Presented by Mark Gallagher

General Market News
• Rates moved lower last week, reaching their lowest point since March, with the 10-year Treasury yield closing at 0.56 percent Friday and opening at 0.62 percent on Monday. The 30-year opened at 1.34 percent on Monday, having closed at 1.24 percent on Friday. The 2-year also reached its lowest level since the spring; it closed at 0.13 percent on Friday and opened at 0.15 percent this Monday morning. Mortgage rates are also at historical lows.
• U.S. equities were led by the tech-oriented Nasdaq Composite last week. Investors continued to flock to Facebook, Apple, Amazon, Microsoft, and Google. All of these names were up by more than 3.5 percent on the week, with Amazon up by double digits. Other tech names, such as Tesla and Netflix, posted even greater gains. The end of the week also saw large banks (i.e., JPMorgan, Citi, Morgan Stanley, Goldman Sachs, and Bank of America) tick higher, on news from Gilead Sciences that its drug Remdesivir may reduce COVID-19 deaths by as much as 62 percent in extremely sick patients.
• The top-performing sectors on the week were consumer discretionary (led by Amazon and Tesla), communications services (led by Facebook and Alphabet), and technology (led by Microsoft and Nvidia). The worst-performing sectors were energy, REITs, and industrials, as the coronavirus made demand murky.
• On Monday, the Institute for Supply Management Nonmanufacturing index for June was released. This measure of service sector confidence far surpassed economist estimates, increasing from 45.5 in May to 57.1 in June, against calls for a more modest increase to 50.2. This is a diffusion index, where values above 50 indicate expansion, so this swift rebound back above 50 after hitting a 10-year low of 41.8 in April is very encouraging. The service sector accounts for the lion’s share of economic activity, so the rapid recovery in confidence we saw in June was a good sign for the ongoing economic recovery. Ultimately, this report showed the pace of economic recovery was likely faster than initially expected once reopening efforts took hold.
• On Friday, the Producer Price Index for June was released. Producer prices declined by more than expected during the month, falling by 0.2 percent against expectations for a 0.4 percent increase. On a year-over-year basis, producer prices contracted by 0.8 percent, which was larger than the 0.2 percent decline that was expected. Core producer prices, which strip out the impact of volatile food and energy prices, also came in below expectations, increasing by 0.1 percent against calls for a 0.4 percent increase. Inflationary pressures have largely been kept at bay over the past few months due to the massive shock to demand that was created by the pandemic.

Source: Bloomberg, as of July 10, 2020

Source: Morningstar Direct, as of July 10, 2020

What to Look Forward To
On Tuesday, the Consumer Price Index for June is set to be released. Headline consumer inflation is expected to show 0.5 percent growth for the month, which would translate to year-over-year consumer inflation of 0.6 percent. Regarding headline consumer inflation, the increase is anticipated due to rising gas prices in June, which were driven up by the increased cost of oil. Core consumer prices, which strip out the impact of volatile food and energy prices, are expected to increase by a more modest 0.1 percent during the month and 1.1 percent on a year-over-year basis. As was the case with producer prices, the pandemic has served as a headwind for inflation over the past few months. Nonetheless, with consumer spending picking up notably in June, economists expect increased activity to lead to modest inflationary pressure. If the estimates hold for headline and core consumer prices in June, inflation would remain well below the Federal Reserve’s stated 2 percent target. As such, it is not expected to be a major concern for the central bank in the short term.

Wednesday will see the release of June’s industrial production report. Production is slated to increase by a strong 4.3 percent during the month, following a 1.4 percent increase in May. Manufacturing output is also expected to show healthy growth, with forecasts calling for a 5.9 percent increase in output in June. Compared to consumer data, May’s industrial production report showed a slower rebound following reopening efforts, but this can be largely attributed to a slower pace of factory openings. Given that many factories reopened in the second half of May and early part of June, the anticipated acceleration of industrial production and manufacturing output growth in June makes sense. Despite the anticipated increases for industrial production and manufacturing output, both indicators fell by double digits in April. If the estimates for June prove to be accurate, this sector has a long way to go to return to pre-pandemic levels.

