Presented by Mark Gallagher

General Market News
• Last week’s heavy supply certainly affected the long end of the curve, as the 10-year Treasury yield moved from a historical low of 0.50 percent to 0.72 percent. (It opened at 0.69 percent on Monday.) The 30-year, which was at 1.18 percent last week, spiked and opened at 1.43 percent on Monday. The 30-year seems to have created a floor around 1.20 percent over the past five months, as it has not approached the historical low of 0.997 percent it set in March 2020. The 2-year, which opened the month at a steady 0.11 percent, backed up to 0.16 percent last week and opened at 0.14 percent on Monday.
• Last week’s rally was driven by the industrials-oriented Dow. The Nasdaq, which had been leading much of the recovery, lagged as cyclical sectors, such as industrials, consumer discretionary, and energy, were among the top performers. Financials also had a strong week, outperforming utilities, real estate, communication services, and technology, all of which lagged. In the past month, we’ve seen strength in sectors that may benefit from reopening efforts. Technology led through the early part of the rebound, and it remains to be seen which sectors will benefit as schools and businesses look to cautiously reopen in the fall. Two major questions are looming: what will a second round of stimulus payments look like, and when might it occur?
• On Tuesday, July’s Producer Price Index report was released. This measure of producer inflation rose by 0.6 percent against forecasts for a 0.3 percent increase. This brought producer prices down 0.4 percent on a year-over-year basis. Core producer inflation, which strips out the impact of volatile food and energy prices, also came in above expectations, increasing by 0.5 percent against forecasts for a 0.1 percent increase. Nonetheless, the deflationary pressure created by anticoronavirus measures earlier in the year continues to keep inflation muted year-over-year.
• Wednesday saw the release of the Consumer Price Index for July. Consumer inflation grew by 0.6 percent against expectations for a more modest 0.3 percent increase. This brought year-over-year consumer inflation to 1 percent, up from 0.6 percent in June. Core consumer inflation, which strips out the impact of food and energy prices, also increased by 0.6 percent during the month, against calls for a 0.2 percent increase. This was the largest monthly increase for core consumer prices since 1991; however, as was the case with producer prices, the declines earlier in the year helped keep inflation constrained year-over-year. Given the continued stress on the labor market, the Federal Reserve (Fed) is not expected to react to rising inflation until the employment picture improves considerably.
• On Friday, July’s retail sales report was released. Sales were mixed, with headline retail sales increasing by 1.2 percent against expectations for a 2.1 percent increase. Core retail sales, which exclude the impact of volatile auto and gas sales, increased by a solid 1.5 percent against expectations for 1 percent growth. Sales staged an impressive rebound in May and June once reopening efforts began, and this continued growth in sales in July was another positive sign that consumers were willing and able to spend. Despite July’s slowdown in the pace of sales growth compared with May and June, this was still an encouraging report, given that both major measures of consumer confidence fell during the month, which typically serves as a headwind for sales growth.
• Finally, we finished the week with the preliminary estimate of the University of Michigan consumer sentiment survey for August. This measure of consumer confidence increased from 72.5 in July to 72.8 in August, against calls for a decline to 72. This better-than-expected result helped the index avoid testing the recent low of 71.8 it hit in April. Rising case counts and slowing reopening efforts caused consumer confidence to decline in July, but progress in containing local outbreaks in the beginning of the month helped bolster consumer sentiment. Typically, improving consumer confidence supports faster consumer spending growth, so this was an encouraging report that should help support additional consumer spending in August.

Source: Bloomberg, as of August 14, 2020

Source: Morningstar Direct, as of August 14, 2020

What to Look Forward To
We started the week with Monday’s release of the National Association of Home Builders Housing Market Index for August. This measure of home builder confidence increased by more than expected during the month, rising from 72 in July to 78 in August, against calls for a more modest increase to 74. (This is the second straight month in which home builder confidence beat expectations, as the index jumped from 58 in June to 72 in July.) This better-than-anticipated result eclipsed the record high the index reached in 1998. Home builder confidence has been boosted by record-low mortgage rates that have been driving additional prospective home buyers into the market since reopening efforts started in May. After the index reached a seven-year low of 30 in April, we’ve seen a swift recovery in home builder confidence that has supported a rebound in new home construction.

