Presented by Mark Gallagher

General Market News
• The Treasury yield curve flattened on a week-over-week basis as markets sought safety early Monday, following a sharp sell-off in Asia and in anticipation of this week’s Federal Reserve (Fed) meeting. The 10-year yield was down about 1 basis point to 1.32 percent. The 30-year fell about 5 basis points (bps) to 1.86 percent, while the 5-year gained 2 bps to about 0.83 percent and the 2-year was unchanged from last week at 0.20 percent.
• Domestic indices were mostly lower last week as markets remained unsettled amid a noisy backdrop. Investors are hoping for clarity on a tapering timeline out of this week’s Fed meeting. Many believe tapering will begin before year-end, but economic data has been volatile recently. August’s Consumer Price Index (CPI) and retail sales reports were surprisingly positive, but sentiment remains dampened by a weak labor market. On the fiscal side, House Democrats will push to suspend the debt ceiling this week as an October deadline looms large. Materials, utilities, and industrials lagged last week while energy, consumer discretionary, and financials outperformed. Markets opened sharply lower this week as seasonal weakness and fears of broader contagion from China Evergrande’s possible default gripped markets.
• On Tuesday, the CPI report for August was released. The report showed that the pace of consumer inflation slowed, with prices rising 0.3 percent against calls for a 0.4 percent increase. This is down from the 0.5 percent rise in consumer prices we saw in July. On a year-over-year basis, consumer prices increased 5.3 percent, which was in line with expectations and a modest decline from the 5.4 percent year-over-year consumer inflation rate from July. Core consumer prices, which strip out the impact of volatile food and energy prices, increased 0.1 percent during the month and 4 percent year-over-year. As was the case with headline consumer inflation, core consumer prices increased less than expected in August. Airline fares, hotel rates, and used car prices all declined notably during the month. Although consumer price growth remains high on a year-over-year basis, the moderating inflationary pressure in August helps support the Fed’s belief that much of the recent price increases will prove to be transitory.
• Wednesday saw the release of the August industrial production report. Production increased 0.4 percent, which was slightly below economist estimates for a 0.5 percent increase. This follows a solid 0.8 percent increase in production in July and marks six straight months with rising production. The increase in production was largely due to a rise in utilities output, as Hurricane Ida negatively affected manufacturing and mining output. Given the hurricane’s timing at the end of August and start of September, the lingering effects from the storm are expected to serve as a similar headwind for mining in September. Manufacturing output increased 0.2 percent during the month, which was below economist estimates for a 0.4 percent increase. With that being said, July’s manufacturing output growth was upwardly revised from 1.4 percent to 1.6 percent, so the miss against expectations in August is not as bad as it first seems. All in all, this report showed that the rebound in industrial production continued during the month.
• Thursday saw the release of the August retail sales report. Sales increased 0.7 percent, which was significantly better than the 0.7 percent drop economists expected. Core retail sales, which strip out the impact of volatile auto and gas sales, were even more impressive, increasing 2 percent against calls to remain flat. This represents the best month for core retail sales growth since March’s stimulus-fueled surge. While the faster-than-expected sales growth during the month was a positive development, the details were less encouraging. Growth was largely driven by a surge in grocery sales and online shopping, which in turn likely reflects rising consumer concerns about the Delta variant. Spending at bars and restaurants was flat, which is another sign that rising health risks likely affected consumer spending decisions. Despite the rotation back toward stay-at-home spending, the better-than-expected increase in headline and core sales shows that consumers remain willing and able to spend.
• We finished the week with Friday’s release of the preliminary estimate of the University of Michigan consumer sentiment survey for September. The report showed that confidence improved modestly to start the month, as the index increased from 70.3 to 71 against forecasts for an increase to 72. Consumer views on current economic conditions fell slightly to start September; however, future expectations saw some improvement. Consumers remain concerned about rising prices, as buying conditions for big-ticket items such as homes and cars worsened during the month due to high costs. Consumer one-year inflation expectations increased from 4.6 percent in August to 4.7 percent in September; however, five-year inflation expectations remained unchanged at 2.9 percent. Despite the modest improvement in confidence to start the month, the index remains well below its recent high of 88.3, set in April. Historically, improving consumer confidence has led to faster consumer spending growth, so the lackluster result in September may signal future weakness in consumer spending.

