last week were technology, consumer discretionary, and materials. Underperforming sectors were energy, communication services, and industrials.
• On Wednesday, the November retail sales report was released. Headline sales came in below expectations, declining by 1.1 percent against forecasts for a 0.3 percent decline. October’s report was also downwardly revised to a 0.1 percent decline. This is the first time since March and April we have seen retail sales decline in consecutive months. Core retail sales, which strip out the impact of volatile auto and gas sales, fell by 0.8 percent during the month against calls for a 0.1 percent increase. October’s core retail sales report was also downwardly revised to show a decline of 0.1 percent. This is a concerning outcome for sales and the overall economic recovery, as consumer spending accounts for the majority of economic activity in the country. Unfortunately, it appears the worsening public health situation and the delay in passing additional federal stimulus have taken an increasing toll on the economic recovery.
• Wednesday saw the release of the National Association of Home Builders Housing Market Index for December. This measure of home builder confidence fell from 90 in November to 86 in December, against calls for a more modest decline to 88. Despite the larger-than-expected decline, the index still sits at its second-highest level on record, highlighting the continued strength of the housing market. Home builder confidence has risen notably since reaching a lockdown-induced low of 30 in April, driven by record-low mortgage rates that have spurred additional prospective homebuyers into the market. The supply of homes available for sale also remains near record lows, another tailwind for home builder confidence.
• The third major release on Wednesday was the Federal Open Market Committee rate decision from the Federal Reserve’s (Fed’s) December meeting. As expected, the Fed did not change the federal funds rate, which was lowered to virtually 0 in March to support a faster economic recovery. The major focus from this meeting was a change in the language for the Fed’s current bond buying program. The Fed reemphasized its commitment to the current purchases of at least $120 billion in assets per month until “substantial further progress” is made on the central bank’s unemployment and inflation goals. This was widely seen as a dovish move meant to support markets and the economy over the short to intermediate term. In a news conference, Fed Chair Jerome Powell doubled down on the continued support for ongoing asset purchases, with the head of the central bank indicating the Fed is ready to do more to support the economic recovery, as needed.
• On Thursday, November’s building permits and housing starts reports were released. Both measures of new home construction showed faster growth than expected, with starts rising by 1.2 percent against forecasts for 0.3 percent growth, while permits increased by 6.2 percent against calls for a 1 percent rise. These strong results brought the pace of permits to its highest level since 2006, while starts remain well above levels seen throughout most of 2019. The pace of single-family housing starts hit a 13-year high in November, driven by shifting consumer preference toward single-family housing. Given the record level of home builder confidence we saw in November, it’s not surprising the pace of new home construction continued to improve during the month; nonetheless, it was an encouraging reminder that the housing market remained healthy despite November’s worsening public health picture.

Source: Bloomberg, as of December 18, 2020

Source: Morningstar Direct, as of December 18, 2020

What to Look Forward To
On Tuesday, the Conference Board Consumer Confidence Index for December will be released. This widely monitored gauge of consumer sentiment is expected to increase from 96.1 in November to 97.8 in December, which would mark a rebound. The index would, however, sit at a lower level than the post-lockdown high of 101.4 in October. Historically, improving consumer confidence has supported faster spending growth, so any improvement to end the year would certainly be a welcome sign. With that said, the index is expected to remain well below this year’s high-water mark of 132.6, set in February. We have a long way to go to get consumer confidence back to pre-pandemic levels.

Tuesday will also see the release of the November existing home sales report. Sales of existing homes are expected to fall by 2.2 percent during the month, following a surprise 4.3 percent increase in October. October’s result brought the pace of existing home sales to its highest level since 2005, so the anticipated decline in November is not a major concern. Existing home sales account for the majority of home sales and, since initial lockdowns were lifted, the pace of sales has increased notably. On a year-over-year basis, existing home sales are expected to show a 25.9 percent increase. Looking forward, low supply and rising prices may serve as a headwind to faster housing sales growth. Still, record-low mortgage rates and high levels of home buyer demand are expected to keep the overall pace of sales high for the time being.

On Wednesday, the preliminary estimate of November’s durable goods orders report is set to be released. Durable goods orders are expected to rise by 0.6 percent during the month, following a 1.3 percent increase in October. Core durable goods orders, which strip out the impact of volatile transportation orders, are expected to rise by 0.5 percent, following a 1.3 percent increase in October. Core durable goods orders are often viewed as a proxy for business investment. Since initial lockdowns ended, we have seen a solid recovery in core orders that surpasses pre-pandemic levels. Business confidence and spending have largely remained resilient through this third wave of infections. A positive result for durable goods orders would be another sign that the business recovery has continued, despite the headwinds created by the pandemic.

The initial jobless claims report for the week ending December 19 will also be released on Wednesday. Economists expect to see a decline in initial claims during the week, with forecasts calling for a drop from 885,000 claims to 863,000. If estimates prove accurate, the result would be a modest improvement from the week before, but the pace of lost jobs would continue at a concerning rate. Given the rise in initial claims this month and the slow pace of hiring in November, it is quite possible we could see a net loss of jobs during December. That result would mark the first net negative month for jobs since initial lockdowns ended in April. Ultimately, to achieve a full economic recovery, we will need to do a much better job of getting people back to work. This weekly release gives us a relatively up-to-date look at the health of the job market, so it will continue to be widely monitored.

Wednesday will also see the release of the November personal spending and personal income reports. Spending is expected to decline by 0.1 percent during the month, down from a 0.5 percent increase in October. If estimates hold, the result would mark the first month with declining spending since April. This decline would echo the drop in November’s retail sales report. Personal income is expected to show a 0.3 percent decline during the month, marking two consecutive months with declining income. Income growth has been very volatile on a month-to-month basis due to shifting government stimulus and unemployment payments. The decline in personal income is expected, due in large part to expiring emergency unemployment payments. We can hope that a second round of federal stimulus payments will support income growth, but the next round of payments is likely to come in early 2021. In the meantime, we may see further declines in income in December given the continued stress on the labor market.

The fourth major data release on Wednesday will be the release of the second and final estimate for the University of Michigan consumer sentiment index for December. The initial estimate showed a surprise increase for the index, from 76.9 in November to 81.4 to start December. Economists expect to see the index fall to 80.9 at month-end. While an intramonth decline would be slightly disappointing, it would leave the index near the post-lockdown high of 81.8 set in October. In addition, the index would remain well above the low of 71.8 it hit in April, suggesting that consumers are reacting to the third wave of infections with more resilience than earlier in the year.

Finally, we will finish the week with Wednesday’s release of the new home sales report for November. New home sales are expected to decline by 0.9 percent during the month, following a 0.3 percent drop in October. Despite the anticipated decline, the pace of new home sales would remain near its highest level since 2006. New home sales are a smaller and often more volatile component of total sales compared with existing home sales, but this segment has rebounded notably since initial lockdowns ended. On a year-over-year basis, new home sales are expected to grow by 42.2 percent in November. As with existing home sales, low supply and high prices may serve as a headwind to faster sales growth going forward. Still, continued sales near current levels would highlight the strength of the housing market and be a positive sign for overall economic 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®