Presented by Mark Gallagher

General Market News
• After a few weeks of almost no movement, there was heightened volatility in the rates market last week. The 10-year Treasury yield swung from 0.63 percent to 0.72 percent and then back to 0.65 percent, opening at 0.72 percent Monday. With the ambiguity behind President Trump’s health since he contracted the coronavirus and the election less than 30 days away, there has been a lot of uncertainty in the markets. Given the way rates have been trading, we may see some additional stimulus from the federal government.
• Last week, markets moved up across the board, with the S&P 500 breaking its four-week streak of declines. The Russell 2000 outperformed, as the small-cap index has a larger weighting for financials, which were among the top three sectors for the week. The Federal Reserve (Fed) extended its restriction on share buybacks and dividend increases for the largest banks through the end of 2020. While this was expected, it provides clarity on a potential deadline. Additionally, we saw a modest pickup in stimulus hopes as Treasury Secretary Steven Mnuchin plans to discuss a deal.
• Other top-performing sectors were REITs and utilities, although both saw a slight sell-off on Friday following the announcement of President Trump’s coronavirus diagnosis. The sole sector to post a loss for the week was energy. Other laggards included technology and communication services.
• On Tuesday, the Conference Board Consumer Confidence Index for September was released. The index rose from 86.3 in August to 101.8 in September, against economist estimates for a more modest increase to 90. This marks the largest single-month increase for the index in more than 17 years, and it brought confidence to its highest level since the pandemic hit. The index peaked at 132.6 in February, so there is still a lot of work to be done to get back to pre-pandemic confidence levels; however, this was a step in the right direction following a disappointing July and August. Historically, improving consumer confidence levels support faster spending growth, so this was a good sign for September’s consumer spending reports.
• On Thursday, August’s personal income and personal spending reports were released. Spending came in above estimates, growing by 1 percent against calls for a 0.8 percent increase. This follows a downwardly revised 1.5 percent increase in spending in July. Personal spending has improved since reopening efforts began; however, the pace of improvement has started to cool. On the other hand, personal income disappointed, falling by 2.7 percent against calls for a 2.5 percent decline. Incomes have been volatile during the pandemic, as large-scale layoffs and shifting government stimulus measures have led to swings in monthly averages. This larger-than-expected decline was driven by the expiration of the supplemental unemployment benefits at the end of July.
• The Institute for Supply Management (ISM) Manufacturing index for September was also released on Thursday. This gauge of manufacturer confidence declined slightly during the month, from 56 in August to 55.4 in September, against calls for an increase to 56.5. Despite the modest decline, the index still sits at its second-highest level in more than a year. This is a diffusion index, where values above 50 indicate expansion, so this is still a strong result for the manufacturing industry. Manufacturing confidence and output have rebounded well since reopening efforts began, and this report is another sign that the manufacturing industry continued to recover at the end of the third quarter, driven by a rebound in demand once reopening efforts began.
• On Friday, September’s employment report was released. This was a disappointing update, as 661,000 jobs were added during the month, well below economist estimates for 859,000. This is down considerably from the 1.3 million jobs added in August and marks the smallest number of additional jobs since reopening efforts began. The unemployment rate fell from 8.4 percent to 7.9 percent against forecasts for a more modest decline to 8.2 percent. Although the unemployment rate fell by more than expected, it was largely due to people dropping out of the workforce, as the labor force participation rate unexpectedly declined during the month. This report is yet another indication that the pace of the economic recovery has slowed, which is concerning given the large amount of work still to be done to get employment back to pre-pandemic levels. Ultimately, a full economic recovery will require significant improvement on the jobs front, so these monthly releases will continue to be closely monitored.
• We finished the week with Friday’s release of the second and final reading of the University of Michigan consumer sentiment survey for September. This measure of consumer confidence increased by more than expected, rising from an initial mid-month estimate of 78.9 up to 80.4 at month-end. This result represents a solid improvement after the index hit 74.1 in August and brings the index to its highest level since the start of the pandemic. There is still a long way to go to reach the pre-pandemic high of 101 set in February, however.

