Presented by Mark Gallagher

General Market News
• The 10-year Treasury yield opened at 0.65 percent on Monday morning before bouncing up to 0.70 percent. The 10-year traded between 0.59 percent and 0.75 percent last week. The 30-year opened at 1.42 percent, and the 2-year opened at 0.18 percent—both higher than where they ended last week. There are some whispers of the Federal Reserve stepping up its bond buying activity to help keep rates lower.
• Global equities rallied last week, as several planned reopenings supported value stocks that have been punished since the beginning of the pandemic. In fact, value stocks outperformed growth for the week. Some of the better-performing value areas included energy, REITs, consumer discretion. Financials outperformed the market last week, as regional banks rallied in this beaten-down stock bounce. The rally was also supported by positive vaccine trial news from Moderna, which saw all 8 healthy candidates in a 45-person trial develop protective antibodies. Central bank policy was cited as a reason for the rally in risk assets, as liquidity has been supported by central banks stepping into markets as needed. The top-performing sectors this week were industrials, energy, and REITs. The sectors that lagged were health care, consumer staples, utilities, and the technology sector, which has led the recovery off of March lows.
• We started the week with Monday’s release of the National Association of Home Builders Housing Market Index for May. This measure of home builder confidence increased from 30 in April up to 37 in May, slightly better than expectations for an increase to 35. This follows a steep fall from 72 in March down to an 8-year low of 30 in April, so the modest rebound we saw in May still leaves the index well below levels seen earlier this year. Home builders cited construction challenges due to social distancing and significant declines in prospective buyers as two key factors causing sentiment to plunge in April, and these headwinds likely persisted into the start of May. Low levels of home builder confidence are expected to slow the pace of new home construction.
• Speaking of which, on Tuesday, April’s building permits and housing starts reports were released. These measures of new home construction showed a sharp decline in April, with housing starts falling by 30.2 percent against expectations for a 26 percent decline. Building permits fell by 20.8 percent during the month, less than the 25.9 percent fall that was anticipated. This was the largest percentage decline for housing starts since records began in 1959, and this worse-than-expected result brought the pace of new home construction to its lowest level since February 2015. These reports can be volatile on a month-to-month basis; however, given the headwinds to the industry and the continued pessimism from home builders, further weakness in new home construction is expected.
• We finished the week with Thursday’s release of April’s existing home sales report. Sales of existing homes fell by 17.8 percent during the month, slightly better than expectations for a 19.9 percent decline. This is the largest monthly decline since July 2010, highlighting the pressure that lockdowns across the country put on the housing market. This disappointing result broke a 9-month streak of year-over-year existing home sales growth. Home sales were one of the bright spots in the second half of 2019 and the start of 2020, so this sudden collapse is disappointing but not surprising, given the effects of shelter-in-place orders during the month.

Source: Bloomberg, as of May 22, 2020

Source: Morningstar Direct, as of May 22, 2020

What to Look Forward To
We started the week with Tuesday’s release of the Conference Board Consumer Confidence Index for May. Confidence rose from a downwardly revised 85.7 in April to 86.6 in May. This result was slightly worse than expectations for an increase to 87, but it is still a step in the right direction. Confidence stabilizing as the country begins to reopen indicates that consumers are likely optimistic that the reopening efforts will be successful as we head into the summer. Consumer expectations for the future increased during the month; however, views of the present condition worsened modestly. Overall, this was a largely positive report, as it indicates that consumer confidence may have bottomed in April and could be set to rebound as states reopen. This will continue to be a widely monitored data report, as hopes of a swift economic recovery largely rely on a quick rebound for consumer confidence and spending.

Tuesday also saw the release of April’s new home sales report. New home sales came in much better than expected, increasing modestly from a downwardly revised annual rate of 619,000 in March to 623,000 in April, against forecasts for a fall to 480,000. Despite this better-than-expected performance during the month, the pace of new home sales is still down notably from the recent high of 717,000 set in January. Last year saw strong growth in new home sales, and this momentum continued into the start of 2020 before the pandemic hit. Looking forward, the slowdown in new home construction in March and April will likely serve as a headwind for future new home sales due to lowered supply in key markets.