On Thursday, the weekly initial jobless claims report for the week ending July 11 is set to be released. Economists expect to see a further reduction in initial unemployment claims during the week, with an additional 1.25 million initial claims expected, down from just over 1.31 million the week before. If estimates prove to be accurate, this report would mark the 15th straight week of declining initial claims after a spike to an all-time high of more than 6.8 million initial claims for the week ending March 27. Continuing claims are also expected to decline from 18 million. Despite these anticipated declines, initial claims would still sit well above the average of roughly 220,000 weekly claims we saw in 2019. We’ll continue to monitor this weekly report until initial claim levels return closer to normal.

Thursday will also see the release of June’s retail sales report. Economists expect to see sales increase by a strong 4.5 percent during the month, following a record 17.7 percent increase in May. Core retail sales, which strip out the impact of volatile auto and gas sales, are expected to rise by 5.4 percent in June, following the 12.4 percent jump in May. May’s exceptionally strong rebound in sales was bolstered by reopening efforts across the country, which should continue to serve as a tailwind in June. High-frequency data showed a continued uptick in consumer activity early in the month; however, a slowdown in certain metrics occurred toward month-end as coronavirus case counts rose. Consumer spending accounts for roughly two-thirds of overall economic activity, so a continued rebound in sales in June would be a good sign for the ongoing economic recovery in the face of higher case counts.

The third major economic report on Thursday will be the release of the National Association of Home Builders Housing Market Index for July. This measure of home builder confidence is expected to increase from 58 in June to 60 in July. The index hit a seven-year low of 30 in April, as lockdowns forced prospective home buyers to press pause on purchases. Since this is a diffusion index, where values above 50 indicate expansion, its strong rebound since April has been very encouraging. Home builders cited significantly higher levels of prospective home buyer foot traffic in June compared with April and May as a major factor in the swift improvement in confidence. This trend is expected to continue in July due to historically low mortgage rates. Ultimately, higher levels of home builder confidence help support faster new home construction, so improvements to this index would be a good sign for future home construction and the overall housing market.

Speaking of new home construction, Friday will see the release of June’s building permits and housing starts reports. These two measures of new home construction are expected to show continued recovery, with permits and starts set to rise by 6.7 percent and 20.3 percent, respectively. These measures can be very volatile from month to month, but June would mark the second straight month with increased housing starts after the index hit a five-year low in April. The record increase in home builder confidence in June is expected to serve as a tailwind for construction during the month, resulting in an anticipated increase of roughly 1.17 million annual new housing starts. If estimates hold, the pace of housing starts would reach levels last seen at the beginning of 2019. Despite this anticipated jump, however, starts would be well below January’s high-water mark of more than 1.6 million, indicating this sector is still far off recent highs.

Finally, we’ll finish the week with Friday’s release of the preliminary estimate of the University of Michigan consumer sentiment survey for July. This widely followed measure of consumer confidence is expected to increase from 78.1 in June to 80 in July. This important data release will give a first look at how consumer sentiment was affected by rising coronavirus case counts in June. The factors that have historically supported higher consumer confidence, namely low gas prices, a strong job market, and strong equity market performance, have largely shown signs of moderation over the past month, which is expected to weigh on consumer sentiment. Improving consumer confidence typically supports faster consumer spending growth, so any improvement for the index would certainly be seen as a positive development. If estimates are accurate, however, the index would still sit well below the recent high of 101 set in February. While this survey has shown a solid rebound in confidence after hitting an eight-year low of 71.8 in March, confidence is still far from pre-pandemic levels. We’ll continue to closely monitor this release as the economic recovery continues.

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

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

Authored by the Investment Research team at Commonwealth Financial Network.

