Presented by Mark Gallagher

General Market News
• Last week saw a moderate flattening of the yield curve in response to potential stimulus talks, vaccine approval news, and the latest jobs report. The 10-year Treasury yield opened last week near 0.97 percent and ended the week just below 0.89 percent. It opened higher this morning, just shy of 0.92 percent. The 30-year opened this morning at 1.66 percent, a loss of 8 basis points (bps) from last week’s open at 1.74 percent. On the shorter end of the curve, we saw a sizable move as the 2-year opened last week at 0.16 percent and dropped 3 bps to 0.13 percent this morning.
• All three major U.S. indices were down modestly last week. Domestic equity markets were affected by concerns about a government shutdown, continuous stimulus discussions, and rising coronavirus case counts. This news did not temper the market debuts of DoorDash and Airbnb, which rose 72 percent and 108 percent, respectively. (The significant bounces in recent initial public offerings has reminded some of the early 2000s and led to discussions of pockets of market frothiness.) Disney also had a strong week, up 14 percent, with its streaming platform exceeding 87 million subscribers. Top-performing sectors were energy, telecom, and consumer staples. Underperforming sectors were real estate, financials, and technology.
• On Thursday, the Consumer Price Index for November was released. Producer prices rose by 0.2 percent during the month, which was slightly higher than economist estimates for 0.1 percent growth. On a year-over-year basis, consumer prices grew by 1.2 percent, which matched October’s year-over-year growth rate. Core consumer prices, which strip out the impact of volatile food and energy prices, also rose by 0.2 percent against calls for a more modest 0.1 percent increase. On a year-over-year basis, core consumer inflation came in at 1.6 percent, which was in line with October but slightly above estimates for 1.5 percent. November saw an uptick in prices for various goods and services that suffered from deflationary forces due to the pandemic, namely airline fares, auto insurance, and clothing. These categories all remain well below pre-pandemic levels in terms of prices, so there is still room to run for further modest price increases in the upcoming months.
• On Friday, the Producer Price Index report for November was released. Producer prices rose by 0.1 percent during the month, which was in line with expectations. On a year-over-year basis, producer inflation climbed 0.8 percent against calls for 0.7 percent. Core producer inflation, which strips out the impact of volatile food and energy prices, rose by 0.1 percent during the month and 1.4 percent on a year-over-year basis, which was slightly below the 0.2 percent and 1.5 percent inflation rates expected for the month and year, respectively. The slower-than-expected increase in core prices is a sign that the moderate inflationary pressure producers saw over the summer has largely subsided. Both consumer and producer inflation remain well below the Federal Reserve’s (Fed’s) stated 2 percent inflation target, driven in large part by the deflationary pressure created by the pandemic.
• Friday saw the release of the preliminary estimate of the University of Michigan consumer sentiment survey for December. This widely followed measure of consumer confidence rose from 76.9 in November to 81.4 in December against forecasts for a decline to 76. This result was driven by improvements in consumer views on both the present economic conditions as well as the future expectations. The report showed a large partisan split, with Democrats expressing a surge in optimism for both current conditions and future expectations while Republicans have seen a sharp drop in future expectations since the election. This marks the second-highest level for the index since initial lockdowns were lifted back in May, trailing only the 81.8 mark the index hit in October. Overall, this was an encouraging report, as improving consumer confidence has historically supported faster consumer spending growth. Given the partisan shift in responses, however, this tailwind may be more muted than normal.

Source: Bloomberg, as of December 11, 2020

Source: Morningstar Direct, as of December 11, 2020

What to Look Forward To
We’ll start the week with Tuesday’s release of the November industrial production report. Economists expect to see production increase by 0.3 percent during the month, down from a 1.1 percent gain in October. Some of this projected growth can be attributed to an anticipated increase in mining production, which in turn was likely supported by rising oil prices. Manufacturing output is also expected to show growth during the month. Economists are forecasting a 0.2 percent increase in output, down from the 1 percent rise in October. If estimates hold, this report would mark seven consecutive months with increased manufacturing output. The recovery for manufacturing activity has been slower than the recovery for consumers, however, and total output would remain below pre-pandemic levels. Ultimately, this report is expected to show continued modest improvement for industrial production and manufacturing in November. This would be a positive sign that recovery continued during the month, albeit at a slower pace than in October.

