Presented by Mark Gallagher

General Market News
• The 10-year Treasury yield spiked to 0.74 percent last week before dropping to 0.60 percent on Friday and opening at 0.68 percent on Monday. The 2-year yield opened at 0.15 percent, while the 30-year yield opened at 1.40 percent. April’s Consumer Price Index (CPI), Producer Price Index (PPI), and retail sales will be released this week, giving us a better understanding of the pandemic’s effects on the economy and likely spurring some additional volatility.
• The S&P 500, Dow Jones Industrial Average, and Nasdaq Composite were all up on the week, with the Nasdaq Composite leading the way with a gain of more than 6 percent. Small-cap stocks also continued their recent rally, as the Russell 2000 moved up another 5.52 percent. The rally came despite a sharp increase in the unemployment rate and concerns over a potential second wave of the coronavirus. It was supported by the Federal Reserve’s (Fed’s) continued economic assistance, as well as positive earnings reports, which revealed a pickup in business activity from lows at the end of March.
• The top-performing sector on the week was energy, as West Texas Intermediate crude oil rallied by 25 percent. Technology and consumer discretionary also had a strong week. The worst performers were the bond proxies in utilities, consumer staples, and financials.
• On Tuesday, the Institute for Supply Management Nonmanufacturing index was released. This measure of service sector confidence declined from 52.5 in March to 41.8 in April, against expectations for a larger fall to 38. Despite the better-than-expected result, this still brought the index to its lowest level in more than a decade, as service sector confidence now sits near the all-time low of 37.8, set in November 2008. This is a diffusion index, where values below 50 indicate contraction, so this decline was concerning but not necessarily surprising, given the business shutdowns during the month.
• Friday brought the release of the April employment report. As expected, this report showed the devastating effects widescale shelter-in-place orders had on the jobs market, with 20.5 million jobs lost during the month. This result was better than economist estimates for 22 million, but previously released unemployment claims data indicates that this report may be undercounting the full extent of the jobs lost during the month. The unemployment rate increased to a post-war high of 14.7 percent, against expectations for a further increase to 16 percent. Despite the better-than-expected results, this represents the worst single month for American job losses on record and brought the unemployment rate well above the 10 percent high we saw during the 2008 financial crisis.

Source: Bloomberg

Source: Morningstar Direct

What to Look Forward To
On Tuesday, April’s CPI will be released. Consumer prices are expected to fall by 0.7 percent during the month, following a 0.4 percent decline in March. On a year-over-year basis, consumer prices are expected to rise by a modest 0.4 percent, down notably from the 1.5 percent year-over-year growth rate the month before. Lowered gas prices are one of the major drivers of expectations for lowered inflation. Core consumer inflation, which strips out the impact of volatile gas and food prices, is expected to fall by only 0.2 percent during the month. This result would translate to year-over-year core consumer inflation of 1.7 percent, the lowest level seen since September 2017. In the short term, the negative shock to consumer demand created by efforts to battle the spread of the coronavirus is expected to continue to hold back inflationary pressure for consumers.

On Wednesday, April’s PPI will be released. Economists expect to see a 0.4 percent decline in headline producer inflation for the month, which would cause producer prices to decline by 0.2 percent on a year-over-year basis. As was the case with consumer inflation, core producer prices are expected to show a more modest decline of 0.1 percent in April, leading to 0.8 percent year-over-year inflation for this segment. If the estimates hold, year-over-year core producer inflation will hit its lowest level in more than four years. Despite the raft of supportive policy measures enacted by the Fed over the past two months, the collapse in global demand is expected to serve as a headwind to inflation in the short term.

On Thursday, the weekly U.S. initial jobless claims report for the week ending May 9 is set to be released. Economists anticipate an additional 2.5 million initial unemployment claims to be filed. Although this result would represent the sixth straight week of declining initial claims, it would bring the eight-week total up to roughly 36 million recently unemployed Americans. If estimates hold, this report would show that mass layoffs have continued into May. We will continue to monitor this weekly gauge of the health of the jobs market until we see levels approach historical norms.

