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 ®

Presented by Mark Gallagher

General Market News
• With future inflation expectations abated and investors returning to bonds, longer-term Treasury yields flattened last week. The 10-year Treasury yield dropped 9.7 basis points (bps) from last week’s open, starting at 1.46 percent Monday morning. The 30-year yield fell 8.5 bps week-over-week, opening at 2.15 percent. On the shorter end of the curve, the 2-year opened at 0.15 percent, up slightly from the previous week.
• Markets moved higher last week, with the S&P 500 reaching an all-time high Friday. The Nasdaq Composite led the way as growth sectors, including technology, health care, and consumer discretionary, outperformed. Future inflation concerns eased, with analysts noting that much of the change in core prices for the month was driven by increases in new and used vehicle prices. Consequently, yields fell, which helped growth stocks rise on the prospect of cheaper capital for growth. In addition, the performance of REITs and health care was affected by individual company news: Blackstone acquired QTS Realty for $10 billion as part of a recent wave of REIT merger and acquisition activity. The largest individual stock news was the approval of Aduhelm, an Alzheimer’s drug from Biogen. The approval, the first by the Food and Drug Administration (FDA) of a treatment for Alzheimer’s in 18 years, is controversial because three FDA panel members stepped down after the approval. Underperforming sectors included financials, materials, and industrials. Banks, in particular, were hurt by the drop in yields.
• On Thursday, the Consumer Price Index for May was released. Consumer prices increased more than expected, with headline prices rising 0.6 percent during the month and 5 percent year-over-year. Economist forecasts called for a 0.5 percent increase in prices during the month and 4.7 percent year-over-year growth. Core consumer prices, which strip out the impact of volatile food and energy prices, increased 0.7 percent during the month and 3.8 percent year-over-year. As was the case with headline prices, core prices increased more than expected; forecasts called for a 0.5 percent increase during the month and a 3.5 percent year-over-year increase. For headline and core prices, some of the large year-over-year growth is due to base effect comparisons to last year, when initial lockdowns created deflationary pressure. With that being said, certain consumer goods have seen upward price pressure recently, due in large part to a surge in demand and a lack of available supply. Although Federal Reserve (Fed) members continue to state their case that the recent rise in prices will be transitory, this will be a closely monitored data release in the months ahead.
• We finished the week with Friday’s release of the preliminary estimate of the University of Michigan consumer sentiment survey for June. This widely followed gauge of consumer confidence rose from 82.9 in May to 86.4 in June against calls for a more modest increase to 84.2. This result was driven by improving consumer views on the current situation and future expectations. Consumer confidence reached its second-highest level since the start of the pandemic, trailing only March’s 88.3 reading. Confidence has rebounded well since hitting a lockdown-induced low of 71.8 last April; however, significant work remains to reach the pre-pandemic high of 101 from February 2020. Rising consumer confidence levels typically help support faster consumer spending growth, so this is a good sign for spending reports.

Source: Bloomberg, as of June 11, 2021

Source: Morningstar Direct, as of June 11, 2021

What to Look Forward To
On Tuesday, the May retail sales report is set to be released. Economists expect headline retail sales to fall 0.5 percent after a flat April. The anticipated decline reflects the fading nature of federal stimulus payments. Sales surged 10.7 percent in March, driven in large part by the round of $1,400 checks hitting bank accounts during the month. Core retail sales, which strip out the impact of volatile auto and gas sales, are expected to remain flat in March after a 0.8 percent decline in April. As was the case with headline sales, core retail sales saw a stimulus-induced 8.9 percent increase in March. Although the forecasts for May’s headline and core retail sales are modest, the overall level of sales has already rebounded well past pre-pandemic levels. Accordingly, the continued moderation of sales growth is understandable. Looking forward, additional progress on the mass vaccination front and improving consumer confidence levels may support a return to sales growth.

