Presented by Mark Gallagher

General Market News
• Treasury yields stabilized after a volatile session at the start of last week. The 10-year yield came in at 1.24 percent on Monday morning, showing a gain of 5 basis points (bps) week-over-week after trading as low as 1.13 percent early last week. The 30-year yield climbed 7 bps week-over-week, sitting at roughly 1.89 percent on Monday morning. Shorter-dated notes saw less-pronounced moves as the 2-year shed 2 bps and the 5-year lost 1 bp week-over-week to open at around 0.19 percent and 0.69 percent, respectively. Investors remain apprehensive about virus variants and how they might weigh on economic growth into the fall.
• Markets sold off swiftly to start last week, with all three major U.S. indices down by more than 1 percent on the day. The Dow Jones Industrial Average dropped more than 2 percent as investors feared that rising case counts, due to the Delta variant of the coronavirus, would temper future growth expectations. Fortunately, the market bounced back the remaining four days of the week, with all three indices up more than 1 percent. Despite the rise in case counts, investors seemed to focus on the good news later in the week as high vaccination rates helped keep hospitalization numbers below that of prior waves. The result was a rebound, with communications services, consumer discretionary, and technology outperforming. Financials, energy, and utilities were among the worst-performing sectors as low-bond yields continued to weigh on the banks and energy was forced to dig itself out of a 7.5 percent sell-off in oil.
• Monday saw the release of the National Association of Home Builders Housing Market Index for July. Home builder confidence slipped slightly, with the index falling from 81 in June to 80 against calls for an increase to 82. Although this marks two consecutive months with declining home builder confidence, the index remains above pre-pandemic levels. In addition, this is a diffusion index, where values above 50 indicate expansion, so this report signals that home builders continued to build in earnest during the month. The housing market has benefited from record-low mortgage rates and high levels of prospective home buyer demand since initial lockdowns were lifted last year; however, rising material and labor costs have recently started to weigh on home builder sentiment. Despite the headwinds created by rising construction costs, high levels of prospective home buyer demand and low inventory of homes for sale should help support healthy levels of home builder confidence and new home construction in the months ahead.
• On Tuesday, the June building permits and housing starts reports were released. These measures of new home construction were mixed. Housing starts rose 6.3 percent against calls for a more modest 1.2 percent increase; however, permits declined 5.1 percent, below expectations for a 0.7 percent increase. The better-than-expected result for housing starts brought the pace of new home construction to its highest level in three months. Home builders have ramped up construction over the course of the past year due to a lack of homes for sale and high levels of home buyer demand, driven by record-low mortgage rates and shifting home buyer preferences due to the pandemic. The continued growth in June despite rising costs for builders is a positive development for the overall housing market, as lack of supply and rising prices have served as a headwind for faster sales. Looking forward, high levels of home builder confidence and a backlog of homes set to be built should continue to support additional new home construction.
• We finished the week with Thursday’s release of the June existing home sales report. Existing home sales increased 1.4 percent, slightly lower than economist estimates for a 1.7 percent increase. Single-family home sales hit a three-month high in June, driven by strong sales growth in the Northeast and Midwest. This marks the first increase in existing home sales in five months and signals continued high levels of home buyer demand. The increase in June kept the pace of existing home sales above pre-pandemic levels; however, lack of supply and rising prices have hindered overall sales growth over the past few months. The report showed the average price for a home was up 23.4 percent year-over-year, while the number of existing homes for sale was down 18.8 percent. Given the supply constraints, the growth in June is an encouraging sign that home buyer demand remains strong and continues to drive the housing market growth we’ve seen since the start of the pandemic.

Source: Bloomberg, as of July 23, 2021

Source: Morningstar Direct, as of July 23, 2021

What to Look Forward To
On Tuesday, the preliminary estimate of the June durable goods orders report is set to be released. Durable goods orders are expected to increase by 2.1 percent during the month, following a 2.3 percent increase in May. Core durable goods orders, which strip out the impact of volatile transportation orders, are expected to increase by 0.8 percent during the month. If estimates hold, this would mark four straight months with core durable goods orders growth, which would be a good sign for business spending and investment in the second quarter. Businesses have ramped up spending ever since the end of initial lockdowns last year, and durable goods orders have surpassed pre-pandemic levels. Business confidence has remained well above pre-pandemic levels for most of the year, which has helped support increased spending. Given the continued reopening efforts and high levels of business confidence, further growth for durable goods orders is expected in the months ahead, as long as the economic recovery continues.

