July Market Commentary

Market Commentary

US stocks rebounded sharply in July posting their best month of the year as the market reacted positively to corporate earnings reports. Earnings for S&P 500 companies continue to be strong despite high inflation levels, with the majority of companies who have posted earnings beating Q2 estimates. Economic news was mixed over the month. Job growth continues to be strong, with US employers adding 372,000 jobs in June, beating the estimated 250,000 economists had forecasted. The unemployment rate held steady, for the fourth consecutive month at 3.6%, in line with estimates. US consumers increased their seasonally adjusted spending by 1.1% in June, up from the revised 0.3% gain in May. US manufacturing activity continued to increase, but at the lowest levels since June 2020. CPI increased by 9.1% in June, higher than the expected 8.8%, marking its largest annual increase since November 1981. The personal consumption expenditures index, the inflation gauge the Fed prefers, was up 6.8% in June from a year earlier, the sharpest rise since January 1982 and above the 6.3% increase expected. GDP fell 0.9% over the second quarter, following the 1.6% decline in the first quarter. Two consecutive quarters of declining economic output is a common, but not official, definition of a recession.

Foreign stocks also rebounded in July propelled by solid corporate earnings. With roughly 20% of European companies reporting earnings nearly 60% have topped analysts’ expectations. The European Central Bank (ECB) increased its key rate, for the first time in eleven years, by a larger than expected 0.5% and signaled that further rate rises are likely at coming meetings. The move takes the ECB’s key interest rate to zero, ending eight years with negative interest rates. The eurozone’s headline inflation rate hit 8.6% in July, higher than the 8.4% expected. Inflation in the U.K. climbed to 9.4% in June, above the 9.3% increase expected. Chinese GDP expanded by 0.4% for the April to June period, the weakest growth rate in more than two years. China’s annual inflation rate increased by 2.5% in June, slightly higher than expectations, but still much lower than in developed countries. Oil prices continued to fall, down 6.8% for the month, ending July at $98.62 per barrel. Developed markets outpaced emerging markets in July, the year to date, and over the trailing year.

Interest rates fell in July driving up bond prices as the bond market focused on the future paths of the world’s central banks. The Fed increased its benchmark rate by 0.75%, for a second consecutive meeting in July, to a range between 2.25% and 2.5%. At their July meeting, the Fed projected they would raise the fed funds rate to at least 3.5% by the end of the year and 4% next year. However, the yield on the 10-year Treasury ended July at 2.64% falling from 2.93% at the end of June on investors’ projections that the Fed will need to begin cutting the fed funds rate next year. The rate for a 30-year fixed-rate mortgage dropped significantly to just below 5%, down from 5.8% in June. US credit bonds were the top performer for July, while US agency bonds were the top performer for the year to date. Longer term bonds outpaced shorter term bonds for July, but shorter term bonds topped longer term bonds for the year to date.