Presented by Mark Gallagher

A positive month for markets
August was another strong month for financial markets. The S&P 500 and Nasdaq Composite both set all-time highs, gaining 7.19 percent and 9.70 percent, respectively. The Dow Jones Industrial Average (DJIA), which has been slower to recover from pandemic-induced volatility earlier in the year, gained a strong 7.92 percent. This brought the index into positive territory year-to-date.

These results were supported by better-than-expected fundamentals during the month. According to Bloomberg Intelligence, with 91 percent of companies having reported, the blended earnings decline for the S&P 500 was 32.8 percent in the second quarter. This is an improvement from initial estimates for a 43.6 percent decline. Companies largely came in above expectations during the quarter, with 82 percent of reporting companies beating earnings estimates. These results, combined with analyst expectations for a return to earnings growth early in 2021, show that companies were able to withstand the economic disruption caused by anticoronavirus measures in the second quarter better than expected.

Technical factors were also supportive during the month. All three major U.S. equity indices spent the month well above their respective 200-day moving averages. This marks two straight months with all three indices finishing above trend. The technical support for the DJIA was especially notable. This was the first month since January where the index spent the entire month above its trendline. The 200-day moving average is a widely followed technical indicator, as sustained breaks above or below trend can signal a change in investor sentiment for an index.

The story was much the same internationally. The MSCI EAFE Index returned 5.14 percent during the month. The MSCI Emerging Markets Index lagged slightly, returning 2.24 percent, as late-month volatility dampened returns. Technicals for emerging and developed markets were supportive in August, and both indices spent the month above trend. This marks the second month in a row where emerging markets have been supported technically. The MSCI EAFE Index fell briefly below trend at the end of July before rebounding swiftly in August.

Fixed income markets had a more challenging month, as rising long-term interest rates weighed on returns. The 10-year Treasury yield started the month at 0.56 percent and rose to 0.72 percent by the end of August. This increase brought long-term yields up to levels last seen in June, but yields remain low on a historical basis. The Bloomberg Barclays U.S. Aggregate Bond Index lost 0.81 percent during the month.

High-yield bonds, which are typically less tied to moves in interest rates and more closely correlated with the equity market, had a more encouraging month. The Bloomberg Barclays U.S. Corporate High Yield Index gained a respectable 0.95 percent in August. High-yield spreads continued to narrow, as investors showed a growing appetite to accept lower yields for relatively riskier fixed income assets.

Public health picture improves
We saw continued progress in slowing the spread of the coronavirus in August. This indicates that measures to combat rising case numbers in July have started to pay off. On a national level, the daily spread rate was roughly 0.7 percent at month-end. This is a significant improvement compared with mid-July, when the spread rate spiked above 2 percent. While new cases per day are up compared with early June’s numbers, we’ve seen progress in lowering new daily cases and even signs of stabilization in total active cases.

Testing disappointed during the month, though. The average number of daily new tests fell by more than 9 percent in the final week of August compared with the last week of July. At these testing levels, we do not have enough daily tests to get a full picture of the pandemic. The positive test ratio, which measures the percentage of tests per day that come back positive, averaged 6.6 percent. This is higher than the World Health Organization’s recommended 5 percent level.

While there was some encouraging progress made on the public health front during the month, there is still more work to be done. The fact that we continued to make progress in August provides some comfort that we are on the right path. But it will be an ongoing effort to contain the coronavirus, and we will likely face setbacks along the way. Looking forward, all eyes will be on efforts to reopen schools, as this represents a clear health risk.

Economic recovery slowing but still growing
The economy continued to rebound in August, but there are signs that the boost provided by reopening efforts and government stimulus earlier in the summer has started to weaken. Economists have monitored July’s consumer spending data to see whether the rebound in spending we saw in May and June would withstand the headwinds created by rising case counts and falling consumer confidence in July. Retail sales and personal spending both increased during the month but at a much slower rate than in May and June. Although the continued growth in consumer spending we saw in July was welcome, the slowdown is a potential cause for concern given the importance of consumer spending for the economy.

One of the drivers of slower consumer spending in July was lowered consumer confidence. Both major measures of consumer confidence fell in July. The Conference Board Consumer Confidence Index fell in August as well, bringing it to a six-year low. Continued challenges for the labor market and concerns about the pace of economic growth weighed on consumers’ minds early in the month. There were signs that confidence started to improve by month-end, however. The University of Michigan consumer sentiment survey showed a moderate increase in confidence between the initial estimate midmonth and the final report at the end of August. Although the drop in the Conference Board’s measure was concerning, the improvement we saw in the University of Michigan survey later in the month was a positive signal that confidence may have bottomed and started to recover.