Source: Bloomberg, as of September 17, 2021

Source: Morningstar Direct, as of September 17, 2021

What to Look Forward To
On Monday, the National Association of Home Builders Housing Market Index for September was released. This gauge of home builder confidence increased modestly—from 75 in August to 76 in September—against calls for a decline to 74. This is a diffusion index, where values above 50 indicate expansion, so this better-than-expected result signals continued growth of home builder confidence. Last year, this index rebounded swiftly once initial lockdowns were lifted as record-low mortgage rates, high levels of home buyer demand, and limited existing homes for sale supported a surge in home construction. Home builder confidence has declined since then, largely due to rising material and labor costs. Although lumber prices have started to normalize, input costs for home builders remain high due to supply chain disruptions and labor shortages. Looking forward, continued high levels of demand should keep home builder confidence in expansionary territory. In the short-term, however, high costs are expected to remain as a headwind for home builders.

On Tuesday, the August building permits and housing starts reports are set to be released. Permits are expected to decline by 2.2 percent, following a 2.6 percent increase in July. Starts are set to rise by 1 percent, after declining by 7 percent in July. Both measures of new home construction can be volatile on a month-to-month basis. Single-family housing starts have been a particular highlight as shifting home buyer preferences for more space caused a surge in new single-family construction over the past year. Looking forward, rising rents and a return to more normal economic conditions may support an increase in multifamily construction. Throughout the pandemic, this sector has generally lagged compared with single-family housing growth.

On Wednesday, the August existing home sales report is set to be released. Sales of existing homes are expected to fall by 2.3 percent, following a 2 percent increase in July. At the end of last year and start of this year, existing home sales surged. Throughout much of this year, however, the limited supply of existing homes for sale and rising prices have negatively affected sales growth. That said, the pace of existing home sales is expected to remain well above pre-pandemic levels, highlighting the continued strength of the housing market. We saw the supply of homes for sale increase in July, which could signal the housing market’s stabilization following last year’s surge in sales. Still, the number of homes for sale remains relatively low on a historical basis. This factor is expected to dampen the pace of overall sales growth until more homes become available for sale.

Wednesday will also see the Federal Open Market Committee rate decision from the Fed’s September meeting. The Fed cut interest rates to virtually zero at the start of the pandemic, and economists do not expect to see any hikes until 2023 at the earliest. The meeting’s focus will be on the asset purchase program, which currently sees the Fed buying a combined $120 billion in Treasury and mortgage-backed securities a month. These purchases have been used to support the markets throughout the course of the pandemic. Currently, however, there is speculation that the Fed may be ready to start tapering purchases. Some Fed members have come out publicly in favor of tapering asset purchases by the end of the year, but no timeline for tapering has been announced yet. The September meeting will be important in terms of guiding market expectations for the Fed’s tapering plans. Although the timing of these efforts is unknown, the Fed is widely expected to slow the pace of asset purchases gradually to minimize market impact.

We’ll finish the week with Thursday’s release of the initial jobless claims report for the week ending September 18. Economists expect to see the number of initial unemployment claims decline modestly from 332,000 to 320,000. If estimates prove accurate, this report would represent the second-fewest initial claims in a week since the start of the pandemic. While claims can be volatile on a weekly basis, the four-week moving average for initial claims would be set to hit a new pandemic-era low if estimates hold. This would highlight the continued labor market recovery in September. Declining medical risks and loosened restrictions on consumers and businesses supported a reduction in weekly layoffs throughout the spring. Recently, however, labor shortages have also helped drive the number of weekly layoffs down. Given the shortage of potential replacements, businesses remain reluctant to lay off workers.

