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.

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
• Treasury yields steepened again last week. The 10-year opened at 0.75 percent and reached an intraday high of 0.87 percent on Friday before closing at 0.84 percent. It gave back 3 basis points (bps) this morning, opening at 0.81 percent. (The 30-year opened at 1.61 percent and the 2-year opened at 0.15 percent.) The 30-year gained 11 bps last week as the potential of stimulus packages near the election continued to be discussed.
• U.S. large-cap indices sold off as we saw underwhelming earnings reports from Intel and IBM. Intel shares came under pressure, with analysts continuing to express concerns over the firm’s production for its next generation 7-nanometer chipset, an issue first raised last quarter. IBM reported a spin-off of its managed infrastructure services business as it looks to focus on cloud services. The two stocks were down 11 percent and 7.9 percent, respectively. Other technology stocks, such as Apple and Microsoft, also underperformed. The worst-performing sectors were technology, consumer staples, and real estate investment trusts. The top-performing sectors were communication services, utilities, and financials as a steepening of the yield curve, supported by potential stimulus, showed a chance of brighter days ahead for banks hurt by lower rates.
• On Tuesday, September’s Consumer Price Index report was released. Consumer prices rose by 0.2 percent, in line with economist expectations and down from a 0.4 percent increase in August. Year-over-year, consumer inflation rose by 1.4 percent, as expected. Core consumer prices, which strip out the impact of volatile food and energy prices, rose by the expected 0.2 percent during the month and 1.7 percent year-over-year. Although lockdowns created deflationary pressure earlier in the year, reopening efforts led to an uptick in inflationary pressure throughout the summer. Despite the tailwind created by increased consumer demand, overall prices remain constrained, and the slowdown in September’s consumer inflation indicates the tailwind appears to have faded.
• The Producer Price Index for September was released Wednesday. Unlike consumer prices, producer prices increased by more than expected, albeit at a slower pace than consumer inflation. Producer prices rose by 0.4 percent, against calls for a 0.2 percent increase. This brought the year-over-year rate of producer inflation up to 0.4 percent, marking the first time producer inflation has been positive year-over-year since March. Core producer inflation, which strips out food and energy prices, also rose by more than expected, up 0.4 percent during the month and 1.2 percent for the year, against forecasts for more modest 0.2 percent and 1 percent growth, respectively. Despite the moderate pickup in inflation since reopening efforts began, inflation still remains well below the Federal Reserve’s (Fed’s) stated 2 percent target, and the Fed is not expected to react to rising inflation by raising rates until and unless the job market improves considerably.
• We finished the week with Friday’s release of the September retail sales report. Sales impressed, rising by 1.9 percent against calls for a more modest 0.8 percent increase. This marks the best month of sales since June and signals consumers were willing and able to continue spending despite expired government stimulus. Core retail sales, which strip out the impact of volatile auto and gas sales, also impressed, with a 1.5 percent increase against calls for a 0.5 percent increase. The gains were widespread, with traditional back-to-school categories and recreational goods showing notable strength. This strong report bodes well for third-quarter growth, given the importance of consumer spending on the overall economy.

  Source: Bloomberg, as of October 23, 2020

  Source: Morningstar Direct, as of October 23, 2020

What to Look Forward To
On Monday, September’s new home sales report was released. The pace of new home sales declined by 3.5 percent, 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 September slowdown in sales was likely due in large part to inventory being near record lows. New home sales are a smaller and often more volatile portion of the overall market compared with existing home sales. Accordingly, the modest pullback is nothing to worry about, especially given the strong rebound in overall housing sales since reopening efforts took hold.

September’s durable goods orders report is set to be released on Tuesday. Durable goods orders are expected to rise by 0.6 percent during the month, following a 0.5 percent increase in August. Core durable goods, which strip out the impact of volatile transportation orders, are set to rise by 0.3 percent. Core durable goods are often used as a proxy for business investment, so continued growth here would be a positive sign during the quarter. Although durable goods orders have recovered since reopening efforts took hold, work remains to return to pre-pandemic levels. The overall level of orders was down more than 5 percent in August compared with the most recent high reached in February. If estimates hold, this report would signal that business investment during the quarter was a net positive for overall third-quarter economic growth.

Tuesday will also see the release of the Conference Board Consumer Confidence Index for October. This widely followed measure of consumer confidence is expected to remain flat at 101.8. The index saw its largest increase in 17 years in September, so a neutral month in October would be understandable. Historically, improving consumer confidence levels support faster spending growth, so any improvement here would certainly be welcome. Despite the rebound in confidence we’ve seen since reopening efforts kicked off, we have a long way to go to return confidence to the pre-pandemic high of 132.6 recorded in February.

