Presented by Mark Gallagher

General Market News
• Rates took a bit of a roller coaster ride last week, as the 10-year Treasury yield spiked to as high as 0.93 percent following the previous week’s sell-off in the bond market. In fact, most of last week’s rates came back down just about as fast as they spiked the week before. The 10-year opened at 0.66 percent on Monday. The 30-year reached a high of 1.75 percent over the same time frame, falling to 1.40 percent as of Monday morning. The 2-year, which reached a recent high of 0.23 percent, opened at 0.18 percent.
• Global equities sold off last week, as a caution from the Federal Reserve (Fed) and concerns over another increase in coronavirus cases moved investors to the sidelines. Fed Chairman Jerome Powell said Fed officials expect to keep rates near zero through at least 2022. As has been the case throughout the year, the tech-oriented Nasdaq was least affected. Indices such as the Russell 2000, which provides exposure to smaller businesses, were hit harder. Last week, we witnessed a reversal of the value trend seen in the prior three weeks. During that time, stocks that had been beat up by the virus rallied; this was flipped last week, as value sectors, such as energy, financials, industrials, and materials, were all hit hard. Sectors that held up best included technology, communication services, and consumer discretionary.
• On Wednesday, May’s Consumer Price Index was released. Consumer prices fell modestly by 0.1 percent during the month, against expectations for no change. This brought the pace of year-over-year consumer inflation to a paltry 0.1 percent. Core consumer prices, which strip out the impact of volatile food and energy prices, also declined by 0.1 percent for the month, against expectations to remain flat. The April inflation reports showed the massive deflationary pressure caused by the coronavirus pandemic. Looking forward, this pressure is expected to remain until economic activity picks up notably.
• Also on Wednesday, the Federal Open Market Committee released its rate decision at its June meeting. As expected, the Fed kept the federal funds rate unchanged. The Fed also released economic forecasts that painted a bleak picture for the near future, with the economy expected to face considerable risks over the short and intermediate term. The Fed predicts a 6.5 percent decline in gross domestic product this year and a year-end unemployment rate of 9.3 percent. As a response to this discouraging outlook, the Fed remains committed to keeping rates low for the foreseeable future. Although the forecasts were dire, the Fed’s commitment to provide as much support as necessary shows that the central bank is ready and willing to pull out all the stops to help stimulate the economy.
• On Thursday, May’s Producer Price Index was released. Producer prices increased by 0.4 percent during the month, surpassing estimates for 0.1 percent growth. This brought the year-over-year pace of producer deflation up to –0.8 percent, from –1.2 percent in April. Core producer prices, which strip out energy and food prices, fell by 0.1 percent during the month, bringing the pace of year-over-year core producer inflation to 0.3 percent. This marks a four-year low for year-over-year core producer inflation. As was the case with consumer inflation estimates, economists aren’t anticipating a swift increase in producer inflation, given the headwinds created by the pandemic and the expected moderate pace of economic recovery.
• We finished the week with Friday’s release of the preliminary estimate of the University of Michigan consumer sentiment survey for June. This measure of consumer confidence beat expectations, rising from 72.3 in May to 78.9 in June, against forecasts for a more modest increase to 75. This was the largest single-month increase for the index since 2016, indicating consumers reacted positively to reopening efforts that began in May. The better-than-expected May jobs report, along with strong equity market performance over the past few months, likely contributed to this result. Although this was certainly a welcome development, the index still sits well below its pre-pandemic high of 101, set in February.

Source: Bloomberg, as of June 12, 2020

Source: Morningstar Direct, as of June 12, 2020

What to Look Forward To
On Tuesday, May’s retail sales report is set to be released. Headline sales are expected to increase by 7.9 percent during the month, following a 16.4 percent decline in April. Although an increase would certainly be welcome, it’s important to remember that the pandemic caused headline sales to drop by a combined 23.4 percent between February and April. One of the major drivers of this anticipated increase in headline sales is a rise in auto and gas sales, which rebounded in May as reopening efforts took hold. Core sales, which strip out the impact of volatile auto and gas prices, are set to increase by 4.5 percent in May, following a 16.2 percent decline in April. Again, while the anticipated increase in core sales would be welcome, it will likely be a long time before the overall pace of sales returns to pre-pandemic levels. Because consumer spending accounts for the lion’s share of economic activity, this release will continue to be widely monitored.