Friday will see the release of April’s retail sales report. Sales are expected to fall by 11 percent during the month, following an 8.7 percent decline in March. To put this into perspective, the worst two back-to-back months for retail sales during the great financial crisis saw sales fall by a combined 6.7 percent. Part of this anticipated decline can be attributed to lowered spending on gas. But even core retail sales, which exclude volatile gas and auto purchases, are slated to decline by 5.5 percent in April. This result would mark the worst month on record for core retail sales, passing last month’s record 2.8 percent decline. Given the importance of consumer spending to the overall economy, if estimates prove to be accurate, April’s retail sales would be a negative signal for second-quarter gross domestic product growth.

Friday will also see the release of the industrial production report for April. Economists expect production to fall by 11.4 percent during the month, following a disappointing 5.4 percent decline in March. The March report represented the worst monthly drop in output since 1946, so the prospect of a further decline is concerning. Much of the April forecast can be traced to low expectations for manufacturing output. This segment is set to fall by 14 percent during the month, after declining by 6.3 percent in March. Given the massive drop in global demand created by the ongoing pandemic, industrial production and manufacturing output are expected to remain challenged until the global economy shows signs of a recovery.

Finally, we’ll finish 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 is expected to decline from 71.8 in April to 67.5 in May. This result would not be surprising, given the fact that most Americans were still under shelter-in-place orders at the beginning of the month. Consumer confidence is typically supported by positive market performance and a strong jobs market. While markets have partially rebounded from recent lows, April’s employment report showcased the damage that efforts to combat the spread of the coronavirus have had on the jobs market. The extremely weak employment situation will likely serve as a headwind against further improvements to consumer confidence, unless large-scale progress is made in returning Americans to work. Consumer confidence will be a widely followed metric over the coming months. Hopes of a swift economic recovery largely rely on a rebound in consumer confidence and spending.

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

Markets rebound in April
Equity markets saw a swift recovery in April, as progress toward slowing the spread of the coronavirus gave hope to investors. The S&P 500 rose by 12.82 percent, marking the best monthly gain since 1987. The Dow Jones Industrial Average (DJIA) gained 11.22 percent for the month, while the Nasdaq Composite, with its heavy technology weighting, led the way with a 15.49 percent gain.

These impressive results came despite worsening fundamentals. According to Bloomberg Intelligence, as of April 30, the blended average earnings growth rate for the S&P 500 for the first quarter sat at –16.4 percent. If the final earnings come in at this level, it would be the worst quarterly result since the second quarter of 2009. This is especially disappointing given the return to quarterly earnings growth that we saw in the fourth quarter. April’s market rally indicates investors may be willing to accept a few quarters of dismal earnings due to the coronavirus. This will be an important area to monitor as we begin to open up the economy, as fundamentals drive performance over the long term.

Technical factors for U.S. markets were mixed during the month. The S&P 500 and DJIA both spent April below their respective 200-day moving averages, although they moved closer to the trendline by month-end. The Nasdaq, however, was able to break through and finish April above its 200-day moving average. This is an important technical signal, as a prolonged break above trend could indicate a shift in investor sentiment. While it is too early to say that U.S. markets are out of the woods, the swift rebound in April was certainly a welcome development.

The story was much the same internationally, with foreign markets rebounding as well, although to a slightly lesser extent. The MSCI EAFE Index gained 6.46 percent during the month, bolstered by reopening efforts across select European countries. Emerging markets fared even better, gaining 9.18 percent. Despite these strong returns, both indices spent the month below their 200-day moving averages.

Fixed income, which benefited from continued low interest rates and supportive policy from the Federal Reserve (Fed), also had a strong month. The yield for the 10-year Treasury note was largely range bound, starting April at 0.62 percent and finishing the month at 0.64 percent. The Fed left rates unchanged at its April meeting after cutting the federal funds rate to zero in March. Fed Chair Jerome Powell used his press conference to reiterate that the Fed is willing and able to provide much-needed support during these uncertain times.