Speaking of new home construction, Tuesday will see the release of July’s building permits and housing starts reports. Both permits and starts are expected to show continued growth during the month, with permits and starts slated to rise by 5.9 percent and 3.7 percent, respectively. If estimates hold, they would bring the pace of new home construction to levels last seen in the first half of 2019. Still, even with anticipated increases for permits and starts, the pace of new home construction would be down nearly 24 percent from its recent high, set in February. So, the results for July are likely to highlight the long road back to pre-pandemic construction levels.

On Wednesday, the Federal Open Market Committee will release the minutes from its July meeting. The committee did not change policy at this meeting, voting unanimously to keep the federal funds rate at virtually zero. These minutes are expected to provide more insight into how Fed members viewed rising case counts in July, as the meeting took place while counts were rising notably in several states. Several members have noted one of the major risks to their economic outlook is the uncertainty created by the pandemic, so it will be interesting to see how the Fed reacted to the worsening public health picture in July. The minutes could also contain hints regarding the types of additional stimulus Fed members prefer, if further economic support is needed. Increased asset buying and forward guidance are two of the potential solutions expected to have been considered.

On Thursday, the weekly initial jobless claims report for the week ending August 15 is set to be released. Economists expect to see 990,000 initial unemployment claims during the week, which would be a modest increase from the 963,000 claims the previous week. This report will be an important test for the labor market, as a better-than-expected result here would be further evidence that headwinds created by rising cases in July are dissipating in August. But, even if initial claims beat expectations, they will likely remain well above historical norms, highlighting the possibility of a long road ahead before employment numbers return to pre-pandemic levels. We’ll continue to monitor this important weekly release until unemployment claims are closer to historically average levels.

We’ll finish the week with Friday’s release of July’s existing homes sales report, which is expected to show an increase of 14.4 percent during the month, following a strong 20.7 percent rise in June. If estimates hold, they would bring the pace of existing home sales to virtually the same level we saw in July 2019, highlighting this indicator’s swift rebound following reopening efforts. Record lows in mortgage rates have been the major driver of rising housing sales. Rates continued to fall in July, so they should help boost growth in housing sales. Nonetheless, despite the improvement we’ve seen and the anticipated increase in July, if estimates prove accurate, existing home sales would be down more than 17 percent compared with February’s recent high. This report will likely highlight the work that needs to be done in this sector.

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

Strong July for markets
July marked a strong start to the second half of the year for markets, as all three major U.S. equity indices ended the month in positive territory. The Dow Jones Industrial Average (DJIA) gained 2.51 percent for the month, and the S&P 500 impressed with a 5.64 percent return. The Nasdaq Composite, with its heavy weighting to technology, was the leader, rising by 6.85 percent.
These positive returns were boosted by better-than-expected fundamentals during the month. According to Bloomberg Intelligence, at the end of July, the quarterly earnings growth rate for the S&P 500 in the second quarter stood at –35 percent. This is significantly better than initial estimates for a 43.4 percent decline. The results were widespread, as 83.4 percent of companies that have reported earnings for the quarter surpassed analyst expectations. If estimates hold, this would mark the best quarter for positive earnings surprises for the index in 27 years. Although the decline during the quarter is concerning, these results, combined with analyst expectations for a return to earnings growth by the first quarter of 2021, indicate that companies were able to withstand the economic damage in the second quarter better than expected.

Technical factors were also supportive for U.S. equity markets during the month. All three major indices finished above their respective 200-day moving averages for the first time since January. Technicals have been mixed throughout the pandemic. The DJIA took longer than the S&P 500 and Nasdaq to recover after hitting lows in March. The 200-day trend line is an important technical signal that is widely followed by market participants. Prolonged breaks above this trend line could indicate a longer-term shift in investor sentiment.