Tuesday will also see the release of the Conference Board Consumer Confidence Index for July. Economists expect to see the index decline from 127.3 in June to 124.3 in July, which would mirror a similar decline in the University of Michigan consumer sentiment survey that was released earlier in the month. Consumers cited rising prices for big-ticket items (e.g., houses and cars) as the primary cause for the decline in sentiment that we saw in the University of Michigan survey. While confidence has rebounded well past the pandemic-era lows that we saw during initial lockdowns last year, concerns about inflation and the Delta variant could weigh on sentiment in the short term. Historically, higher levels of consumer confidence have helped support faster consumer spending growth. As such, the anticipated decline in confidence during the month will be worth monitoring, especially if we continue to see further declines in the months ahead.

On Wednesday, the Federal Open Market Committee rate decision from the Federal Reserve’s (Fed’s) July meeting is set to be released. The Fed cut rates to virtually zero last year in response to the pandemic, and economists do not anticipate any rate changes until 2023 at the earliest. Given the lack of anticipated changes to interest rates, the focus will largely be on the Fed’s press release, as well as Fed Chair Jerome Powell’s post-meeting press conference. The Fed is currently purchasing $120 billion in Treasury and mortgage-backed securities per month, and economists will be looking for any hints about the central bank’s plan to potentially start tapering these asset purchases. So far, the Fed has not set any timetable on when it may start to taper purchases. But given the fact that a tapering could affect markets and cause short-term volatility, any mention of changes to the asset-buying program will be closely examined. Ultimately, the Fed is expected to keep policy supportive at this meeting. Any surprises could negatively affect markets; therefore, this will be a widely monitored release.

On Thursday, the advance report of annualized gross domestic product growth in the second quarter is set to be released. Economists are anticipating that the economy grew at an annualized rate of 8.4 percent during the quarter, which would be a step up from the 6.4 percent annualized growth rate that we saw in the first quarter. Personal consumption is expected to be the major driver of overall growth during the second quarter, with economists calling for a 10.5 percent annualized increase in consumption during the quarter. If estimates hold, this would be a slight decline in the pace of personal consumption growth from the first quarter, but it would still represent a very strong quarter for consumption growth on a historical basis. Personal consumption growth was supported by the most recent federal stimulus bill that provided checks to individuals near the start of the quarter. Overall, this report is expected to show that the economic recovery remained largely on track to finish out the first half of the year.

Thursday will also see the release of the initial jobless claims report for the week ending July 24. Economists expect to see the number of initial unemployment claims decline from 419,000 to 380,000 during the week. Given the surprising increase in initial claims the week before, this will be a widely monitored report, giving economists a better idea into whether the recent rise in claims noise in the data or the start of a new upward trend was just driven by rising health risks. While this data can be volatile on a week-to-week basis, the trend has largely been downward throughout the course of the year. If the estimates hold, it would be an encouraging sign that the labor market recovery remains on track. Given the importance of the labor market recovery on the overall economic recovery, a return to declining initial claims during the week would be a positive signal for the health of the overall economy.

We’ll finish the week with Friday’s release of the personal income and personal spending reports for June. Spending is expected to increase by 0.6 percent during the month, following a flat result in May. Spending growth has been relatively strong throughout the year, as reopening efforts and federal stimulus payments have helped support increased spending growth. Personal income is expected to decline by 0.6 percent during the month, following a 2 percent drop in May. Personal income has been very volatile on a month-to-month basis throughout the pandemic and recovery, as shifting federal stimulus payments have led to large monthly swings in income growth. This was highlighted in March, when another round of federal stimulus checks caused personal income to increase by a record 20.9 percent during the month. Given the high levels of consumer saving that we’ve seen throughout the pandemic and the continued economic recovery, economists expect to see continued spending growth in the months ahead, even if incomes remain volatile on a month-to-month basis.

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. Basis points (bps) is a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 1/100th of 1 percent, or 0.01 percent.

