Presented by Mark Gallagher

General Market News
• The 10-year Treasury yield fell to 0.55 percent last week, slightly above the historical low of 0.54 percent reached on March 9. It opened at 0.57 percent on Monday. The 2-year yield opened at 0.14 percent, and the 30-year yield opened at 1.21 percent. With short-term rates at or near all-time lows, a slowing economy, and continued coronavirus concerns, there will likely be new lows in Treasuries and mortgages in the days and weeks to come.
• U.S. equities were down last week. The tech-oriented Nasdaq Composite struggled the most, as big names in the space—Microsoft and Intel—sold off after reporting their earnings. Microsoft reported slower cloud computing growth than expected, and Intel reported there would be a delay in the rollout of its next generation of chips. Communication services and health care also struggled. The best-performing sectors included energy, consumer discretionary, and financials. The value-oriented sectors in energy and financials outperformed growth names due to concerns about historically high valuations. There have also been concerns regarding the economic recovery, as states such as California and Texas passed restrictions to help slow the spread of the coronavirus. In addition, U.S.-China geopolitical tensions increased, with each country closing its consulate (i.e., Houston and ChengDu) in the other’s country.
• On Wednesday, June’s existing home sales report was released. Sales increased by 20.7 percent during the month after falling by 9.7 percent in May. This was slightly below economist estimates for a 21.4 percent increase, but still represents the best single month for existing home sales growth on record. Even with this strong result for June, sales are down more than 11 percent on a year-over-year basis, so there is still real work to be done to get this portion of the housing market back to pre-pandemic levels.
• We finished the week with Friday’s release of the June new home sales report. New home sales came in far better than expected, increasing by 13.8 percent, against expectations for a more modest 3.6 percent increase. This follows an upwardly revised 19.4 percent increase in new home sales in May. This performance brought the pace of new home sales to its highest level since 2007, as record low mortgage rates led to a surge in new home sales once reopening efforts began. New home sales are a smaller and often more volatile portion of the housing market compared with existing home sales, but the strong rebound we saw in new home sales in May and June indicates that sectors of the housing market served as a bright spot in the initial economic rebound.

Source: Bloomberg, as of July 24, 2020

Source: Morningstar Direct, as of July 24, 2020

What to Look Forward To
On Monday, June’s preliminary durable goods orders report was released. Durable goods orders increased by more than expected, rising 7.3 percent during the month against forecasts for a 6.9 percent increase. This result follows a downwardly revised 15.1 percent increase in May that was supported by factory reopening efforts. Core durable goods orders, which strip out the impact of volatile transportation orders, increased by 3.3 percent in June, slightly below expectations for a 3.6 percent rise. Core durable goods orders are often used as a proxy for business spending, so the continued rebound in core orders in June is a reassuring sign that business spending was bolstered by reopening efforts.

Tuesday will see the release of the Conference Board Consumer Confidence Index for July. Economists expect to see consumer sentiment fall modestly during the month, from 98.1 in June to 95 in July. While this result would be disappointing, it would be in line with a similar decline in the preliminary reading of the University of Michigan consumer sentiment index for July. Rising coronavirus case counts across the country are expected to serve as a headwind for any gains in confidence until the public health picture improves. Stronger consumer confidence typically supports faster consumer spending growth, so this anticipated decline is concerning, albeit understandable.

On Wednesday, the Federal Open Market Committee will release its rate decision. As the federal funds rate was cut to virtually zero at the start of the pandemic, economists do not expect any rate hikes this year. Given the worsening public health situation since the committee met in early June, the July press release should discuss the negative effects that rising coronavirus case counts are expected to have on the economic recovery. The uncertainty surrounding efforts to contain the coronavirus was previously mentioned by Federal Reserve members as a major risk factor for economic improvement. The central bank will likely use the July meeting to reiterate its desire to keep monetary policy as supportive as possible throughout the crisis.

On Thursday, the weekly initial jobless claims report for the week ending July 25 will be released. Economists are currently forecasting a modest decline from 1.42 million initial unemployment claims the week before to 1.41 million. As we saw last week, rising coronavirus case counts and the associated pause or rolling back of reopening efforts in certain states have begun to impede improvements to initial jobless claims. This headwind is expected to continue until the public health picture is brighter. Both initial and continuing unemployment claims remain high compared to historical norms, so we’ll be monitoring these weekly releases until claims return to more normal levels.