On Wednesday, the November retail sales report is set to be released. Economists expect to see sales fall by 0.2 percent during the month, following a 0.3 percent increase in October. If estimates hold, this report would mark the first month with declining sales since April. Core retail sales, which strip out the impact of volatile auto and gas sales, are set to show solid 0.3 percent growth in November. This result would be a step up from the 0.2 percent core sales growth we saw in October. Going forward, steady core retail sales growth at these levels would be a positive development, as retail sales have already rebounded past pre-pandemic levels. With that being said, high-frequency consumer spending data signals there may be a slowdown in spending on the horizon, driven by newly imposed lockdowns and changing consumer habits due to the worsening public health situation. Given the importance of consumer spending for the overall economy, this release will be widely monitored. It will give us an idea of just how resilient consumer spending was in November.

Wednesday will also see the release of the National Association of Home Builders Housing Market Index for December. This measure of home builder confidence is expected to fall from a record high of 90 in November to 88 in December. If estimates hold, this reading would represent the second-highest mark for the index since its inception in 1985, so a modest decline would be nothing to worry about. Home builder confidence has shown a very impressive rebound since hitting a lockdown-induced low of 30 in April. This rebound has been largely driven by record low mortgage rates that have drawn prospective home buyers into the market in droves since initial lockdowns ended. In addition, the supply of homes available for sale remains near historic lows. This fact has driven prices up and given home builders confidence that newly built units will sell quickly.

The third major release on Wednesday will be the release of the Federal Open Market Committee (FOMC) rate decision from the Fed’s December meeting. Economists do not expect the Fed to make any changes to the federal funds rate, which was lowered to virtually zero in March to combat the pandemic’s economic impact. Economists will closely monitor this meeting. It’s possible the Fed will announce forward guidance for future asset purchases, which would be seen as a supportive move for markets and the economy. Given rising COVID-19 case counts since the Fed met at the start of November, the news release from the meeting will be widely monitored, as will Fed Chair Jerome Powell’s news conference.

On Thursday, the initial jobless claims report for the week ending December 12 is set to be released. Economists expect to see 820,000 initial unemployment claims filed during the week. This would be an improvement from the 853,000 initial claims filed the week before but an increase from the post-lockdown low of 711,000 initial claims set the week ending November 6. If estimates hold, the result would signal that rising case counts and the associated measures taken by states to combat the spread of the coronavirus have increased pressure on the labor market in December. If we continue to see initial claims at these levels during the month, a net loss of jobs in December could result. That would highlight the threat that the worsening public health picture represents for the economic recovery in the short to medium term. Given the high level of initial unemployment claims, this report will continue to be closely monitored. It should be noted, however, that jobless claims have a high level of week-to-week volatility. As such, it’s important to not read too much into large weekly swings.

We’ll finish the week with Thursday’s release of the November building permits and housing starts reports. Economists expect mixed results from these two measures of new home construction. Permits are set to rise by 0.7 percent and starts are expected to fall by 0.3 percent. Despite the anticipated decline for starts, the pace of new home construction has rebounded swiftly since lockdowns ended. It now sits well above levels seen throughout most of 2019. Construction of single-family homes has been a highlight, given that the pace of single-family housing starts hit a 13-year high in October, driven by changing consumer preferences due to the pandemic and a lack of supply. The signs of this strong pace of construction could carry over into 2021. The number of projects permitted but not yet started remains near its highest level since October 2008. If estimates hold, these reports would showcase the continued strength of the housing market. This sector has been one of the bright spots in the overall economic recovery since initial lockdowns were lifted earlier in the year.

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

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

Authored by the Investment Research team at Commonwealth Financial Network.

© 2020 Commonwealth Financial Network®

Presented by Mark Gallagher

Vaccine news boosts markets in November
November was a strong month for markets, as news about developmental vaccines for the coronavirus caused markets to surge. The S&P 500 gained 10.95 percent in November, and the Nasdaq Composite rose by 11.91 percent. The Dow Jones Industrial Average led the way with a 12.14 percent gain. These strong results brought the three indices to all-time highs.

These market gains were accompanied by improving fundamentals. According to Bloomberg Intelligence, as of November 24 with 97 percent of companies having reported results, the blended third-quarter earnings decline for the S&P 500 sits at 7.3 percent. This is notably better than analyst estimates at the start of earnings season for a 21.5 percent drop during the quarter. Roughly 85 percent of companies are beating expectations.