On Thursday, the second estimate of first-quarter gross domestic product (GDP) growth is set to be released. Economists expect to see the annualized growth rate for the quarter remain unchanged at –4.8 percent. Personal consumption, which was the major driver of GDP growth in 2019, is expected to improve slightly to a 7.4 percent annualized decline during the quarter, from an initial estimate of a 7.6 percent decline. Even if this anticipated improvement in consumption holds true, this would still represent the worst quarter for personal consumption since the second quarter of 1980. Although these very weak growth figures are concerning, they are likely just the tip of the iceberg, as economists are currently forecasting a 33.5 percent annualized contraction for the economy in the second quarter.

Thursday will also see the preliminary estimate of durable goods orders in April. Orders are set to decline by 18 percent in April following a 14.7 percent drop in March. Much of the March drop in headline orders was due to a sharp decline in volatile aircraft orders; however, that is not expected to be the case in April. Core durable goods orders, which strip out the effect of volatile transportation orders, are expected to fall by 15 percent during the month, significantly worse than the modest 0.4 percent decline we saw in March. Core durable goods orders are often used as a proxy for business investment. So, if estimates hold, it would indicate that already weak business spending in the first quarter only worsened to start the second quarter.

The third major data release on Thursday will be the weekly initial jobless claims report for the week ending May 23. Economists currently expect 2 million additional Americans filed initial claims during the week. Depending on the revision to the prior week’s report due to the Massachusetts reporting error, this result may end up being a slight increase in initial filings during the week if estimates hold. As we’ve seen over the past two weeks, however, this data is certainly not perfect, and it’s important not to place too much emphasis on week-to-week changes. Rather, the focus should be on the general trend, which has been downward for the past seven weeks, indicating that the worst is likely behind us. We will continue to monitor this weekly update until we see sustained progress in getting weekly initial claims closer to historical levels.

On Friday, April’s personal income and personal spending reports are set to be released. Both of these reports are expected to show historically bad results for the month. Incomes are set to fall by 7 percent, while spending is expected to decline by 12.6 percent. If estimates prove to be accurate, this would be the worst month for both reports on record. While the sharp drop in spending is certainly concerning, the anticipated income decline is also worrisome, as it could hinder a return to faster spending growth as states begin to reopen. April’s retail sales report came in worse than expected, and a similar result for personal spending would serve to reemphasize the damage that the measures to combat the spread of the coronavirus had on the economy during the month.

Finally, we’ll finish the week with Friday’s release of the second and final estimate of the University of Michigan consumer sentiment survey for May. Economists expect to see the index remain unchanged at month-end, remaining in line with the midmonth estimate of 73.7. If this initial result holds, it would represent a slight improvement from April’s final reading of 71.8, driven by a noted improvement in the current conditions subindex, which rose from 74.3 in April to 83 at the start of May. As is the case with the Conference Board report on consumer confidence, this will be a widely followed release as it will give a glimpse into how consumers are reacting to the easing of shelter-in-place orders as we head into the summer.

