Presented by Mark Gallagher

Solid July for Markets
July was a positive month for most markets despite rising medical risks. The three major U.S. indices saw all-time highs as the Nasdaq Composite gained 1.19 percent, the Dow Jones Industrial Average notched a 1.34 percent gain, and the S&P 500 led the way with a 2.38 percent return.

These positive returns coincided with more good news on the earnings front. According to Bloomberg Intelligence as of July 30, the second-quarter blended earnings growth rate for the S&P 500 was 89 percent (with 59 percent of companies reporting results). This year-over-year growth compares to when initial lockdowns suppressed earnings last year, but the current rate is higher than analyst estimates of a 65.9 percent increase at the start of earnings seasons. Better-than-expected earnings growth has been widespread across every sector in the index. Fundamentals drive long-term performance, so continued growth is a good sign for markets.

Technical factors also supported domestic markets as all three indices remained above their respective 200-day moving averages for the 13th consecutive month. Prolonged breaks above or below the 200-day moving average can indicate shifting investor sentiment for an index; this continued technical support is an encouraging sign that despite medical risks, investors remain confident in the ongoing economic recovery in the U.S.

Although performance was generally solid across domestic markets, the story was mixed on the international side. The MSCI EAFE Index experienced some volatility but was able to manage a 0.75 percent gain for the month. Rising medical risks due to the Delta variant spooked emerging investors; the MSCI Emerging Markets Index ended July down by 6.67 percent.

From a technical perspective, the MSCI EAFE Index remained well above its 200-day moving average throughout the month, marking nine straight months with continued technical support for developed international markets. The MSCI Emerging Markets Index fell midway through the month, ending below its trend line and breaking a 12-month streak of finishing above the 200-day moving average. This could be a sign of more risk for emerging markets going forward.

Fixed income markets also had a strong July as falling interest rates caused bond prices to rise. The 10-year U.S. Treasury yield fell from 1.48 percent at the start of the month to 1.24 percent at month-end. This marks the lowest month-end level for the 10-year yield since January as rising concerns about the Delta variant led some investors to seek the relative safety of fixed income. The Bloomberg Barclays U.S. Aggregate Bond Index ended the month with a 1.12 percent gain.

High-yield fixed income—typically less tied to interest rate movements—had a slightly muted month, with the Bloomberg Barclays U.S. Corporate High Yield Index increasing by 0.38 percent. High-yield credit spreads widened modestly during the month, a sign that investors were becoming slightly more cautious.

Medical Risks Rising but Still Contained
Despite noted progress on the public health front throughout most of the year, medical risks increased in July, driven in large part by the Delta variant. This more contagious form of the novel coronavirus led to more infections throughout the month as the average number of daily new cases grew by roughly five times in July. We’ve also seen a concerning upsurge in the amount of COVID-related hospitalizations, with the total number of hospitalized patients reaching a five-month high.

While overall numbers have deteriorated, so far case numbers are concentrated in a handful of states. The majority of the country still has the virus largely under control, which should limit the national impact. Behaviors such as seeking vaccinations and mask wearing—as we saw in previous waves—are becoming more prevalent in many areas, and there are signs the increase may be slowing. This is something we need to watch closely, but the most likely course of events is for the resurgence to once again be brought under control.

Economic Recovery Slowing but Solid
Although medical risks certainly rose during the month, the impact of those risks on the economic recovery is likely to be muted compared with last spring. With outbreaks limited by area, nationwide shutdowns appear unnecessary; even localized shutdowns in the most affected areas remain unlikely. In the absence of such shutdowns, the economy will remain open and growing.

Even though growth is likely to continue, there are signs it may be slowing. Labor market recovery has decelerated as layoffs remained stubbornly high in July and started to climb toward month-end following previous improvements. We’ve also seen business confidence pull back from record-high levels earlier in the year as rising uncertainty weighed on business owners.

Despite some data deterioration, however, the economy still has substantial momentum and continued growth remains the most likely path forward. Consumer confidence remains very strong despite rising medical risks, with the Conference Board Consumer Confidence Index increasing by more than expected in July. This result brought the overall level of consumer confidence in line with pre-pandemic levels, which should help support continued consumer spending growth following better-than-expected boosts for both retail sales and personal spending in June. Given the importance of consumer spending on the overall economy, the continually high level of consumer confidence and spending growth is a good sign for the pace of economic recovery.

Also encouraging is business confidence—while below recent highs, it’s still at very healthy levels, which should support continued business spending and investment. As you can see in Figure 1, the total level of durable goods orders has recovered past pre-pandemic levels, indicating a healthy recovery for business spending since the expiration of initial lockdowns last year.

Figure 1. Durable Goods Orders, 2010–Present

The fundamentals are still positive as both consumers and businesses remain confident—and spending—despite rising risks. As long as most of the country remains open, growth should continue even if we do see some slowing.

