Market Commentary: Market Recap

Market Update for the Month Ending July 31, 2016

Markets move up around the world
Equity markets performed well in July. The S&P 500 Index ended the month up 3.69 percent, and the Dow Jones Industrial Average also rose, though slightly less, gaining 2.94 percent. The Nasdaq led the group with a 6.65-percent gain. All three set all-time highs.

Earnings for the second quarter of 2016 came in better than expected. With 63 percent of S&P 500 companies reporting, the blended earnings decline of 3.8 percent was better than the 5.5-percent decline anticipated on June 30. Additionally, 71 percent of reporting companies announced earnings per share above estimates—higher than the five-year 67-percent average.

Technical factors also improved in July. The three major indices stayed above their 200-day moving averages, often a sign of continued strength.

Developed international markets were also up in July, with the MSCI EAFE Index of developed markets outside the U.S. gaining 5.07 percent and climbing above its 200-day moving average by month-end.

Emerging markets also did well, gaining 5.03 percent in July. Technical factors for the MSCI Emerging Markets Index were positive, as the index stayed above its 200-day moving average for the entire month.

The Barclays Capital Aggregate Bond Index gained 0.63 percent for the month. The high-yield portion of the market, represented by the Barclays Capital U.S. Corporate High Yield Index, performed even better, posting returns of 2.70 percent.

U.S. economic news mostly positive
July began with the ISM Manufacturing survey surprising to the upside and reporting a 53.2 reading. This was followed by a surprise reading from the ISM Non-Manufacturing Index of 56.5. Seeing both measures beat expectations could point to accelerated domestic growth heading into the second half of 2016.

Perhaps more important, the June jobs data blew away expectations, with 287,000 nonfarm jobs created, well above the estimated 180,000. As illustrated in Figure 1, the very strong June report came after two weak months.

Figure 1. Monthly Change in Total Nonfarm Employment, 2011—Year-to-Date 2016

The July survey of home builders came in at its 2016 average of 59, indicating steady growth. Additionally, existing home sales rose 1.1 percent in June, to a 5.57-million annual rate, the highest level since 2007.

A final bright spot was a surprising increase in retail sales, which were up 0.6 percent in June. This follows a positive 0.5-percent gain in May.

Business investment continued to disappoint, particularly in the June durable goods orders report. Driven by this weakness, the advance reading of second-quarter gross domestic product (GDP) growth came in well below estimates.

International risks continue to weigh on investors
The most widely discussed international event in July was the failed coup d’état in Turkey. Although the motives remain unclear, the attempt highlighted the very real political risks abroad. Nevertheless, international markets withstood the short-term volatility caused by the coup attempt, and its worst economic impact seemed to be on Turkish markets and currency.

In Europe, political risks receded, as Brexit moved from a crisis to a process. Still, economic concerns mounted, particularly over the health of the Italian banking sector.

Asia continues to experience its own mix of economic and political risks. The decision by the Bank of Japan to maintain rather than increase its stimulus programs could lead to a significant profit decline for Japanese companies and increase pressure on the Japanese stock market. China also continues to raise concerns, including its currency devaluation and defiant response to a U.N. tribunal’s decision regarding territorial claims in the South China Sea.

Improving trends favorable for second half of 2016
Improving trends in the domestic economy and some lower risk abroad suggest that the second half of the year might be better than the first. Though concerns remain, the U.S. economy is still the most stable and resilient of the world. Some short-term volatility is likely, so a well-diversified portfolio with a long-term focus is the best means of achieving financial goals 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. The Barclays Capital 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.

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