Technical factors were also supportive for markets during the month. The three major indices remained well above their respective 200-day moving averages in November, marking five straight months where all three indices finished the month above trend. The 200-day moving average is a widely followed technical indicator, as sustained breaks above or below this level tend to signal shifting investor sentiment. The continued technical support for equity markets since reopening efforts took hold indicates that investors remain confident in U.S. companies and their ability to withstand the pandemic.

The story was much the same internationally. Positive vaccine news pushed global equity markets higher during the month. The MSCI EAFE Index gained an impressive 15.50 percent in November, which caused the index to pass pre-pandemic levels for the first time. Emerging market investors also celebrated the vaccine news, with the MSCI Emerging Markets Index gaining a strong 9.25 percent. Both of these indices finished the month above their respective 200-day moving averages, indicating solid technical support. This was a welcome rebound for the MSCI EAFE Index, which ended October below its 200-day moving average.

Fixed income also had a positive month, supported by falling interest rates. The 10-year Treasury yield fell from 0.88 percent at the end of October to 0.84 percent at the end of November. The Bloomberg Barclays U.S. Aggregate Bond Index gained 0.98 percent during the month. High-yield bonds, which are typically less tied to movements in rates, also had a positive month. The Bloomberg Barclays U.S. Corporate High Yield Index returned 3.96 percent in November. High-yield spreads narrowed to their lowest level since February, indicating that investors’ tolerance for higher-yielding, riskier securities rose during the month. This makes sense, given the rally in equity markets we saw in November.

Medical risks remain, but signs for hope emerge
November was a mixed bag on the public health front, yet there are reasons for optimism looking forward. COVID-19 case counts continued to rise, but the pace of case growth slowed near month-end, which could mean we’ll see a peak in case growth in December. Although we are far from out of the woods with this third wave of infections, the slowdown in growth indicates that current containment efforts may be having a positive effect.

We saw continued growth in daily testing throughout November. The positive test rate started to decline by month-end, showing we are doing a better job of identifying and addressing new infections. The positive test rate is still above the WHO’s recommended 5 percent level, but we are now moving in the right direction after two months with a rising rate. It takes time to contain new outbreaks, but the developments in November indicate we may be making progress in dealing with this third wave.

With that being said, there are still very real risks on the medical front. The potential for an increased infection rate following the Thanksgiving holiday is a primary concern. We will have to wait and see if there is a large uptick in cases in the weeks to come, so case counts in December will continue to be closely monitored. Ultimately, between the slowing case growth, improvements in testing, and vaccine news, November was largely a positive month for public health.

Economic recovery continues at slower pace
The economy continued to grow in November, but there were signs that rising case counts served as a headwind for faster growth during the month. Consumer spending, which has been one of the bright spots in the economic recovery, showed continued growth. October’s retail sales and personal spending reports, however, marked their lowest monthly growth levels since lockdowns were lifted. There were also signs of a slowdown in spending growth in the higher-frequency consumer spending data.

Consumer confidence was a concern as well, with both major measures of consumer confidence falling by more than expected in November. One of the factors that likely led to this decline was rising stress on the job market. We saw initial jobless claims tick up for two consecutive weeks for the first time since July. This highlights the negative effect rising case counts had on the recovery during the month.

Business spending and confidence figures pointed to continued growth. Both manufacturer and service sector confidence remained near or above pre-pandemic levels, indicating that businesses remain resilient despite rising case counts. This high level of confidence translated into faster business spending, with the durable goods orders report for October coming in above expectations. Core durable goods orders, which strip out the impact of volatile transportation orders, were especially impressive. They rose by 1.3 percent during the month against forecasts for more modest 0.5 percent growth. Core durable goods orders are often used as a proxy for business investment. As you can see in Figure 1, core orders have rebounded well past pre-pandemic levels. Business investment was a positive contributor to gross domestic product growth in the third quarter. This strong start to the fourth quarter is a positive sign for economic growth as we finish out the year.

Figure 1. Core Durable Goods Orders, November 2010–Present

Risks remain . . .
As we saw in November, medical concerns still present a risk to the continued economic recovery. While markets cheered about the vaccine news, it will likely be well into 2021 before vaccines are available for all. In the meantime, setbacks on the public health front could spur further volatility. Coronavirus cases are still rising and could lead to further drops in consumer confidence and spending in December.