Rising Risks Indicate Caution Is Warranted
Despite rising medical risks, we are still in a much better place as a country on both the public health and economic fronts than we were even a couple of months ago. That said, July also reminds us that real risks to recovery remain. Though the spike in medical risks during the month has not yet caused significant economic or market impact, those risks should be closely monitored. The key question looking forward will be whether rising localized infection rates lead to another national wave of infection growth. It does represent a very real risk to acknowledge and watch, however unlikely it currently appears.

Aside from rising medical risks, we have normal risks as well. Continued negotiations on the size and scope of the potential infrastructure deal from Washington have caused uncertainty. Looming in the near future is the fact that Congress needs to address the federal debt limit, which could lead to a potential government shutdown as early as October. These political risks are not necessarily immediate concerns; however, uncertainty has the potential to weigh on investors and markets in the months ahead.

While these and other risks may prompt increased ambiguity and instability in the months ahead, it’s important to focus on the bigger picture over a long-term horizon. A well-diversified portfolio that matches goals and timelines remains the best path forward for most investors. If you have concerns, reach out to your financial advisor to review 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 ®

Presented by Mark Gallagher

General Market News
• Treasury yields moved slightly lower across the curve week-over-week. The 10-year Treasury yield slid about 7 basis points (bps) to open near 1.21 percent. The 2-year fell roughly 2 bps to 0.17 percent, the 5-year dropped approximately 5 bps to 0.67 percent, and the 30-year shed 5 bps to about 1.89 percent. Investors are in a holding pattern after last week’s Federal Reserve (Fed) meeting, awaiting guidance on impending monetary policy shifts.
• U.S. equity markets were down as we entered a busy week of earnings, with market giants Tesla, Apple, Microsoft, Google, Facebook, and Amazon all reporting. Despite each beating expectations by at least 14 percent, several sold off because of peak-growth concerns. Amazon was down 9 percent despite beating earnings estimates by roughly 23 percent; e-commerce sales growth dropped to 16 percent for the quarter, compared with 49 percent last year during the worst of the pandemic. Top-performing sectors included financials, materials, health care, and energy. In addition to consumer discretionary, other underperforming sectors included technology and communication services.
• On Tuesday, the preliminary estimate of the June durable goods orders report was released. Orders increased 0.8 percent, below economist expectations for a 2.2 percent increase. The report also showed that May’s durable goods orders growth was upwardly revised from 2.3 percent to 3.2 percent, so the miss in June against expectations isn’t as bad as it first looks. Core durable goods orders, which strip out the impact of volatile transportation orders, increased 0.3 percent following an upwardly revised 0.5 percent increase in June. This marks four straight months with core durable goods orders growth, an encouraging sign for business spending during the second quarter. The continued growth in headline and core orders was especially impressive, given that the overall level of orders has already passed pre-pandemic levels.
• Tuesday also saw the release of the Conference Board Consumer Confidence Index for July. This widely followed measure of consumer confidence increased more than expected, from an upwardly revised 128.9 in June to 129.1 in July against calls for a decline to 123.9. This result brought the index to its highest level since the start of the pandemic. This marks six straight months with improving confidence, as positive developments on the public health front and reopening efforts throughout the first half of the year supported improved sentiment. One area of notable strength in the report was the share of consumers who cited that jobs were plentiful, reaching a 21-year high during the month. Overall, this was an encouraging report that signaled continued high levels of consumer confidence, despite rising medical risks from the Delta variant.
• On Wednesday, the Federal Open Market Committee (FOMC) rate decision from the Fed’s July meeting was released. The Fed cut rates to virtually zero last year in response to the pandemic, and there were no changes to rates at this meeting, as expected. The major focus was on the Fed’s news release and Chair Jerome Powell’s post-meeting news conference. The Fed is currently purchasing $120 billion in Treasury and mortgage bonds per month, and it did not change the pace of asset purchases at this meeting. With that being said, the news release noted that the economic recovery has made additional progress toward the Fed’s dual mandate of maximum employment and long-term inflation at 2 percent. Given improving economic fundamentals, economists expect to see further discussion on potential taper timing from upcoming Fed meetings; however, any change to the asset purchasing program is expected to be communicated well in advance to limit potential market volatility.
• On Thursday, the advance report of annualized GDP growth in the second quarter was released. The report showed that the economy grew at an annualized rate of 6.5 percent during the quarter, which was up from the downwardly revised 6.3 percent annualized growth rate we saw in the first quarter but below expectations for an 8.4 percent growth rate. This miss against expectations was primarily due to headwinds from international trade and declining business inventories, which, combined, took roughly 1.5 percent off of the overall growth rate in the second quarter. The silver lining from the report was personal consumption, which increased 11.8 percent on an annualized basis during the quarter against calls for a more modest 10.5 percent growth rate. This represents the second-best quarter for personal consumption growth since 1952 and signals that high levels of consumer saving throughout the pandemic continued to support spending growth during the quarter. Although overall economic growth missed against expectations, strong personal consumption growth is a good sign for the overall health of the economic recovery.
• Friday saw the release of the personal income and personal spending reports for June. Personal spending increased 1 percent against calls for a more modest 0.7 percent increase. The better-than-expected result was driven in large part by increased spending on services, as nationwide reopening efforts allowed consumers to dine out and travel. This marked four straight months with increased service spending, which is an encouraging sign that consumer demand remains robust. Personal income has been very volatile on a month-to-month basis throughout the pandemic and economic recovery, as federal stimulus payments have led to large monthly swings in income growth. Personal income increased 0.1 percent during the month, which was above economist estimates for a 0.3 percent decline. The increase was largely due to rising wage income, which, in turn, was supported by reopening efforts and a short supply of potential workers. Given the high levels of consumer confidence and the continuing economic recovery, spending and income are expected to show continued improvements in the months ahead.

