Presented by Mark Gallagher

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

Source: Bloomberg, as of September 18, 2020

Source: Morningstar Direct, as of September 18, 2020

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

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

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

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

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

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

© 2020 Commonwealth Financial Network ®

Presented by Mark Gallagher

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

• modestly higher prices by tightening monetary policy this year.

Source: Bloomberg, as of September 11, 2020

Source: Morningstar Direct, as of September 11, 2020

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

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

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

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

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

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

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

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

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

Authored by the Investment Research team at Commonwealth Financial Network.
© 2020 Commonwealth Financial Network ®

Presented by Mark Gallagher

General Market News
• There was heightened volatility in the rates market last week—the 10-year Treasury yield swung from 0.75 percent to 0.60 percent and then back to 0.72 percent, opening at 0.68 percent Monday. The steepest part of the curve is currently the 10- to 20-year yield, where rates jumped from 0.68 percent to 1.20 percent. The 30-year yield opened at 1.41 percent, and the 2-year yield opened at 0.13 percent. The Federal Reserve (Fed) has made it clear it is willing to provide support with as much liquidity as needed. It meets again next week to discuss policy, which will be the second-to-last scheduled meeting of the year.
• Last week saw markets take a breather from their recent rally. The market decline was led by the technology-oriented Nasdaq Composite. A number of large tech names sold off, including Microsoft, Facebook, Alphabet, Amazon, and Apple. Tesla also sold off 19 percent from the open on Tuesday through the close on Thursday. The sell-off was largely caused by overbought conditions, driven by concentration in the FAANG companies in recent months. Sectors that fared better on the week were materials, utilities, financials, and consumer staples.
• On Tuesday, the Institute for Supply Management (ISM) Manufacturing index for August was released. This measure of manufacturer confidence rose from 54.2 in July to 56 in August, against forecasts for a more modest increase to 54.8. This better-than-expected result brought the index to its highest level since the end of 2018, highlighting an impressive rebound in manufacturer sentiment once reopening efforts kicked off in May. This is a diffusion index, where values above 50 indicate expansion, so the continued improvement for the index in August is a good sign for increased business spending in the third quarter.
• Thursday saw the release of the ISM Services index for August. Service sector confidence fell by a little more than expected during the month—from 58.1 in July to 56.9 in August—against calls for a drop to 57. As has been the case with manufacturing confidence, service sector confidence has experienced a strong rebound since reopening efforts began, so this moderate decline in August is nothing to worry about for the time being. Service sector confidence hit a prepandemic high of 57.3 in February, so August’s slightly disappointing result still leaves the index in line with prepandemic levels. This is another diffusion index, where values above 50 indicate expansion, so the strong rebound in business confidence that we’ve seen since May has been encouraging and should support higher business spending throughout the month.
• Finally, we finished the week with Friday’s release of the August employment report. About 1.37 million jobs were added during the month, which was slightly above economist estimates for 1.35 million. This follows a downwardly revised 1.73 million jobs in July. The unemployment rate declined by more than expected during the month, falling from 10.2 percent in July to 8.4 percent in August, against forecasts for 9.8 percent. While these better-than-expected results were certainly welcome, it’s important to view the report in context, as we lost more than 22 million jobs between March and April alone. Despite the progress we’ve made in getting people back to work, we’ve still seen only about 10.6 million jobs come back between May and August, leaving a notable gap in total employment compared with prepandemic levels. Ultimately, a full economic recovery will require significant improvements on the employment front, so these monthly releases will continue to be closely monitored.

Source: Bloomberg, as of September 4, 2020

Source: Morningstar Direct, as of September 4, 2020

What to Look Forward To
On Thursday, the Producer Price Index for August is set to be released. Economists expect to see producer inflation rise by 0.2 percent during the month, following a stronger-than-expected 0.6 percent increase in July. Core consumer inflation, which strips out the impact of volatile food and energy prices, is also expected to rise by 0.2 percent during the month. Despite the anticipated increase, producer prices should show a 0.4 percent decline on a year-over-year basis, and core producer inflation will likely increase by a modest 0.3 percent annually. These results would highlight the headwinds to faster inflation and the subsequent hit to demand caused by the pandemic.