Political risks also remain, despite the conclusion of the November elections. Although there is hope for another round of federal stimulus early in 2021, it is likely we will head into the new year with a divided federal government, which could lead to a lower or slower stimulus than expected. There are also international concerns, as U.S.-China trade relations are strained and a no-deal Brexit at year-end seems likely.

. . . But the recovery continues
Despite the risks, both the economy and markets remain resilient. We will get the pandemic under control, and vaccines will accelerate that process. While the economy may have slowed, it’s still growing and has surpassed pre-pandemic levels in some areas. Strong earnings results are a sign that companies are adapting. The continued market rally says investors think things will get better—but volatility is always a possibility. A well-diversified portfolio that matches investor goals and timelines remains the best path forward for most. If concerns remain, however, contact your financial advisor to review your financial plans and goals.

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 Brad McMillan, CFA®, CAIA, MAI, managing principal, chief investment officer, and Sam Millette, senior investment research analyst, at Commonwealth Financial Network®.

© 2020 Commonwealth Financial Network®

Presented by Mark Gallagher

General Market News
• Last week saw a major pickup in Treasury yields following the news of the Pfizer and BioNTech vaccine results. The 10-year Treasury yield opened at 0.83 percent and closed just shy of 0.89 percent, hitting an intra-week high of 0.97 percent on Tuesday. The 1 percent mark remains an important level to watch, particularly with additional discussion of stimulus. The 30-year opened at 1.67 percent, gaining 3 basis points on the week, while the 2-year opened at 0.18 percent.
• The vaccine results also fueled a shift in equity market dynamics. The Dow Jones Industrial Average, which has lagged the technology-oriented Nasdaq Composite throughout the pandemic, outperformed week. The vaccine gave way to greater demand hopes for energy and industrial stocks and increased lending rate expectations for financials. These sectors posted sharp gains to begin the week, but as the week went on, technology, consumer discretionary, and communication services regained footing with the record number of coronavirus cases and stricter state-specific measures.
• On Thursday, October’s Consumer Price Index was released. This measure of consumer inflation came in below expectations for the month, as prices remained flat against calls for a 0.1 percent increase. Core consumer prices, which strip out the impact of volatile food and energy prices, also remained unchanged, against forecasts for 0.2 percent growth. On a year-over-year basis, headline prices rose by 1.2 percent while core prices increased by 1.6 percent. Inflation has remained largely constrained this year due to the deflationary pressure created by the pandemic, and this report showed a moderation in the modest upward price pressure we’ve seen since lockdowns ended.
• Friday saw the release of the Producer Price Index report for October. Headline producer prices rose by 0.3 percent against calls for a 0.2 percent increase. Core producer prices, which strip out the impact of food and energy prices, rose by a more modest 0.1 percent, against forecasts for 0.2 percent growth. These results brought year-over-year producer inflation up to 0.5 percent, while core producer prices rose by 1.1 percent on an annual basis. Overall, these two reports showed that inflation remains under control, as both consumer and producer inflation is well below the Federal Reserve’s (Fed’s) stated 2 percent inflation target. With the Fed’s current focus on supporting the ongoing labor market recovery, inflation is not expected to drive monetary policy for the time being.
• We finished the week with Friday’s release of the preliminary University of Michigan consumer sentiment survey for November. This first look at consumer confidence for the month showed an unexpected decline, from 81.8 in October to a three-month low of 77 to start November. This decline was driven by a notable drop in future expectations due to lowered Republican expectations for economic growth. The decline took Republican expectations to their lowest level since the start of the Trump presidency. Democrat expectations, on the other hand, rose modestly during the month, after increasing notably in October, presumably due to heightened expectations for a Biden presidency. Historically, improving consumer confidence has helped support faster spending growth, so this is a disappointing update that bodes poorly for consumer spending as we head into the holiday season.