© 2020 Commonwealth Financial Network ®

Presented by Mark Gallagher

General Market News
• The 10-year Treasury yield opened at 0.68 percent on Monday, while the 30-year opened at 1.44 percent and the 2-year at 0.15 percent. The 10-year and shorter part of the yield curve remain lower as uncertainty and near-term concerns about the economy linger. Meanwhile, the 10- to 20-year portion of the curve has become steeper, as there has been an influx of new supply.
• With a number of economic measures helping fuel optimism in the economy, U.S. equities held a strong rally last week in the face of rising COVID-19 cases. As we will cover below, June’s Institute for Supply Management (ISM) Manufacturing index and employment reports surprised to the upside. We also saw positive early study results from a joint effort by Pfizer (PFE) and BioNTech SE (BNTX) to develop a coronavirus vaccine. Lastly, we saw the release of the minutes of the June Federal Open Market Committee (FOMC) meeting, at which the board stated there was a substantial likelihood of additional waves. The FOMC announced it has continued to purchase corporate bonds from names such as AT&T (T), UnitedHealth Group (UNH), and Walmart (WMT). Sectors that outperformed last week included communication services, REITs, and materials. Lagging sectors included financials, energy, and consumer staples.
• We started last week with Tuesday’s release of the Conference Board Consumer Confidence Index for June. Confidence rose from 86.6 in May to 98.1 in June, against expectations for a more modest increase to 91.5. This improvement, the best single-month increase for the index since 2011, helps calm concerns about rising case counts affecting consumer confidence. Increased confidence levels support faster consumer spending growth, so this was a very encouraging sign for June’s consumer spending reports and overall economic growth in the second quarter.
• On Wednesday, the ISM Manufacturing index for June was released. This measure of manufacturing sector confidence rose from 43.1 in May to 52.6 in June, against forecasts for a more modest increase to 49.8. This was the largest single-month increase for the index in nearly 40 years, bringing manufacturer confidence to a 14-month high. This is a diffusion index, where values greater than 50 indicate expansion, so this better-than-expected result bodes well for manufacturing output during the month. Many factories began to reopen in late May and early June, boosting confidence after forced closures in April brought the index to its lowest level since the 2008 financial crisis. Ultimately, this result points toward a faster-than-expected recovery for the manufacturing sector, which was hit hard by anticoronavirus measures.
• We finished the holiday-shortened week with Thursday’s release of the June employment report. Approximately 4.8 million jobs were added during the month, far better than economist estimates for slightly more than 3.2 million. This marks the second consecutive month in which headline job creation was far above economist estimates, indicating that once reopening efforts took hold, the pace of economic recovery was faster than expected. The underlying data was positive as well, with the unemployment rate falling from 13.3 percent in May to 11.1 percent in June, against forecasts for a more modest fall to 12.5 percent. The labor force participation rate also increased while the underemployment rate fell. In summary, this was a very strong employment report that showed reopening efforts spurred more hiring than anticipated, and that supports hopes for a faster-than-expected economic recovery.

Source: Bloomberg, as of July 2, 2020

Source: Morningstar Direct, as of July 2, 2020

What to Look Forward To

On Monday, the ISM Nonmanufacturing index for June was released. This measure of service sector confidence far surpassed economist estimates, increasing from 45.5 in May to 57.1 in June, against calls for a more modest rise to 50.2. This is another diffusion index, where values above 50 indicate expansion, so this swift rebound after the index hit a 10-year low of 41.8 in April is very encouraging. The service sector accounts for the lion’s share of economic activity, so the rapid recovery in confidence in June is a good sign for the ongoing economic recovery. As we saw with manufacturer confidence, reopening efforts in May and June served as a tailwind for service sector confidence during the month. Ultimately, this report indicates the pace of economic recovery was faster than initially expected once reopening efforts took hold.