May’s industrial production report will also be released Tuesday. Production is expected to rise by 3 percent during the month, following an 11.2 percent decline in April. Factories were largely shut down in April and began gradually reopening in May, which explains the anticipated rebound. Manufacturing output is expected to top that gain, with economists forecasting a 5.9 percent increase to follow the 13.7 percent decline in April. Looking forward, both industrial production and manufacturing output are expected to face headwinds created by low energy prices, lowered global demand, and disrupted supply chains due to the pandemic. Compared with service-based sectors, a swift recovery to pre-pandemic levels may be more difficult for the industrial sector.

The third major release scheduled for Tuesday is the National Association of Home Builders Housing Market Index for June. This measure of home builder confidence is slated to increase from 37 in May to 44 in June. This would mark the second consecutive month of increased home builder confidence, following the index’s drop to a seven-year low of 30 in April. Despite the anticipated increase, the index would sit far below its recent high of 76, set in December 2019. Home builders cited a steep fall in foot traffic from potential buyers due to the pandemic as a major driver of this decline in confidence. But, with the country reopening, potential buyers may come back faster than expected. Such a rebound would likely lead to a faster-than-expected recovery for home builder confidence and spending.

On Wednesday, May’s building permits and housing starts reports are set to be released. Economists expect to see a strong rebound in both measures of new home construction, with permits and starts expected to increase by 14.9 percent and 23.5 percent, respectively. Nonetheless, these solid results would represent only a partial rebound from April, when anticoronavirus measures caused permits to fall by 20.8 percent and starts to plummet by 30.2 percent. As was the case with home builder confidence, the forecasted rebound for permits and starts in May would be a positive development for the housing market. Still, even if estimates hold, this segment has a long way to go before returning to recent highs.

We’ll finish the week with Thursday’s release of the weekly initial jobless claims report for the week ending June 13. Economists expect that 1.295 million initial unemployment claims will be filed during the week, down from 1.542 million the week before. Continuing claims are also expected to fall, from roughly 20.9 million to 19.4 million. If estimates hold, this report would mark the 11th consecutive week with declining initial claims. Although this anticipated decline is welcome, initial and continuing claims sit well above historical norms, indicating the jobs market remains under significant stress despite reopening efforts that began in May. We will continue to monitor these important weekly releases until we see claims return to more normal levels.