Source: Bloomberg, as of November 13, 2020

Source: Morningstar Direct, as of November 13, 2020

What to Look Forward To
On Tuesday, the October retail sales report is set to be released. Sales are expected to show 0.5 percent growth during the month, following a 1.9 percent increase in September. Core retail sales, which strip out the impact of volatile auto and gas purchases, are expected to grow by 0.6 percent, following a 1.5 percent increase in September. The pace of sales growth is set to slow, however, following the better-than-expected September results, which were driven in part by a surge in clothing sales. With that said, we should see continued retail sales growth in October, supported by the later-than-normal Amazon Prime day. If estimates hold, this report would mark six straight months with sales growth, although the pace of growth has slowed notably since earlier in the summer. Looking forward, more moderate gains are expected, as retail sales have already rebounded well past pre-pandemic levels.

Tuesday will also see the release of the October industrial production report. Production is expected to show solid 1 percent growth during the month, following a disappointing 0.6 percent decline in September. The September result was due primarily to a drop in manufacturing output during the month. In October, economists expect manufacturing output to rebound and rise by 1 percent. If estimates hold, this report would mark a return to growth for this important sector of the economy. Nonetheless, the pace of recovery for producers would remain below that for consumers. Demand remains strong, which should serve as a tailwind for future production growth. We have, however, seen a gap between increased consumer demand and manufacturing output since lockdowns ended, as producers have been slower to adapt to the pandemic economy.

The third major data release on Tuesday will be the National Association of Home Builders Housing Market Index for November. This measure of home builder confidence is expected to remain unchanged at 85. If estimates hold, this release would tie the record high the index set in October. Home builder confidence has rebounded impressively following the end of lockdowns, as record-low mortgage rates have driven prospective home buyers into the market in droves. But supply has remained constrained in key markets, providing a boon for home builder confidence. Historically, an inverse relationship has existed between the supply of homes available for sale and home builder confidence. Accordingly, the low inventory levels should continue to serve as a tailwind for confidence and faster new home construction over the coming months.

Speaking of new home construction, Wednesday will see the release of the October building permits and housing starts reports. Both of these measures of new home construction are expected to show growth during the month. Permits are set to rise by 1.5 percent and starts are expected to show a 2.5 percent gain. Post-lockdown, housing starts have been boosted by high home builder confidence and low inventory in key regions. Single-family housing starts have been a highlight, hitting their highest level in 13 years in September. This rise in single-family homes has helped offset volatility in multifamily starts over the past few months. In the post-pandemic world, shifting home buyer demand has home builders favoring single-family homes over condominium or apartment buildings.

Thursday will see the release of the weekly initial jobless claims report for the week ending November 14. Economists expect to see 710,000 initial unemployment claims were filed during the week, which would be a slight increase from the 709,000 filed the week before. Continuing unemployment claims are expected to show steady decline. Still, despite the very real progress we have made in lowering initial and continuing unemployment claims since lockdowns ended, they remain high on a historical basis. The fact demonstrates the continued stress on the labor market. For context, if the estimates for November 14 prove accurate, initial claims would still be more than three times higher than the weekly average from 2019. These weekly releases will continue to be widely monitored until initial and continuing claims are back down to historically normal levels.

We’ll finish the week with Friday’s release of the October existing home sales report. Sales of existing homes are expected to decline by 1.6 percent during the month, following a much better-than-expected 9.4 percent increase in September. Nonetheless, if estimates hold, this report would represent the second-best month for existing home sales since 2006, highlighting the impressive rebound in sales since lockdowns ended. On a year-over-year basis, existing home sales are expected to show a 19.2 percent increase from October of 2019, demonstrating the strength of the housing market recovery. Looking forward, the major headwind for housing sales is expected to be a lack of available inventory. At the end of September, inventory was down more than 19 percent on a year-over-year basis. Given the low level of available inventory and the strong rise in home sales this year, the anticipated modest decline in sales in October is understandable and nothing to worry about for the time being.

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

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

Authored by the Investment Research team at Commonwealth Financial Network.