Despite the mixed results for consumer confidence and spending, businesses performed well. Business confidence, as measured by the Institute for Supply Management (ISM) Composite index, increased in July to its highest level in more than a year, as you can see in Figure 1.

Figure 1. ISM Composite Index, 2009–Present

Businesses also showed they were willing and able to spend during the month. July’s durable goods orders report blew past expectations, rising by 11.2 percent against calls for a 4.8 percent increase. Core durable goods sales, which strip out the impact of volatile transportation orders and are often used as a proxy for business investment, also grew by more than expected. These strong results, combined with higher-than-expected levels of manufacturing output and new home construction, give a reason to hope for strong business investment during the quarter.

Risks remain, but outlook is modestly optimistic
We saw many signs of continued improvement in public health and the economy in August, but very real risks remain. School reopening efforts will likely draw the majority of the attention, especially if we start to see case numbers rise in student populations. Lower federal unemployment support is expected to serve as a barrier to future spending growth. While the path forward most likely points to continued growth, the hopes of an ongoing recovery rely largely on consumer improvements.

There are also external risks that should be monitored. These include worsening U.S.-China trade relations, social unrest, and the upcoming elections. Each has the potential to cause additional market turbulence.

We are in a better place than we were a month ago, but markets are pricing in continued steady improvements, which could lead to additional volatility if these expectations aren’t met. A well-diversified portfolio that matches investor timelines and goals is the best path forward for most. If concerns remain, a discussion with your financial advisor can help as you navigate these uncertain times.

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 Brad McMillan, CFA®, CAIA, MAI, managing principal, chief investment officer, and Sam Millette, senior investment research analyst, at Commonwealth Financial Network®.

© 2020 Commonwealth Financial Network®

Presented by Mark Gallagher

General Market News
• The 10-year Treasury yield reached 0.78 percent late last week, rebounding from a low of 0.62 percent only a few days earlier. It opened at 0.73 percent on Monday morning. The 30-year jumped from 1.32 percent to 1.57 percent, opening Monday at 1.52 percent. On the short end of the curve, rates started the week higher but moved to their lowest levels in three weeks, with the 2-year opening Monday morning at 0.13 percent. Primary factors affecting rates are supply, Federal Reserve (Fed) involvement, and the coronavirus pandemic.
• Last week featured another rally driven by communication services and technology, as the Nasdaq Composite, S&P 500, and Dow Jones Industrial Average each increased by more than 2.5 percent. The largest drivers within communication services included Facebook and Netflix, which increased 10 percent and 6.4 percent, respectively. Other than utilities, every sector was up as vaccine optimism helped fuel a rally for beaten-down consumer discretionary names. Financials increased after interest rates picked up.
• Fed Chairman Jerome Powell announced a policy framework shift that will allow inflation to average 2 percent over time and will support a “lower-for-longer” interest rate policy. This move was supportive of energy and materials companies, which typically benefit from inflationary environments.
• On Tuesday, the Conference Board Consumer Confidence Index for August was released. Confidence fell unexpectedly from 91.7 in July to 84.8 in August, against forecasts for a modest rise to 93. This marks the second month in a row of declines for the index after it rebounded to 98.3 in June as the country began reopening. This disappointing result, driven by lackluster consumer views on economic conditions during the month, brought the index to its lowest level in six years. Improving confidence typically supports faster consumer spending growth, so this concerning result bodes poorly for consumer spending growth in August.
• On a brighter note, Tuesday also saw the release of July’s new home sales report, which surprised to the upside. The pace of new home sales rose from an upwardly revised 791,000 in June to 901,000 in July, against economist estimates for 790,000. This significantly better-than-expected result brought the pace of new home sales to its highest level since December 2006. Add in the strong existing home sales results we saw two weeks ago, and the housing market has seen an impressive rebound over the past few months. Housing has been boosted by record-low mortgage rates and shifting consumer preferences in the face of the pandemic.
• On Wednesday, the preliminary estimate of July’s durable goods orders report was released. Durable goods orders impressed, rising by 11.2 percent during the month against forecasts for a 4.8 percent increase. Much of this better-than-expected result was due to a rebound in transportation orders, as core durable goods orders (which strip out the impact of transportation orders) grew by a more modest 2.4 percent. Core durable goods orders are often used as a proxy for business investment, so this positive result indicates businesses continued to spend during the month despite rising case counts.
• Thursday saw the release of the second estimate of second-quarter gross domestic product (GDP) growth. The economy contracted at an annualized rate of 31.7 percent during the quarter, slightly better than the advanced estimate of a 32.5 percent annualized contraction. Despite the improvement, this represents the worst quarter for economic growth in modern history, far surpassing the 8.4 annualized decline we saw in the fourth quarter of 2008. The steep drop in economic output was driven by collapsing personal consumption during the quarter, which was down a record 34.1 percent on an annualized basis. These are certainly concerning figures, but it’s important to note this is old data. Economists anticipate a double-digit rebound in GDP growth in the third quarter, which should partially offset the damage created by anticoronavirus measures in the second quarter.
• On Friday, July’s personal income and personal spending reports were released. Both were better than expected, with spending up 1.9 percent against calls for a 1.6 percent increase and income up by 0.4 percent against calls for a 0.2 percent decline. This result helped calm concerns that rising case counts and falling confidence could lead to a more significant slowdown in spending growth after two strong months in May and June. The income growth we saw during the month was also encouraging because it showed improvements from rising wage income were more than enough to offset a fall in government stimulus.
• Finally, we finished the week with the second and final reading of the University of Michigan consumer sentiment survey for August. Consumer sentiment improved throughout the month, rising from 72.8 mid-month to 74.1 at month-end, against expectations to remain flat. This represents a modest increase from July’s 72.5 reading and is notably better than initial economist estimates for a decline to 72. The index still sits below the post-reopening high of 78.1 it reached in June and is a far cry from the prepandemic high of 101 it set in February. As was the case with the Conference Board Consumer Confidence Index, this report highlighted the very real work remaining to return confidence to prepandemic levels.