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 0.66 percent on Monday, while the 2-year came in at 0.17 percent and the 30-year at 1.43 percent. We are set to get some May economic numbers this week, which should give us a clearer view on where we stand as an economy. The Federal Reserve meets next week, and, while it has done a lot and has essentially asked Congress to step in, it should be interesting to see what members have to say when faced with hard May economic numbers.
• Global equities rallied last week, as investors grew optimistic after Dr. Anthony Fauci said a vaccine could be available by November or December. For the second week in a row, value continued to outperform as the positive news saw beaten-down value stocks bounce back. U.S. and China trade tensions picked up again as the U.S. suspended Hong Kong’s special tariff rates following the proposal of a new national security law there. Emerging markets understandably lagged the S&P 500 and Dow Jones Industrial Average for the week, while international markets outperformed amid European reopenings. The top-performing sectors were financials, industrials, REITs, and utilities. Underperforming sectors were communication services, energy, and technology.
• The Conference Board Consumer Confidence Index for May was released last Tuesday. Confidence rose from a downwardly revised 85.7 in April to 86.6 in May. This was slightly worse than expectations for an increase to 87 but still a step in the right direction. Consumer expectations for the future increased during the month; however, views of the present condition worsened modestly. Altogether, this was a largely positive report because it indicates consumer confidence may have bottomed in April and could be set to rebound as states continue to reopen. As hopes of a swift economic recovery largely rely on a quick rebound for consumer confidence and spending, this report will be watched closely.
• On Tuesday, April’s new home sales report was released. New home sales came in much better than expected, increasing modestly from a downwardly revised annual rate of 619,000 in March to 623,000 in April, against forecasts for a fall to 480,000. Despite this better-than-expected performance, the pace of new home sales is still down notably from its recent high of 717,000, set in January. We saw strong growth in new home sales in 2019, and this momentum continued into 2020 before the pandemic hit. Looking forward, the slowdown in new home construction in March and April will likely serve as a headwind for future new home sales because of lowered supply in key markets.
• On Thursday, the second estimate of first-quarter gross domestic product (GDP) growth was released. Economic growth was revised down from an annualized –4.8 percent to –5 percent. Personal consumption, the major driver of GDP growth in 2019, improved slightly to –6.8 percent annualized during the quarter, from an initial estimate of –7.6 percent. Despite this better-than-expected revision to consumption growth, this still represents the worst quarter for personal consumption since the second quarter of 1980. Although these very weak growth figures are concerning, they are likely just the tip of the iceberg; economists are forecasting a 33.5 percent annualized contraction for the economy in the second quarter.
• Thursday also saw the release of the preliminary estimate of April’s durable goods orders report. Orders came in slightly better than expected, falling by 17.2 percent during the month against forecasts for a 19 percent decline. As was the case in March, much of the decline in headline orders during the month can be attributed to a fall in volatile aircraft orders. Core durable goods orders, which strip out the impact of volatile transportation orders, came in much better than expected, falling 7.4 percent against calls for a 15 percent decline. While this result is a positive development, it still represents the largest single-month drop in core orders in more than a decade. Core durable goods orders are often used as a proxy for business investment, so this report indicates that already weak business spending in the first quarter likely worsened to start the second quarter.
• On Friday, April’s personal income and personal spending reports were released. Personal spending, which accounts for roughly two-thirds of total economic activity, fell by 13.6 percent during the month, worse than the expected 12.8 percent decline. This was the worst monthly decline in spending since records began in 1959. Personal incomes increased by 10.5 percent during the month, far surpassing estimates for a 5.9 percent decline. Incomes were boosted by the Coronavirus Aid, Relief, and Economic Security (CARES) Act payments to consumers during the month. Despite the better-than-expected result for income growth, the historically bad spending highlights the massive disruption to consumer spending that shelter-in-place orders had during the month.
• Finally, we finished the week with Friday’s release of the second and final estimate of the University of Michigan consumer sentiment survey for May. Consumer confidence fell slightly during the month, down from 73.7 midmonth to 72.3 at month-end, against expectations for a modest increase to 74. Despite the modest decline, this still represents a step in the right direction after the index hit an eight-year low of 71.8 in April. This echoes the results from the Conference Board Consumer Confidence Index, released on Tuesday. As is the case with that report, this will be a widely followed release because it will give a glimpse into how consumers are reacting to the easing of shelter-in-place orders as we head into the summer.

Source: Bloomberg, as of May 29, 2020

Source: Morningstar Direct, as of May 29, 2020

What to Look Forward To
We started the week with Monday’s release of the Institute for Supply Management (ISM) Manufacturing index for May. This measure of manufacturer confidence increased modestly from 41.5 in April to 43.1 in May, against expectations for a larger increase to 43.8. While this gain was a positive development, this is a diffusion index, where values below 50 indicate contraction, so the index remains at a concerning level. The manufacturing industry was hard hit in April by factory shutdowns and a steep drop in global demand due to the pandemic, but efforts to reopen factories in May bolstered confidence modestly. While the factory openings should be a tailwind for manufacturer confidence in the short term, the drop in global demand will likely linger and serve as a headwind for a swift increase in this indicator.