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
• On Tuesday, May 12, the Treasury issued new 10-year debt, which led yields to drop from 0.70 percent to 0.58 percent before bouncing back to current levels on Friday. The 10-year Treasury yield opened at 0.64 percent on Monday. The 2-year yield opened at 0.14 percent, and the 30-year yield opened at 1.34 percent. The U.S. Treasury is issuing a lot of new debt to help fight the economic effects of COVID 19, but yields remain at or close to historical lows.
• Global equities moved lower this past week. Jitters surrounding the restart of the economy as well as increased tensions with China were potential reasons for the sell-off. Trade tensions with China flared as the U.S. placed new export restrictions on semiconductors and Huawei products. Beijing responded with threats to place restrictions on Qualcomm, Cisco, and Apple.
• The top-performing sectors on the week were health care, consumer discretionary, and communication services. The worst performers included energy, REITs, and industrials. Hotels and airlines were particularly notable pockets during the sell-off in REITs and industrials.
• On Tuesday, April’s Consumer Price Index was released. Consumer prices fell by 0.8 percent during the month, in line with economist expectations. This brought year-over-year inflation down to 0.3 percent, which was slightly below expectations for 0.4 percent. Core inflation, which strips out the impact of volatile energy and food prices, fell by 0.4 percent during the month, bringing annual core inflation down to 1.4 percent. The massive shock to consumer demand created by efforts to battle the spread of the coronavirus is expected to continue to hold back inflationary pressures in the short term.
• On Wednesday, the Producer Price Index was released. Headline producer inflation fell by 1.3 percent during the month, far surpassing economist estimates for a 0.5 percent decline. On a year-over-year basis, producer prices fell by 1.2 percent. This brought the pace of producer inflation to its lowest level in more than four years. Falling gasoline prices were one of the major drivers of the deflationary pressure on headline producer prices, as gas prices fell by the most since records began in 1947. Core producer inflation, which strips out the impact of volatile gas and food prices, fell by 0.3 percent, bringing the pace of annual core inflation to 0.6 percent in April. Given the deflationary pressure created by the ongoing pandemic, inflation is expected to remain contained for the time being.
• Friday saw the release of April’s retail sales report. Sales came in worse than expected during the month, falling by 16.4 percent on a monthly basis, against forecasts for a 12 percent decline. This follows an upwardly revised 8.3 percent decline in March, which at the time was the record for the worst single month decline on record. For perspective, the worst back-to-back months during the 2008 financial crisis saw sales fall by a combined 6.7 percent. Perhaps more concerning than the headline decrease was the core retail sales figure, which strips out volatile gas and auto purchases. This proxy for true consumer demand fell by 16.2 percent during the month, far worse than estimates for a 7.6 percent decline. Once again, this represents the worst monthly result on record, easily surpassing last month’s low water mark of –2.8 percent. Consumer spending is the major driver of economic growth, and these historically bad reports indicate that the second-quarter gross domestic product report is likely to be terrible.
• Finally, we finished the week with Friday’s release of the first estimate of the University of Michigan consumer sentiment survey for May. This widely followed measure of consumer confidence increased from 71.8 in April up to 73.7 in May, against expectations for a decline to 68. This follows a sharp decline from 89.1 in March, so the modest increase still left the index at low levels when compared to the recent high of 101 set in February. This improving confidence was driven by increased optimism around the current situation, as the subindex that measures present conditions increased during the month while future expectations fell. Part of this can be attributed to the fact that more Americans received stimulus checks during the month, but efforts to open up some state economies likely played a role as well. While the increase during the month was welcome, we still have a long way to go before confidence and spending levels reach pre-pandemic levels, so this will continue to be a widely monitored report.

Source: Bloomberg

Source: Morningstar Direct

What to Look Forward To
We started the week with Monday morning’s release of the National Association of Home Builders Housing Market Index for May. This measure of home builder confidence increased from 30 in April to 37 in May, slightly better than expectations for a move to 35. Following a steep fall from 72 in March to an eight-year low of 30 in April, this modest rebound leaves the index well below levels seen earlier this year. Home builders cited significant declines in prospective buyers and construction challenges due to measures to combat the spread of the coronavirus as two key factors causing sentiment to plunge in April. This report showed that these headwinds persisted into the beginning of May. Low levels of home builder confidence are expected to slow the pace of new home construction.

Speaking of new home construction, on Tuesday, April’s building permits and housing starts reports are set to be released. These measures of new home construction are expected to show a steep drop-off in the pace of new home construction. Building permits are set to decline by 25.9 percent, while starts are expected to fall by 23.6 percent. That would bring the pace of housing starts to a four-year low, offsetting the gains in the second half of 2019 and the beginning of this year. These reports can be volatile on a month-to-month basis, however. Given the headwinds to the industry and the collapse in home builder confidence in April, further weakness in new home construction is expected.

Wednesday will see the release of the minutes from the April Federal Open Market Committee meeting. No major announcements were made, so the minutes are not likely to reveal major information. There has been some chatter recently about the potential for negative interest rates in the U.S., but Federal Reserve (Fed) Chairman Jerome Powell stated during an interview last week that the Fed does not intend to use negative rates as a policy tool. Instead, the Fed prefers to use other measures to support the economy and markets. We can expect the minutes to reveal additional commentary describing the economic outlook held by various Fed members at the end of the month, so this release will be worth monitoring.

On Thursday, the weekly U.S. initial jobless claims report for the week ending May 16 is set to be released. Economists anticipate the filing of an additional 2.4 million initial unemployment claims during the week. While this result would represent the seventh straight week with declining initial claims, the numbers would remain significantly higher than historical norms. For reference, initial claims averaged just under 220,000 a week throughout 2019. If the estimates hold, this report would show that mass layoffs have continued well into May. We’ll continue to monitor this weekly gauge of the health of the jobs market until levels approach historical norms.

We’ll finish the week with Thursday’s release of April’s existing home sales report. Sales are expected to decline by 18.3 percent during the month, following an 8.5 percent drop in March. With much of the country under shelter-in-place orders in April and home builders citing a large decline in foot traffic, a sharp drop in sales would make sense. If the estimates hold, a nine-month streak of year-over-year growth would be broken for existing home sales, one of the bright spots in the economic expansion in the second half of 2019. Going forward, further weakness in home sales is expected, given the steep drop-off in prospective buyers caused by the coronavirus.