On Thursday, we’ll get the initial jobless claims report for the week ending July 4. The level of initial jobless claims has improved for each of the past 13 weeks after hitting an all-time high of more than 6.8 million in the final week of March. Still, despite the continued improvement over three months, the level of weekly initial claims on an absolute basis remains elevated compared with historical norms. Throughout 2019, roughly 220,000 initial claims were made per week; June’s range of 1.4–1.6 million weekly claims is well above normal levels. These numbers indicate continuing pressure on the jobs market despite improvements we’ve seen since the end of March. We’ll continue to monitor this weekly report until the level of initial claim returns closer to normal.

On Friday, the Producer Price Index for June will be released. Economists expect to see producer prices increase by 0.4 percent for the month, following a 0.4 percent increase in May. Nonetheless, headline producer prices are likely to show a modest decline on a year-over-year basis. Core producer prices, which strip out the impact of volatile food and energy prices, are expected to increase by 0.1 percent in June after falling by 0.1 percent in May. Inflationary pressures have been kept at bay over the past few months due to the massive shock to demand created by the pandemic; however, with businesses reopening and producers and consumers starting to spend again, increased inflationary pressure is expected.

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

Positive June caps off strong quarter for markets
June was another positive month for markets, despite concerns about the spread of the coronavirus causing some volatility near month-end. All three major indices posted positive returns for the month. The S&P 500 returned 1.99 percent, the Dow Jones Industrial Average (DJIA) gained 1.82 percent, and the Nasdaq Composite rose by 6.07 percent. On a quarterly basis, all three indices showed strong rebounds following March’s volatility. The Nasdaq led the way with a quarterly gain of 30.95 percent, while the DJIA gained 18.51 percent and the S&P increased by 20.54 percent.

These strong results came despite worsening fundamentals. According to Bloomberg Intelligence, as of June 26, the estimated earnings growth rate for the S&P 500 in the second quarter is –44.1 percent. This is down from estimates at the start of the quarter for a more modest 16.1 percent decline. Over the long term, fundamentals drive performance. So, the market rally in the face of these numbers suggests that investors expect a continued recovery and are willing to overlook a quarter or two of declines. The expected poor second-quarter results, while concerning, are understandable, given the damage created by anti-pandemic measures that were in place for much of the quarter.

From a technical perspective, June was another mixed month for U.S. markets. The S&P 500 managed to break above its 200-day moving average at the end of May. It finished above trend for the second month in a row, despite briefly falling below this important technical level twice during the month. The DJIA broke above trend early in the month before falling back and finishing June below its 200-day moving average. The Nasdaq was the only major index that spent the entire month above its 200-day trend line, after doing the same in May.

The story was similar for international markets during the month and quarter. The MSCI EAFE Index gained 3.41 percent in June, capping off a quarter that saw the index rise by 14.88 percent. Emerging markets fared even better, gaining 7.40 percent in June and 18.18 percent for the quarter. The developed and emerging market indices remained below their 200-day moving averages at month-end. Both indices managed to briefly break above trend during the month, however, which is an encouraging sign.

Fixed income markets also had a solid month and quarter, driven by continued support from the Federal Reserve that kept interest rates constrained. The 10-year U.S. Treasury yield was largely range-bound. It started the period at 0.62 percent and hit a high of 0.91 percent in early June before falling back to 0.66 percent at quarter-end. The Bloomberg Barclays U.S. Aggregate Bond Index rose by 0.63 percent during the month and 2.90 percent for the quarter.

High-yield fixed income, which is typically driven less by interest rate movements and more closely correlated to equity markets, also had a strong quarter. The Bloomberg Barclays U.S. Corporate High Yield Index gained 0.98 percent in June and 10.18 percent for the quarter. High-yield bond spreads ended the month largely unchanged, after falling notably in both April and May.

Local outbreaks cause national case numbers to rise
Despite the positive news in the markets, the public health data released during the month showed some setbacks. New daily coronavirus cases in the U.S. set record highs toward month-end. Outbreaks in several states sparked fears of a national second wave of infections. Most of the attention was centered on rising case numbers in Arizona, California, Florida, and Texas, but cases have been increasing in other states as well. We finished the quarter with the highest level of active cases in the U.S. on record, although the daily case growth rate remained under control at the national level.