Disclosures: Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. All indices are unmanaged and are not available for direct investment by the public. Past performance is not indicative of future results. The S&P 500 is based on the average performance of the 500 industrial stocks monitored by Standard & Poor’s. The Nasdaq Composite Index measures the performance of all issues listed in the Nasdaq Stock Market, except for rights, warrants, units, and convertible debentures. The Dow Jones Industrial Average is computed by summing the prices of the stocks of 30 large companies and then dividing that total by an adjusted value, one which has been adjusted over the years to account for the effects of stock splits on the prices of the 30 companies. Dividends are reinvested to reflect the actual performance of the underlying securities. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a market capitalization-weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index. The Bloomberg US Aggregate Bond Index is an unmanaged market value-weighted performance benchmark for investment-grade fixed-rate debt issues, including government, corporate, asset-backed, and mortgage-backed securities with maturities of at least one year. The U.S. Treasury Index is based on the auctions of U.S. Treasury bills, or on the U.S. Treasury’s daily yield curve. The Bloomberg US Mortgage Backed Securities (MBS) Index is an unmanaged market value-weighted index of 15- and 30-year fixed-rate securities backed by mortgage pools of the Government National Mortgage Association (GNMA), Federal National Mortgage Association (Fannie Mae), and the Federal Home Loan Mortgage Corporation (FHLMC), and balloon mortgages with fixed-rate coupons. The Bloomberg US Municipal Index includes investment-grade, tax-exempt, and fixed-rate bonds with long-term maturities (greater than 2 years) selected from issues larger than $50 million. One basis point is equal to 1/100th of 1 percent, or 0.01 percent.

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

© 2020 Commonwealth Financial Network

Presented by Mark Gallagher

General Market News
• The Treasury yield curve steepened modestly last week after Federal Reserve (Fed) Chairman Jerome Powell’s remarks at the Fed’s virtual annual symposium. The 10-year Treasury yield picked up 5 basis points (bps) week-over-week to open at about 1.3 percent on Monday morning. The 2-year fell about 1 bp to around 0.21 percent, the 5-year gained approximately 2 bps to 0.79 percent, and the 30-year was up 5 bps to 1.92 percent. After these muted moves, the markets are looking ahead to the August jobs report.
• Global equity markets moved higher, with domestic small-caps and emerging markets as notable leaders. The largest news last week was Powell’s speech, in which he discussed potentially easing the Fed’s asset purchases later this year. Unsurprisingly, risk assets moved higher, with cyclicals particularly in favor; energy, financials, consumer discretionary, materials, and industrials were all top performers. Bond proxies in utilities and consumer staples lagged as investors continued to flock to risk assets with the Fed remaining supportive of the recovery.
• Monday saw the release of the July existing home sales report. Sales of existing homes came in above expectations, as sales increased 2 percent during the month against calls for a 0.5 percent decline. This better-than-expected result brought the pace of existing home sales to its highest level in four months. Existing home sales have been supported by record-low mortgage rates and shifting home buyer preference for more space due to the pandemic; however, a lack of supply has been a headwind for sales throughout 2021. The strong July result coincided with an increase in the supply of homes for sale, as the number of existing homes for sale increased 7.3 percent and hit its highest level since last October. This is an encouraging signal that the housing market is starting to normalize after a surge in sales growth over the past year led to reduced supply and rising prices. Looking forward, the supply of homes for sale still remains relatively low on a historical basis and is expected to hamper overall sales growth; however, if sales remain near the current pace, it would still signal healthy levels of home buyer demand.
• On Wednesday, the preliminary estimate for the July durable goods orders report was released. Durable goods orders fell 0.1 percent during the month, which was slightly better than economist estimates for a 0.3 percent decline. The headline decline was due to a slowdown in volatile aircraft orders. Core durable goods orders, which strip out the impact of transportation orders and are often viewed as a proxy for business investment, increased by a strong 0.7 percent against calls for a 0.5 percent increase. This better-than-expected result was a positive signal that businesses continue to invest to meet high levels of demand. This was an encouraging report, as rising medical risks appear to have a relatively muted effect on business confidence and spending. Business spending has been robust since initial lockdowns were lifted last year. Looking ahead, the pace of the ongoing economic recovery is expected to be supported by continued business spending.
• On Friday, July’s personal income and personal spending reports were released. Both income and spending increased during the month, with incomes rising 1.1 percent against calls for a 0.3 percent increase, while spending rose 0.3 percent against forecasts for a 0.4 percent increase. Income has been very volatile throughout the pandemic, as shifting federal stimulus and unemployment claims have led to large monthly swings in average income. The 1.1 percent increase in July, for example, was due in large part to advance child tax credit payments. The increase in spending in July was a welcome sign that consumers continued to go out and spend the additional cash, and it marks five straight months of spending growth. Reopening efforts throughout the country have served as a tailwind for increased spending growth, and we saw a continued increase in spending on services. Overall, this was an encouraging report that showed consumers are willing and able to spend despite rising medical risks.