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 yields rebounded modestly last week before a sharp sell-off cratered yields on Monday morning. The 10-year lost 14 basis points (bps) week-over-week to open at around 1.2 percent, its lowest level since early February of this year. The 30-year shed 15 bps to open around 1.83 percent early Monday. Shorter-dated bonds saw smaller adjustments but still moved lower, as the 5-year yield lost 7 bps to open at about 0.72 percent and the 2-year lost 2 bps to open at around 0.2 percent. The latest moves mark a renewed fear of virus variants and questions about economic growth in the near term.
• U.S. markets sold off last week; small-caps and the Nasdaq Composite were the hardest hit. Small-caps sold off as bond yields continued their recent slide and inflation expectations dropped. The result was a challenging environment for both oil and financials, which were among the worst performers on the week and make up roughly 19 percent of the Russell 2000 Index. Oil posted its largest weekly loss since September 2020 as investors seemed to agree with the Federal Reserve (Fed) that inflation will be transitory as commodities such as lumber roll over. The Nasdaq was pulled down by its weight in names such as Amazon (AMZN), NVIDIA (NVDA), Facebook (FB), and Tesla (TSLA), which all lost at least 1.9 percent for the week. The top-performing space was emerging markets, which was supported by China’s reported second-quarter growth of 7.9 percent, as well as a recovery in its stock market after recent tensions with the U.S. The top-performing major U.S. index was the Dow Jones Industrial Average (DJIA), which benefited from investors’ move to defensive sectors such as utilities, consumer staples, and real estate.
• On Tuesday, the Consumer Price Index for June was released. Consumer prices rose faster than expected, with headline consumer prices up 0.9 percent in June against expectations for a 0.5 percent increase. Consumer inflation increased by 5.4 percent year-over-year, which was higher than economist estimates for 4.9 percent. The report showed that food, energy, and housing prices all showed noted gains during the month, but inflation was widespread across most sectors. Core consumer prices, which strip out the impact of volatile food and energy prices, increased by 0.9 percent during the month and 4.5 percent year-over-year. Some of the year-over-year growth is due to base effect comparisons to last summer when the pandemic weighed on price growth. Consumer prices have seen upward pressure over the past few months, however, due to high levels of demand and slim business inventories.
• Wednesday saw the release of the Producer Price Index for June. Producer prices also rose by more than expected, with headline producer prices increasing by 1 percent against calls for a more modest 0.6 percent increase. On a year-over-year basis, producer prices rose by 7.3 percent, which was higher than the 6.7 percent increase that was expected. Core producer prices, which strip out food and energy prices, also increased by 1 percent during the month and 5.6 percent year-over-year. As was the case with consumer prices, producer inflation was widespread and seen in most sectors. Producers have had to contend with rising material costs and tangled global supply chains, and recently, rising labor costs have also started to contribute to rising inflationary pressure. Fed members continue to reiterate the view that inflation is largely a product of the economic recovery and will ultimately prove to be transitory. Rising inflation remains a risk that market participants are closely monitoring, however.
• On Friday, the June retail sales report was released. Retail sales rose by 0.6 percent against forecasts for a 0.3 percent decline. This better-than-expected result was broad-based, as sales increased across a variety of sectors. Restaurant, clothing, and appliance sales were notably strong, as consumers continued to show pent-up demand. While most sectors saw increased sales, auto sales fell, driven by the low supply of cars for sale and rising prices. Core retail sales, which strip out the impact of volatile auto and gas sales, increased by 1.1 percent, easily surpassing the 0.5 percent increase that was expected. Retail sales have been supported this year by the improvements on the public health front and the associated nationwide reopening efforts, along with the tailwind provided by additional federal stimulus payments. Looking forward, economists expect to see further growth as the economic recovery continues.
• We finished the week with Friday’s release of the preliminary estimate of the University of Michigan Consumer Sentiment survey for July. This report showed that confidence surprisingly dropped, falling from 85.5 in June to 80.8 in July, against calls for an increase up to 86.5. This disappointing result brought the index to its lowest level since February and signaled growing consumer concern. Rising prices were cited as the primary cause for the decline in confidence as rising costs for big-ticket items such as cars and houses weighed on consumer sentiment. Expectations for inflation over the next year increased up to 4.8 percent, which is the highest level since 2008. Ultimately, this report served as a reminder that there is still a lot of work to be done to get economic activity back to pre-pandemic levels.

Source: Bloomberg, as of July 16, 2021

Source: Morningstar Direct, as of July 16, 2021

What to Look Forward To

Monday saw the release of the National Association of Home Builders Housing Market Index for July. Home builder confidence slipped slightly during the month, with the index falling from 81 in June to 80 in July, against calls for an increase up to 82. This report marks two consecutive months with declining home builder confidence, although the index remains above pre-pandemic levels. Additionally, this is a diffusion index, where values above 50 indicate expansion, so this report signals that home builders have continued to build in earnest. The housing market has benefited from record-low mortgage rates and high levels of prospective home buyer demand ever since initial lockdowns were lifted last year. Nonetheless, rising material and labor costs have recently started to weigh on home builder sentiment. Still, despite the headwinds created by rising construction costs, high levels of prospective home buyer demand and low inventory of homes for sale should support healthy levels of home builder confidence and new home construction in the months ahead.