On Thursday, we’ll receive our first look at third-quarter gross domestic product growth. Economists are forecasting a 32 percent annualized increase in economic output during the quarter, following a 31.4 percent annualized decline in the second quarter. Rising personal consumption is expected to be the major driver of this growth. Predictions are for consumption to rise by 38.9 percent on an annualized basis, after declining by 33.2 percent in the second quarter. Business investment and government spending are expected to contribute to economic growth, while foreign trade should serve as a minor headwind. Although a rebound in economic activity would certainly be welcome, it’s important to note that this report looks backward. The anticipated growth in the third quarter would not be enough to offset the declines in activity seen in the second quarter.

Thursday will also see the release of the weekly initial jobless claims report for the week ending October 24. Economists expect to see an additional 788,000 initial unemployment claims filed during the week, which would be a slight increase from the 787,000 initial claims recorded the week before. After peaking in late March, the pace of layoffs has shown signs of improvement over the course of the pandemic; nonetheless, claims remain stubbornly high. Given the continued high level of weekly claims and the slowing pace of new job creation, we could see a drop in overall employment in October, which would mark the first monthly decline since April. With the labor market lagging other sectors in the recent recovery, these weekly releases will continue to be closely monitored by economists.

September’s personal income and personal spending reports will be released Friday. Personal spending is expected to rise by 1 percent during the month, following a 1 percent increase in August. Previously released retail sales data for September showed surprising strength in spending on goods, which should offset weak spending on services. Incomes are expected to rise by 0.3 percent during the month, following a 2.7 percent decline in August. Personal incomes have been very volatile throughout the pandemic, driven in large part by shifting government stimulus and unemployment benefit payments. Overall, if estimates hold, this update would be a solid confirmation of the resilience of consumer spending in September.

Finally, we’ll finish 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, against calls for a move to 80.4. Economists expect the index to remain unchanged from the preliminary estimate, which would mark the third consecutive month with increased confidence. Still, despite expectations for the index to stay at a seven-month high in October, it will be far from the high of 101 it reached in February. This fact highlights the work that needs to be done to get consumer sentiment back to pre-pandemic levels.

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
• Treasury yields experienced heightened volatility during the shortened holiday week. The 10-year opened at 0.76 percent, dropped to as low as 0.68 percent by Wednesday, and spiked right back up to 0.76 percent this Monday morning. (The 30-year opened at 1.56 percent and the 2-year at 0.14 percent.) Many factors are affecting yield markets, including supply, governmental spending, the upcoming election, and a possible stimulus package. Other factors are in play, too, including the economy, the Federal Reserve (Fed), and COVID-19 and its related repercussions.
• Large-cap U.S. indices posted modest gains last week. Trading was largely specific to stimulus talks and individual leader performance in certain sectors. Top-performing sectors were industrials, communication services, utilities, technology, and consumer staples. Lagging sectors were real estate investment trusts, energy, financials, and health care. Examples of the mixed trading included an uptick in machinery (Caterpillar) and parcel and logistics (FedEx), offset by weakness in airlines. Communication services and technology were supported by gains in Google and Apple. Consumer staples also saw a pickup in big box retailers Costco and Walmart. The travel and leisure segment moved lower as United Airlines posted greater losses than expected. In addition, we saw lack of enthusiasm from the House of Representatives for a stand-alone airline stimulus package. Health care underperformed as Eli Lilly and Johnson & Johnson paused their coronavirus drug trials.
• On Tuesday, September’s Consumer Price Index report was released. Consumer prices rose by 0.2 percent, in line with economist expectations and down from a 0.4 percent increase in August. Consumer inflation rose by 1.4 percent year-over-year, as expected. Core consumer prices, which strip out the impact of volatile food and energy prices, rose by the expected 0.2 percent during the month and 1.7 percent year-over-year. The lockdowns created deflationary pressure earlier in the year, but reopening efforts led to an uptick in inflationary pressure throughout the summer. Despite the tailwind created by increased consumer demand, however, overall prices remain constrained, and the slowdown in consumer inflation indicates the tailwind may have faded.
• The Producer Price Index for September was released on Wednesday. Producer prices increased by more than expected—albeit at a slower pace than consumer inflation—rising by 0.4 percent against calls for a 0.2 percent increase. This brought the year-over-year rate of producer inflation up to 0.4 percent, marking the first time producer inflation has been positive on a year-over-year basis since March. Core producer inflation, which strips out food and energy prices, also rose by more than expected, up 0.4 percent during the month and 1.2 percent for the year against forecasts for more modest 0.2 percent and 1 percent growth, respectively. Despite the moderate pickup in inflation we’ve seen since reopening efforts began, inflation remains well below the Fed’s stated 2 percent target, and the Fed is not expected to react to rising inflation by raising rates until the job market improves considerably.
• We finished the week with Friday’s release of the September retail sales report. Sales impressed, rising by 1.9 percent against calls for a more modest 0.8 percent increase. This result marks the best month of sales since June and signals that consumers were willing and able to continue spending despite expired government stimulus. Core retail sales, which strip out the impact of volatile auto and gas sales, also impressed, with a 1.5 percent increase during the month against calls for a 0.5 percent increase. The gains were widespread, with traditional back-to-school categories and recreational goods showing notable strength. This strong report bodes well for third-quarter growth, given the importance of consumer spending on the overall economy.