On Wednesday, we will see the release of the ISM Nonmanufacturing index. This measure of service sector confidence is also expected to increase modestly, from 41.8 in April to 44 in May. This is another diffusion index, where values below 50 indicate contraction. So, while the projected May increase would be positive, confidence would still sit well below levels needed to support a swift economic recovery. Ultimately, while an uptick in business confidence would certainly be welcome, modest increases linked to reopening efforts would be unlikely to significantly increase business investment without a marked improvement in economic conditions.

On Thursday, the initial jobless claims for the week ending May 30 will be released. Economists expect to see an additional 1.8 million initial unemployment claims filed during the week, marking the ninth straight week of declining initial claims. This result would bring the total amount of initial claims filed during the pandemic to roughly 42 million. Despite the anticipated decline for initial claims in the last week of May, we will continue to closely monitor this weekly release until levels get closer to historical norms. We will also be keeping a close eye on the continuing claims report set to be released at the same time, to see if the decline the previous week is sustainable or a one-off result.

Thursday will also see the release of the April international trade report. The trade deficit is expected to narrow, from $44.4 billion in March to $41.5 billion in April. Previously released data for the trade of goods during the month showed exports falling by more than 25 percent in April, offsetting a 14.3 percent decline for imports over the same period. That data brought the trade gap for goods to its widest level in seven months. Looking forward, trade is expected to show continued weakness in the short term, as the disruptions caused by the pandemic should serve as a headwind for global trade growth.

We’ll finish the week with Friday’s release of May’s employment report. Economists expect to see 8 million additional jobs lost during the month, following more than 20 million job losses in April. This would bring the unemployment rate up to 19.5 percent, notably higher than the 14.7 percent unemployment rate reported in April. For context, this would be the worst result for unemployment since the Great Depression, when the unemployment rate was estimated to peak at just under 25 percent. Given the continued pace of mass layoffs throughout May, the unemployment report will likely reflect the truly devastating impact that anticoronavirus measures have had on the livelihood of millions of Americans.

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 0.65 percent on Monday morning before bouncing up to 0.70 percent. The 10-year traded between 0.59 percent and 0.75 percent last week. The 30-year opened at 1.42 percent, and the 2-year opened at 0.18 percent—both higher than where they ended last week. There are some whispers of the Federal Reserve stepping up its bond buying activity to help keep rates lower.
• Global equities rallied last week, as several planned reopenings supported value stocks that have been punished since the beginning of the pandemic. In fact, value stocks outperformed growth for the week. Some of the better-performing value areas included energy, REITs, consumer discretion. Financials outperformed the market last week, as regional banks rallied in this beaten-down stock bounce. The rally was also supported by positive vaccine trial news from Moderna, which saw all 8 healthy candidates in a 45-person trial develop protective antibodies. Central bank policy was cited as a reason for the rally in risk assets, as liquidity has been supported by central banks stepping into markets as needed. The top-performing sectors this week were industrials, energy, and REITs. The sectors that lagged were health care, consumer staples, utilities, and the technology sector, which has led the recovery off of March lows.
• We started the week with Monday’s release of the National Association of Home Builders Housing Market Index for May. This measure of home builder confidence increased from 30 in April up to 37 in May, slightly better than expectations for an increase to 35. This follows a steep fall from 72 in March down to an 8-year low of 30 in April, so the modest rebound we saw in May still leaves the index well below levels seen earlier this year. Home builders cited construction challenges due to social distancing and significant declines in prospective buyers as two key factors causing sentiment to plunge in April, and these headwinds likely persisted into the start of May. Low levels of home builder confidence are expected to slow the pace of new home construction.
• Speaking of which, on Tuesday, April’s building permits and housing starts reports were released. These measures of new home construction showed a sharp decline in April, with housing starts falling by 30.2 percent against expectations for a 26 percent decline. Building permits fell by 20.8 percent during the month, less than the 25.9 percent fall that was anticipated. This was the largest percentage decline for housing starts since records began in 1959, and this worse-than-expected result brought the pace of new home construction to its lowest level since February 2015. These reports can be volatile on a month-to-month basis; however, given the headwinds to the industry and the continued pessimism from home builders, further weakness in new home construction is expected.
• We finished the week with Thursday’s release of April’s existing home sales report. Sales of existing homes fell by 17.8 percent during the month, slightly better than expectations for a 19.9 percent decline. This is the largest monthly decline since July 2010, highlighting the pressure that lockdowns across the country put on the housing market. This disappointing result broke a 9-month streak of year-over-year existing home sales growth. Home sales were one of the bright spots in the second half of 2019 and the start of 2020, so this sudden collapse is disappointing but not surprising, given the effects of shelter-in-place orders during the month.