Tuesday will also see the release of the May Producer Price Index. Economists expect to see producer prices rise 0.4 percent during the month and 6.2 percent year-over-year. Core producer prices, which strip out the impact of volatile food and energy prices, are expected to increase 0.5 percent during the month and 4.8 percent year-over-year. As was the case with consumer prices, part of the anticipated annual rise in producer prices can be attributed to comparisons with last year’s lockdown-affected prices. Producers have seen upward pressure on prices throughout this year, as rising material costs and supply bottlenecks boosted inflationary pressure. In addition, rising labor costs have become a concern for producers. Still, the Fed believes these headwinds will dissipate as we head toward more normal economic conditions.

The third major data release on Tuesday will be the release of the May industrial production report. Production is expected to increase 0.6 percent after a 0.7 percent increase in April. If estimates hold, this report would mark three straight months with increased production after a drop in February attributed to unseasonably cold weather. The rebound in overall industrial production has been supported by increased manufacturing production over the past two months. Manufacturing production is expected to rise 0.7 percent in May, driven by continued high levels of consumer demand. This result would be an improvement from the 0.4 percent increase in April’s manufacturing output. It would also mark three straight months with increased production. Overall, if estimates hold, this report is expected to show steady growth for industrial and manufacturing production, despite headwinds created by rising prices and supply chain constraints.

The final major data release scheduled for Tuesday is the release of the National Association of Home Builders Housing Market Index for June. This measure of home builder confidence is expected to remain steady at 83, marking three consecutive months with no change for the index. (This is a diffusion index, where values above 50 indicate expansion.) The estimated result would be positive, signaling continued high levels of home builder confidence. The index is expected to remain well above the pre-pandemic high of 76 we saw in December 2019. Home builder confidence has been supported throughout the past year by record-low mortgage rates and shifting home buyer demand due to the pandemic. In addition, a lack of supply of homes for sale has boosted builder confidence. Although rising material and labor costs have recently become a headwind for home builder confidence and construction, the housing market should continue to show healthy growth in the months ahead.

Wednesday will see the release of the May building permit and housing starts reports. These measures of new home construction are expected to show mixed results. Permits are expected to decline by 0.2 percent and starts are expected to increase by 5.2 percent. Permits and starts have rebounded well since initial lockdowns were lifted last year. High home builder confidence and low supply of homes for sale have supported the surge in new home constriction over the past year. If estimates hold, permits and starts would come in above pre-pandemic levels, highlighting the improvement for this important sector. Looking forward, rising material and labor costs may serve as a headwind for significantly faster levels of new home construction. Still, if the pace of construction remains near current levels, it would signal a healthy housing market.

Wednesday will also see the release of the Federal Open Market Committee (FOMC) rate decision from the Fed’s June meeting. The Fed cut interest rates to virtually zero last March due to the pandemic, and economists do not anticipate any changes at this meeting. In fact, the Fed has projected that no interest rate hikes will occur until 2023 at the earliest. Accordingly, economists’ focus will be on the news release, as well as Fed Chairman Jerome Powell’s post-meeting news conference. The Fed is currently purchasing $120 billion per month in Treasury and mortgage-backed securities. The meeting may see discussion about when and how the Fed plans to taper these asset purchases going forward. Market participants expect a gradual tapering, but, so far, the Fed has not given any material guidance on such plans. Any mention of this topic has the potential to affect the markets, so this meeting will be widely followed.

We’ll finish the week with Thursday’s release of the initial jobless claims report for the week ending June 12. Economists expect the number of weekly initial unemployment claims to fall from 376,000 to 360,000. If estimates prove accurate, weekly layoffs would sink to their lowest level since the start of the pandemic, marking seven straight weeks with declining claims. This year, following a high of more than 900,000 initial weekly claims set in January, we’ve made solid progress reducing claims. Continued improvements on the public health front and associated reopening efforts across the country have been driving this progress. So, though work remains to return the job market to pre-pandemic levels, the continued improvement for initial claims throughout the year signals we’re on the right path.