On Tuesday, the June building permits and housing starts reports are set to be released. These two measures of new home construction are expected to show growth during the month. Permits and starts are set to rise by 1 percent and 1.2 percent, respectively, if estimates hold. As these results would bring the pace of new home construction well above pre-pandemic levels, they would be seen as a positive sign for the overall housing industry. Given the lack of available homes for sale and the high levels of home builder confidence in June, we may see the pace of construction improve by more than expected. Falling timber prices may serve as an additional tailwind for construction growth, and home builders have a large backlog of homes permitted for construction but not yet started. Looking forward, lack of supply is expected to be the main challenge for the housing market, so any improvement in the pace of construction would be seen positively.

Thursday will see the release of the initial jobless claims report for the week ending on July 17. Economists expect to see 350,000 initial unemployment claims filed during the week, marking an improvement from the 360,000 initial claims filed the week before and a new pandemic-era low. The anticipated result would also bring the four-week moving average of claims to a new low. Still, although we’ve seen steady progress in getting initial layoffs down over the course of the year, work remains to be done to return to pre-pandemic levels. Throughout 2019, weekly initial jobless claims averaged roughly 220,000 per week. Ultimately, the overall pace and path of the economic recovery will likely depend on the speed of the labor market recovery. Accordingly, this weekly release will continue to be closely monitored, as it provides an up-to-date look into the ongoing recovery.

We’ll finish the week with Thursday’s release of the June existing home sales report. Home sales are expected to increase by 1.7 percent, following a 0.9 percent decline in May. If estimates prove accurate, this report will break a fourth-month streak of declining sales and keep the pace of sales well above pre-pandemic levels. Housing sales rebounded impressively once initial lockdowns were lifted last year, driven in large part by record-low mortgage rates and shifting home buyer preferences due to the pandemic. Throughout much of this year, however, we have seen the pace of sales slow due to a lack of homes available for sale and rising prices. Looking forward, the supply constraints are expected to serve as a headwind for significantly higher levels of existing home sales. If, however, sales stay near current levels, they would represent an improvement compared with pre-pandemic data and demonstrate the continued strength of buyer demand.

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. Basis points (bps) is a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 1/100th of 1 percent, or 0.01 percent.

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
Equity markets rallied in June, which capped off a positive month and quarter for all three major U.S. indices. Both the S&P 500 and Nasdaq Composite hit record highs in June before pulling back slightly toward month-end. The S&P 500 gained 2.33 percent in June and 8.55 percent for the quarter. The Nasdaq rose by 5.55 percent during the month and 9.68 percent for the quarter. The Dow Jones Industrial Average was held back by poor results from a few constituents during the month, but it managed to gain 0.02 percent in June and 5.08 percent for the quarter.

These strong results coincided with improved fundamentals. According to Bloomberg Intelligence, as of June 25, the expected second-quarter earnings growth rate for the S&P 500 is 59.2 percent. This follows a 45.8 percent year-over-year increase in earnings in the first quarter. While part of the large year-over-year growth can be attributed to comparisons to last year’s lockdown-influenced earnings, we saw better-than-expected earnings growth in the first quarter and positive revisions in the second quarter. The anticipated further growth is a positive sign for markets, as fundamentals ultimately drive long-term performance.

Technical factors were also supportive for markets during the month and quarter. All three major U.S. indices remained well above their respective 200-day moving average throughout the period. This marks 12 straight months where the indices have ended above trend. Prolonged breaks above or below the 200-day moving average can signal a shift in investor sentiment for an index. So, the continued technical support was a positive sign for U.S. equity markets.

International markets also saw solid results for the quarter. Some volatility in June held back overall performance compared with the U.S., however. The MSCI EAFE Index declined by 1.13 percent during the month, but it managed to return a respectable 5.17 percent for the quarter. The MSCI Emerging Markets Index held up a bit better with a 0.21 percent increase in June that contributed to a 5.12 percent gain for the quarter. Both indices were well supported technically, spending the entire period above their respective trend lines.