Thursday will also see the release of the first estimate of gross domestic product (GDP) growth for the second quarter. Economists expect to see a 34 percent annualized decline in economic output during the quarter, highlighting the devastating impact that anti-coronavirus measures had on the economy. Personal consumption, which is expected to be the major driver of the anticipated economic contraction, is expected to decline 35 percent on an annualized basis. These figures are certainly concerning, but it’s important to recognize that this data looks backward and economists anticipate a double-digit rebound in third-quarter GDP growth. Ultimately, this release will give us a better picture of the economic disruption in the second quarter and the work required to get economic output back to levels seen before the crisis.

On Friday, June’s personal income and personal spending reports are set to be released. Economists expect the results to be mixed. Forecasts look for spending to increase by 5.5 percent and incomes to fall by 1 percent. Personal spending staged an impressive recovery in May, rising 8.2 percent after dropping by more than 12 percent in April. Continued spending growth for June makes sense, given the strong retail sales growth during the month. Incomes have been volatile over the past two months. Due to the $1,200 refundable tax credits distributed in April, personal income soared by a record 10.8 percent during the month, before declining by 4.2 percent in May. Given the lack of recurring government stimulus payments and the continued stress on the jobs market, the anticipated decline in incomes in June makes sense. Looking forward, additional rounds of direct economic stimulus to consumers could support income growth, but, at this time, no final plans are in place for such payments.

We’ll finish the week with the second and final estimate of the University of Michigan consumer sentiment survey for July. The index is expected to fall modestly from 73.2 midmonth to 72.7 at month-end. As with the Conference Board Consumer Confidence Index, economists expect rising coronavirus case counts to serve as a headwind for improvements. The anticipated decline would bring the index close to the eight-year low of 71.8 recorded in April, which was followed by a partial rebound to 78.1 in June. If estimates prove to be accurate, they would signal a notable moderation of the economic recovery we saw in May and June and a poor outlook for July’s consumer spending reports.

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 moved lower last week, reaching their lowest point since March, with the 10-year Treasury yield closing at 0.56 percent Friday and opening at 0.62 percent on Monday. The 30-year opened at 1.34 percent on Monday, having closed at 1.24 percent on Friday. The 2-year also reached its lowest level since the spring; it closed at 0.13 percent on Friday and opened at 0.15 percent this Monday morning. Mortgage rates are also at historical lows.
• U.S. equities were led by the tech-oriented Nasdaq Composite last week. Investors continued to flock to Facebook, Apple, Amazon, Microsoft, and Google. All of these names were up by more than 3.5 percent on the week, with Amazon up by double digits. Other tech names, such as Tesla and Netflix, posted even greater gains. The end of the week also saw large banks (i.e., JPMorgan, Citi, Morgan Stanley, Goldman Sachs, and Bank of America) tick higher, on news from Gilead Sciences that its drug Remdesivir may reduce COVID-19 deaths by as much as 62 percent in extremely sick patients.
• The top-performing sectors on the week were consumer discretionary (led by Amazon and Tesla), communications services (led by Facebook and Alphabet), and technology (led by Microsoft and Nvidia). The worst-performing sectors were energy, REITs, and industrials, as the coronavirus made demand murky.
• On Monday, the Institute for Supply Management Nonmanufacturing index for June was released. This measure of service sector confidence far surpassed economist estimates, increasing from 45.5 in May to 57.1 in June, against calls for a more modest increase to 50.2. This is a diffusion index, where values above 50 indicate expansion, so this swift rebound back above 50 after hitting a 10-year low of 41.8 in April is very encouraging. The service sector accounts for the lion’s share of economic activity, so the rapid recovery in confidence we saw in June was a good sign for the ongoing economic recovery. Ultimately, this report showed the pace of economic recovery was likely faster than initially expected once reopening efforts took hold.
• On Friday, the Producer Price Index for June was released. Producer prices declined by more than expected during the month, falling by 0.2 percent against expectations for a 0.4 percent increase. On a year-over-year basis, producer prices contracted by 0.8 percent, which was larger than the 0.2 percent decline that was expected. Core producer prices, which strip out the impact of volatile food and energy prices, also came in below expectations, increasing by 0.1 percent against calls for a 0.4 percent increase. Inflationary pressures have largely been kept at bay over the past few months due to the massive shock to demand that was created by the pandemic.