Source: Bloomberg, as of August 27, 2021

Source: Morningstar Direct, as of August 27, 2021

What to Look Forward To
Tuesday will see the release of the Conference Board Consumer Confidence Index for August. This widely followed measure of consumer sentiment is expected to decline from 129.1 in July to 123. July’s result brought the index back to pre-pandemic levels, marking a new pandemic-era high for consumer confidence. Given that, the anticipated decline in August is understandable. If estimates prove accurate, confidence will remain well above lockdown-induced lows and at levels supporting continued consumer spending growth. Consumer confidence has been resilient this year, compared with data from last spring when initial lockdowns caused sentiment and spending to plummet. The rising medical risks are real, however, and should be monitored for a sustained decline in confidence and spending. A drop in these indicators could threaten the pace of the overall economic recovery as we head into fall.

On Wednesday, the Institute for Supply Management (ISM) Manufacturing index for August is set to be released. This measure of manufacturer confidence is expected to decline slightly from 59.5 in July to 58.6. This is a diffusion index, where values above 50 indicate expansion, so the anticipated result would signal continued growth for the manufacturing industry. Manufacturing confidence has been supported this year by reopening efforts, high levels of consumer demand, and low levels of business inventory. High input prices continue to serve as a headwind for the industry, however. Tangled global supply chains continue to drive up costs of materials, and, recently, labor shortages have started to drive up employment costs. Despite these headwinds, high levels of demand should continue to serve as a tailwind for manufacturers in the months ahead.

Thursday will see the release of the initial jobless claims report for the week ending August 28. Economists expect to see 346,000 initial unemployment claims filed during the week, in a drop from the 353,000 initial claims filed the week before. If estimates prove accurate, the report would represent a new record low for weekly initial claims since the start of the pandemic. We’ve made solid progress this year in getting the number of initial claims down, though work remains to return to pre-pandemic levels. In 2019, we averaged roughly 220,000 initial claims per week. The Fed continues to closely monitor the labor market recovery, as a full economic recovery will rely on further improvements in the job market.

Thursday will also see the release of the July international trade balance report. The trade deficit is expected to narrow slightly, from $75.7 billion in June to $74.1 billion. If estimates prove accurate, this report would mark the third-largest monthly trade deficit on record, trailing only results from June and March of this year. According to the advanced report on the trade of goods, the exports of goods increased 1.5 percent in July, while imports fell 1.4 percent. Part of the decline in imports of goods was due to a slowdown in consumer goods imports during the month, which reflects slowing consumer demand. Looking ahead, there is room for more improvement in export growth, as the total level of exports remains below pre-pandemic levels. Given the uneven nature of the global economic recovery, it may take some time to get export growth back to earlier highs. Over the long term, however, rising global demand for U.S. goods should drive further improvements.