Source: Bloomberg, as of August 28, 2020

Source: Morningstar Direct, as of August 28, 2020

What to Look Forward To
On Tuesday, the Institute for Supply Management (ISM) Manufacturing index for August will be released. This measure of manufacturer confidence is set to rise modestly from 54.2 in July to 54.5 in August. This result would bring the index to its highest level since March 2019, highlighting an impressive rebound in manufacturer sentiment that began once reopening efforts kicked off in May. This is a diffusion index, where values above 50 indicate expansion, so its continued improvement in August would be a good sign for manufacturing output in the third quarter. Still, despite the anticipated increase in manufacturing confidence, output remains roughly 8 percent below prepandemic levels, demonstrating work needs to be done here.

On Thursday, the initial jobless claims report for the week ending August 29 is set to be released. Economists expect to see 978,000 initial claims during the week, which would be an improvement from the 1.006 million initial claims from the prior week but above the low of 971,000 recorded for the week ending August 7. Initial claims have bounced around 1 million per week throughout August, highlighting the very real headwinds the job market faces despite the boost from reopening efforts earlier in the summer. Continuing claims are also expected to show modest improvement, but they will remain elevated on a historical basis. We’ll continue to monitor these weekly reports until initial and continuing claims return to more normal levels.

Thursday will also see the release of July’s international trade report. The trade deficit is expected to widen, from $50.7 billion in June to $52.7 billion in July, following a similar expansion of the trade deficit for goods previously reported for July. Imports and exports of goods both increased by 11.8 percent in July, after trade volumes hit multiyear lows at the height of the global pandemic. July’s rebound in goods-related trade was primarily driven by increasing motor vehicle trade, with both exports and imports of cars increasing by more than 40 percent, which brought this segment close to prepandemic levels. Although the trade of goods has shown a solid recovery since reopening efforts began, service-related trade has been slower to bounce back, primarily due to lowered international travel during the pandemic.

The third major data release on Thursday will be the release of the ISM Services index for August. Economists expect to see service sector confidence decline from 58.1 in July to 57.4 in August. As was the case with manufacturing confidence, service sector confidence has shown a strong rebound since reopening efforts began, so this anticipated decline is nothing to worry about. In fact, if estimates hold, the index would sit at its second-highest level this year, behind July’s stronger-than-anticipated result. This is another diffusion index, where values above 50 indicate expansion, so the index would still point toward continued growth if estimates prove accurate. The strong rebound in business confidence we’ve seen since May has been very encouraging, indicating business owners have largely viewed reopening efforts as a success. Nonetheless, we’ll have to wait and see whether confidence can remain high now that the tailwind from reopening efforts is starting to fade.