Source: Bloomberg, as of October 16, 2020

Source: Morningstar Direct, as of October 16, 2020

What to Look Forward To
We started the week with Monday’s release of the National Association of Home Builders Housing Market Index for October. This measure of home builder confidence increased by more than expected, rising from 83 in September to 85 in October against calls to remain unchanged. This gain brought the index to a record high, breaking the previous mark set in September. Home builder confidence has rebounded notably since reopening efforts took hold, aided by record-low mortgage rates that have driven additional prospective home buyers into the market. Confidence was further supported by falling timber prices during the month. Previously, the pace of new home sales hit its highest level in 14 years in August. Historically, higher levels of home builder confidence have supported faster building of new homes, so this report bodes well for October’s new home construction reports.

Speaking of new home construction, the September building permits and housing starts reports are set to be released on Tuesday. Both measures are expected to show growth, with permits and starts slated to increase by 3.2 percent and 2.4 percent, respectively. As noted above, home builder confidence set a new all-time high in September, which helps explain the anticipated increases in new home construction. Furthermore, lumber prices have dropped considerably compared with prices earlier in the summer, which should serve as an additional tailwind for new construction. Driven by rising home builder confidence, falling mortgage rates, and limited supply, building permits and housing starts have improved markedly since hitting a pandemic-induced low in April.

On Thursday, the weekly initial jobless claims report for the week ending October 17 will be released. Economists expect to see an additional 848,000 initial claims filed during the week, down from the 898,000 claims filed the previous week but still very high on a historical basis. If estimates hold, this report would mark seven consecutive weeks in which initial claims have hovered around 850,000 per week, roughly four times the average we saw in 2019. Continuing unemployment claims are also expected to decline, but some of the anticipated drop can be attributed to claimants exhausting their state benefits and going on federal emergency pandemic aid rather than returning to the workforce. Given the continued stress on the labor market, this weekly update will continue to be widely followed.

We’ll finish the week with Thursday’s release of the September existing home sales report. Existing home sales are expected to rise by 3 percent, following a 2.4 percent increase in August. The pace of existing home sales has already surpassed pre-pandemic levels, and, if the estimate holds, would be up more than 14 percent compared with last September. September would mark the best month for existing home sales since December 2006, highlighting the impressive rebound we’ve seen in the housing sector over the past few months. Looking forward, the low level of available inventory may start to serve as a headwind for existing home sales, as the supply of existing homes for sale was down 18.6 percent on a year-over-year basis in August.

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

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

© 2020 Commonwealth Financial Network ®

Presented by Mark Gallagher

General Market News
• There was a pickup in yields last week in the wake of stimulus talks. The 10-year Treasury yield stood at 0.70 percent 10 days ago before spiking to 0.81 percent on Wednesday and dipping to 0.79 percent on Friday. (The 30-year Treasury yield rose 10 basis points last week.) The spike on Wednesday was supported by Federal Reserve (Fed) Chairman Jerome Powell, who said the economy has a “long way to go” and there is “low risk of overdoing it.” The 10-year’s minor tick down came as President Trump closed the gap on a potential stimulus deal with Congress.
• A risk-on rally developed last week as enthusiasm grew behind a stimulus deal. The small-cap Russell 2000 led the way for the week. The Nasdaq was the top-performing domestic large-cap index, followed by the S&P 500 and the Dow Jones. Materials, energy, utilities, technology, and health care were among the top performing sectors. Technology benefited from a stronger-than-expected earnings preannouncement from NXP Semiconductors (NXPI) and news that AMD had made an offer to acquire Xilinx (XLNX) for $30 billion. Health care was supported by names such as Johnson & Johnson, which agreed to provide the EU with 400 million doses of its coronavirus vaccine, currently in stage three testing. Thermo Fisher Scientific (TMO) saw its stock rise over news of an expansion of COVID-19 testing operations and laboratory plastics production. Underperforming sectors included real estate investment trusts, communication services, and consumer staples.
• On Monday, the Institute for Supply Management (ISM) Services index for September was released. This measure of service sector confidence rose from 56.9 in August to 57.8, against calls for a decline to 56.2. This better-than-expected result brought the index near its post-pandemic high of 58.1 from July, helping calm concerns about wavering business confidence after the index fell by more than expected in August. Service sector confidence now sits above the pre-pandemic high of 57.3 set in February, highlighting the impressive rebound in business confidence we’ve seen since reopening efforts began. This is a diffusion index, where values above 50 indicate expansion, so this is a positive sign for service sector confidence and spending during September.