Source: Bloomberg, as of October 2, 2020

Source: Morningstar Direct, as of October 2, 2020

What to Look Forward To
On Monday, the ISM Services index for September was released. This measure of service sector confidence came in above estimates, rising from 56.9 in August to 57.8 in September against calls for a decline to 56.2. This result brought the index near its post-pandemic high of 58.1 from July and helped 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 another diffusion index, where values above 50 indicate expansion. Accordingly, this strong September reading is a positive sign for service sector confidence and spending during the month, which is welcome given that the service sector accounts for the majority of economic activity.

Tuesday will see the release of the international trade report for August. The trade deficit is expected to widen from $63.6 billion in July to $66.3 billion in August. The deficit grew to its widest level in more than 12 years in July, and, if the estimates hold, the deficit would move close to the modern low of $67 billion recorded in July 2008. Previously announced data on the trade of goods during August showed the trade deficit for goods widened to its largest level on record, as a 2.8 percent rise in exports could not offset a 3.1 percent increase in imports of foreign goods. Despite the increased trade in goods during the month, overall trade volume is about 15 percent below pre-pandemic levels, indicating there’s a long way to go to restore pre-pandemic global trade.

On Wednesday, the Federal Open Market Committee minutes from the Fed’s September meeting will be released. This release will be interesting, due to the recent Fed policy changes that will allow inflation to rise above 2 percent for an extended period of time if the job market remains weak. Economists expect these minutes will give us a better idea of how committed the Fed is to keeping rates low to support a job market recovery if inflation rises before the return of full employment. Interestingly, two voters dissented at this meeting, one of whom argued the Fed’s new policy was too supportive, while the other thought that more support should have been committed. These minutes will give us a chance to learn more about the debate surrounding the Fed’s new inflation target and get an idea of what kind of overshoot the central bank would be comfortable with going forward. Other than the inflation target change, economists will be looking for mentions of future asset purchases and hints about potential changes to purchase plans.

Finally, we’ll finish the week with Thursday’s release of the initial jobless claims report for the week ending October 3. Economists expect to see an additional 820,000 initial filings during the week, which would be a modest improvement from the 837,000 initial claims the week before. Despite the anticipated decline, initial claims would remain significantly higher than historical norms if estimates prove to be accurate. Over the past five weeks, initial claims have largely plateaued around 850,000 per week, which is nearly four times the average from 2019. We’ll continue to monitor this important weekly update until initial and continuing unemployment claims return closer to historically normal 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
• The 10-year Treasury yield (along with the rest of the Treasury curve) stayed within the range it’s been in for the past couple of weeks. It opened at 0.67 percent on Monday after spending most of last week at exactly that level. The 2-year opened at 0.13 percent and the 30-year at 1.42 percent, which is where they spent most of last week. As we enter the last quarter of the year, with an election in a little more than a month, many investors may be adopting a wait-and-see approach.
• Last week, the S&P 500 posted its fourth consecutive week of losses. Although the sell-off in the S&P 500 and Dow Jones Industrial Average continued, the Nasdaq Composite moved higher as consumer discretionary names such as Amazon and technology companies such as Apple, Microsoft, and Nvidia helped buoy the index. The cyclical sectors struggled as increasing case counts in France and Spain led to stricter mobility restrictions across Europe. Those hardest hit were energy, financials, and materials because lower mobility generates concerns over demand for oil and economic activity.
• On Tuesday, August’s existing home sales report was released. Sales of existing homes rose by 2.4 percent, in line with expectations. On a year-over-year basis, sales are up by more than 10 percent. This solid result brings the pace of existing home sales to its highest level since 2006, highlighting an impressive rebound for the housing market since reopening efforts began. The housing market has been buoyed by record-low mortgage rates that have driven additional prospective homebuyers into the market.
• On Thursday, August’s new home sales report was released. New home sales beat expectations, rising by 4.8 percent during the month against calls for a 1.2 percent decline. July’s sale growth was also revised up to 14.7 percent. As was the case with existing home sales, the continued improvement in August brought the pace of new home sales to its highest level since 2006. Sales were strongest in the South, where purchases of new homes increased by 13.4 percent. Housing has been one of the bright spots in the recent economic recovery, and these reports showcase the impressive rebound in home buyer demand we’ve seen over the past few months.
• We finished the week with Friday’s release of the preliminary durable goods orders report for August. Durable goods orders disappointed during the month, rising by 0.4 percent against forecasts for a 1.5 percent increase. This follows an upwardly revised 11.7 percent increase in July. Core durable goods orders, which strip out the impact of volatile transportation orders, also rose by 0.4 percent. Core durable goods orders are often viewed as a proxy for business investment. So, the continued improvement in August, following a 3.2 percent rise in July, is a positive sign for business spending, which has rebounded well from shutdowns earlier in the year.