Source: Bloomberg, as of May 22, 2020

Source: Morningstar Direct, as of May 22, 2020

What to Look Forward To
We started the week with Tuesday’s release of the Conference Board Consumer Confidence Index for May. Confidence rose from a downwardly revised 85.7 in April to 86.6 in May. This result was slightly worse than expectations for an increase to 87, but it is still a step in the right direction. Confidence stabilizing as the country begins to reopen indicates that consumers are likely optimistic that the reopening efforts will be successful as we head into the summer. Consumer expectations for the future increased during the month; however, views of the present condition worsened modestly. Overall, this was a largely positive report, as it indicates that consumer confidence may have bottomed in April and could be set to rebound as states reopen. This will continue to be a widely monitored data report, as hopes of a swift economic recovery largely rely on a quick rebound for consumer confidence and spending.

Tuesday also saw the release of April’s new home sales report. New home sales came in much better than expected, increasing modestly from a downwardly revised annual rate of 619,000 in March to 623,000 in April, against forecasts for a fall to 480,000. Despite this better-than-expected performance during the month, the pace of new home sales is still down notably from the recent high of 717,000 set in January. Last year saw strong growth in new home sales, and this momentum continued into the start of 2020 before the pandemic hit. Looking forward, the slowdown in new home construction in March and April will likely serve as a headwind for future new home sales due to lowered supply in key markets.

On Thursday, the second estimate of first-quarter gross domestic product (GDP) growth is set to be released. Economists expect to see the annualized growth rate for the quarter remain unchanged at –4.8 percent. Personal consumption, which was the major driver of GDP growth in 2019, is expected to improve slightly to a 7.4 percent annualized decline during the quarter, from an initial estimate of a 7.6 percent decline. Even if this anticipated improvement in consumption holds true, this would still represent the worst quarter for personal consumption since the second quarter of 1980. Although these very weak growth figures are concerning, they are likely just the tip of the iceberg, as economists are currently forecasting a 33.5 percent annualized contraction for the economy in the second quarter.

Thursday will also see the preliminary estimate of durable goods orders in April. Orders are set to decline by 18 percent in April following a 14.7 percent drop in March. Much of the March drop in headline orders was due to a sharp decline in volatile aircraft orders; however, that is not expected to be the case in April. Core durable goods orders, which strip out the effect of volatile transportation orders, are expected to fall by 15 percent during the month, significantly worse than the modest 0.4 percent decline we saw in March. Core durable goods orders are often used as a proxy for business investment. So, if estimates hold, it would indicate that already weak business spending in the first quarter only worsened to start the second quarter.

The third major data release on Thursday will be the weekly initial jobless claims report for the week ending May 23. Economists currently expect 2 million additional Americans filed initial claims during the week. Depending on the revision to the prior week’s report due to the Massachusetts reporting error, this result may end up being a slight increase in initial filings during the week if estimates hold. As we’ve seen over the past two weeks, however, this data is certainly not perfect, and it’s important not to place too much emphasis on week-to-week changes. Rather, the focus should be on the general trend, which has been downward for the past seven weeks, indicating that the worst is likely behind us. We will continue to monitor this weekly update until we see sustained progress in getting weekly initial claims closer to historical levels.