The story was much the same for international markets. The MSCI EAFE Index gained a solid 2.33 percent during the month, bolstered by a new stimulus package for the European Union. Emerging markets did even better, with the MSCI Emerging Markets Index rising by 9.03 percent. Emerging markets were supported by a weakening dollar, as the Dollar Spot Index fell to its lowest point in more than two years in July.

Technicals for international markets were mixed during the month. The MSCI EAFE Index spent much of July above its 200-day moving average trend line. Volatility at month-end brought the index below trend for the sixth month in a row, however. The MSCI Emerging Markets Index spent virtually all of July above its 200-day moving average. It ended the month above trend for the first time since the start of the pandemic.

Fixed income markets had a positive month. The 10-year Treasury yield fell from 0.69 percent at the start of July to 0.55 percent at month-end. This brought the 10-year yield to its lowest level since March and near all-time lows. Shorter duration bonds also saw yields fall, with both the 3-year and 5-year yields setting new intraday lows near month-end. Declining yields led the Bloomberg Barclays U.S. Aggregate Bond Index to a gain of 1.49 percent during the month. High-yield bonds were also strong, with the Bloomberg Barclays U.S. Corporate High Yield Index gaining 4.69 percent. High-yield spreads dropped to their lowest level since the start of the pandemic.

U.S. sees public health progress
July was a mixed bag on the pandemic front, as measures to combat localized outbreaks led to some signs of progress by month-end, despite rising national case counts. While new and total case numbers remain high, the daily growth rate showed improvement later in the month. It fell from around 2 percent to approximately 1.5 percent by month-end. This indicates that the pausing or rolling back of reopening efforts in certain states is starting to help control the spread of the virus.

We continued to see improved testing capability, with average daily new tests increasing to around 800,000 by the end of the month. We still don’t have enough daily tests to get a full understanding of the pandemic, however. We can see the impact of this in the positive test ratio, which remains elevated at around 8 percent. The World Health Organization recommends a target positive test rate of 5 percent.
Ultimately, although case counts remain high, July’s public health results were encouraging. They showed stabilization and, in some cases, real progress in tamping down localized outbreaks. There is still work to do before we have the virus under control in the U.S., but the results in July showed we are on the right path.

Economic data shows signs of moderating recovery
The economic updates in July were mixed and pointed to a slowing recovery, following the strong rebound in activity we saw in May and June. Although many of the spending reports from July have not yet been released, the data we have seen so far is concerning. Weekly initial jobless claims, which show how many new Americans filed for unemployment each week, rose for two weeks in a row in July. This marks the first increase for weekly initial claims since March and highlights the challenges rising case counts created for the job market.

Consumer confidence was also disappointing in July. Both major measures of consumer confidence fell after rebounding in May and June. As you can see in Figure 1, the University of Michigan consumer sentiment survey was especially disappointing, as the larger-than-expected decline in July brought the index near lows set in April. Typically, rising consumer confidence supports faster consumer spending growth. So, these declines in July will likely serve as a headwind for further consumer spending gains.

Figure 1. University of Michigan Consumer Sentiment, 2010–Present

Despite these reports, July showed signs of hope as well. Business confidence and spending came in better than expected, indicating that businesses were willing and able to open once lockdown restrictions lifted. We also saw continued strength in the housing market, with home builder confidence shooting up by more than expected in July. Home builder confidence hit a seven-year low in April and now sits near all-time highs. The housing market has been a bright spot in the recent recovery. It has shown surprising resilience driven in large part by mortgage rates that hit historic lows in July.

Markets pricing in continued progress, but risks remain
As has been the case for much of the year, very real risks to the economic recovery exist and should be monitored. July showed us how localized outbreaks and rising case counts can be a barrier to further economic improvements.