Finally, we’ll finish the week with Friday’s release of the August employment report. Economists expect to see just more than 1.5 million jobs added in August, following about 1.75 million jobs added in July. The unemployment rate is also set to show improvement, with forecasts calling for a decline from 10.2 percent in July to 9.8 percent in August. Although adding roughly 1.5 million jobs in August would certainly be a positive development, it’s important to view this release in context; we lost more than 22 million jobs between March and April alone. Even if we do see an additional 1.5 million jobs in August, it would leave us with fewer than 11 million hires between May and August. That figure represents a substantial gap compared with prepandemic employment levels. Ultimately, a full economic recovery will require significant improvement on the employment front, so these monthly releases will continue to be closely 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.

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
• Last week’s heavy supply certainly affected the long end of the curve, as the 10-year Treasury yield moved from a historical low of 0.50 percent to 0.72 percent. (It opened at 0.69 percent on Monday.) The 30-year, which was at 1.18 percent last week, spiked and opened at 1.43 percent on Monday. The 30-year seems to have created a floor around 1.20 percent over the past five months, as it has not approached the historical low of 0.997 percent it set in March 2020. The 2-year, which opened the month at a steady 0.11 percent, backed up to 0.16 percent last week and opened at 0.14 percent on Monday.
• Last week’s rally was driven by the industrials-oriented Dow. The Nasdaq, which had been leading much of the recovery, lagged as cyclical sectors, such as industrials, consumer discretionary, and energy, were among the top performers. Financials also had a strong week, outperforming utilities, real estate, communication services, and technology, all of which lagged. In the past month, we’ve seen strength in sectors that may benefit from reopening efforts. Technology led through the early part of the rebound, and it remains to be seen which sectors will benefit as schools and businesses look to cautiously reopen in the fall. Two major questions are looming: what will a second round of stimulus payments look like, and when might it occur?
• On Tuesday, July’s Producer Price Index report was released. This measure of producer inflation rose by 0.6 percent against forecasts for a 0.3 percent increase. This brought producer prices down 0.4 percent on a year-over-year basis. Core producer inflation, which strips out the impact of volatile food and energy prices, also came in above expectations, increasing by 0.5 percent against forecasts for a 0.1 percent increase. Nonetheless, the deflationary pressure created by anticoronavirus measures earlier in the year continues to keep inflation muted year-over-year.
• Wednesday saw the release of the Consumer Price Index for July. Consumer inflation grew by 0.6 percent against expectations for a more modest 0.3 percent increase. This brought year-over-year consumer inflation to 1 percent, up from 0.6 percent in June. Core consumer inflation, which strips out the impact of food and energy prices, also increased by 0.6 percent during the month, against calls for a 0.2 percent increase. This was the largest monthly increase for core consumer prices since 1991; however, as was the case with producer prices, the declines earlier in the year helped keep inflation constrained year-over-year. Given the continued stress on the labor market, the Federal Reserve (Fed) is not expected to react to rising inflation until the employment picture improves considerably.
• On Friday, July’s retail sales report was released. Sales were mixed, with headline retail sales increasing by 1.2 percent against expectations for a 2.1 percent increase. Core retail sales, which exclude the impact of volatile auto and gas sales, increased by a solid 1.5 percent against expectations for 1 percent growth. Sales staged an impressive rebound in May and June once reopening efforts began, and this continued growth in sales in July was another positive sign that consumers were willing and able to spend. Despite July’s slowdown in the pace of sales growth compared with May and June, this was still an encouraging report, given that both major measures of consumer confidence fell during the month, which typically serves as a headwind for sales growth.
• Finally, we finished the week with the preliminary estimate of the University of Michigan consumer sentiment survey for August. This measure of consumer confidence increased from 72.5 in July to 72.8 in August, against calls for a decline to 72. This better-than-expected result helped the index avoid testing the recent low of 71.8 it hit in April. Rising case counts and slowing reopening efforts caused consumer confidence to decline in July, but progress in containing local outbreaks in the beginning of the month helped bolster consumer sentiment. Typically, improving consumer confidence supports faster consumer spending growth, so this was an encouraging report that should help support additional consumer spending in August.