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
• The yield curve moved modestly lower again last week as the Federal Reserve (Fed) continued its patient monetary policy. The 10-year Treasury yield opened the week at 1.62 percent and closed more than 4 basis points (bps) lower at 1.58 percent. It opened at 1.63 percent on Tuesday morning. The 30-year opened at 2.33 percent, slightly up from last week’s open of 2.32 percent. On the shorter end of the curve, the 2-year opened at 0.15 percent, 0.6 bps below last week’s open.
• Markets moved higher, with small-caps and the technology-led Nasdaq Composite leading the way. The move in interest rates was the primary driver as cyclical growth sectors, including communication services, consumer discretionary, REITs, industrials, and technology, outperformed. Utilities, health care, and consumer staples were among the worst performers as investors’ appetite for risk increased, with a drop in bond yields supporting the move. Tesla, Microsoft, NVIDIA, Facebook, Google, Disney, and Amazon were among the top performers.
• Last week began with multiple releases on Tuesday. The pace of new home sales fell 6 percent to 863,000 in April, short of forecasts for 959,000 homes sold. The drop comes on the heels of a 20 percent increase in March. Potential buyers continue to be supported by low mortgage rates, which have been partially offset by increased homebuilding costs. Also released Tuesday was the Conference Board Consumer Confidence Index for May, which ticked down from 117.5 to 117.2.
• On Thursday, we saw the release of initial jobless claims and durable goods orders reports. The results were mixed, with initial jobless claims dropping to 406,000, their lowest level since March 2020. Durable goods orders dropped 1.3 percent in April. This release is typically seen as a proxy for business spending and will be one to watch.
• Several important data points were released Friday. The personal income report showed income dropping 13.1 percent, better than the expected 14 percent drop. (Personal income rose 20.9 percent in March after the most recent stimulus package.) The personal spending report showed consumer spending increased by 0.5 percent. Finally, personal consumption expenditures (also known as the Fed’s preferred inflation data point) were 3.6 percent higher year-over-year. The core version of this index, which strips out components such as energy prices, rose 0.7 percent month-over-month, higher than an expected 0.6 increase.

Source: Bloomberg, as of May 28, 2021

Source: Morningstar Direct, as of May 28, 2021

What to Look Forward To
We started the week with Tuesday’s release of the Institute for Supply Management (ISM) Manufacturing index for May. This widely followed measure of manufacturer confidence increased by more than expected. It rose from 60.7 in April to 61.2, against forecasts for a more modest increase to 61. Driven in large part by new order growth due to strong consumer demand, this result brought the index to its second-highest level on record. This is a diffusion index, where values above 50 indicate expansion. The improvement in May is a positive signal that manufacturing output has continued, despite headwinds created by rising prices and supply chain constraints. Manufacturer confidence has increased notably since hitting a lockdown-induced low of 41.7 in April 2020. Overall, this encouraging report showed a continued manufacturing recovery driven by sky-high levels of demand as reopening efforts accelerated.

On Thursday, we’ll see the release of the initial jobless claims report for the week ending May 29. Economists expect to see the number of initial unemployment claims drop from 425,000 to 395,000. If estimates prove accurate, this report would mark the fifth week in a row in which initial claims have declined. It would also set another pandemic-era low for initial claims. Although claims can be volatile on a week-to-week basis, the continued improvement over the past two months has been very encouraging. With that said, however, the number of weekly initial claims remains higher than normal. The progress we’ve made so far this year is promising, but the current level of weekly layoffs indicates the labor market continues to face stress. Accordingly, this weekly report will continue to be closely monitored.

Thursday will also see the release of the ISM Services index for May. As was the case with manufacturer confidence, economists expect to see service sector sentiment improve during the month. Forecasts are calling for the index to rise from 62.7 in April to 63. If estimates hold, the index would sit at the second-highest level on record, trailing only the 63.7 reading in March 2021. This is another diffusion index, where values above 50 indicate expansion, so a reading above 50 would mark 12 straight months with service sector growth. Confidence for this sector has rebounded strongly following the weather- and pandemic-related slump in February. Continued readings near current levels would indicate very high service sector confidence on a historical basis. Given the continued reopening efforts and progress in combatting the pandemic, service sector confidence is expected to remain high as we head into the summer months.