Source: Bloomberg, as of July 10, 2020

Source: Morningstar Direct, as of July 10, 2020

What to Look Forward To
On Tuesday, the Consumer Price Index for June is set to be released. Headline consumer inflation is expected to show 0.5 percent growth for the month, which would translate to year-over-year consumer inflation of 0.6 percent. Regarding headline consumer inflation, the increase is anticipated due to rising gas prices in June, which were driven up by the increased cost of oil. Core consumer prices, which strip out the impact of volatile food and energy prices, are expected to increase by a more modest 0.1 percent during the month and 1.1 percent on a year-over-year basis. As was the case with producer prices, the pandemic has served as a headwind for inflation over the past few months. Nonetheless, with consumer spending picking up notably in June, economists expect increased activity to lead to modest inflationary pressure. If the estimates hold for headline and core consumer prices in June, inflation would remain well below the Federal Reserve’s stated 2 percent target. As such, it is not expected to be a major concern for the central bank in the short term.

Wednesday will see the release of June’s industrial production report. Production is slated to increase by a strong 4.3 percent during the month, following a 1.4 percent increase in May. Manufacturing output is also expected to show healthy growth, with forecasts calling for a 5.9 percent increase in output in June. Compared to consumer data, May’s industrial production report showed a slower rebound following reopening efforts, but this can be largely attributed to a slower pace of factory openings. Given that many factories reopened in the second half of May and early part of June, the anticipated acceleration of industrial production and manufacturing output growth in June makes sense. Despite the anticipated increases for industrial production and manufacturing output, both indicators fell by double digits in April. If the estimates for June prove to be accurate, this sector has a long way to go to return to pre-pandemic levels.

On Thursday, the weekly initial jobless claims report for the week ending July 11 is set to be released. Economists expect to see a further reduction in initial unemployment claims during the week, with an additional 1.25 million initial claims expected, down from just over 1.31 million the week before. If estimates prove to be accurate, this report would mark the 15th straight week of declining initial claims after a spike to an all-time high of more than 6.8 million initial claims for the week ending March 27. Continuing claims are also expected to decline from 18 million. Despite these anticipated declines, initial claims would still sit well above the average of roughly 220,000 weekly claims we saw in 2019. We’ll continue to monitor this weekly report until initial claim levels return closer to normal.

Thursday will also see the release of June’s retail sales report. Economists expect to see sales increase by a strong 4.5 percent during the month, following a record 17.7 percent increase in May. Core retail sales, which strip out the impact of volatile auto and gas sales, are expected to rise by 5.4 percent in June, following the 12.4 percent jump in May. May’s exceptionally strong rebound in sales was bolstered by reopening efforts across the country, which should continue to serve as a tailwind in June. High-frequency data showed a continued uptick in consumer activity early in the month; however, a slowdown in certain metrics occurred toward month-end as coronavirus case counts rose. Consumer spending accounts for roughly two-thirds of overall economic activity, so a continued rebound in sales in June would be a good sign for the ongoing economic recovery in the face of higher case counts.

The third major economic report on Thursday will be the release of the National Association of Home Builders Housing Market Index for July. This measure of home builder confidence is expected to increase from 58 in June to 60 in July. The index hit a seven-year low of 30 in April, as lockdowns forced prospective home buyers to press pause on purchases. Since this is a diffusion index, where values above 50 indicate expansion, its strong rebound since April has been very encouraging. Home builders cited significantly higher levels of prospective home buyer foot traffic in June compared with April and May as a major factor in the swift improvement in confidence. This trend is expected to continue in July due to historically low mortgage rates. Ultimately, higher levels of home builder confidence help support faster new home construction, so improvements to this index would be a good sign for future home construction and the overall housing market.

Speaking of new home construction, Friday will see the release of June’s building permits and housing starts reports. These two measures of new home construction are expected to show continued recovery, with permits and starts set to rise by 6.7 percent and 20.3 percent, respectively. These measures can be very volatile from month to month, but June would mark the second straight month with increased housing starts after the index hit a five-year low in April. The record increase in home builder confidence in June is expected to serve as a tailwind for construction during the month, resulting in an anticipated increase of roughly 1.17 million annual new housing starts. If estimates hold, the pace of housing starts would reach levels last seen at the beginning of 2019. Despite this anticipated jump, however, starts would be well below January’s high-water mark of more than 1.6 million, indicating this sector is still far off recent highs.