We also saw the true extent of the damage caused by lockdown efforts firsthand when the first estimate for economic output in the second quarter showed gross domestic product contracting at a record rate of 32.9 percent annualized. This served as a reminder that the road to a full economic recovery will likely be long, with setbacks on the way. With that said, we saw very real progress on the public health front in July and can expect it to continue.

Markets are pricing in health and economic improvements, but it’s always possible negative news will rattle investors and drive volatility. Trade tensions between the U.S. and China and rising social unrest could negatively affect markets in the short term as well. Given the uncertain times, maintaining a well-diversified portfolio that matches investor goals and timelines remains the best path forward for most. As always, if concerns remain, you should contact your financial advisor to discuss your investment plan.

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 reached another record low last Thursday of 0.50 percent before slowly increasing to 0.55 percent, where it opened Monday morning. The 2-year also reached a new low last week of 0.11 percent before opening on Monday at 0.12 percent. The 30-year remains well above its historic low yield, trading at 1.22 percent on Monday, and the 20-year is trading at 0.95 percent, slightly above its historical low. The large amount of new 10-year and 30-year supply this week could move rates higher.
• During last week’s rally in the S&P 500, we continued to see large tech and communication service names, such as Apple, Microsoft, and Facebook, push the index higher.
• Looking at returns, sectors such as industrials, energy, and financials also fared well. Industrials were led by a massive earnings surprise of more than 100 percent by UPS, as the firm was able to keep costs in check despite increasing demand in the second quarter. Financials were supported by Berkshire Hathaway, which announced a $5.1 billion share buyback. The result was a rally in financials and value toward the end of the week.
• We started the week with Monday’s release of the Institute for Supply Management (ISM) Manufacturing index for July. This measure of manufacturer confidence rose from 52.6 in June to 54.2 in July, against forecasts for a more modest increase to 53.6. This result marks an impressive three-month rebound for manufacturer confidence after the index hit a multiyear low of 41.5 in April. This is a diffusion index, where values below 50 indicate contraction and values above 50 indicate expansion. So, this quick recovery up to expansionary territory once reopening efforts began was quite welcome. The index now sits at its highest level in more than a year, which is a good sign for business spending and investment as the economic recovery continues.
• On Wednesday, the ISM Services index for July was released. The index rose from 57.1 in June to 58.1 in July, against expectations for a fall to 55. This is another diffusion index, where values above 50 indicate expansion. This continued improvement in July was encouraging because it indicated service sector confidence held up well despite rising case counts throughout the month. Ultimately, the better-than-expected results for manufacturing and service sector confidence bode well for business spending and hiring.
• Speaking of hiring, we saw the impact from the strong business sentiment during the month with Friday’s release of the July employment report. The economy added 1.76 million jobs in July, which was better than economist estimates for 1.48 million. Although this is down from the 4.79 million jobs added in June, this marks the third consecutive month with more than 1 million jobs added after anticoronavirus measures in March and April devastated the labor market. The underlying data was positive as well, with the unemployment rate falling from 11.1 percent in June to 10.2 percent in July, against expectations for a more modest decline to 10.6 percent. Hourly earnings, which were expected to fall by 0.5 percent, also impressed by rising 0.2 percent. All in all, this was an encouraging report that showed hiring improvements continued during the month despite concerns of rising case counts hurting the economic recovery. Looking forward, there is still real work to be done to return to pre-pandemic employment levels, but this continued improvement is very encouraging.

Source: Bloomberg, as of August 7, 2020

Source: Morningstar Direct, as of August 7, 2020

What to Look Forward To
On Tuesday, July’s Producer Price Index is set to be released. This measure of producer inflation is expected to rise by 0.3 percent during the month after falling by 0.2 percent in June. This result would leave producer prices down 0.7 percent year-over-year. Core producer inflation, which strips out the impact of volatile food and energy prices, is expected to show a modest 0.1 percent increase during the month, which would translate to a year-over-year increase of just 0.1 percent. Producer inflation had been muted before the pandemic, but, in April, headline inflation fell by the biggest percentage on record, highlighting the deflationary pressure created by anticoronavirus measures during the early stages of the crisis.