We’ll finish the week with Friday’s release of the employment report for May. Economists expect to see 650,000 jobs added during the month. This result would be a solid step up from the relatively disappointing 266,000 jobs added in April, but below the 770,000 jobs added in March. April’s slowdown in the pace of hiring was largely attributed to a shortage of available workers, as evidenced by the high level of job openings across the country. Although potential labor shortages may serve as a headwind for a return to full employment, continued progress on mass vaccinations and state reopenings should support job growth in the months ahead. The April employment report demonstrated the continued positive impact from reopening efforts, with the hard-hit leisure and hospitality sector seeing the largest job gains. This trend is expected to continue as reopening efforts accelerate as we head into summer. The underlying data is set to improve compared with the numbers from April. Economists expect the unemployment rate to fall from 6.1 percent to 5.9 percent in May. Ultimately, if estimates hold, this report would be an encouraging sign for the labor market recovery, as well as acceleration of the overall economic recovery.

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

Mark Gallagher is a financial advisor located at Gallagher Financial Services at 2586 East 7th Ave. Suite #304, North Saint Paul, MN 55109. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 651-774-8759 or at mark@markgallagher.com.
Authored by the Investment Research team at Commonwealth Financial Network.
© 2020 Commonwealth Financial Network ®

Presented by Mark Gallagher

General Market News
• The yield curve ticked lower on the week as investors digested the most recent inflationary data and debated future inflation expectations. The 10-year Treasury yield opened Monday morning at 1.62 percent, only slightly lower than last week’s open of 1.63 percent. The 30-year yield opened at 2.31 percent, down 4.1 basis points (bps) from last week’s open of 2.35 percent. On the shorter end of the curve, the 2-year opened at 0.16 percent, just 0.6 bps more than last week’s open.
• Markets were mixed on the week, highlighted by the volatility in the cryptocurrency market with bitcoin down by 30 percent in a 24-hour period. Developed international markets and emerging markets outperformed as vaccinations increased and case counts dropped in Europe and India. In the U.S., the tech-oriented Nasdaq Composite Index outperformed. The cyclical trade cooled this week with energy, industrials, materials, and consumer discretionary all among the worst performers. The defensive sectors in REITs, health care, utilities, and tech were the top performers.
• On Monday, the National Association of Home Builders Housing Market Index for May was released. The report showed that home builder sentiment remained healthy during the month, as the index was unchanged in May at 83, which was in line with economist estimates. This strong result left home builder confidence near the record high of 90 set in November 2020 and signals healthy levels of confidence during the month. Home builder sentiment rebounded swiftly after initial lockdowns ended last year, as low mortgage rates and high levels of home buyer demand sparked a housing sector rally. Supply of homes for sale remains low across much of the country, which has been another tailwind for increased home builder confidence and construction over the past year. This release was a positive signal that home builders remain confident in the current housing market expansion, despite rising material and construction costs, and is a good sign for additional construction in the months ahead.
• Speaking of construction, Tuesday saw the release of the April building permits and new home sales reports. Permits increased 0.3 percent during the month against calls for a 0.6 percent increase. Starts fell 9.5 percent in April, following an upwardly revised 19.8 percent increase in March. This was a larger decline than the 2 percent drop economists forecasted. Home builders cited supply chain disruptions and rising lumber costs as headwinds during the month. These two measures of new home construction can be volatile on a month-to-month basis; however, both have increased notably since initial lockdowns were lifted last year. New home construction has been supported by a limited supply of homes for sale and high levels of home buyer demand. Although the larger-than-expected decline in starts disappointed against expectations, continued high levels of home builder confidence and home buyer demand should support additional construction in the months ahead.
• We finished the week with Friday’s release of the April existing home sales report. The pace of existing home sales fell 2.7 percent during the month, which was below economist estimates for a 1 percent increase. This marks three straight months with declining existing home sales, as low inventory levels and rising prices continued to hold back faster sales growth during the month. The report showed that the median sales price increased 19.1 percent year-over-year and that supply was down 20.5 percent. Despite the slowdown in sales over the past three months, the pace of existing home sales is still well above pre-pandemic levels. On a year-over-year basis, sales of existing homes were up 33.9 percent in April. Ultimately, while low levels of supply and rising prices may remain a headwind for significantly faster sales growth in the short term, if we continue to see sales near the current level, it would indicate that the housing market remains strong.