The Bloomberg Barclays U.S. Aggregate Bond Index gained 1.78 percent during the month. High-yield bonds fared even better, with the Bloomberg Barclays U.S. Corporate High Yield Index gaining 4.51 percent.

States begin reopening as coronavirus growth slows
In April, we saw real progress in the fight against the coronavirus, although there is still much work to be done. Case counts continue to increase, but the pace of growth for new cases has been falling. We ended the month with the daily case growth rate in the U.S. at its lowest level since the end of February. This shows the positive impact widespread social distancing and shelter-in-place orders have had on containing the virus. We’ve also seen some promising results for potential treatments, which have boosted confidence.

Given the progress we saw in April, some states have started the process of opening their economies back up. There is concern that this may lead to further localized spread of the coronavirus. But for the time being, these states will serve as an example for the rest of the country of what to expect upon reopening. Given the virus’s long incubation period and the resulting lag between policy changes and infection rates, it will take at least a couple of weeks to get a clear picture of exactly how reopening will affect new case counts.

Large-scale testing capabilities in the U.S. remain well below levels called for by experts in order to safely reopen large swaths of the economy. The impact of not having enough tests can be seen in the percentage of tests that come back positive, which still remains elevated despite generally following a downward trend during the month. Ultimately, testing will be the key tool to allow us to safely open up the economy until a vaccine is available.

Economic data highlights costs of lockdown
Although there was positive news on the coronavirus front, the story was very different for the economy as a whole. The economic data released in April was terrible, as expected. This highlights the devastating impact shelter-in-place orders have had on the economy. More than 30 million Americans filed initial jobless claims over the past 6 weeks, almost certainly sending the unemployment rate soaring above the 10 percent high it last hit in October 2009. Gross domestic product (GDP) contracted by an annualized rate of 4.8 percent in the first quarter, signaling that we are quite likely in a recession. Personal consumption, which was the major driver of economic growth last year, experienced its biggest decline since the fourth quarter of 2008, as you can see in Figure 1.

Figure 1. Personal Consumption Expenditures, 2007–Present

This sharp fall in consumer spending was greater than expected and highlights the risks April’s extended lockdowns pose to second-quarter growth. Consumer confidence plummeted during the month, with both the Conference Board and University of Michigan consumer sentiment indices now sitting at multiyear lows. A V-shaped recovery will largely rely on a swift rebound in consumer confidence and spending. So, this is an important area to monitor going forward.

Businesses also suffered during the month. Both manufacturers and the service sector saw declining confidence and output figures in April. Industrial production experienced its largest drop since 1946, with manufacturing output slashed as factories shut down in the latter half of March. Business confidence now sits at levels that have historically indicated a double-digit contraction in GDP is possible.

While the results released in April were terrible, even worse news is likely on its way. We will almost certainly see the unemployment rate rise past highs set during the 2008 financial crisis, and GDP is expected to contract much further in the second quarter. The good news is that much of the damage is now done. There is also a real possibility that growth may recover more quickly than currently expected once the virus is under control. But for the time being, the economic data is likely to get worse before it gets better.

Pandemic and economic risks remain, despite April market recovery
April was a surprisingly good month for markets, but it was the opposite for the economy as a whole—and for the average American. The rebound we saw in equities, combined with the cratering earnings outlook, indicates that markets are pricing in a faster recovery. So significant risk remains if the recovery is not as swift as markets expect.

As investors, we need to keep a long-term view on not just what we hope will happen, but on what is likely, too. Right now, markets are pricing in a bit of a best-case scenario. Earnings, for example, are expected to return to growth in the first quarter of next year. For that to be the case, we will likely need to have the coronavirus under much better control by then. This is certainly a possibility. But the reality is that we will likely face setbacks as we try to gradually reopen the economy, and the process might take longer than expected.

In this environment of uncertainty about both the virus and the economy, we can expect further volatility, even as we continue to make real progress. Given the likelihood of future market turbulence and the uncertain times we’re in, maintaining a well-diversified portfolio that matches investor goals and timelines remains the best path forward.