Thursday will also see the release of the initial jobless claims report for the week ending September 5. Economists expect to see 830,000 initial claims filed during the week, which would be an improvement from the 881,000 initial claims made the week before. Throughout most of August, initial claims bounced around the level of 1 million per week, before setting a new pandemic low during the last week of the month. Accordingly, continued improvement in the first week in September would be an encouraging sign. Continuing claims are also expected to show modest improvement but will remain elevated on a historical basis. We’ll continue to monitor these weekly reports until we see initial and continuing claims return to more normal levels.

Friday will see the release of the Consumer Price Index for August. Consumer inflation is expected to moderate in August, with headline inflation set to rise by 0.3 percent following a 0.6 percent increase in July. Core consumer inflation, which excludes energy and food prices, is expected to show a more moderate 0.2 percent increase during August. On a year-over-year basis, headline consumer inflation is set to rise by 1.2 percent, while core consumer inflation should show a 1.6 percent increase. The modest increase in consumer prices is expected to be widespread, with prices rebounding for categories severely affected by the pandemic, such as clothing and car insurance. If estimates hold, consumer inflation would remain well below the Fed’s stated 2 percent target. Given the continued weakness in the labor market, the Fed is not expected to react to modestly higher prices by tightening monetary policy any time soon.

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

A positive month for markets
August was another strong month for financial markets. The S&P 500 and Nasdaq Composite both set all-time highs, gaining 7.19 percent and 9.70 percent, respectively. The Dow Jones Industrial Average (DJIA), which has been slower to recover from pandemic-induced volatility earlier in the year, gained a strong 7.92 percent. This brought the index into positive territory year-to-date.

These results were supported by better-than-expected fundamentals during the month. According to Bloomberg Intelligence, with 91 percent of companies having reported, the blended earnings decline for the S&P 500 was 32.8 percent in the second quarter. This is an improvement from initial estimates for a 43.6 percent decline. Companies largely came in above expectations during the quarter, with 82 percent of reporting companies beating earnings estimates. These results, combined with analyst expectations for a return to earnings growth early in 2021, show that companies were able to withstand the economic disruption caused by anticoronavirus measures in the second quarter better than expected.

Technical factors were also supportive during the month. All three major U.S. equity indices spent the month well above their respective 200-day moving averages. This marks two straight months with all three indices finishing above trend. The technical support for the DJIA was especially notable. This was the first month since January where the index spent the entire month above its trendline. The 200-day moving average is a widely followed technical indicator, as sustained breaks above or below trend can signal a change in investor sentiment for an index.

The story was much the same internationally. The MSCI EAFE Index returned 5.14 percent during the month. The MSCI Emerging Markets Index lagged slightly, returning 2.24 percent, as late-month volatility dampened returns. Technicals for emerging and developed markets were supportive in August, and both indices spent the month above trend. This marks the second month in a row where emerging markets have been supported technically. The MSCI EAFE Index fell briefly below trend at the end of July before rebounding swiftly in August.

Fixed income markets had a more challenging month, as rising long-term interest rates weighed on returns. The 10-year Treasury yield started the month at 0.56 percent and rose to 0.72 percent by the end of August. This increase brought long-term yields up to levels last seen in June, but yields remain low on a historical basis. The Bloomberg Barclays U.S. Aggregate Bond Index lost 0.81 percent during the month.

High-yield bonds, which are typically less tied to moves in interest rates and more closely correlated with the equity market, had a more encouraging month. The Bloomberg Barclays U.S. Corporate High Yield Index gained a respectable 0.95 percent in August. High-yield spreads continued to narrow, as investors showed a growing appetite to accept lower yields for relatively riskier fixed income assets.