Source: Bloomberg, as of July 30, 2021

Source: Morningstar Direct, as of July 30, 2021

What to Look Forward To
On Monday, the Institute for Supply Management (ISM) Manufacturing index for July was released. This widely monitored gauge of manufacturer confidence declined modestly, falling from 60.6 in June to 59.5 in July against forecasts for an increase to 61. As this is a diffusion index, where values above 50 indicate expansion, the result demonstrates continued strength in manufacturer production despite the miss against expectations. Supply constraints remained a headwind for production growth in July, as order backlogs increased. Rising material costs, tangled supply chains, and labor shortages have negatively affected manufacturers over the past few months. Nonetheless, throughout the year, high levels of consumer demand have supported increased output. In addition, the July report showed a welcome pickup in manufacturing employment, demonstrating that manufacturers succeeded in finding workers to address high levels of consumer demand. Overall, this report was relatively encouraging, signaling continued growth despite the headwinds facing the manufacturing sector.

Wednesday will see the release of the ISM Services index for July. Service sector confidence is expected to show modest improvement, as economist forecasts call for the index to rise from 60.1 in June to 60.5 in July. This is another diffusion index, where values above 50 indicate expansion. So, if estimates hold, the result would demonstrate accelerated growth during the month. The service sector accounts for the lion’s share of economic activity in the U.S., so any improvement for the index would be an encouraging sign for the overall economic recovery. As was the case with manufacturer confidence, service sector confidence has remained in expansionary territory and well above pre-pandemic levels since June of last year. This indicates that businesses across industry sectors remain confident and willing to spend.

On Thursday, the June international trade report is set to be released. Economists expect to see the trade deficit widen from $71.2 billion in May to $73.0 billion in June. If estimates hold, this report would bring the deficit to its second-widest level on record, trailing only the $75 billion deficit recorded in March of this year. The advance report on the trade of goods showed a 0.3 percent increase in goods exports in June, but a 1.5 percent increase in the import of goods was more than enough to offset the modest export growth. High levels of domestic consumer demand have driven a surge in imports throughout the year, which has weighed on overall economic growth. With that said, the continued global economic recovery is expected to serve as a tailwind for further export growth and recovery.

Thursday will also see the release of the initial jobless claims report for the week ending July 31. Economist forecasts call for initial claims to decline from 400,000 the week before to 378,000. If the estimates prove accurate, this report will mark the fewest number of initial claims in three weeks. It would also bring the number of claims close to the post-pandemic low of 368,000 set during the week ending July 9. Still, though notable progress has been made in reducing claims, compared with data from earlier in the year, the pace of improvement slowed in June and July. Concerns about the Delta variant of the coronavirus may be playing a part in the slowdown. But, given the volatile nature of weekly initial unemployment claims, it’s too early to tell if rising medical risks have negatively affected the labor market recovery. If claims decline to end July, this report will indicate that the labor market recovery continues.

Speaking of the labor market recovery, we’ll finish the week with Friday’s release of the July employment report. Economists expect to see 900,000 jobs added during the month, a step up from the 850,000 jobs added in June. If estimates hold, this report would represent the greatest number of jobs added during a month since August 2020. It would also mark seven straight months of job growth. Following accelerated hiring in June, growth in July would be an encouraging sign that reopening efforts are continuing to boost the labor market. The underlying data should also improve for the month. The unemployment rate is set to fall from 5.9 percent in June to 5.6 percent in July, and year-over-year growth for average hourly earnings should increase from 3.6 percent to 3.9 percent. If estimates prove accurate, they would signal that the labor market recovery continued to pick up steam to start the second half of the year.

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. 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 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.
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