Source: Bloomberg, as of October 9, 2020

Source: Morningstar Direct, as of October 9, 2020

What to Look Forward To
On Tuesday, the Consumer Price Index for September will be released. Consumer prices are expected to rise by 0.2 percent during the month, down from a 0.4 percent increase in August. On a year-over-year basis, consumer inflation is slated to increase by 1.4 percent, up modestly from the 1.3 percent annual inflation rate we saw in August. Core consumer prices, which strip out the impact of volatile food and energy prices, are expected to rise by 0.2 percent during the month and 1.7 percent year-over-year. Inflationary pressure picked up during the summer as low inventories and rising demand led to modest increases in consumer prices; nonetheless, the deflationary pressures created by the lockdown measures are expected to keep inflation constrained for the time being.

Speaking of inflation, the Producer Price Index for September will be released Wednesday. This measure of producer inflation is expected to show a modest 0.2 percent gain in producer prices during the month, down from a 0.3 percent increase in August. On a year-over-year basis, producer prices are expected to rise by 0.2 percent. Core consumer prices, which strip out volatile food and energy prices, are expected to go up by 0.2 percent during the month. On an annual basis, core producer inflation is expected to increase by 0.9 percent, compared with a 0.6 percent increase in August. As was the case with consumer inflation, the deflationary pressure created by anti-coronavirus measures earlier in the year is expected to keep producer inflation moderate for the time being. Despite the pickup in inflation we’ve seen since reopening efforts kicked off, inflation remains well below the Fed’s stated 2 percent target. Accordingly, the central bank is not expected to react to rising inflation by raising rates until the job market improves considerably.

On Thursday, the initial jobless claims report for the week ending October 10 will be released. Economists expect to see an additional 823,000 initial claims filed during the week. If estimates hold, initial claims will have plateaued around 850,000 per week over the past six weeks, a pace roughly four times the average for weekly initial claims in 2019. The continued high number of layoffs is a concerning sign that the labor market still faces significant headwinds well after lockdowns ended. Given the current stress on the job market, this important weekly release will continue to be monitored as a gauge of the health of the labor market.

Friday will see the release of September’s retail sales report. Sales are expected to rise by 0.8 percent during the month, taking a step up from August’s 0.6 percent increase. Part of this anticipated increase is due to the more than 7 percent rise in car sales in September. Core retail sales, which strip out the impact of volatile auto and gas sales, are expected to show a more modest 0.5 percent increase during the month, down from a 0.7 percent gain in August. The pace of retail sales growth has slowed notably since the summer, when reopening efforts and heightened government stimulus supported faster growth. Still, the overall level of sales has rebounded above pre-pandemic levels. Looking forward, we are unlikely to see double-digit gains in sales. Nonetheless, continued growth at the forecasted level would be a positive sign that consumers remain willing and able to spend despite expired government stimulus payments.

September’s industrial production report will also be released on Friday. Production is expected to increase by 0.6 percent during the month, up from a 0.4 percent gain in August. Manufacturing production is expected to rise by 0.7 percent during the month, marking a slight decline from August’s 1 percent growth. The pace of industrial production growth has slowed since the summer, when reopening efforts provided a tailwind for producers. Despite the anticipated increase during the month, industrial production remains well below pre-pandemic levels, highlighting the divergent pace of the economic recovery for domestic production compared with consumption since lockdowns ended.

We’ll finish the week with Friday’s release of the preliminary estimate for the University of Michigan consumer sentiment survey. The index is expected to show a modest rise from 80.4 in September to 80.5 in October. Consumer confidence rebounded in September to its highest level since the pandemic began, and any further improvement in October would be another step in the right direction. Increased consumer confidence typically leads to faster consumer spending growth, so this report has been widely followed throughout the pandemic. Despite the increase in confidence in September and the anticipated rise in October, the index sits well below the high of 101 it set in February. A lot of work remains to get consumer confidence back to pre-pandemic levels.

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

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

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