On Wednesday, July’s Consumer Price Index will be released. As was the case with producer inflation, economists expect to see a 0.3 percent rise in headline consumer inflation during the month. This increase would bring the year-over-year pace of consumer inflation to 0.7 percent, up from 0.6 percent in June. Core consumer prices, which strip out the impact of volatile food and energy prices, are expected to go up a modest 0.2 percent for the month and 1.1 percent year-over-year. Even if estimates hold for producer and consumer prices in July, inflation would still sit well below the Federal Reserve’s (Fed’s) stated 2 percent inflation target. Ultimately, the Fed is unlikely to see modestly increasing inflationary pressure as a major concern, given the significant damage to the labor market and the need to keep policy supportive until more jobs are regained.

On Thursday, the weekly initial jobless claims report for the week ending August 8 will be released. Economists expect to see a modest decline in initial unemployment claims, from 1.19 million to 1.15 million. That continuing improvement would be an encouraging development, indicating the job market was able to withstand pressures created by rising COVID-19 case counts. But was last week’s better-than-expected result for initial and continuing claims the start of a new downward trend or just an aberration? We’ll have to wait and see, so this release will be widely followed. Even if the anticipated improvement for initial claims occurs, they would remain significantly above historically normal levels, highlighting the work that must be done to return the employment market to healthy levels. We’ll continue to monitor this weekly release until initial and continuing claims revert more closely to past norms.

On Friday, July’s retail sales report is set to be released. Sales are expected to rise by 1.8 percent during the month, following a better-than-expected 7.5 percent increase in June. Core retail sales, which strip out the impact of volatile auto and gas sales, are expected to show solid 1.2 percent growth during the month after rising by 6.7 percent in June. Sales staged an impressive rebound in May and June once reopening efforts began, and continued growth in July would be another sign consumers are willing and able to spend despite rising case counts. This result would be especially encouraging, given that both major measures of consumer confidence fell during the month, a scenario that typically serves as a headwind for sales growth. Consumer spending accounts for the lion’s share of economic activity, so increased spending in July would be a good sign for overall economic growth to start the third quarter.

Also on Friday, July’s industrial production report is due to be released. Production is expected to rise by a solid 3 percent during the month, following a 5.4 percent increase in June. This increase is expected to be supported by a 3 percent rise in manufacturing output during the month. Industrial production and manufacturing output were boosted in May and June by factory reopening efforts across the country. This report will serve as an important test regarding the ability of production to continue to rebound despite rising case counts during the month. Given the better-than-expected business confidence we saw in July, an increase in production makes sense. Still, despite the rebound in production we’ve seen since reopening efforts began, the estimated level of production for July would remain below pre-pandemic levels, highlighting the likelihood of a long road back to full recovery.

Finally, we’ll finish the week with the preliminary estimate of the University of Michigan consumer sentiment survey for August. Economists expect to see this measure of consumer confidence fall from 72.5 in July to 71.5 in August. If estimates hold, the index would fall below April’s measure of 71.8, marking an eight-year low. Rising case counts and slowing reopening efforts caused consumer confidence to decline in July, and continued case growth will likely provide a similar headwind for confidence in August. Typically, improving consumer confidence supports faster consumer spending growth, so a decline for the second month in a row would be concerning. Economists will be closely monitoring confidence and spending figures over the next few months to gauge the pace of the ongoing economic recovery.

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

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

Authored by the Investment Research team at Commonwealth Financial Network.