Source: Bloomberg, as of August 14, 2020

Source: Morningstar Direct, as of August 14, 2020

What to Look Forward To
We started the week with Monday’s release of the National Association of Home Builders Housing Market Index for August. This measure of home builder confidence increased by more than expected during the month, rising from 72 in July to 78 in August, against calls for a more modest increase to 74. (This is the second straight month in which home builder confidence beat expectations, as the index jumped from 58 in June to 72 in July.) This better-than-anticipated result eclipsed the record high the index reached in 1998. Home builder confidence has been boosted by record-low mortgage rates that have been driving additional prospective home buyers into the market since reopening efforts started in May. After the index reached a seven-year low of 30 in April, we’ve seen a swift recovery in home builder confidence that has supported a rebound in new home construction.

Speaking of new home construction, Tuesday will see the release of July’s building permits and housing starts reports. Both permits and starts are expected to show continued growth during the month, with permits and starts slated to rise by 5.9 percent and 3.7 percent, respectively. If estimates hold, they would bring the pace of new home construction to levels last seen in the first half of 2019. Still, even with anticipated increases for permits and starts, the pace of new home construction would be down nearly 24 percent from its recent high, set in February. So, the results for July are likely to highlight the long road back to pre-pandemic construction levels.

On Wednesday, the Federal Open Market Committee will release the minutes from its July meeting. The committee did not change policy at this meeting, voting unanimously to keep the federal funds rate at virtually zero. These minutes are expected to provide more insight into how Fed members viewed rising case counts in July, as the meeting took place while counts were rising notably in several states. Several members have noted one of the major risks to their economic outlook is the uncertainty created by the pandemic, so it will be interesting to see how the Fed reacted to the worsening public health picture in July. The minutes could also contain hints regarding the types of additional stimulus Fed members prefer, if further economic support is needed. Increased asset buying and forward guidance are two of the potential solutions expected to have been considered.

On Thursday, the weekly initial jobless claims report for the week ending August 15 is set to be released. Economists expect to see 990,000 initial unemployment claims during the week, which would be a modest increase from the 963,000 claims the previous week. This report will be an important test for the labor market, as a better-than-expected result here would be further evidence that headwinds created by rising cases in July are dissipating in August. But, even if initial claims beat expectations, they will likely remain well above historical norms, highlighting the possibility of a long road ahead before employment numbers return to pre-pandemic levels. We’ll continue to monitor this important weekly release until unemployment claims are closer to historically average levels.

We’ll finish the week with Friday’s release of July’s existing homes sales report, which is expected to show an increase of 14.4 percent during the month, following a strong 20.7 percent rise in June. If estimates hold, they would bring the pace of existing home sales to virtually the same level we saw in July 2019, highlighting this indicator’s swift rebound following reopening efforts. Record lows in mortgage rates have been the major driver of rising housing sales. Rates continued to fall in July, so they should help boost growth in housing sales. Nonetheless, despite the improvement we’ve seen and the anticipated increase in July, if estimates prove accurate, existing home sales would be down more than 17 percent compared with February’s recent high. This report will likely highlight the work that needs to be done in this sector.

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

Strong July for markets
July marked a strong start to the second half of the year for markets, as all three major U.S. equity indices ended the month in positive territory. The Dow Jones Industrial Average (DJIA) gained 2.51 percent for the month, and the S&P 500 impressed with a 5.64 percent return. The Nasdaq Composite, with its heavy weighting to technology, was the leader, rising by 6.85 percent.
These positive returns were boosted by better-than-expected fundamentals during the month. According to Bloomberg Intelligence, at the end of July, the quarterly earnings growth rate for the S&P 500 in the second quarter stood at –35 percent. This is significantly better than initial estimates for a 43.4 percent decline. The results were widespread, as 83.4 percent of companies that have reported earnings for the quarter surpassed analyst expectations. If estimates hold, this would mark the best quarter for positive earnings surprises for the index in 27 years. Although the decline during the quarter is concerning, these results, combined with analyst expectations for a return to earnings growth by the first quarter of 2021, indicate that companies were able to withstand the economic damage in the second quarter better than expected.

Technical factors were also supportive for U.S. equity markets during the month. All three major indices finished above their respective 200-day moving averages for the first time since January. Technicals have been mixed throughout the pandemic. The DJIA took longer than the S&P 500 and Nasdaq to recover after hitting lows in March. The 200-day trend line is an important technical signal that is widely followed by market participants. Prolonged breaks above this trend line could indicate a longer-term shift in investor sentiment.