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 spiked to 0.74 percent last week before dropping to 0.60 percent on Friday and opening at 0.68 percent on Monday. The 2-year yield opened at 0.15 percent, while the 30-year yield opened at 1.40 percent. April’s Consumer Price Index (CPI), Producer Price Index (PPI), and retail sales will be released this week, giving us a better understanding of the pandemic’s effects on the economy and likely spurring some additional volatility.
• The S&P 500, Dow Jones Industrial Average, and Nasdaq Composite were all up on the week, with the Nasdaq Composite leading the way with a gain of more than 6 percent. Small-cap stocks also continued their recent rally, as the Russell 2000 moved up another 5.52 percent. The rally came despite a sharp increase in the unemployment rate and concerns over a potential second wave of the coronavirus. It was supported by the Federal Reserve’s (Fed’s) continued economic assistance, as well as positive earnings reports, which revealed a pickup in business activity from lows at the end of March.
• The top-performing sector on the week was energy, as West Texas Intermediate crude oil rallied by 25 percent. Technology and consumer discretionary also had a strong week. The worst performers were the bond proxies in utilities, consumer staples, and financials.
• On Tuesday, the Institute for Supply Management Nonmanufacturing index was released. This measure of service sector confidence declined from 52.5 in March to 41.8 in April, against expectations for a larger fall to 38. Despite the better-than-expected result, this still brought the index to its lowest level in more than a decade, as service sector confidence now sits near the all-time low of 37.8, set in November 2008. This is a diffusion index, where values below 50 indicate contraction, so this decline was concerning but not necessarily surprising, given the business shutdowns during the month.
• Friday brought the release of the April employment report. As expected, this report showed the devastating effects widescale shelter-in-place orders had on the jobs market, with 20.5 million jobs lost during the month. This result was better than economist estimates for 22 million, but previously released unemployment claims data indicates that this report may be undercounting the full extent of the jobs lost during the month. The unemployment rate increased to a post-war high of 14.7 percent, against expectations for a further increase to 16 percent. Despite the better-than-expected results, this represents the worst single month for American job losses on record and brought the unemployment rate well above the 10 percent high we saw during the 2008 financial crisis.

Source: Bloomberg

Source: Morningstar Direct

What to Look Forward To
On Tuesday, April’s CPI will be released. Consumer prices are expected to fall by 0.7 percent during the month, following a 0.4 percent decline in March. On a year-over-year basis, consumer prices are expected to rise by a modest 0.4 percent, down notably from the 1.5 percent year-over-year growth rate the month before. Lowered gas prices are one of the major drivers of expectations for lowered inflation. Core consumer inflation, which strips out the impact of volatile gas and food prices, is expected to fall by only 0.2 percent during the month. This result would translate to year-over-year core consumer inflation of 1.7 percent, the lowest level seen since September 2017. In the short term, the negative shock to consumer demand created by efforts to battle the spread of the coronavirus is expected to continue to hold back inflationary pressure for consumers.

On Wednesday, April’s PPI will be released. Economists expect to see a 0.4 percent decline in headline producer inflation for the month, which would cause producer prices to decline by 0.2 percent on a year-over-year basis. As was the case with consumer inflation, core producer prices are expected to show a more modest decline of 0.1 percent in April, leading to 0.8 percent year-over-year inflation for this segment. If the estimates hold, year-over-year core producer inflation will hit its lowest level in more than four years. Despite the raft of supportive policy measures enacted by the Fed over the past two months, the collapse in global demand is expected to serve as a headwind to inflation in the short term.

On Thursday, the weekly U.S. initial jobless claims report for the week ending May 9 is set to be released. Economists anticipate an additional 2.5 million initial unemployment claims to be filed. Although this result would represent the sixth straight week of declining initial claims, it would bring the eight-week total up to roughly 36 million recently unemployed Americans. If estimates hold, this report would show that mass layoffs have continued into May. We will continue to monitor this weekly gauge of the health of the jobs market until we see levels approach historical norms.