Even fixed income had a strong second quarter, as declining long-term interest rates helped support fixed income markets. The 10-year U.S. Treasury yield ended the quarter at 1.45 percent, which was down from 1.69 percent at the start of the quarter. The Bloomberg Barclays U.S. Aggregate Bond Index gained 0.70 percent in June and 1.83 percent in the second quarter. High-yield fixed income, which is typically less tied to changes in interest rates, also saw gains during the month and quarter. The Bloomberg Barclays U.S. Corporate High Yield Bond Index increased by 1.34 percent in June and 2.74 percent during the quarter. High-yield spreads declined throughout the quarter, as investors continued to favor higher-yielding, riskier securities.

Pandemic’s Economic Impact Fades
Although the pandemic continues as an ongoing medical risk, from an economic and market perspective, the worst appears to be behind us. We made steady progress throughout the month and quarter in containing the spread of the coronavirus, with continued vaccine progress driving much of the improvement.

The number of new daily cases fell to its lowest point since the start of the pandemic by the end of June, and we saw similar progress with hospitalizations and deaths throughout the quarter. While concerns remain about localized outbreaks, the high vaccination rates throughout the country make another national outbreak unlikely. We ended the quarter with more than half of the country having received at least one vaccine shot, and more than 46 percent of Americans have now been fully vaccinated.

The big risk as we close out the first half of the year remains the introduction of more contagious versions of the virus, notably the Delta variant. As that spreads, especially in areas with lower vaccination rates, there is the potential for medical risks to rise in the future, but for the time being, they remain largely contained.

Economic Recovery Picks Up Steam
The progress on the medical front allowed for continued reopening efforts, and we finished the quarter with almost all of the country open again. This helped support a faster economic recovery, as we saw job growth accelerate in May after a lull in April. Layoffs declined in June while job openings continued to grow. In a positive sign for the labor market recovery, we ended the month with layoffs at their lowest weekly level since the start of the pandemic.

Consumer confidence and spending also showed signs of improvement during the month and quarter, with both now sitting back near pre-pandemic levels. The improvement was especially impressive for consumer confidence. As you can see in Figure 1, the Conference Board Consumer Confidence Index hit a 16-month high in June and now sits near pre-pandemic highs. The strong level of consumer confidence is expected to help support faster consumer spending growth in the months ahead, which, in turn, should help support the continued economic recovery.

Figure 1. Conference Board Consumer Confidence, 2011–Present

Businesses also showed signs of faster growth throughout the quarter, driven by high levels of consumer demand and the easing of state and local restrictions. Service sector confidence increased to a record high in May, and we saw similar improvements for manufacturer confidence. The Institute for Supply Management Composite index, which combines service sector and manufacturer confidence, remains well above pre-pandemic levels. High levels of business confidence supported healthy business spending and hiring throughout the month and quarter, which is expected to continue into the months ahead.

Risks Remain Despite Progress
Despite the continued progress, there are some areas of concern. On the medical side, the Delta variant and slowing vaccination rates pushed off the likely date of herd immunity and raised the chances of medical disruptions. On the economic side, the problems were more immediate and largely generated by the success of the recovery so far. Labor shortages are becoming a concern as people hesitate before returning to work, which has driven wages higher. Similarly, gaps in supply chains have pushed material costs up. Between these two factors, both producer and consumer prices have seen upward pressure, resulting in fears about inflation.

Another area of concern is the housing sector, which showed signs of stress during the month. Rising home prices served as a headwind for faster sales growth in May, as high levels of home buyer demand and low supply of homes for sale caused sales of existing homes to decline for the fourth month in a row. Up until recently, housing had been one of the bright spots in the economic recovery, as low mortgage rates and shifting home buyer preferences due to the pandemic supported a surge in demand. Looking forward, the low inventory of homes for sale and rising prices may hold back the pace of overall sales growth. But if sales remain near current levels, it would still signal an improvement compared with the pace of pre-pandemic home sales.

Finally, political risks remain and should be recognized. Domestically, all eyes are on Washington, where negotiations around a potential infrastructure bill continue in earnest. Any additional stimulus spending would likely be seen as a tailwind for the economic recovery, but the size and scope of any new spending remain uncertain. Internationally, risks remain as well, especially in countries that have not made as much progress as the U.S. with the pandemic.

These problems, however, are largely symptoms of the recovery so far here in the U.S. and are being solved as we speak. Despite them, we ended the month with both the medical news and the economy in the best place since the start of the pandemic. But while the path forward looks bright, it also remains uncertain, which could lead to market volatility in the months ahead. Given that, a well-diversified portfolio that matches investor goals and timelines remains the best path forward for most. If concerns remain, reach out to your advisor to discuss your financial plan.

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.
© 2020 Commonwealth Financial Network ®