On Friday, April’s personal income and personal spending reports are set to be released. Both of these reports are expected to show historically bad results for the month. Incomes are set to fall by 7 percent, while spending is expected to decline by 12.6 percent. If estimates prove to be accurate, this would be the worst month for both reports on record. While the sharp drop in spending is certainly concerning, the anticipated income decline is also worrisome, as it could hinder a return to faster spending growth as states begin to reopen. April’s retail sales report came in worse than expected, and a similar result for personal spending would serve to reemphasize the damage that the measures to combat the spread of the coronavirus had on the economy during the month.

Finally, we’ll finish the week with Friday’s release of the second and final estimate of the University of Michigan consumer sentiment survey for May. Economists expect to see the index remain unchanged at month-end, remaining in line with the midmonth estimate of 73.7. If this initial result holds, it would represent a slight improvement from April’s final reading of 71.8, driven by a noted improvement in the current conditions subindex, which rose from 74.3 in April to 83 at the start of May. As is the case with the Conference Board report on consumer confidence, this will be a widely followed release as it will give a glimpse into how consumers are reacting to the easing of shelter-in-place orders as we head into the summer.

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
• On Tuesday, May 12, the Treasury issued new 10-year debt, which led yields to drop from 0.70 percent to 0.58 percent before bouncing back to current levels on Friday. The 10-year Treasury yield opened at 0.64 percent on Monday. The 2-year yield opened at 0.14 percent, and the 30-year yield opened at 1.34 percent. The U.S. Treasury is issuing a lot of new debt to help fight the economic effects of COVID 19, but yields remain at or close to historical lows.
• Global equities moved lower this past week. Jitters surrounding the restart of the economy as well as increased tensions with China were potential reasons for the sell-off. Trade tensions with China flared as the U.S. placed new export restrictions on semiconductors and Huawei products. Beijing responded with threats to place restrictions on Qualcomm, Cisco, and Apple.
• The top-performing sectors on the week were health care, consumer discretionary, and communication services. The worst performers included energy, REITs, and industrials. Hotels and airlines were particularly notable pockets during the sell-off in REITs and industrials.
• On Tuesday, April’s Consumer Price Index was released. Consumer prices fell by 0.8 percent during the month, in line with economist expectations. This brought year-over-year inflation down to 0.3 percent, which was slightly below expectations for 0.4 percent. Core inflation, which strips out the impact of volatile energy and food prices, fell by 0.4 percent during the month, bringing annual core inflation down to 1.4 percent. The massive shock to consumer demand created by efforts to battle the spread of the coronavirus is expected to continue to hold back inflationary pressures in the short term.
• On Wednesday, the Producer Price Index was released. Headline producer inflation fell by 1.3 percent during the month, far surpassing economist estimates for a 0.5 percent decline. On a year-over-year basis, producer prices fell by 1.2 percent. This brought the pace of producer inflation to its lowest level in more than four years. Falling gasoline prices were one of the major drivers of the deflationary pressure on headline producer prices, as gas prices fell by the most since records began in 1947. Core producer inflation, which strips out the impact of volatile gas and food prices, fell by 0.3 percent, bringing the pace of annual core inflation to 0.6 percent in April. Given the deflationary pressure created by the ongoing pandemic, inflation is expected to remain contained for the time being.
• Friday saw the release of April’s retail sales report. Sales came in worse than expected during the month, falling by 16.4 percent on a monthly basis, against forecasts for a 12 percent decline. This follows an upwardly revised 8.3 percent decline in March, which at the time was the record for the worst single month decline on record. For perspective, the worst back-to-back months during the 2008 financial crisis saw sales fall by a combined 6.7 percent. Perhaps more concerning than the headline decrease was the core retail sales figure, which strips out volatile gas and auto purchases. This proxy for true consumer demand fell by 16.2 percent during the month, far worse than estimates for a 7.6 percent decline. Once again, this represents the worst monthly result on record, easily surpassing last month’s low water mark of –2.8 percent. Consumer spending is the major driver of economic growth, and these historically bad reports indicate that the second-quarter gross domestic product report is likely to be terrible.
• Finally, we finished the week with Friday’s release of the first estimate of the University of Michigan consumer sentiment survey for May. This widely followed measure of consumer confidence increased from 71.8 in April up to 73.7 in May, against expectations for a decline to 68. This follows a sharp decline from 89.1 in March, so the modest increase still left the index at low levels when compared to the recent high of 101 set in February. This improving confidence was driven by increased optimism around the current situation, as the subindex that measures present conditions increased during the month while future expectations fell. Part of this can be attributed to the fact that more Americans received stimulus checks during the month, but efforts to open up some state economies likely played a role as well. While the increase during the month was welcome, we still have a long way to go before confidence and spending levels reach pre-pandemic levels, so this will continue to be a widely monitored report.