The story was much the same for international markets. The MSCI EAFE Index gained a solid 2.33 percent during the month, bolstered by a new stimulus package for the European Union. Emerging markets did even better, with the MSCI Emerging Markets Index rising by 9.03 percent. Emerging markets were supported by a weakening dollar, as the Dollar Spot Index fell to its lowest point in more than two years in July.

Technicals for international markets were mixed during the month. The MSCI EAFE Index spent much of July above its 200-day moving average trend line. Volatility at month-end brought the index below trend for the sixth month in a row, however. The MSCI Emerging Markets Index spent virtually all of July above its 200-day moving average. It ended the month above trend for the first time since the start of the pandemic.

Fixed income markets had a positive month. The 10-year Treasury yield fell from 0.69 percent at the start of July to 0.55 percent at month-end. This brought the 10-year yield to its lowest level since March and near all-time lows. Shorter duration bonds also saw yields fall, with both the 3-year and 5-year yields setting new intraday lows near month-end. Declining yields led the Bloomberg Barclays U.S. Aggregate Bond Index to a gain of 1.49 percent during the month. High-yield bonds were also strong, with the Bloomberg Barclays U.S. Corporate High Yield Index gaining 4.69 percent. High-yield spreads dropped to their lowest level since the start of the pandemic.

U.S. sees public health progress
July was a mixed bag on the pandemic front, as measures to combat localized outbreaks led to some signs of progress by month-end, despite rising national case counts. While new and total case numbers remain high, the daily growth rate showed improvement later in the month. It fell from around 2 percent to approximately 1.5 percent by month-end. This indicates that the pausing or rolling back of reopening efforts in certain states is starting to help control the spread of the virus.

We continued to see improved testing capability, with average daily new tests increasing to around 800,000 by the end of the month. We still don’t have enough daily tests to get a full understanding of the pandemic, however. We can see the impact of this in the positive test ratio, which remains elevated at around 8 percent. The World Health Organization recommends a target positive test rate of 5 percent.
Ultimately, although case counts remain high, July’s public health results were encouraging. They showed stabilization and, in some cases, real progress in tamping down localized outbreaks. There is still work to do before we have the virus under control in the U.S., but the results in July showed we are on the right path.

Economic data shows signs of moderating recovery
The economic updates in July were mixed and pointed to a slowing recovery, following the strong rebound in activity we saw in May and June. Although many of the spending reports from July have not yet been released, the data we have seen so far is concerning. Weekly initial jobless claims, which show how many new Americans filed for unemployment each week, rose for two weeks in a row in July. This marks the first increase for weekly initial claims since March and highlights the challenges rising case counts created for the job market.

Consumer confidence was also disappointing in July. Both major measures of consumer confidence fell after rebounding in May and June. As you can see in Figure 1, the University of Michigan consumer sentiment survey was especially disappointing, as the larger-than-expected decline in July brought the index near lows set in April. Typically, rising consumer confidence supports faster consumer spending growth. So, these declines in July will likely serve as a headwind for further consumer spending gains.

Figure 1. University of Michigan Consumer Sentiment, 2010–Present

Despite these reports, July showed signs of hope as well. Business confidence and spending came in better than expected, indicating that businesses were willing and able to open once lockdown restrictions lifted. We also saw continued strength in the housing market, with home builder confidence shooting up by more than expected in July. Home builder confidence hit a seven-year low in April and now sits near all-time highs. The housing market has been a bright spot in the recent recovery. It has shown surprising resilience driven in large part by mortgage rates that hit historic lows in July.

Markets pricing in continued progress, but risks remain
As has been the case for much of the year, very real risks to the economic recovery exist and should be monitored. July showed us how localized outbreaks and rising case counts can be a barrier to further economic improvements.

We also saw the true extent of the damage caused by lockdown efforts firsthand when the first estimate for economic output in the second quarter showed gross domestic product contracting at a record rate of 32.9 percent annualized. This served as a reminder that the road to a full economic recovery will likely be long, with setbacks on the way. With that said, we saw very real progress on the public health front in July and can expect it to continue.

Markets are pricing in health and economic improvements, but it’s always possible negative news will rattle investors and drive volatility. Trade tensions between the U.S. and China and rising social unrest could negatively affect markets in the short term as well. Given the uncertain times, maintaining a well-diversified portfolio that matches investor goals and timelines remains the best path forward for most. As always, if concerns remain, you should contact your financial advisor to discuss your investment plan.

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 ®