Market Commentary: Market Recap
Market Update for the Month Ending July 31, 2014
U.S. markets continue their rise
July broke the streak of strong performance for U.S. equity markets, due in large part to Argentina’s default on its debt and other international turmoil, which knocked markets for a loss at month-end. The S&P 500 Index closed down 1.38 percent, the Dow Jones Industrial Average dropped 1.44 percent, and the Nasdaq declined 0.87 percent.
Strong U.S. market performance prior to month-end was largely driven by positive earnings. Per FactSet, as of July 25, more than three-quarters of reporting companies had beaten earnings estimates, while two-thirds had beaten sales forecasts.
Technical factors were strong for most of July, but the declines in U.S. equity markets at month-end brought all three major indices below their 50-day moving averages; the Dow also broke below its 100-day moving average.
Like the U.S., developed international markets declined in July, with the MSCI EAFE Index down 1.97 percent. The weak results can largely be attributed to growing uncertainty around international events. On the other hand, emerging markets, as represented by the MSCI Emerging Markets Index, had a very strong month, gaining 1.43 percent for July. This was due to relative rising risk in developed markets and faster economic growth in emerging ones.
Fixed income showed losses in July as rates rose. The 10-year Treasury rate went from 2.53 percent at the start of the month to 2.58 percent at its end. The Barclays Capital Aggregate Bond Index lost 0.25 percent for the month.
U.S. economic recovery accelerates out of first quarter
July’s economic reports indicated continued recovery. Early in the month, employment reports shocked to the upside, with a top-line growth figure of 288,000 jobs. Private employment expanded, and government employment increased, driving the unemployment rate down to 6.1 percent.
Full-time positions increased, as part-time jobs decreased. The mix of industries and pace of hiring were very similar to 10 years ago, per the chart, which reflects the highest- (e.g., health and business services) and lowest- (e.g., retail and leisure) paying sectors and compares job-growth levels.
Other statistics also supported an accelerating recovery. Retail sales increased after adjusting for autos and gasoline, as did auto sales. Business surveys conducted by the Federal Reserve showed increasing confidence across the country, and the trade deficit improved.
Housing showed mixed results, with sales weakening and building permits and starts slowing, but prices increased and industry confidence did, too. The National Association of Home Builders confidence index rose from 49 to 53.
Even the Fed endorsed the recovery by stating its intention to end its bond-buying program in October.
International risks return to the forefront
As the U.S. recovery continued, international risks took center stage—with the Malaysian airliner tragedy in Ukraine, growing conflict with Russia, ongoing Hamas rocket attacks, the Israeli incursion into Gaza, and the ISIS insurgency threatening Iraq’s oil fields.
Economic risks also made headlines. The near failure of banks in Portugal and Bulgaria raised fears of the return of the European financial crisis, as Chinese lending and exports accelerated again. In addition, the Argentine debt default rattled markets at month-end. Still, as we move into late summer, these risks appear contained.
Good summer weather continues, but storms remain likely
Strong results from the U.S. economy have been encouraging, but substantial risks remain. Investors have benefited from a just-right mixture of economic acceleration, economic and monetary policy, and geopolitical calm over the past couple of years, but there is serious risk that favorable conditions may become less so.
The current high valuations and low-volatility of U.S. markets are also increasing the risk. Both factors could lead to significant adjustments if economic and market conditions become less favorable.
In the big picture, however, risk is normal, and the U.S. remains well positioned to ride out any uncertainty. The U.S. economy and financial markets are among the most solid in the world. A well-diversified portfolio with regular rebalancing is still the best way to meet financial goals over time and should be maintained through good times and bad.
All information according to Bloomberg, unless stated otherwise.
Disclosure: 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. 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 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 Dow Jones Industrial Average is a price-weighted average of 30 actively traded blue-chip 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 Barclays Capital 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 Barclays Capital government and corporate securities, mortgage-backed pass-through securities, and asset-backed securities.