Source: Bloomberg

Source: Morningstar Direct

What to Look Forward To
We started the week with Monday morning’s release of the National Association of Home Builders Housing Market Index for May. This measure of home builder confidence increased from 30 in April to 37 in May, slightly better than expectations for a move to 35. Following a steep fall from 72 in March to an eight-year low of 30 in April, this modest rebound leaves the index well below levels seen earlier this year. Home builders cited significant declines in prospective buyers and construction challenges due to measures to combat the spread of the coronavirus as two key factors causing sentiment to plunge in April. This report showed that these headwinds persisted into the beginning of May. Low levels of home builder confidence are expected to slow the pace of new home construction.

Speaking of new home construction, on Tuesday, April’s building permits and housing starts reports are set to be released. These measures of new home construction are expected to show a steep drop-off in the pace of new home construction. Building permits are set to decline by 25.9 percent, while starts are expected to fall by 23.6 percent. That would bring the pace of housing starts to a four-year low, offsetting the gains in the second half of 2019 and the beginning of this year. These reports can be volatile on a month-to-month basis, however. Given the headwinds to the industry and the collapse in home builder confidence in April, further weakness in new home construction is expected.

Wednesday will see the release of the minutes from the April Federal Open Market Committee meeting. No major announcements were made, so the minutes are not likely to reveal major information. There has been some chatter recently about the potential for negative interest rates in the U.S., but Federal Reserve (Fed) Chairman Jerome Powell stated during an interview last week that the Fed does not intend to use negative rates as a policy tool. Instead, the Fed prefers to use other measures to support the economy and markets. We can expect the minutes to reveal additional commentary describing the economic outlook held by various Fed members at the end of the month, so this release will be worth monitoring.

On Thursday, the weekly U.S. initial jobless claims report for the week ending May 16 is set to be released. Economists anticipate the filing of an additional 2.4 million initial unemployment claims during the week. While this result would represent the seventh straight week with declining initial claims, the numbers would remain significantly higher than historical norms. For reference, initial claims averaged just under 220,000 a week throughout 2019. If the estimates hold, this report would show that mass layoffs have continued well into May. We’ll continue to monitor this weekly gauge of the health of the jobs market until levels approach historical norms.

We’ll finish the week with Thursday’s release of April’s existing home sales report. Sales are expected to decline by 18.3 percent during the month, following an 8.5 percent drop in March. With much of the country under shelter-in-place orders in April and home builders citing a large decline in foot traffic, a sharp drop in sales would make sense. If the estimates hold, a nine-month streak of year-over-year growth would be broken for existing home sales, one of the bright spots in the economic expansion in the second half of 2019. Going forward, further weakness in home sales is expected, given the steep drop-off in prospective buyers caused by the coronavirus.

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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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