On Friday, the August employment report will be released. Economists expect to see 750,000 jobs added during the month, in a step down from the 943,000 jobs added in July. Still, this result would represent a notable increase in the pace of hiring compared with data from earlier in the year. Reopening efforts supported faster hiring growth in June and July. If estimates for August prove accurate, they would signal strongly that the recovery remains on track despite rising coronavirus case counts. The underlying data is also expected to show continued improvement, with the unemployment rate set to drop from 5.4 percent to 5.2 percent. Average hourly earnings are expected to increase 0.3 percent in August, reflecting continued high levels of demand from businesses for additional employees. Overall, if estimates prove accurate, this report would be a sign that the labor market recovery continued in earnest during the month. This may provide additional support for the Fed’s potential plans to taper asset purchases later this year.

We’ll finish the week with Friday’s release of the ISM Services index for August. This gauge of service sector confidence is expected to decline from 64.1 in July to 62. This is another diffusion index, where values above 50 indicate growth, so the anticipated result would signal continued expansion for the service sector. July’s result marked a record high for the index, so a modest pullback would be understandable, especially when rising case counts and increased local restrictions on businesses are considered. Service sector confidence has been supported throughout the year by reopening efforts allowing businesses to ease off on pandemic restrictions. But, with some areas of the country starting to reimpose anti-pandemic measures, we may see service sector confidence face new headwinds. The service sector accounts for the majority of economic activity in the country, so this release will continue to be widely monitored.

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 moved slightly lower across the curve last week as July’s Consumer Price Index report matched economist expectations. The 10-year Treasury yield fell 4 basis points (bps) to open Monday at 1.28 percent. The 2-year lost 1 bp to 0.20 percent, the 5-year shed 2 bps to 0.77 percent, and the 30-year was down 3 bps to about 1.9 percent.
• Trading in domestic markets was mixed, with the Dow Jones Industrial Average and S&P 500 Index up while the Nasdaq Composite and small-caps were down. Mixed trading was seen in international markets as well, with the MSCI EAFE Index up while emerging markets were down. Despite ongoing concerns over the Delta variant of the coronavirus, the Federal Reserve (Fed) has been preparing to lift its foot off the gas pedal of easy monetary policy. The financial sector was a top performer as it benefits directly from higher rates and a less accommodating Fed. Other leading sectors included materials, consumer staples, and utilities. Underperforming sectors included energy, consumer discretionary, and technology.
• On Wednesday, the Consumer Price Index for July was released. Consumer prices rose 0.5 percent, which was in line with expectations but a noted slowdown compared with the 0.9 percent increase in prices we saw in June. On a year-over-year basis, headline consumer prices increased 5.4 percent, which was slightly higher than economist estimates for a 5.3 percent increase. Core consumer prices, which strip out the impact of volatile food and energy prices, increased 0.3 percent for the month and 4.3 percent year-over-year. This was largely in line with forecasts that called for increases of 0.4 percent and 4.3 percent, respectively. The report showed a slowdown in inflationary pressure in some sectors that were affected by reopening efforts, including prices for air travel and used cars. The moderation in price growth for these reopening sectors helps support the Federal Reserve’s (Fed’s) view that much of the recent rise in prices will prove to be transitory.
• Thursday saw the release of the Producer Price Index for July. Producer prices increased 1 percent during the month against calls for a more modest 0.6 percent increase. On a year-over-year basis, producer prices increased 7.8 percent, which was up from 7.3 percent in June and higher than economist estimates for a 7.2 percent increase. Core producer prices, which strip out the impact of food and energy costs, also increased 1 percent against calls for a 0.5 percent increase. Core producer prices were up 6.2 percent on a year-over-year basis. As was the case with consumer prices, some reopening-related sectors saw moderate price growth; however, producer inflation still remains high on a historical basis. Producer prices have seen upward pressure this year caused by high levels of demand, supply chain constraints, and material shortages. Recently, producers have also started to contend with labor shortages, which also serve to increase inflationary pressure.
• We finished the week with Friday’s release of the preliminary estimate for the University of Michigan consumer sentiment survey for August. This widely monitored gauge of consumer confidence fell by more than expected to start the month, dropping from 81.2 in July to 70.2 in August against forecasts calling for no change. This brought the index to its lowest level since 2011. The decline was largely driven by worsening consumer views on future economic prospects, as the subindex that measures future expectations fell from 79 in July to 65.2 in August. Rising medical risks and persistent worries about inflation negatively affected consumer confidence during the month, and the current conditions subindex also declined by more than expected. Historically, higher levels of confidence have supported faster consumer spending growth, so this sharp decline is a concerning signal for future consumer spending. Given the fact that consumer spending is the major driver for the overall economy, this will be an important area to monitor in the months ahead.