Finally, we’ll finish the week with Friday’s release of the preliminary estimate of the University of Michigan consumer sentiment survey for July. This widely followed measure of consumer confidence is expected to increase from 78.1 in June to 80 in July. This important data release will give a first look at how consumer sentiment was affected by rising coronavirus case counts in June. The factors that have historically supported higher consumer confidence, namely low gas prices, a strong job market, and strong equity market performance, have largely shown signs of moderation over the past month, which is expected to weigh on consumer sentiment. Improving consumer confidence typically supports faster consumer spending growth, so any improvement for the index would certainly be seen as a positive development. If estimates are accurate, however, the index would still sit well below the recent high of 101 set in February. While this survey has shown a solid rebound in confidence after hitting an eight-year low of 71.8 in March, confidence is still far from pre-pandemic levels. We’ll continue to closely monitor this release as the economic recovery continues.

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 at 0.68 percent on Monday, while the 30-year opened at 1.44 percent and the 2-year at 0.15 percent. The 10-year and shorter part of the yield curve remain lower as uncertainty and near-term concerns about the economy linger. Meanwhile, the 10- to 20-year portion of the curve has become steeper, as there has been an influx of new supply.
• With a number of economic measures helping fuel optimism in the economy, U.S. equities held a strong rally last week in the face of rising COVID-19 cases. As we will cover below, June’s Institute for Supply Management (ISM) Manufacturing index and employment reports surprised to the upside. We also saw positive early study results from a joint effort by Pfizer (PFE) and BioNTech SE (BNTX) to develop a coronavirus vaccine. Lastly, we saw the release of the minutes of the June Federal Open Market Committee (FOMC) meeting, at which the board stated there was a substantial likelihood of additional waves. The FOMC announced it has continued to purchase corporate bonds from names such as AT&T (T), UnitedHealth Group (UNH), and Walmart (WMT). Sectors that outperformed last week included communication services, REITs, and materials. Lagging sectors included financials, energy, and consumer staples.
• We started last week with Tuesday’s release of the Conference Board Consumer Confidence Index for June. Confidence rose from 86.6 in May to 98.1 in June, against expectations for a more modest increase to 91.5. This improvement, the best single-month increase for the index since 2011, helps calm concerns about rising case counts affecting consumer confidence. Increased confidence levels support faster consumer spending growth, so this was a very encouraging sign for June’s consumer spending reports and overall economic growth in the second quarter.
• On Wednesday, the ISM Manufacturing index for June was released. This measure of manufacturing sector confidence rose from 43.1 in May to 52.6 in June, against forecasts for a more modest increase to 49.8. This was the largest single-month increase for the index in nearly 40 years, bringing manufacturer confidence to a 14-month high. This is a diffusion index, where values greater than 50 indicate expansion, so this better-than-expected result bodes well for manufacturing output during the month. Many factories began to reopen in late May and early June, boosting confidence after forced closures in April brought the index to its lowest level since the 2008 financial crisis. Ultimately, this result points toward a faster-than-expected recovery for the manufacturing sector, which was hit hard by anticoronavirus measures.
• We finished the holiday-shortened week with Thursday’s release of the June employment report. Approximately 4.8 million jobs were added during the month, far better than economist estimates for slightly more than 3.2 million. This marks the second consecutive month in which headline job creation was far above economist estimates, indicating that once reopening efforts took hold, the pace of economic recovery was faster than expected. The underlying data was positive as well, with the unemployment rate falling from 13.3 percent in May to 11.1 percent in June, against forecasts for a more modest fall to 12.5 percent. The labor force participation rate also increased while the underemployment rate fell. In summary, this was a very strong employment report that showed reopening efforts spurred more hiring than anticipated, and that supports hopes for a faster-than-expected economic recovery.

Source: Bloomberg, as of July 2, 2020

Source: Morningstar Direct, as of July 2, 2020

What to Look Forward To

On Monday, the ISM Nonmanufacturing index for June was released. This measure of service sector confidence far surpassed economist estimates, increasing from 45.5 in May to 57.1 in June, against calls for a more modest rise to 50.2. This is another diffusion index, where values above 50 indicate expansion, so this swift rebound after the index hit a 10-year low of 41.8 in April is very encouraging. The service sector accounts for the lion’s share of economic activity, so the rapid recovery in confidence in June is a good sign for the ongoing economic recovery. As we saw with manufacturer confidence, reopening efforts in May and June served as a tailwind for service sector confidence during the month. Ultimately, this report indicates the pace of economic recovery was faster than initially expected once reopening efforts took hold.