© 2020 Commonwealth Financial Network ®

Presented by Mark Gallagher

General Market News
• Treasury rates reached historical lows last week as the 10-year yield slid to 0.51 percent. The 30-year touched 1.20 percent, its lowest level since April, and the 2-year reached its new low of 0.10 percent on Monday. Poor gross domestic product (GDP) numbers from last week, combined with Federal Reserve (Fed) commentary on providing more support and the continued battle with COVID-19, had a hand in pushing rates (especially shorter-term rates) to new lows.
• The Nasdaq Composite continued its leadership last week, with Facebook, Amazon, Apple, and Alphabet/Google reporting earnings on Thursday. The results came on the heels of high-profile leaders from each company testifying before Congress on Wednesday. According to Nasdaq, all four firms beat consensus earnings estimates by more than 20 percent. Amazon posted strong results as the coronavirus has fueled its sales. Apple was particularly strong, as the company brushed off store closures in March and April and posted better-than-expected results. The stock was up 14.73 percent for the week, and the firm announced it would conduct a four-to-one stock split on August 24. The lone name that lagged out of the big four that reported last week was Alphabet/Google, as the firm experienced some softness in its cloud segment. Microsoft, which saw similar slowing cloud growth, will be something to watch in future earnings releases.
• On Monday, June’s preliminary durable goods orders report was released. Orders rose 7.3 percent, against forecasts for a 6.9 percent increase. This follows a downwardly revised 15.1 percent increase in May that was supported by factory reopening efforts throughout the month. 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 increase. Core durable goods orders are often used as a proxy for business spending, so the continued rebound in core orders we saw in June is a reassuring sign that business spending was bolstered by reopening efforts.
• On Tuesday, the Conference Board Consumer Confidence Index for July was released. Consumer confidence fell from 98.3 in June to 92.6 in July, against forecasts for a more modest decline to 95. This disappointing result is in line with similar declines in the preliminary reading of the University of Michigan consumer sentiment survey for the month. This larger-than-expected decline was caused by falling expectations for future economic growth, as consumers likely see rising case counts as a headwind. The index remains above the recent low of 85.7 in April, so this still represents an improvement compared with the height of the crisis; however, rising consumer confidence typically supports faster consumer spending growth, so this sharp decline is concerning and should be monitored going forward.
• On Wednesday, the Federal Open Market Committee (FOMC) released its rate decision for its scheduled July meeting. The committee cut the federal funds rate to virtually zero at the start of the pandemic, and, as expected, there were no changes made at this meeting. Members also supported continued open market purchases of Treasury and mortgage-backed securities over the upcoming months. At his post-meeting news conference, Fed Chair Jerome Powell reiterated the Fed’s commitment to using all of the tools available to support the ongoing economic recovery. Powell noted that although rising case counts remain a large concern, additional fiscal stimulus from Congress would be seen as a positive development.
• Thursday saw the release of the first estimate of second-quarter GDP growth. The economy contracted at an annualized rate of 32.9 percent, which was slightly better than economist estimates for a 34.5 percent annualized contraction. This is the worst single quarter for economic growth in modern history, surpassing the 8.4 percent annualized decline in the fourth quarter of 2008. This report shows the devastating impact anticoronavirus measures had on the economy during the quarter. A sharp drop in personal consumption was the primary driver of the economic contraction; the 34.6 percent annualized decline in consumption was the largest quarterly decline on record. These are certainly concerning figures, but it’s important to recognize this is backward-looking data and that economists anticipate a double-digit rebound in GDP growth in the third quarter.
• On Friday, June’s personal income and personal spending reports were released. Results were mixed, with spending increasing by more than expected and incomes falling by more than forecast. Personal spending increased by 5.6 percent in June, against calls for a 5.2 percent increase. Personal spending staged an impressive recovery in May, rising 8.2 percent after falling by more than 12 percent in April. This continued spending growth for June makes sense, given the strong retail sales growth we saw during the month. Personal income, on the other hand, fell by 1.1 percent against forecasts for a 0.6 percent decline. Incomes have been volatile due to the $1,200 refundable tax credits that were distributed in April, causing the index to increase by a record 12.1 percent in April before declining 4.2 percent in May. Given the lack of recurring government stimulus payments during the month, the decline in income makes sense.
• We finished the week with the second and final estimate for the University of Michigan consumer sentiment survey for July. Consumer confidence fell from 73.2 midmonth to 72.5 at month-end, against expectations for a more modest fall to 72.9. As was the case with the Conference Board measure of consumer confidence, rising case counts throughout the month likely served as a headwind for consumer sentiment. The index hit an eight-year low of 71.8 in April, so this decline brought consumer sentiment near recent lows after seeing a partial rebound to 78.1 in June. Ultimately, the declines we saw in July for both major measures of consumer confidence indicate the economic recovery we saw in May and June likely moderated notably in July.