The rise in cases during the month led some state and local governments to pause or, in some instances, even roll back reopening efforts. For example, Florida and Texas recently announced they would be closing bars again, and large swaths of California are doing the same to try to contain localized outbreaks. These measures should help bring those outbreaks under control, even as they risk slowing the economic recovery.

Testing continued to improve in June, ending the month with a new daily high of roughly 650,000 tests, compared with roughly 400,000 at the end of May. Although the growth in testing capability is a positive development, current testing levels are still not high enough to track and contain the disease on a national level. This was evidenced by the increase in the ratio of positive tests we saw during the month. The seven-day moving average of positive tests increased from 4.9 percent at the start of June to 6.9 percent at month-end. The World Health Organization recommends that communities maintain a positive test rate of less than 5 percent for two weeks before reopening efforts begin.

The local outbreaks have raised risks and should be watched, but the daily case growth rate remains at a much better level than during the first wave and showed signs of stabilization at month-end. With states acting to contain the outbreaks, the risks at the national level remain low.

Data shows continued rebound in economic activity
The economic data released in June largely pointed to a faster-than-expected rebound in economic activity as reopening efforts took hold. Perhaps the best example of this comes from consumers, who saw confidence and spending figures rise notably. May’s retail sales report was a highlight, with headline sales rising by 17.7 percent against expectations for an 8.4 percent increase. Personal spending rose by 8.2 percent, indicating that consumers were ready and willing to go out and spend as reopening efforts kicked off. Consumer spending accounts for roughly two-thirds of overall economic activity, so these reports were very encouraging.

The strong consumer spending growth was supported by improving consumer confidence during the quarter. Both major measures of consumer sentiment rebounded in May and June after hitting multiyear lows in April. The Conference Board Consumer Confidence Survey was especially impressive. It improved from 85.9 in May to 98.1 in June, the largest single-month increase for the index since 2011. As you can see in Figure 1, there is still quite a way to go before we’re back to pre-pandemic confidence levels, but we’re heading in the right direction.

Figure 1. Conference Board Consumer Confidence, 2010–Present

Consumer confidence was supported by improving jobs numbers and a strong equity market rebound. May’s employment report showed a surprising 2.5 million jobs were created, against economist estimates for a loss of 7.5 million jobs. We’ve also seen initial jobless claims and continuing unemployment claims decline recently, indicating that the worst of the job losses caused by the pandemic is likely behind us. The improving employment situation in May was one of the first reports to show significantly better-than-expected results for the economy as reopening efforts began.

Business confidence and spending also showed improvement during the month. Business confidence, as measured by the monthly Institute for Supply Management Purchasing Managers’ Index surveys, rose in May after hitting multiyear lows in April. This improving confidence translated into faster spending growth. May’s durable goods orders report showed a 15.8 percent increase in orders, which helped offset an 18.1 percent decline in April. Core durable goods orders, which are often used as a proxy for business investment, also saw a solid rebound in May, indicating that businesses were willing to spend as reopening efforts took hold. All things considered, the improvements we saw on the economic front during the month were very encouraging and point to a faster-than-expected recovery if things stay on track.

Risks to economic recovery remain
Although the positive economic news we received in June was encouraging, most of the data was backward looking. It should be noted that risks to the economic recovery and market rally are still out there. Month-end headlines were focused primarily on the rising case count. Any further bad news about the pandemic could lead to slower reopening efforts or lowered confidence and spending figures. Given the market’s recent resilience, it does not seem like rising case counts on their own are likely to trigger more volatility. They could lead to worsening fundamentals, however, and should certainly be monitored.

Looking past the coronavirus, trade tensions between the U.S. and China continue to rise. This will be an important area to monitor as the recovery begins worldwide, given the damage to global trade caused by the pandemic. Rising social unrest here in the U.S. is also worth monitoring. The uncertainty created by continued demonstrations and calls for political action could lead to additional market volatility. And, as always, there is the possibility that currently unknown risks could surface and negatively affect markets.