On Thursday, we’ll get the initial jobless claims report for the week ending July 4. The level of initial jobless claims has improved for each of the past 13 weeks after hitting an all-time high of more than 6.8 million in the final week of March. Still, despite the continued improvement over three months, the level of weekly initial claims on an absolute basis remains elevated compared with historical norms. Throughout 2019, roughly 220,000 initial claims were made per week; June’s range of 1.4–1.6 million weekly claims is well above normal levels. These numbers indicate continuing pressure on the jobs market despite improvements we’ve seen since the end of March. We’ll continue to monitor this weekly report until the level of initial claim returns closer to normal.

On Friday, the Producer Price Index for June will be released. Economists expect to see producer prices increase by 0.4 percent for the month, following a 0.4 percent increase in May. Nonetheless, headline producer prices are likely to show a modest decline on a year-over-year basis. Core producer prices, which strip out the impact of volatile food and energy prices, are expected to increase by 0.1 percent in June after falling by 0.1 percent in May. Inflationary pressures have been kept at bay over the past few months due to the massive shock to demand created by the pandemic; however, with businesses reopening and producers and consumers starting to spend again, increased inflationary pressure is expected.

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

Positive June caps off strong quarter for markets
June was another positive month for markets, despite concerns about the spread of the coronavirus causing some volatility near month-end. All three major indices posted positive returns for the month. The S&P 500 returned 1.99 percent, the Dow Jones Industrial Average (DJIA) gained 1.82 percent, and the Nasdaq Composite rose by 6.07 percent. On a quarterly basis, all three indices showed strong rebounds following March’s volatility. The Nasdaq led the way with a quarterly gain of 30.95 percent, while the DJIA gained 18.51 percent and the S&P increased by 20.54 percent.

These strong results came despite worsening fundamentals. According to Bloomberg Intelligence, as of June 26, the estimated earnings growth rate for the S&P 500 in the second quarter is –44.1 percent. This is down from estimates at the start of the quarter for a more modest 16.1 percent decline. Over the long term, fundamentals drive performance. So, the market rally in the face of these numbers suggests that investors expect a continued recovery and are willing to overlook a quarter or two of declines. The expected poor second-quarter results, while concerning, are understandable, given the damage created by anti-pandemic measures that were in place for much of the quarter.

From a technical perspective, June was another mixed month for U.S. markets. The S&P 500 managed to break above its 200-day moving average at the end of May. It finished above trend for the second month in a row, despite briefly falling below this important technical level twice during the month. The DJIA broke above trend early in the month before falling back and finishing June below its 200-day moving average. The Nasdaq was the only major index that spent the entire month above its 200-day trend line, after doing the same in May.

The story was similar for international markets during the month and quarter. The MSCI EAFE Index gained 3.41 percent in June, capping off a quarter that saw the index rise by 14.88 percent. Emerging markets fared even better, gaining 7.40 percent in June and 18.18 percent for the quarter. The developed and emerging market indices remained below their 200-day moving averages at month-end. Both indices managed to briefly break above trend during the month, however, which is an encouraging sign.

Fixed income markets also had a solid month and quarter, driven by continued support from the Federal Reserve that kept interest rates constrained. The 10-year U.S. Treasury yield was largely range-bound. It started the period at 0.62 percent and hit a high of 0.91 percent in early June before falling back to 0.66 percent at quarter-end. The Bloomberg Barclays U.S. Aggregate Bond Index rose by 0.63 percent during the month and 2.90 percent for the quarter.

High-yield fixed income, which is typically driven less by interest rate movements and more closely correlated to equity markets, also had a strong quarter. The Bloomberg Barclays U.S. Corporate High Yield Index gained 0.98 percent in June and 10.18 percent for the quarter. High-yield bond spreads ended the month largely unchanged, after falling notably in both April and May.

Local outbreaks cause national case numbers to rise
Despite the positive news in the markets, the public health data released during the month showed some setbacks. New daily coronavirus cases in the U.S. set record highs toward month-end. Outbreaks in several states sparked fears of a national second wave of infections. Most of the attention was centered on rising case numbers in Arizona, California, Florida, and Texas, but cases have been increasing in other states as well. We finished the quarter with the highest level of active cases in the U.S. on record, although the daily case growth rate remained under control at the national level.

