Presented by Mark Gallagher

General Market News
• Although August is an off month for Federal Open Market Committee (FOMC) meetings, Federal Reserve (Fed) Chair Jerome Powell still had an opportunity to provide forward guidance and steer the markets through his much-anticipated appearance at the annual Economic Symposium in Jackson Hole, WY last week. Powell took a strongly hawkish tone; he made it clear that more rate hikes are coming and fighting inflation is his top priority despite the pain that many households will likely experience as a result. This comes as the Chicago Fed’s National Financial Conditions Index (NFCI) pointed to loosening economic conditions in most of July and August, which is a trend the Fed is eager to put into reverse—especially after already hiking rates by a historic 75 basis points (bps) at the past two FOMC meetings. From here, markets will look toward the Fed’s September meeting for the next rate hike and additional economic guidance as we near the final quarter of 2022. U.S. Treasury yields were up across the curve last week. The 2-year, 5-year, 10-year, and 30-year rose 9 bps (to 3.38 percent), 8 bps (to 3.19 percent), 11 bps (to 3.07 percent), and 8 bps (to 3.28 percent), respectively.
• Equity markets sold off heavily last week as the Fed took center stage at the Jackson Hole retreat. Most of the selloff came on Friday following Powell’s comments regarding rate hikes to push inflation toward the Fed’s long-term target of two percent over the economic cycle. While this move was expected, the Chairman’s live press conference surprised many investors. As a result, several sectors, including technology, consumer discretionary, and industrials, reversed course despite performing well during the recent rally. Sectors that held up better were those that benefit from sustained inflation, such as energy, materials, utilities, and real estate. Future employment reports and inflation reports will be closely monitored as the Fed continues to drive demand back down to hit its target.
• On Wednesday, the preliminary July durable goods orders report was released. Headline durable goods orders growth came in below expectations, with the report showing that orders were unchanged against calls for a 0.8 percent increase. This miss was due to a slowdown in volatile transportation orders during the month. Core durable goods orders, which strip out the impact of transportation, increased 0.3 percent against calls for a 0.2 percent rise. Core durable goods orders are often viewed as a proxy for business investment, so this solid result signaled continued business spending.
• On Friday, the personal income and personal spending reports for July were released. Personal income increased 0.2 percent against calls for a 0.6 percent increase. This was the 10th consecutive month with income growth, and, though the increase in July came in below expectations, this was still a positive result. Spending also failed to meet expectations, with the report showing a 0.1 percent increase against calls for a 0.5 percent rise. This follows a 1 percent rise in spending in June and marks seven consecutive months with increased spending. Overall, these reports showed that consumers were still willing and able to spend during the month, which was a good sign for overall economic growth.

Source: Bloomberg, as of August 19, 2022

Source: Morningstar Direct, as of August 19, 2022

What to Look Forward To
On Tuesday, the Conference Board Consumer Confidence Index for August is set to be released. Economists expect confidence to increase modestly during the month, with the index set to rise from 95.7 in July to 97.4. If estimates hold, this would end a streak of three consecutive months with declining confidence. Despite the anticipated improvement for the index, it is expected to remain well below the pandemic-era high of 128.9 from June 2021. It’s likely we’ll need to see a continued slowdown in inflationary pressure before the index can recover to recent highs.

Friday will see the release of the August employment report. Economists expect to see that 300,000 jobs were added during the month after beating expectations in July with 528,000 jobs added. If estimates hold, this would represent a strong month of job growth on a historical basis and could support Fed plans for tighter monetary policy at the central bank’s September 21 meeting. The underlying data is expected to show signs of a strong labor market; the unemployment rate is set to remain unchanged at 3.5 percent, while average hourly earnings growth is expected to slow modestly.

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 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 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 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. 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.
© 2022 Commonwealth Financial Network®

Presented by Mark Gallagher

General Market News
• Last week’s inflation reports showed encouraging signs of softening, but the Federal Reserve (Fed) is still far from out of the woods and is looking for much stronger signs of moderation. For July, the Producer Price Index (PPI) fell 0.5 percent (against market estimates of a 0.2 percent increase) and the Consumer Price Index (CPI) showed a price increase of 8.5 percent on a headline basis (against market estimates of an 8.7 percent increase). Despite these mildly positive signs, there is still plenty of work to be done and many market participants expect the Fed to consider a 50 or 75 basis point (bp) rate hike at the September FOMC meeting. The U.S. Treasury yield curve saw modest changes last week. The 2-year and 30-year fell 1 bp (to 3.2 percent) and 3 bps (to 3.13 percent), respectively, while the 5-year and 10-year rose 6 bps (to 2.97 percent) and 8 bps (to 2.86 percent), respectively.
• Equity markets rallied last week as both consumer and producer inflation came in lower than expected, offering the first sign of relief from rising prices since the second quarter of 2021. While inflation remains well above long-term norms, this represents the first hint of potential easing moving forward. It’s important to note that a main contributor to the inflation report was a monthly decline in fuel prices, which are more volatile than items such as housing and impact the inflation data on a lag. Despite the softer data on inflation, performance was mixed. Sectors sensitive to inflation, such as energy, financials, materials, and REITs, were among the best performers. Consumer staples and health care were among the worst performers. This week will see numerous reports from retailers such as Walmart (WMT), Home Depot (HD), Lowes (LOW) TJX Companies (TJX), Target (TGT), Estee Lauder (EL), and Ross Stores (ROST).
• On Wednesday, the July Consumer Price Index report was released. Consumer inflation came in below expectations, with headline prices remaining unchanged in July against calls for a 0.2 percent increase. On a year-over-year basis, consumer prices were up 8.5 percent, below the 9.1 percent increase in June and economist estimates for an 8.7 percent rise. Much of the slowdown in headline prices was due to falling gas prices; however, even core inflation showed signs of moderating. Core consumer prices, which strip out energy and food prices, increased 0.3 percent, well below the 0.7 percent increase in June and economist estimates for a 0.5 percent rise.
• Thursday saw the release of the July Producer Price Index report. Producer prices also showed signs of slowing inflation. Headline producer prices fell 0.5 percent against calls for a 0.2 percent increase, marking the first monthly decline for producer prices in more than two years. Producer inflation cooled on a year-over-year basis, too. Core producer prices, which strip out volatile energy and food prices, increased 0.2 percent during the month and 7.6 percent year-over-year, failing to meet economist estimates. All in all, the two inflation reports showed positive signs of cooling inflationary pressure, but it’s likely the Fed will want to see continued evidence of slowing inflation.