© 2020 Commonwealth Financial Network

Presented by Mark Gallagher

General Market News
• Last week, the pickup in Treasury yields continued, despite a drop in equities. The 10-year Treasury yield opened at 0.84 percent and hit an intra-week high just shy of 0.87 percent on Friday before closing at 0.86 percent. The 10-year gained almost 2 basis points on the week. The 30-year opened at 1.64 percent and stayed mostly flat, and the 2-year opened at 0.16 percent. The pickup in yields is surprising, as investors moved out of short- and intermediate-term Treasuries in the second half of the week. This move may be supported by additional expected near-term stimulus.
• Equities sold off last week as new coronavirus restrictions were implemented in France, Germany, Spain, and the U.K. U.S. small-cap stocks, which benefited from a recent reopening trade, were among the hardest hit. The technology sector was among the biggest detractor—down 6.42 percent for the week, followed by health care and consumer discretionary. Among the largest detractors were Microsoft, Apple, Amazon, Facebook, Mastercard, Visa, and NVIDIA. Despite beating earnings expectations, Microsoft fell on softer-than-expected future revenue and earnings guidance. Apple also beat on both revenue and earnings, but low iPhone sales led investors to wonder if consumers are holding out for the newly released 5G models or if this is a trend.
• The top-performing sectors were real estate, energy, and materials. Additional stimulus from the federal government may lead to higher inflation expectations, from which these sectors are best positioned to benefit.
• On Monday, September’s new home sales report was released. The pace of new home sales declined by 3.5 percent during the month, from an annualized rate of 994,000 in August to 959,000 in September, against estimates for an increase to 1.03 million. Despite the modest decline, the pace of new home sales is up more than 33 percent year-over-year and remains well above pre-pandemic levels. The slowdown in sales is likely due in large part to low inventory, as the level of available homes for sale at the current sales pace remains near record lows. New home sales are a smaller and often more volatile portion of the overall market compared with existing home sales, so the modest pullback in September is nothing to worry about, especially given the strong rebound in overall sales since reopening efforts took hold.
• Tuesday saw the release of the September durable goods orders report. Durable goods orders rose by more than expected during the month—to 1.9 percent against calls for a more modest 0.5 percent increase. Core durable goods orders, which strip out the impact of volatile transportation orders, also beat expectations, rising by 0.8 percent against calls for 0.4 percent growth. Core durable goods orders are often used as a proxy for business investment, so this is a positive sign for business investment during the quarter. With the better-than-expected result in September, the level of durable goods orders is now approaching pre-pandemic levels.
• Tuesday also saw the release of the Conference Board Consumer Confidence Index for October. This widely followed measure of consumer confidence fell slightly during the month, from 101.3 in September to 100.9 in October. Economists had previously forecast a modest increase to 102. Confidence improved notably in September, and this slight moderation is understandable, given the uncertainty created by rising case counts and the upcoming election. Typically, improving consumer confidence supports faster spending growth, so this will continue to be a widely followed monthly report. The index still sits well below this year’s pre-pandemic high of 132.6 set in February, highlighting the work necessary to get back to pre-pandemic levels.
• On Thursday, the first estimate for third-quarter gross domestic product (GDP) growth was released. The report showed the economy growing at a 33.1 percent annualized rate during the quarter, which was better than economist estimates for 32 percent. This marks the best quarter for growth on record, as activity rebounded swiftly following the 31.4 percent annualized decline we saw in the second quarter. As expected, increased personal consumption was the major driver of this strong rebound in economic activity, with consumption growing at a 40.7 percent annualized rate against forecasts for 38.9 percent. Rising business investment also contributed to the growth in the quarter, while trade served as a headwind. Despite the better-than-expected results, the overall size of the economy remains roughly 3.5 percent down from the recent peak, highlighting the damage caused in the second quarter. Economists expect to see the economy remain smaller than its pre-crisis size for a number of quarters.
• Friday saw the release of September’s personal income and personal spending reports. Both came in above expectations, with spending up 1.4 percent during the month against forecasts for 1 percent growth, while income rose by 0.9 percent against calls for 0.4 percent. These results were quite welcome and show the continued resilience of the American consumer in the third quarter, as we saw with the personal consumption growth in the GDP report. Incomes were boosted by additional supplemental jobless payments authorized in August, but the growth was not enough to offset a 2.5 percent decline in incomes in August. Income growth has been very volatile throughout the pandemic, with shifting government stimulus and support leading to large swings in monthly income levels. Spending, on the other hand, has seen consistent growth since reopening efforts began, increasing in each of the past five months. Overall, this was a strong report that highlighted the continued resilience in consumer spending at the end of the third quarter.
• We finished the week with Friday’s release of the second and final reading of the University of Michigan consumer sentiment survey. The preliminary estimate released earlier in the month showed the index rising by more than expected, from 80.4 in September to 81.2 in October. The final report showed additional improvement throughout the month, with the index finishing October at 81.8 against forecasts to remain unchanged from the preliminary estimate. This result was likely driven in part by rising expectations for a Biden presidency, as the gauge of Democrat expectations surged to levels last seen before the pandemic, while Republican expectations remain muted. Despite these results, the index still sits well below the pre-pandemic high of 101 it hit in February.