Ultimately, though we saw positive economic updates during the month, the setbacks in containing the virus serve as a reminder that we are far from out of the woods. Even as overall conditions remain positive, over the next few months, we are likely to face challenges and volatility. Given this uncertainty, a well-diversified portfolio that matches timelines and risk levels remains the best path forward for most investors; however, you should consult with your financial advisor if concerns remain.

All information according to Bloomberg, unless stated otherwise.

Disclosure: Certain sections of this commentary contain forward-looking statements based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets. All indices are unmanaged and investors cannot invest directly into an index. The Dow Jones Industrial Average is a price-weighted average of 30 actively traded blue-chip stocks. The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. The Nasdaq Composite Index measures the performance of all issues listed in the Nasdaq Stock Market, except for rights, warrants, units, and convertible debentures. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a market capitalization-weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. It excludes closed markets and those shares in otherwise free markets that are not purchasable by foreigners. The Bloomberg Barclays Aggregate Bond Index is an unmanaged market value-weighted index representing securities that are SEC-registered, taxable, and dollar-denominated. It covers the U.S. investment-grade fixed-rate bond market, with index components for a combination of the Bloomberg Barclays government and corporate securities, mortgage-backed pass-through securities, and asset-backed securities. The Bloomberg Barclays U.S. Corporate High Yield Index covers the USD-denominated, non-investment-grade, fixed-rate, taxable corporate bond market. Securities are classified as high-yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below.

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

Authored by the Investment Research team at Commonwealth Financial Network.

© 2020 Commonwealth Financial Network ®

Presented by Mark Gallagher

General Market News
• Treasury rates were largely range bound last week, as Federal Reserve (Fed) Chairman Jerome Powell’s midweek testimony to Congress did not contain major market-moving news. The 10-year Treasury yield started the week at 0.70 percent, slightly higher than last week’s opening yield of 0.66 percent. The story was the same on the longer end of the curve, with the 30-year opening at 1.44 percent, compared with 1.40 percent the week before.
• Last week, global equities rebounded from the previous week’s pullback as indices posted gains across the board. The rebound, led by the Nasdaq, favored growth and momentum companies. The Fed’s choice to purchase individual corporate bonds and to kick off its Main Street Lending Program were among the reasons for the move higher. In addition, there is speculation that a future infrastructure stimulus plan could be proposed. Sectors that fared best during the week included health care, technology, consumer staples, and consumer discretionary. Underperforming sectors were bond proxy sectors in utilities, energy, and REITs.
• On Tuesday, May’s retail sales report was released. Sales blew away expectations, increasing by 17.7 percent against forecasts for an 8.4 percent increase. This rebound shows consumers were more than ready to get out and spend as states started reopening. Car sales were a highlight during the month, increasing by more than 40 percent from April; however, even core retail sales, which strip out the impact of auto and gas sales, rose by a better-than-expected 12.4 percent. All things considered, this was a positive report that indicates the economic recovery may be swifter than originally anticipated.
• Also released Tuesday was the National Association of Home Builders Housing Market Index for June. This measure of home builder confidence rose from 37 in May to 58 in June, against expectations for a more modest increase to 45. This was one of the largest single-month increases on record, as home builders cited significantly higher prospective home buyer interest during the month. Although there remains a long way to go to return to the recent high of 78, set in December, this better-than-expected report is a good sign for future home construction as we enter the summer months, with state economies largely opened up to renewed construction work.
• Speaking of new home construction, May’s building permits and housing starts reports were released Wednesday. Here, the news was a bit disappointing, as both measures of new home construction came in below expectations. Starts rose by 4.3 percent, against forecasts for a 23.5 percent increase. Permits rose by a more encouraging 14.4 percent, against calls for a 16.8 percent increase. Although the increased pace of new home construction in May was welcome, it followed April declines of more than 26 and 21 percent for starts and permits, respectively, so there remains a long way to go before returning to pre-pandemic activity levels.