Source: Bloomberg, as of July 31, 2020

Source: Morningstar Direct, as of July 31, 2020

What to Look Forward To
We started the week with Monday’s release of the Institute for Supply Management (ISM) Manufacturing index for July. This measure of manufacturer confidence increased by more than expected. It rose from 52.6 in June to 54.2 in July, against forecasts for a more modest increase to 53.6. This better-than-expected result marks an impressive three-month rebound for manufacturer confidence after the index hit a multiyear low of 41.5 in April. This is a diffusion index, where values below 50 indicate contraction and values above 50 indicate expansion. So, this quick recovery up to expansionary territory once reopening efforts began was quite welcome. The index now sits at its highest level in more than a year, which is a good sign for business spending and investment as the economic recovery continues.

On Wednesday, the international trade report for June is set to be released. The trade deficit is expected to narrow during the month, from $54.6 billion in May to $50.3 billion in June. May saw the trade deficit reach its widest point in more than a year. If expectations prove to be accurate, it would bring the deficit closer to levels seen throughout much of 2019. Exports and imports are expected to show solid growth during the month, after the pace of international trade fell to its lowest overall level in more than a decade in May. Looking forward, imports and exports are expected to show continued recovery over the next few months; however, given the disruption created by the pandemic, it will likely take a long time before trade volumes recover to pre-crisis levels.

Wednesday will also see the release of the ISM Nonmanufacturing index for July. This measure of service sector confidence is expected to fall from 57.1 in June to 55 in July. As was the case with the manufacturing index, service sector confidence staged an impressive recovery once reopening efforts began after hitting a low of 41.8 in April. This is another diffusion index, where values above 50 indicate expansion. So, even if estimates prove to be accurate, service sector confidence would still serve as a positive tailwind for business spending in July. Both manufacturer and service sector confidence benefited from reopening efforts in May and June; however, the July reports will give us an opportunity to see how business confidence has been affected by rising case counts throughout the month.

On Thursday, the weekly initial jobless claims report for the week ending August 1 is set to be released. Economists expect to see an additional 1.45 million initial claims filed during the week, which would mark the third straight week with increasing initial claims. As we’ve seen over the past two weeks, rising case counts and the slowdown of reopening efforts throughout the month have served as a headwind for further improvements to initial jobless claims. This headwind is expected to remain in place until the public health picture improves and reopening efforts can continue in earnest. Both initial and continuing unemployment claims remain high compared with historical averages, and we will continue to monitor these weekly releases until claims can return to more normal levels.

We’ll finish the week with Friday’s release of the July employment report. Economists expect to see 1.875 million jobs added during the month, following a better-than-expected 4.8 million jobs added in June. This would mark the third consecutive month with more than 1 million new jobs added, after anticoronavirus measures in March and April devastated the labor market. The underlying data is also expected to show improvement, as the unemployment rate is expected to fall from 11.1 percent in June to 10.5 percent in July. Although this would be a welcome improvement, it would still leave the unemployment rate higher than at any point during the great financial crisis, highlighting the very real work that remains to return to pre-pandemic employment levels.

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

Authored by the Investment Research team at Commonwealth Financial Network.

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