Source: Bloomberg, as of September 25, 2020

Source: Morningstar Direct, as of September 25, 2020

What to Look Forward To
On Tuesday, the Conference Board Consumer Confidence Index for September will be released. Consumer confidence is expected to improve, with economists forecasting an increase from 84.8 in August to 90 in September. Although this increase would be a positive development if estimates hold, it would still leave the index below the post-pandemic high of 98.3 it hit in June. August marked a six-year low for the index, as a weak jobs market and expiring federal stimulus affected confidence. Historically, improving consumer confidence levels support faster spending growth, so weak overall confidence levels are concerning and will be closely monitored over the upcoming months.

On Thursday, August’s personal income and personal spending reports are set to be released. Spending is expected to grow by 0.7 percent during the month, following a 1.9 percent increase in July. Personal spending has improved notably since reopening efforts began; however, the pace of improvement has cooled as the tailwinds from reopening and extra government stimulus have faded. Personal income for August is expected to fall by 2.1 percent, due primarily to the expiration of the extra $600 weekly jobless payments at the end of July. Personal income has been very volatile over the past few months due to changes in government policy. If estimates hold, this report would be another indication the pace of the economic recovery has slowed.

Thursday will also see the release of the weekly initial jobless claims report for the week ending September 26. Economists expect to see an additional 850,000 initial unemployment claims filed during the week, which would be an improvement from the 870,000 initial claims recorded the week before. Despite the anticipated decline, initial claims would remain significantly higher than historical norms if estimates prove accurate. Over the past month, initial claims have plateaued, which is concerning given the overall high level of initial claims being filed each week. We’ll continue to monitor this weekly update until the level of claims returns closer to historically normal levels.

The third release on Thursday will be the Institute for Supply Management (ISM) Manufacturing index for September. This gauge of manufacturing confidence is expected to remain unchanged at 56. In August, the index rose to its highest level since 2018, so a similar result in September would be encouraging. This is a diffusion index, where values above 50 indicate expansion, so this report would be strong if estimates hold. A solid rebound in the demand for goods has caused manufacturing confidence and output to rise notably since reopening efforts began. So, a positive result here would be another sign manufacturing is continuing to do well as we enter the fall, despite the slowdown in the pace of the overall economic recovery.

On Friday, September’s employment report will be released. Economists expect to see 900,000 jobs added during the month, following a better-than-expected 1.32 million additional jobs in August. The unemployment rate is expected to fall from 8.4 percent to 8.2 percent. Although such improvements would certainly be welcome, it’s important to look at this report in context, given that we lost more than 22 million jobs between March and April. We did see a partial recovery for the job market once reopening efforts began, but the pace of improvement has slowed, which is concerning given the notable gap in total employment compared with pre-pandemic levels. Ultimately, a full economic recovery will require significant improvement on the employment front, so these monthly releases will continue to be closely monitored.

We’ll finish the week with Friday’s release of the second and final estimate of the University of Michigan consumer sentiment survey for September. Economists expect to see the index remain unchanged, after the preliminary report released earlier in the month showed a better-than-expected increase to 78.9. If estimates hold, this release would represent a modest improvement from the August result of 74.1 and would mark the highest level for the index since the pandemic hit. As is the case with the Conference Board report, improving confidence would certainly be a welcome development. Nonetheless, the index would sit significantly below the year’s pre-pandemic high of 101 recorded in February, indicating consumers remain cautious.

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

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

Authored by the Investment Research team at Commonwealth Financial Network.