Source: Bloomberg, as of October 30, 2020

Source: Morningstar Direct, as of October 30, 2020

What to Look Forward To
We started the week with Monday’s release of the Institute for Supply Management (ISM) Manufacturing index for October. This gauge of manufacturer confidence rose by more than expected, going from 55.4 in September to 59.3 in October, against calls for an increase to 56. This result calmed fears that the index’s decline in September might have been the start of a negative trend. Manufacturer confidence has increased notably since hitting a lockdown-imposed low of 41.5 in April, and the index now sits well above pre-pandemic levels. This is a diffusion index, where values above 50 indicate expansion, and this result showed manufacturing expanding at the fastest pace since 2018. Ultimately, this strong report demonstrated manufacturing’s continued recovery in October despite rising case counts.

Wednesday will see the release of the international trade report for September. Economists expect to see the trade deficit narrow from a 14-year low of $67.1 billion in August to $63.9 billion in September. Nonetheless, if estimates hold, this report would represent the second-largest monthly trade deficit since 2006. The previously released advance goods trade report showed the trade deficit for goods narrowing during the month, with exports of goods rising by 2.7 percent and imports declining by 0.2 percent. On the whole, trade volumes remain low, but imports have rebounded more quickly than exports. Looking forward, this indicates there may be room for additional export growth. If we do see such continued growth, it may be enough to serve as a tailwind for the fourth-quarter economy.

Also on Wednesday, the ISM Services index for October is set to be released. This measure of service sector confidence is expected to show a modest decline from 57.8 in September to 57.5 in October. This is another diffusion index, where values above 50 indicate expansion, so this drop would leave the index in expansionary territory. In addition, the anticipated result would put the index above the pre-pandemic high of 57.3 it hit in February and at a level that has historically signaled 4 percent annualized GDP growth. Strong business confidence often supports additional business investment, and we saw the positive impact that increased business investment can have in the third-quarter GDP report. If estimates prove to be accurate, October would represent another strong month for service sector confidence, which would be all the more impressive given the rising case counts.

On Thursday, the initial jobless claims report for the week ending October 31 is set to be released. Economists expect to see the number of initial filers decline from 751,000 the week before to 738,000 for the final week of October. This result would represent the lowest level of weekly initial claims since the pandemic began, but it would be more than three times higher than 2019’s weekly average. Continuing unemployment claims are also expected to decline, but it should be noted that some of the drop seen in October has likely been due to claimants exhausting their benefits rather than finding new employment. Ultimately, even with the anticipated improvement for the week, the high level of initial and continuing claims continues to indicate stress on the labor market months after lockdowns were lifted.

Thursday will also see the release of the Federal Open Market Committee (FOMC) rate decision from its November meeting. In March, the Federal Reserve cut rates to virtually zero as a response to the pandemic, and economists do not expect rates to be raised for the foreseeable future. Accordingly, the focus will be largely on the Fed’s statement and Fed Chair Jerome Powell’s press conference following the release. Market participants will be interested in seeing how the central bank reacts to rising case counts in October. Previously released Fed minutes showed a widespread concern among FOMC members that the pandemic presents a continued risk to the ongoing economic recovery. Given the rising medical risks since the Fed last met in September, continued supportive monetary policy is expected.

Finally, we’ll finish the week with Friday’s release of the October employment report. Economists expect to see 600,000 jobs added during the month, down from 661,000 in September. September’s report was disappointing, coming in below expectations and marking the weakest month for job growth since the lockdowns ended. The unemployment rate is expected to have declined slightly during the past month, from 7.9 percent in September to 7.7 percent in October. While certain areas of the economy have been able to recover to or above pre-pandemic levels, employment growth is lagging in the recovery. We have recovered only about half of the 22 million jobs lost in March and April. The slowdown in the pace of hiring is concerning given the amount of people who are still unemployed. It highlights the very real work that still needs to be done in order to get the economy back to pre-pandemic levels.

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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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