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
• The 10-year Treasury yield opened at 0.59 percent on Monday, which is where it has been for the better part of the past three weeks. The 30-year yield opened at 1.23 percent, and the 2-year yield opened at 0.18 percent. With the start of the new month, we will receive numbers from April, which will give us a better idea of the effects of the quarantine. Interest rate markets have priced in some of the predictions but seem to be waiting for more economic data.
• The S&P 500, Dow Jones Industrial Average, and Nasdaq Composite were all down modestly on the week. Small-cap stocks saw a bounce, however, as the Federal Reserve (Fed) broadened its Main Street Lending Program to businesses with at least 15,000 employees and up to $5 billion in annual revenue. It also created a new loan program for firms with higher levels of debt. The Russell 2000 was up more than 2 percent for the week. The Main Street Lending Program’s perceived support for smaller, distressed energy exploration and production companies made energy the top-performing sector on the week, followed by communication services and materials. The worst-performing sectors included utilities, health care, and consumer staples.
• On Tuesday, the Conference Board Consumer Confidence Index for April was released. Confidence fell by more than expected, declining from a downwardly revised 118.8 in March to 86.9 in April. This was slightly worse than economist estimates for a fall to 87 and represents the worst monthly decline since the oil embargo in 1973. This disappointing but unsurprising result brought the index to its lowest level since 2014. The decline in headline confidence was caused by a sharp drop in the present situation subindex, which fell from 166.7 in March to 76.4 in April. Given the unprecedented number of layoffs over the past two months and the continued efforts to combat the spread of the coronavirus, weak confidence is expected going forward.
• On Wednesday, the first estimate of first-quarter gross domestic product growth was released. The economy contracted at a 4.8 percent rate annualized during the quarter, which was worse than economist estimates for a 4 percent annualized decline. Personal consumption, which was the major driver of economic growth last year, declined by 7.6 percent annualized during the quarter, which was far worse than estimates for a 3.6 percent annualized decline. This marks the worst quarter for personal spending growth since the second quarter of 1980. While these very weak growth figures are concerning, they are likely just the tip of the iceberg, as economists are currently forecasting a 25.8 percent annualized contraction for the second quarter.
• Wednesday also saw the release of the Federal Open Market Committee rate decision for its April meeting. The Fed lowered the range of the federal funds rate to zero in March, and it reiterated the message that rates will remain low for the foreseeable future. Fed Chair Jerome Powell used his press conference to reassure market participants that the Fed is ready and able to continue to support markets and the economy during these uncertain times.
• On Thursday, March’s personal income and personal spending reports were released. Personal income fell by 2 percent during the month, against expectations for a 1.7 percent decline. Spending fell even further, with a 7.5 percent drop, against expectations for a more moderate 5.1 percent decline. This was the worst single month for spending growth on record, far surpassing the previous monthly record of a 1.4 percent decline back in November 2008.
• Finally, we finished the week with Friday’s release of the April Institute for Supply Management (ISM) Manufacturing index. This measure of manufacturer confidence fell from 49.1 in March to 41.5 in April, which was better than estimates for a further fall to 36. This is a diffusion index, where values below 50 indicate contraction. So, the current level of 41.5 is still quite concerning, as it shows how the manufacturing industry has been hit by factory closings and lowered global demand due to the coronavirus.

Source: Bloomberg

Source: Morningstar Direct

What to Look Forward To
We’ll start the week with Tuesday’s release of the international trade report for March. Economists are forecasting a widening of the trade gap during the month, from a three-year low of $39.9 billion in February to $44.2 billion in March. As such, the deficit would move toward the $45.5 billion gap we saw in January. Part of this expectation can be attributed to China’s decision to reopen factories in March after closing them in February. In addition, previously released trade data saw both imports and exports falling during March despite the resumption of some trade with China. Looking forward, both imports and exports are expected to fall even further in April, driven by the slowdown in global demand in the face of the coronavirus pandemic.