Public health picture improves
We saw continued progress in slowing the spread of the coronavirus in August. This indicates that measures to combat rising case numbers in July have started to pay off. On a national level, the daily spread rate was roughly 0.7 percent at month-end. This is a significant improvement compared with mid-July, when the spread rate spiked above 2 percent. While new cases per day are up compared with early June’s numbers, we’ve seen progress in lowering new daily cases and even signs of stabilization in total active cases.

Testing disappointed during the month, though. The average number of daily new tests fell by more than 9 percent in the final week of August compared with the last week of July. At these testing levels, we do not have enough daily tests to get a full picture of the pandemic. The positive test ratio, which measures the percentage of tests per day that come back positive, averaged 6.6 percent. This is higher than the World Health Organization’s recommended 5 percent level.

While there was some encouraging progress made on the public health front during the month, there is still more work to be done. The fact that we continued to make progress in August provides some comfort that we are on the right path. But it will be an ongoing effort to contain the coronavirus, and we will likely face setbacks along the way. Looking forward, all eyes will be on efforts to reopen schools, as this represents a clear health risk.

Economic recovery slowing but still growing
The economy continued to rebound in August, but there are signs that the boost provided by reopening efforts and government stimulus earlier in the summer has started to weaken. Economists have monitored July’s consumer spending data to see whether the rebound in spending we saw in May and June would withstand the headwinds created by rising case counts and falling consumer confidence in July. Retail sales and personal spending both increased during the month but at a much slower rate than in May and June. Although the continued growth in consumer spending we saw in July was welcome, the slowdown is a potential cause for concern given the importance of consumer spending for the economy.

One of the drivers of slower consumer spending in July was lowered consumer confidence. Both major measures of consumer confidence fell in July. The Conference Board Consumer Confidence Index fell in August as well, bringing it to a six-year low. Continued challenges for the labor market and concerns about the pace of economic growth weighed on consumers’ minds early in the month. There were signs that confidence started to improve by month-end, however. The University of Michigan consumer sentiment survey showed a moderate increase in confidence between the initial estimate midmonth and the final report at the end of August. Although the drop in the Conference Board’s measure was concerning, the improvement we saw in the University of Michigan survey later in the month was a positive signal that confidence may have bottomed and started to recover.

Despite the mixed results for consumer confidence and spending, businesses performed well. Business confidence, as measured by the Institute for Supply Management (ISM) Composite index, increased in July to its highest level in more than a year, as you can see in Figure 1.

Figure 1. ISM Composite Index, 2009–Present

Businesses also showed they were willing and able to spend during the month. July’s durable goods orders report blew past expectations, rising by 11.2 percent against calls for a 4.8 percent increase. Core durable goods sales, which strip out the impact of volatile transportation orders and are often used as a proxy for business investment, also grew by more than expected. These strong results, combined with higher-than-expected levels of manufacturing output and new home construction, give a reason to hope for strong business investment during the quarter.

Risks remain, but outlook is modestly optimistic
We saw many signs of continued improvement in public health and the economy in August, but very real risks remain. School reopening efforts will likely draw the majority of the attention, especially if we start to see case numbers rise in student populations. Lower federal unemployment support is expected to serve as a barrier to future spending growth. While the path forward most likely points to continued growth, the hopes of an ongoing recovery rely largely on consumer improvements.

There are also external risks that should be monitored. These include worsening U.S.-China trade relations, social unrest, and the upcoming elections. Each has the potential to cause additional market turbulence.

We are in a better place than we were a month ago, but markets are pricing in continued steady improvements, which could lead to additional volatility if these expectations aren’t met. A well-diversified portfolio that matches investor timelines and goals is the best path forward for most. If concerns remain, a discussion with your financial advisor can help as you navigate these uncertain times.

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 Brad McMillan, CFA®, CAIA, MAI, managing principal, chief investment officer, and Sam Millette, senior investment research analyst, at Commonwealth Financial Network®.

© 2020 Commonwealth Financial Network®