Source: Bloomberg, as of August 13, 2021

Source: Morningstar Direct, as of August 13, 2021

What to Look Forward To
We’ll start the week with Tuesday’s release of the July retail sales report. Sales are expected to decline 0.3 percent after rising by 0.6 percent in June. Core retail sales, which strip out the impact of volatile auto and gas sales, are expected to remain flat, following a 1.1 percent surge in June driven largely by reopening-induced spending. High-frequency spending data showed that consumers continued to spend at newly reopened bars and restaurants in July. This is an encouraging sign that rising medical risks have not yet had a major impact on consumer spending. That said, a continued slowdown in auto sales is set to weigh on overall sales growth during the month. But, as sales have already recovered well past pre-pandemic levels, more moderate growth is expected as long as the economic recovery continues.

Tuesday will also see the release of the National Association of Home Builders Housing Market Index for August. This measure of home builder confidence is expected to remain unchanged at 80. This is a diffusion index, where values above 50 indicate growth, so the anticipated result would signal continued strength for new home construction. Home builder confidence rebounded swiftly following the end of initial lockdowns last year. If estimates hold, this report would mark 14 straight months of growth, keeping the index above the pre-pandemic high of 76 recorded in December 2019. Throughout the year, home builder confidence has been supported by strong levels of home buyer demand and low supply of existing homes for sale. Nonetheless, during this period, rising costs have served as a headwind for faster new home construction.

Speaking of new home construction, Wednesday will see the release of the July building permits and housing starts reports. Permits are expected to increase 1 percent, following a 5.1 percent decline in June. Starts are set to fall 2.3 percent in July, after seeing a 6.3 percent increase in June. Both of these measures of new home construction remain above pre-pandemic levels, however, supported by high home buyer demand and low supply of existing homes for sale. Although rising material costs have served as a headwind for faster construction throughout much of the year, a fall in lumber prices in July could support additional single-family housing starts. Housing has been one of the strongest sectors of the economy throughout this recovery, driven by record-low mortgage rates and shifting home buyer preference due to the pandemic. July’s reports on buildings permits and housing starts are expected to show continued strength for this important area of the economy.

Wednesday will also see the release of the Federal Open Market Committee (FOMC) meeting minutes from the Fed’s recent July meeting. The Fed cut interest rates to virtually zero last March in response to the pandemic, and rates are not expected to change until at least 2023. No major changes to monetary policy were made at the July FOMC meeting, but we did get hints that the Fed may be considering a change to its asset purchase program. Currently, the central bank purchases $120 billion per month in Treasury- and mortgage-backed securities. Economists widely expect the Fed to taper these purchases by the end of this year or in early 2022, however. The minutes are expected to indicate the potential path and timing of any purchase tapering. It should be noted, however, that the Fed will likely telegraph its tapering plans well before making any changes to minimize potential market impact.

On Thursday, the initial jobless claims report for the week ending August 14 will be released. Economists expect to see 365,000 initial claims filed during the week, in an improvement from the 375,000 initial claims filed the week before. If estimates prove accurate, this result would represent the lowest number of initial claims in a week since the start of the pandemic. It would also mark four straight weeks with declining initial jobless claims. Throughout the course of the year, we’ve made solid progress in lowering initial jobless claims. The continued momentum from recent reopening efforts is expected to drive further improvements despite rising medical risks. Looking forward, continued labor shortages and the expiration of enhanced unemployment benefits are expected to serve as a tailwind for further improvements. Still, increased uncertainty caused by the continued spread of the Delta variant remains a risk to the labor market recovery that bears monitoring.

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

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.
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