Also on Tuesday, the ISM Nonmanufacturing index is set to be released. Economists expect to see this measure of service sector confidence fall sharply from 52.5 in March to 37.2 in April. If this estimate holds, the index would sit at the lowest level on record, dropping below the low of 37.8 hit in November 2008. This is a diffusion index, where values below 50 indicate contraction. Accordingly, this anticipated drop is concerning, although not necessarily surprising given the shutdowns to most businesses during the month. Previously released surveys of service sector confidence showed a larger-than-expected decline in April, so the potential for a worse result exists.

Thursday will see the release of the weekly U.S. initial jobless claims report for the week ending May 2. Economists expect to see an additional 3 million initial claims filed during the week, down from the 3.84 million claims we saw the week before. Despite this anticipated decline, if estimates hold, the seven-week total would rise to more than 33 million newly unemployed Americans—an unprecedented amount. While we are likely past the peak for initial jobless claims, we will continue to monitor this weekly report. It’s important to track how quickly we can get back to normal levels of weekly initial claims, which averaged just under 220,000 claims per week in 2019.

Finally, all eyes will be on Friday’s release of April’s employment report. While March’s report gave a preview of the damage that the wide-scale shelter-in-place orders are having on the job market, April’s results will give a more complete picture of the impact. Economists are currently estimating that 22 million jobs were lost during the month, which would send the unemployment rate skyrocketing to 16 percent. This figure would be well above the high-water mark of unemployment at 10 percent that we saw during the peak of the great financial crisis. Average hours worked is expected to decline to levels last seen in 2010. Given the fact that more than 30 million Americans filed initial unemployment claims in the past six weeks, this report will be a very bleak snapshot of the overall health of the jobs market. We can, however, hope that many of the lost jobs will be regained once shelter-in-place orders are lifted and state economies begin to open back up.

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 rates market experienced some volatility last week, but it ended the week only slightly below where it started. The 10-year Treasury yield dropped from 0.65 percent to 0.53 percent last week and opened at 0.62 percent on Monday. The 30-year was as high as 1.41 percent about 10 days ago and now stands at 1.19 percent, while the 2-year has stayed quite steady over the past 10 days and opened at 0.22 percent. The Federal Reserve (Fed) is set to meet this week.
• Markets posted a modest sell-off last week. Oil ended up down 32.3 percent, the largest weekly drop ever recorded. This was the result of lower demand due to shelter-in-place orders, higher production amid significant pumping by Russia and Saudi Arabia, and a shortage of storage capacity. Despite the drop, the energy sector was the only positive sector, as the sell-off from the early part of the week waned on discussions of potential reopening in Europe and certain U.S. states. Other strong sectors included communication services and consumer discretionary, which were supported by Facebook and Amazon. Those stocks rose 6.04 percent and 1.48 percent, respectively. The sectors that underperformed included REITs, utilities, consumer staples, and financials. Companies such as AT&T, Coca-Cola, Berkshire Hathaway, and Bank of America were among the top underperformers. Financials were hit hard, as a number of banks have increased their provisions for lost or nonperforming loans.
• On Tuesday, March’s existing home sales report was released. Sales of existing homes fell by 8.5 percent during the month, which was better than the 9 percent drop that was expected. This decline was due in large part to the social distancing efforts that went into place across the country around midmonth. Despite the monthly decline, on a year-over-year basis, sales rose modestly. Going forward, further weakness in home sales is expected.
• On Thursday, the initial jobless claims for the week ending April 18 were released. An additional 4,427,000 initial claims were filed during the week, better than economist estimates for 4,500,000. This brought the 5-week total up to more than 26.5 million new filers, which is unprecedented in American history. We will continue to monitor this weekly release until we get a sign that the pace of firings has returned closer to pre-crisis levels.
• Thursday will also saw the release of March’s new home sales report. New home sales fell by 15.4 percent during the month, which was slightly better than calls for a 16.1 percent decline. This is a smaller and more volatile portion of the overall housing market compared with existing home sales. This result brought the pace of new home sales to its lowest level since May 2019.
• On Friday, March’s preliminary durable goods orders report was released. Orders fell by 14.4 percent during the month, which was worse than economist expectations for a 12 percent drop. Much of this decline can be attributed to a slowdown in aircraft orders. Core durable goods orders, which strip out the impact of volatile transportation orders, held up better than expected, falling by 0.2 percent against expectations for a 6.5 percent decline. This surprising resiliency for core durable goods orders indicates that business spending did not see the sharp contraction that was expected during the month.
• Finally, we finished the week with Friday’s release of the second and final reading of the University of Michigan consumer sentiment survey for April. Surprisingly, confidence improved slightly during the month, rising from an initial estimate of 71 at midmonth to 71.8 at month-end. Despite the slightly better-than-expected end result, this still represents a sharp drop from the 89.1 reading in March. In fact, this marks the worst monthly drop in the survey’s history.