© 2020 Commonwealth Financial Network ®

Presented by Mark Gallagher

General Market News
• Rates were relatively flat last week, with the 10-year Treasury yield staying between 0.65 percent and 0.70 percent and opening on the lower part of that range on Monday morning. The 2-year opened at 0.15 percent Monday but dropped to 0.13 percent in early trading. The 30-year traded between 1.40 percent and 1.45 percent all week, opening at 1.39 percent Monday. The steepest part of the curve remains from the 10-year to the 20-year, where investors can capture more than 50 basis points of yield.
• Last week saw the three major U.S. large-cap indices flat to slightly lower as the FAAMG (Facebook, Amazon, Apple, Microsoft, and Google) companies continued their sell-off. In addition to shifting away from mega-cap technology, investors also sold out of communications services and consumer discretionary. Positive news on coronavirus vaccine trials from Pfizer, BioNTech, AstraZeneca, and Moderna supported the shift toward names that could potentially rebound from a return to normal. Pfizer, BioNTech, and Moderna said their trial results could be known as early as late October. As a result, we saw investors move into small-cap stocks and sectors, such as energy, industrials, and materials, that would benefit from a return to global economic growth.
• Last Wednesday, we saw the release of the August retail sales report. Sales disappointed during the month, rising by 0.6 percent against calls for a 1 percent increase. July’s retail sales growth was also revised down from 1.2 percent to 0.9 percent. Core retail sales, which strip out the impact of volatile food and gas sales, increased by 0.7 percent against calls for 0.9 percent growth. Although the slowing growth in sales in August was disappointing, the overall level of retail sales now sits nearly 2 percent higher than prepandemic levels. Given this rebound and the slowing tailwind from lowered government stimulus, the slowdown in sales is understandable.
• Also on Wednesday, the National Association of Home Builders Housing Market Index for September was released. Homebuilder sentiment soared past expectations, rising to a record high of 83, against forecasts to remain flat at 78. This better-than-expected result was driven by a surge in prospective home buyer foot traffic during the month, with the subindex that measures foot traffic rising from 64 to 73. This increase in prospective home buyers has been driven in large part by low mortgage rates, which remain near all-time lows. Since the index bottomed out at 30, we’ve seen an impressive rebound in the homebuilder confidence sector as the economy has reopened.
• The third major release on Wednesday was the Federal Open Market Committee (FOMC) rate decision. As expected, the Federal Reserve (Fed) voted to keep the federal funds rate unchanged at virtually zero during its September meeting. The forecasts released for this meeting showed the vast majority of Fed officials do not expect to raise rates until 2023 at the earliest, driven by concerns about low inflation and the significant stress facing the job market. Fed Chair Jerome Powell used his post-meeting news conference to advocate for additional fiscal stimulus from the federal government, as the Fed remains concerned about the headwinds created by the pandemic.
• On Thursday, we returned to housing with the release of August’s building permits and housing starts reports. Both of these measures of new home construction disappointed, with starts falling by 5.1 percent against calls for a 0.6 percent decline, while permits dropped by 0.9 percent against forecasts for a 2 percent rise. Both permits and starts rose by 17.9 percent in July, so this decline in August is notable but not concerning—especially when accounting for the slowdown in construction in the South caused by tropical storms during the month. The pace of new home construction has improved markedly since hitting a pandemic low in April, driven by rising homebuilder sentiment and low mortgage rates.
• We finished the week with Friday’s release of the preliminary estimate of the University of Michigan consumer sentiment survey for September. This early look at consumer confidence came in better than expected, rising from 74.1 in August to 78.9 in September, against forecasts for a more moderate rise to 75. This marks the second consecutive month with improving confidence, following a decline in July caused by rising case counts. This brought the index to its highest level since the pandemic hit, which is encouraging because improving confidence typically supports faster spending growth. Although the improvement in September was certainly welcome, the index still sits significantly below the prepandemic high of 101 it hit in February, indicating there remains a long way to go to return to those confidence levels.