Source: Bloomberg, as of August 12, 2022

Source: Morningstar Direct, as of August 12, 2022

What to Look Forward To
On Wednesday, the FOMC meeting minutes from the Fed’s July meeting will be released. The Fed hiked the federal funds rate by 75 bps at that meeting, and economists and investors will monitor the minutes for hints about future Fed plans. Although strong job growth and cooling inflationary pressure in July were encouraging, the central bank is still expected to tighten monetary policy throughout the rest of the year. Markets are pricing in a rate hike of 50 bps at the Fed’s next meeting on September 21, with additional hikes expected in November and December.

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 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 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 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. 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.

© 2022 Commonwealth Financial Network®

Presented by Mark Gallagher

General Market News
• The Federal Reserve (Fed) raised interest rates by another 75 basis points (bps) at last week’s FOMC meeting, bringing its target range to 2.25 percent to 2.50 percent. Inflation remains stubbornly high and conversation among market participants is becoming increasingly focused on the timing—rather than the likelihood—of a potential recession. Some believe the U.S. may already be in a recession after seeing two quarters of economic contraction as measured by gross domestic product (GDP). Others, including Fed Bank of Atlanta President Raphael Bostic, maintain hope that such a development can still be avoided if the job market remains robust. “I don’t think the country is in a recession,” Mr. Bostic said on NPR. “One of the things that I’ve been encouraged by is actually how strong the job growth has been, which suggests to me there’s a lot of momentum in the economy.” He added, “There’s a lot of demand out there, and so I think we’re a ways away from a recession.” The U.S. Treasury yield curve saw some inversion last week. Treasury yields fell on the short to intermediate end of the curve with the 2-year, 5-year, and 10-year down 6 bps (to 3 percent), 11 bps (to 2.73 percent), and 4 bps (to 2.71 percent), respectively. The 30-year, however, was up 8 bps (to 3.06 percent).
• Equity markets rallied last week, supported by seemingly dovish Fed speak from FOMC Chairman Jerome Powell and better-than-expected second-quarter earnings reports from Apple (AAPL) and Amazon (AMZN). In recent months, we’ve heard from companies such as Micron (MU), Qualcomm (QCOM), and Apple about the impact of lockdowns in China on sales and parts availability. In April, Apple said it expected a $4 billion–$8 billion revenue hit during the second quarter. The hit was smaller than expected, with the company beating revenue and gaining 3 percent in iPhone revenue growth year-over-year. Amazon’s earnings were bolstered by better-than-expected performance from its cloud and advertising segments. Cost cuts on the fulfillment side also showed the company’s ability to adapt following massive e-commerce demand during the Covid-19 pandemic. While these two FAANG names helped ease broader growth, the biggest news last week was the 75 bps rate hike at the July meeting. Powell highlighted the need for the Fed to remain data dependent during the post-meeting press conference, which was seen as an easing from prior discussion about crushing inflation. This commentary led market participants to believe we may be close to the end of a Fed rate hike cycle, with the bond market pricing in cuts to the federal funds rate in March of 2023.
• On Wednesday, the FOMC rate decision from the Fed’s July meeting was released. The Fed hiked the upper limit for the federal funds rate by 75 bps, raising the target from 1.75 percent to 2.5 percent. This action, the central bank’s second consecutive 75 bps hike, designed to slow the pace of the economy and combat inflation, was widely expected by markets and economists. Looking ahead, the Fed is expected to continue to tighten monetary policy throughout the year; however, the pace of future rate hikes will be highly dependent on July and August inflation and jobs reports.
• On Thursday, the advance estimate for annualized second-quarter GDP growth was released. The report showed that the economy contracted at an annualized rate of 0.9 percent, which was worse than the consensus 0.4 percent increase that was expected. This marks two consecutive quarters with economic contraction, though this slowdown in growth is not expected to slow the Fed’s tightening plans, given still-high levels of inflation throughout the economy. Personal consumption continued to show modest growth during the quarter, with consumption up 1 percent on an annualized basis against forecasts for a 1.2 percent increase.

Source: Bloomberg, as of July 29, 2022

Source: Morningstar Direct, as of July 29, 2022

What to Look Forward To
On Friday, the July employment report is set to be released. Economists expect to see that 250,000 jobs were added, far fewer than the 372,000 that were added in June but still strong on a historical basis. The unemployment rate is expected to remain unchanged at 3.6 percent for the fifth consecutive month, which would tie the post-pandemic low. If estimates hold, this report would signal continued solid growth for the labor market, which, in turn, could help support the Fed’s efforts to tighten monetary policy to rein in inflation in the months ahead.

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 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 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 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. 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.

© 2022 Commonwealth Financial Network®