Source: Bloomberg

Source: Morningstar Direct

What to Look Forward To
On Tuesday, the Conference Board Consumer Confidence Index for April is set to be released. Confidence is expected to plunge from a surprisingly strong 120 in March to 87.8 in April. This would bring the index to its lowest level since 2014, in an echo of the large decline we saw in the University of Michigan consumer sentiment survey last week. Looking forward, mass layoffs and continued shelter-in-place efforts around the country should continue to serve as a headwind against improvements to consumer confidence. As communities and businesses attempt to return to normal over the coming months, it will be important to monitor this index. Our hopes for a swift economic recovery largely rely on a sharp rebound in consumer confidence and spending.

On Wednesday, the first estimate of first-quarter gross domestic product growth will be released. Economist forecasts are calling for a 3.7 percent annualized decline during the quarter, down from the 2.1 percent annualized growth achieved in the fourth quarter of 2019. Expectations for lowered consumer spending, the major driver of economic growth in 2019, are the basis for the negative forecast. Personal consumption, which increased by 1.8 percent on an annualized basis in the fourth quarter of 2019, is set to decline by 2.3 percent annualized during the first quarter. This figure would mark the worst result since the fourth quarter of 2008. Although these expectations are concerning, the real damage from the efforts to combat the coronavirus is expected to come in the second quarter. Economists are currently predicting a roughly 25 percent annualized decline in economic output in that time period.

Wednesday will also see the release of the Federal Open Market Committee rate decision from the Fed’s April meeting. The Fed had previously lowered the federal funds rate to zero, where it is expected to remain for the duration of the crisis. To provide accommodations to the market, the Fed will continue to use its other policy tools. Market participants will be focused on the language chosen by the Fed to discuss the April meeting. The press release will give us insights into the Fed’s views on the current economic environment; it might also supply hints regarding future measures to support the economy.

On Thursday, March’s personal income and personal spending reports are both set to be released. Personal income is expected to fall by 1.3 percent during the month, down from a 0.6 percent increase in February. Spending is set to fall even further, with forecasts calling for a 4.2 percent decline. Accordingly, March would mark the worst single month for spending growth on record, far surpassing the previous record of a 1.4 percent slump in November 2008. The estimate is due in large part to a sharp drop in consumer spending on services such as airlines and restaurants, both of which saw activity virtually stop by midmonth. Again, while the anticipated March figures are bad, the real damage is expected to show up in April.

Thursday will also see the release of the weekly U.S. initial jobless claims report for the week ending April 25. Economists expect to see an additional 3.5 million initial claims filed during the week, down from the roughly 4.4 million filed the previous week. Nonetheless, if estimates hold, the 6-week total would rise to roughly 30 million newly unemployed Americans. While the peak in initial jobless claims is likely past for the time being, we will continue to monitor this weekly report to see how quickly the levels of weekly initial claims approaches normal.

Finally, we’ll finish the week with Friday’s release of the April Institute for Supply Management (ISM) Manufacturing index. This measure of manufacturer confidence is expected to decline from 49.1 in March to 36.7 in April. This result would put the index roughly in line with levels last seen during the great financial crisis, during which confidence bottomed out at 34.5 in December 2008. It would also echo the results from the IHS Markit Flash PMI survey released last week. The ISM Manufacturing index is a diffusion index, where values below 50 indicate contraction. A decline in April would serve as another example of how hard hit the manufacturing industry has been by government policies to combat the coronavirus.

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.

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