Source: Bloomberg, as of September 18, 2020

Source: Morningstar Direct, as of September 18, 2020

What to Look Forward To
On Tuesday, August’s existing home sales report will be released. Sales of existing homes are expected to rise by 2.4 percent, following a 24.7 percent surge in July. If estimates hold, existing home sales would be up more than 10 percent on a year-over-year basis compared with last August. The pace of existing home sales rebounded sharply once reopening efforts started, with sales in July reaching their highest level since 2006. This expected improvement would be another sign the housing market remains strong, driven by continued low mortgage rates.

On Thursday, August’s new home sales report will be released. New home sales are expected to fall by 1.2 percent during the month, following a 13.9 percent increase in July. The anticipated modest decline is not a major concern because of July’s strong showing. As was the case with existing home sales, new home sales surged past prepandemic levels once reopening efforts began, highlighting the impressive strength of the housing market over the summer.

Also on Thursday, the weekly initial jobless claims report for the week ending September 19 will be released. Economists expect to see an additional 840,000 initial filers during the week, which would be an improvement from the 860,000 the week before. Despite the anticipated decline, initial claims would nonetheless come in significantly higher than normal if estimates hold. Over the past few weeks, initial unemployment claims have plateaued—a concerning development given the high overall level of claims. We’ll continue to monitor this weekly update until the level of claims returns closer to historically normal levels.

We’ll finish the week with Friday’s release of the preliminary durable goods orders report for August. Durable goods orders are expected to rise by 1.4 percent during the month, following an 11.4 percent surge in July. Much of the increase in July was due to volatile transportation orders, as core durable goods orders, which strip out transportation orders, rose by only 2.6 percent. Core orders are expected to go up by 1 percent in August, providing a good sign for continued business investment. Durable goods orders have almost recovered to prepandemic levels, and further improvements in August would be a signal that the recovery for business spending has largely been V-shaped.

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
• The 10-year Treasury yield opened Monday at 0.66 percent, where it closed last week. This rate also happens to be the average rate for the 10-year yield since early April, when rates first dropped from nearly 2 percent. The 2-year yield opened at 0.13 percent, slightly more than its historical low of 0.10 percent but less than its average since April of 0.17 percent. The 30-year yield opened at 1.41 percent, much more than its historic low of 0.99 percent in March and more than its average since that time of 1.36 percent. The Federal Reserve (Fed) meets this week to discuss policy. Fed futures now point to no rate hikes until sometime in 2024.
• Last week saw a continuation of the previous week’s sell-off, largely driven by this year’s high-flying technology and consumer discretionary names. The week began with a sharp sell-off in Tesla. The stock fell by more than 10 percent when it was not added to the S&P 500 Index. An addition to the widely utilized benchmark would have represented another way for investors to gain access to the company. We also saw a continuation in the sell-off in other FAANG companies; Apple, Microsoft, Amazon, Facebook, Alphabet, and Netflix all sold off by more than 4 percent. As a result, information technology and communication services were the two worst-performing sectors. The only positive sector was materials. Utilities and industrials were also among those that were less affected by the sell-off.
• On Thursday, the Producer Price Index for August was released. Producer prices increased by 0.3 percent during the month, which was slightly above estimates for 0.2 percent growth. Core consumer inflation, which strips out the impact of volatile food and energy prices, also came in above expectations with a 0.4 percent increase. Despite the larger-than-anticipated increase in producer inflation, producer prices were down 0.2 percent on a year-over-year basis, highlighting the headwinds to faster inflation created by the pandemic.
• Friday saw the release of the Consumer Price Index for August. Consumer inflation also came in slightly above estimates, with prices rising by 0.4 percent against forecasts for 0.3 percent growth. Core consumer inflation, which excludes energy and food prices, also rose by 0.4 percent, which was higher than estimates for a 0.2 percent increase. On a year-over-year basis, headline consumer inflation grew by 1.3 percent, while core consumer inflation showed a 1.7 percent increase. Despite the higher prices in August for consumers and producers, inflation remains well below the Fed’s stated 2 percent inflation target. Given the continued weakness in the labor market, the Fed is not expected to react to modestly higher prices by tightening monetary policy this year.

• modestly higher prices by tightening monetary policy this year.