Friday will see the release of April’s retail sales report. Sales are expected to fall by 11 percent during the month, following an 8.7 percent decline in March. To put this into perspective, the worst two back-to-back months for retail sales during the great financial crisis saw sales fall by a combined 6.7 percent. Part of this anticipated decline can be attributed to lowered spending on gas. But even core retail sales, which exclude volatile gas and auto purchases, are slated to decline by 5.5 percent in April. This result would mark the worst month on record for core retail sales, passing last month’s record 2.8 percent decline. Given the importance of consumer spending to the overall economy, if estimates prove to be accurate, April’s retail sales would be a negative signal for second-quarter gross domestic product growth.

Friday will also see the release of the industrial production report for April. Economists expect production to fall by 11.4 percent during the month, following a disappointing 5.4 percent decline in March. The March report represented the worst monthly drop in output since 1946, so the prospect of a further decline is concerning. Much of the April forecast can be traced to low expectations for manufacturing output. This segment is set to fall by 14 percent during the month, after declining by 6.3 percent in March. Given the massive drop in global demand created by the ongoing pandemic, industrial production and manufacturing output are expected to remain challenged until the global economy shows signs of a recovery.

Finally, we’ll finish the week with Friday’s release of the first estimate of the University of Michigan consumer sentiment survey for May. This widely followed measure of consumer confidence is expected to decline from 71.8 in April to 67.5 in May. This result would not be surprising, given the fact that most Americans were still under shelter-in-place orders at the beginning of the month. Consumer confidence is typically supported by positive market performance and a strong jobs market. While markets have partially rebounded from recent lows, April’s employment report showcased the damage that efforts to combat the spread of the coronavirus have had on the jobs market. The extremely weak employment situation will likely serve as a headwind against further improvements to consumer confidence, unless large-scale progress is made in returning Americans to work. Consumer confidence will be a widely followed metric over the coming months. Hopes of a swift economic recovery largely rely on a rebound in consumer confidence and spending.

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

Markets rebound in April
Equity markets saw a swift recovery in April, as progress toward slowing the spread of the coronavirus gave hope to investors. The S&P 500 rose by 12.82 percent, marking the best monthly gain since 1987. The Dow Jones Industrial Average (DJIA) gained 11.22 percent for the month, while the Nasdaq Composite, with its heavy technology weighting, led the way with a 15.49 percent gain.

These impressive results came despite worsening fundamentals. According to Bloomberg Intelligence, as of April 30, the blended average earnings growth rate for the S&P 500 for the first quarter sat at –16.4 percent. If the final earnings come in at this level, it would be the worst quarterly result since the second quarter of 2009. This is especially disappointing given the return to quarterly earnings growth that we saw in the fourth quarter. April’s market rally indicates investors may be willing to accept a few quarters of dismal earnings due to the coronavirus. This will be an important area to monitor as we begin to open up the economy, as fundamentals drive performance over the long term.

Technical factors for U.S. markets were mixed during the month. The S&P 500 and DJIA both spent April below their respective 200-day moving averages, although they moved closer to the trendline by month-end. The Nasdaq, however, was able to break through and finish April above its 200-day moving average. This is an important technical signal, as a prolonged break above trend could indicate a shift in investor sentiment. While it is too early to say that U.S. markets are out of the woods, the swift rebound in April was certainly a welcome development.

The story was much the same internationally, with foreign markets rebounding as well, although to a slightly lesser extent. The MSCI EAFE Index gained 6.46 percent during the month, bolstered by reopening efforts across select European countries. Emerging markets fared even better, gaining 9.18 percent. Despite these strong returns, both indices spent the month below their 200-day moving averages.

Fixed income, which benefited from continued low interest rates and supportive policy from the Federal Reserve (Fed), also had a strong month. The yield for the 10-year Treasury note was largely range bound, starting April at 0.62 percent and finishing the month at 0.64 percent. The Fed left rates unchanged at its April meeting after cutting the federal funds rate to zero in March. Fed Chair Jerome Powell used his press conference to reiterate that the Fed is willing and able to provide much-needed support during these uncertain times.

The Bloomberg Barclays U.S. Aggregate Bond Index gained 1.78 percent during the month. High-yield bonds fared even better, with the Bloomberg Barclays U.S. Corporate High Yield Index gaining 4.51 percent.

States begin reopening as coronavirus growth slows
In April, we saw real progress in the fight against the coronavirus, although there is still much work to be done. Case counts continue to increase, but the pace of growth for new cases has been falling. We ended the month with the daily case growth rate in the U.S. at its lowest level since the end of February. This shows the positive impact widespread social distancing and shelter-in-place orders have had on containing the virus. We’ve also seen some promising results for potential treatments, which have boosted confidence.