The rise in cases during the month led some state and local governments to pause or, in some instances, even roll back reopening efforts. For example, Florida and Texas recently announced they would be closing bars again, and large swaths of California are doing the same to try to contain localized outbreaks. These measures should help bring those outbreaks under control, even as they risk slowing the economic recovery.

Testing continued to improve in June, ending the month with a new daily high of roughly 650,000 tests, compared with roughly 400,000 at the end of May. Although the growth in testing capability is a positive development, current testing levels are still not high enough to track and contain the disease on a national level. This was evidenced by the increase in the ratio of positive tests we saw during the month. The seven-day moving average of positive tests increased from 4.9 percent at the start of June to 6.9 percent at month-end. The World Health Organization recommends that communities maintain a positive test rate of less than 5 percent for two weeks before reopening efforts begin.

The local outbreaks have raised risks and should be watched, but the daily case growth rate remains at a much better level than during the first wave and showed signs of stabilization at month-end. With states acting to contain the outbreaks, the risks at the national level remain low.

Data shows continued rebound in economic activity
The economic data released in June largely pointed to a faster-than-expected rebound in economic activity as reopening efforts took hold. Perhaps the best example of this comes from consumers, who saw confidence and spending figures rise notably. May’s retail sales report was a highlight, with headline sales rising by 17.7 percent against expectations for an 8.4 percent increase. Personal spending rose by 8.2 percent, indicating that consumers were ready and willing to go out and spend as reopening efforts kicked off. Consumer spending accounts for roughly two-thirds of overall economic activity, so these reports were very encouraging.

The strong consumer spending growth was supported by improving consumer confidence during the quarter. Both major measures of consumer sentiment rebounded in May and June after hitting multiyear lows in April. The Conference Board Consumer Confidence Survey was especially impressive. It improved from 85.9 in May to 98.1 in June, the largest single-month increase for the index since 2011. As you can see in Figure 1, there is still quite a way to go before we’re back to pre-pandemic confidence levels, but we’re heading in the right direction.

Figure 1. Conference Board Consumer Confidence, 2010–Present

Consumer confidence was supported by improving jobs numbers and a strong equity market rebound. May’s employment report showed a surprising 2.5 million jobs were created, against economist estimates for a loss of 7.5 million jobs. We’ve also seen initial jobless claims and continuing unemployment claims decline recently, indicating that the worst of the job losses caused by the pandemic is likely behind us. The improving employment situation in May was one of the first reports to show significantly better-than-expected results for the economy as reopening efforts began.

Business confidence and spending also showed improvement during the month. Business confidence, as measured by the monthly Institute for Supply Management Purchasing Managers’ Index surveys, rose in May after hitting multiyear lows in April. This improving confidence translated into faster spending growth. May’s durable goods orders report showed a 15.8 percent increase in orders, which helped offset an 18.1 percent decline in April. Core durable goods orders, which are often used as a proxy for business investment, also saw a solid rebound in May, indicating that businesses were willing to spend as reopening efforts took hold. All things considered, the improvements we saw on the economic front during the month were very encouraging and point to a faster-than-expected recovery if things stay on track.

Risks to economic recovery remain
Although the positive economic news we received in June was encouraging, most of the data was backward looking. It should be noted that risks to the economic recovery and market rally are still out there. Month-end headlines were focused primarily on the rising case count. Any further bad news about the pandemic could lead to slower reopening efforts or lowered confidence and spending figures. Given the market’s recent resilience, it does not seem like rising case counts on their own are likely to trigger more volatility. They could lead to worsening fundamentals, however, and should certainly be monitored.

Looking past the coronavirus, trade tensions between the U.S. and China continue to rise. This will be an important area to monitor as the recovery begins worldwide, given the damage to global trade caused by the pandemic. Rising social unrest here in the U.S. is also worth monitoring. The uncertainty created by continued demonstrations and calls for political action could lead to additional market volatility. And, as always, there is the possibility that currently unknown risks could surface and negatively affect markets.

Ultimately, though we saw positive economic updates during the month, the setbacks in containing the virus serve as a reminder that we are far from out of the woods. Even as overall conditions remain positive, over the next few months, we are likely to face challenges and volatility. Given this uncertainty, a well-diversified portfolio that matches timelines and risk levels remains the best path forward for most investors; however, you should consult with your financial advisor if concerns remain.

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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