Source: Bloomberg, as of September 11, 2020

Source: Morningstar Direct, as of September 11, 2020

What to Look Forward To
We’ll start the week with Tuesday’s release of August’s industrial production report. Production is expected to increase by 1 percent during the month, following a solid 3 percent increase in July. Manufacturing output, which went up by a better-than-expected 3.4 percent in July, should show a 2 percent increase in August, driven by the continued reopening of factories and a rebound in demand. If estimates hold, this report would mark four straight months of industrial production growth. Nonetheless, the overall level of production still remains well below prepandemic levels, signaling further work is needed.

On Wednesday, August’s retail sales report is set to be released. Headline sales are expected to show 1 percent growth during the month, following a 1.2 percent rise in July. Core retail sales, which strip out the impact of volatile food and gas sales, are expected to go up by 1.3 percent, down from 1.9 percent growth in July. Even with the anticipated increases for headline and core sales, which would certainly be welcome, August would represent the worst month for sales since reopening efforts kicked off in May, highlighting the slowdown in the recovery during the summer. Consumer spending accounts for the lion’s share of economic activity, so retail sales will be closely monitored by economists as we head into the fall.

Also on Wednesday, the National Association of Home Builders Housing Market Index for September is set to be released. This measure of home builder confidence is expected to remain flat, following a better-than-anticipated increase to 78 in August. The strong results in August brought the index to its highest level since 1998, so a flat month would be nothing to worry about. Homebuilder confidence bottomed at 30 in April, but the impressive rebound for the index since then shows the strength of the housing market in the recent recovery. The housing industry has been supported by record low mortgage rates that continued to grind lower throughout the summer, which drove additional prospective home buyers into the market.

Speaking of rates, the third major release on Wednesday will be the Federal Open Market Committee rate decision at the Fed’s September meeting. The Fed cut the federal funds rate to virtually zero at the start of the pandemic, and economists do not anticipate any rate hikes this year. This meeting will be interesting, as the Fed’s previous meeting occurred at the end of July, when the public health picture was worsening notably. Given the improvements seen since then on the public health front, economists will be scrutinizing Fed Chair Jerome Powell’s press conference for insights into how the central bank views the evolving public health picture. Ultimately, given the continued pressure on the labor market, the Fed is expected to remain extremely supportive for the short to intermediate term.

On Thursday, we’ll return to housing with the release of August’s building permits and housing starts reports. Economists anticipate that these two measures of new home construction will show mixed results, following significantly-better-than expected numbers in July, when permits and starts rose by 18.8 percent and 22.6 percent, respectively. Permits are slated to increase by 3.2 percent in August, and starts should fall by 3.1 percent. Previously, the rebound in housing starts brought this segment close to prepandemic levels, so this anticipated modest decline is understandable given the strong results in July. Throughout the summer, improving homebuilder confidence supported the swift rebound in new home construction, which in turn has helped drive faster sales growth in regions with constrained supply.

Thursday will also see the release of the weekly initial jobless claims report for the week ending September 12. Economists expect to see 850,000 initial claims filed during the week, which would represent an improvement from the 884,000 initial claims filed the week before. Still, over the past few weeks, initial claims have plateaued, which is a concerning development given the high level of claims on a historical basis. For comparison, during the 2008 financial crisis, initial claims peaked at 665,000 per week, but they have now spent more than five months above that level. Continuing unemployment claims are also historically high, giving us another cause for concern. As the labor market continues to face significant stress, these weekly releases will be closely monitored by economists for the timely picture they provide as to the health of the job market.

Finally, we’ll finish the week with Friday’s release of the preliminary estimate of the University of Michigan consumer sentiment survey for September. This early look at consumer confidence is expected to show a modest improvement from 74.1 in August to 75 in September. Consumer confidence has been volatile throughout the summer, with an initial improvement in June offset by a drop in July and a modest recovery in August. If estimates hold, this report would mark two straight months with improved confidence. Nonetheless, the index would still fall below the post-pandemic high of 78.1 it hit in June and well below the prepandemic high of 101 set in February. Improving consumer confidence has historically supported faster consumer spending growth, so any increase in the index would be welcome, but the low overall confidence levels are cause for concern.

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 ®