Source: Bloomberg, as of June 19, 2020

Source: Morningstar Direct, as of June 19, 2020

What to Look Forward To
On Monday, May’s existing home sales report was released. Sales fell by 9.7 percent during the month, against expectations for a 5.6 percent decline. Following a 17.8 percent decline in April, this disappointing result brought the annualized pace of existing home sales down to a nine-year low of 3.91 million. The declines were geographically widespread, with sales down by double digits on a year-over-year basis across all four major regions of the country. Before the pandemic hit, existing home sales showed solid growth in 2019 and the first two months of 2020, peaking at an annualized rate of 5.76 million in February. With mortgage rates near a three-year low and consumer confidence stabilizing in June, we can hope home sales may rebound in the upcoming months. As May’s disappointing results showed, however, the disruption to the housing market caused by the pandemic was severe. It’s likely the pace of home sales will take some time to recover to pre-pandemic levels.

We’ll get another look at the housing market with Tuesday’s release of the May new home sales report. New home sales are expected to rise by 1.1 percent after posting a surprise 0.6 percent increase in April. New home sales are a smaller and, often, more volatile portion of the housing market compared with existing home sales, but the anticipated increase would still be a positive sign for the overall market. Once again, the combination of low rates and improving consumer demand is expected to serve as a tailwind for new home sales as we head into the summer. One key area to monitor will be the pace of new home construction, as the slowdown caused by the pandemic may serve as a temporary headwind to new home sales, especially in supply-constrained markets. Nonetheless, the better-than-expected home builder confidence figures should support faster new home construction, which, in turn, would likely boost new home sales.

On Thursday, the preliminary durable goods orders report for May will be released. Durable goods orders are expected to increase by 10.5 percent, following a 17.7 percent decline in April. Much of the anticipated increase can be attributed to transportation orders, which can be especially volatile on a month-to-month basis. Core durable goods orders, which strip out the impact of transportation orders, are set to increase by 2.5 percent during the month, following a 7.7 percent decline in April. Core durable goods orders are often seen as a proxy for business investment, so while this anticipated increase would be a positive development, it would indicate business spending will likely face a longer path back to pre-pandemic levels compared with consumer spending, which has already showed signs of a swifter rebound.

Thursday will also see the release of the weekly initial jobless claims estimate for the week ending June 20. Economists expect initial claims to fall for the 12th consecutive week, down to 1.3 million from just more than 1.5 million the previous week. Although continued declines for initial claims would be welcome, the pace of reduction has slowed over the past few weeks, indicating the job market still faces significant stress despite reopening efforts. We will continue to monitor these weekly releases until we see claims returning to historically normal levels.

On Friday, May’s personal income and personal spending reports will be released. Incomes are expected to fall by 6 percent, following a surprising 10.5 percent increase in April. Incomes were boosted by onetime CARES Act payments in April, which are not expected to have a meaningful effect in May. Spending is set to increase by 8.6 percent, partially offsetting a 13.6 percent decline in April that was the worst monthly decline for personal spending since records began being kept in 1959. Once again, though the anticipated increase in spending would be a welcome development, it will likely take some time to recover from the damage to consumer spending caused by the pandemic, even if the pace of recovery may be faster than originally anticipated.

Finally, we’ll finish the week with Friday’s release of the second and final estimate of the University of Michigan consumer sentiment index for June. Economists expect it to remain unchanged from the midmonth preliminary estimate of 78.9, up from 72.3 in May and higher than initial estimates of 75 in June. The much-better-than-expected May jobs report and equity market rebound likely contributed to this better-than-expected preliminary result. Improving consumer sentiment has historically supported faster consumer spending growth, so a continued rebound for this index would bode well for June’s spending figures. Although the anticipated increase would be welcome, confidence would still sit well below its recent high of 101 in February, so there remains much work to be done to fully restore consumer sentiment.

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

Authored by the Investment Research team at Commonwealth Financial Network.

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