Given the progress we saw in April, some states have started the process of opening their economies back up. There is concern that this may lead to further localized spread of the coronavirus. But for the time being, these states will serve as an example for the rest of the country of what to expect upon reopening. Given the virus’s long incubation period and the resulting lag between policy changes and infection rates, it will take at least a couple of weeks to get a clear picture of exactly how reopening will affect new case counts.

Large-scale testing capabilities in the U.S. remain well below levels called for by experts in order to safely reopen large swaths of the economy. The impact of not having enough tests can be seen in the percentage of tests that come back positive, which still remains elevated despite generally following a downward trend during the month. Ultimately, testing will be the key tool to allow us to safely open up the economy until a vaccine is available.

Economic data highlights costs of lockdown
Although there was positive news on the coronavirus front, the story was very different for the economy as a whole. The economic data released in April was terrible, as expected. This highlights the devastating impact shelter-in-place orders have had on the economy. More than 30 million Americans filed initial jobless claims over the past 6 weeks, almost certainly sending the unemployment rate soaring above the 10 percent high it last hit in October 2009. Gross domestic product (GDP) contracted by an annualized rate of 4.8 percent in the first quarter, signaling that we are quite likely in a recession. Personal consumption, which was the major driver of economic growth last year, experienced its biggest decline since the fourth quarter of 2008, as you can see in Figure 1.

Figure 1. Personal Consumption Expenditures, 2007–Present

This sharp fall in consumer spending was greater than expected and highlights the risks April’s extended lockdowns pose to second-quarter growth. Consumer confidence plummeted during the month, with both the Conference Board and University of Michigan consumer sentiment indices now sitting at multiyear lows. A V-shaped recovery will largely rely on a swift rebound in consumer confidence and spending. So, this is an important area to monitor going forward.

Businesses also suffered during the month. Both manufacturers and the service sector saw declining confidence and output figures in April. Industrial production experienced its largest drop since 1946, with manufacturing output slashed as factories shut down in the latter half of March. Business confidence now sits at levels that have historically indicated a double-digit contraction in GDP is possible.

While the results released in April were terrible, even worse news is likely on its way. We will almost certainly see the unemployment rate rise past highs set during the 2008 financial crisis, and GDP is expected to contract much further in the second quarter. The good news is that much of the damage is now done. There is also a real possibility that growth may recover more quickly than currently expected once the virus is under control. But for the time being, the economic data is likely to get worse before it gets better.

Pandemic and economic risks remain, despite April market recovery
April was a surprisingly good month for markets, but it was the opposite for the economy as a whole—and for the average American. The rebound we saw in equities, combined with the cratering earnings outlook, indicates that markets are pricing in a faster recovery. So significant risk remains if the recovery is not as swift as markets expect.

As investors, we need to keep a long-term view on not just what we hope will happen, but on what is likely, too. Right now, markets are pricing in a bit of a best-case scenario. Earnings, for example, are expected to return to growth in the first quarter of next year. For that to be the case, we will likely need to have the coronavirus under much better control by then. This is certainly a possibility. But the reality is that we will likely face setbacks as we try to gradually reopen the economy, and the process might take longer than expected.

In this environment of uncertainty about both the virus and the economy, we can expect further volatility, even as we continue to make real progress. Given the likelihood of future market turbulence and the uncertain times we’re in, maintaining a well-diversified portfolio that matches investor goals and timelines remains the best path forward.

All information according to Bloomberg, unless stated otherwise.

Disclosure: Certain sections of this commentary contain forward-looking statements based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets. All indices are unmanaged and investors cannot invest directly into an index. The Dow Jones Industrial Average is a price-weighted average of 30 actively traded blue-chip stocks. The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. The Nasdaq Composite Index measures the performance of all issues listed in the Nasdaq Stock Market, except for rights, warrants, units, and convertible debentures. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a market capitalization-weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. It excludes closed markets and those shares in otherwise free markets that are not purchasable by foreigners. The Bloomberg Barclays Aggregate Bond Index is an unmanaged market value-weighted index representing securities that are SEC-registered, taxable, and dollar-denominated. It covers the U.S. investment-grade fixed-rate bond market, with index components for a combination of the Bloomberg Barclays government and corporate securities, mortgage-backed pass-through securities, and asset-backed securities. The Bloomberg Barclays U.S. Corporate High Yield Index covers the USD-denominated, non-investment-grade, fixed-rate, taxable corporate bond market. Securities are classified as high-yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below.

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