Source: Bloomberg, as of May 21, 2021

What to Look Forward To
On Tuesday, the April new home sales report is set to be released. The pace of new home sales is expected to fall by 7 percent during the month, following a 20.7 percent surge in March. The jump in March brought new home sales to their highest level since 2006, so the anticipated pullback in April is understandable. New home sales are a smaller and more volatile portion of total sales compared with existing home sales. Still, despite the monthly volatility, the pace of new home sales has increased notably compared with pre-pandemic levels. If estimates hold, this segment will be up by more than 66 percent on a year-over-year basis in April. Some of this large year-over-year growth is due to comparisons with the results of last April, when new home sales plummeted during the initial lockdowns. Even accounting for the April drop, however, new home sales have been supported by low mortgage rates and high home buyer demand over the past year.

Tuesday will also see the release of the Conference Board Consumer Confidence Index for May. This widely followed gauge of consumer sentiment is expected to decline slightly from 121.7 in April to 119.4 in May. This modest decline would echo the results for the preliminary estimate of the University of Michigan consumer sentiment survey for May. If estimates hold, this release would represent the second-highest level for the index since the start of the pandemic. Confidence has improved notably this year, as the index is expected to remain well above the 87.1 reading we saw in December 2020. Improvements on the public health front and additional federal stimulus payments have supported the rise in consumer confidence we’ve seen so far this year. Given continued progress with vaccinations and the accelerated reopening efforts throughout much of the country, confidence is expected to remain high as we head into the summer months. This should support additional consumer spending growth.

On Thursday, the preliminary estimate for the April durable goods orders report is set to be released. Orders of durable goods are expected to increase by 0.8 percent during the month, matching the 0.8 percent uptick in March. If estimates hold, this release will mark 12 consecutive months with rising durable goods orders. Starting last May, orders rebounded swiftly once initial lockdowns were lifted. Core durable goods orders, which strip out the impact of volatile transportation orders, are expected to increase by 0.7 percent in April, following a 1.9 increase in March. This result would mark two consecutive months with rising core durable goods orders, following a weather-related slump in February. Core durable goods orders are often viewed as a proxy for business investment. So, continued growth in April would be a positive sign that business have continued to spend, even though core durable goods orders have already surpassed pre-pandemic levels.

Thursday will also see the release of the initial jobless claims report for the week ending May 22. Economists expect the number of initial unemployment claims to decline from 444,000 to 425,000. If estimates prove accurate, this report would bring the pace of weekly layoffs to its lowest level since the start of the pandemic. It would also mark four straight weeks with declining initial claims. Still, despite the impressive improvement in the pace of jobs lost throughout the year, the number of weekly initial claims remains high on a historical basis. This fact, along with the slowdown in hiring in April, indicates the labor market continues to face stress. Accordingly, this release will continue to be widely monitored, as it provides economists with an up-to-date look at the labor market recovery.

On Friday, the personal income and personal spending reports are set to be released. Spending is expected to increase by a healthy 0.5 percent during the month, following a stimulus-induced 4.2 percent surge in March. This result would mark two straight months with personal spending growth, signaling that the tailwind from the recent stimulus payments lingered into April. Personal income has been very volatile on a month-to-month basis throughout the pandemic, driven by shifting federal stimulus and unemployment payments. In March, the stimulus payments caused incomes to spike by a record 21.1 percent. In April, economists expect to see personal income decline by 15 percent. Still, despite the anticipated income drop, consumer spending is expected to remain robust. It should be supported by high levels of consumer savings and continued progress on vaccinations and reopenings, as well as high levels of consumer confidence.

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