Market Update for the Month Ending July 31, 2019

Positive July for U.S. markets
All major U.S. indices showed gains for July. The S&P 500 returned 1.44 percent, the Dow Jones Industrial Average rose by 1.12 percent, and the Nasdaq Composite gained 2.15 percent.

This positive performance was supported by solid earnings. As of July 31, year-over-year earnings growth for the S&P 500 was 0.8 percent for the second quarter. Fundamentals drive market performance, so this result is encouraging.

Technicals for all major U.S. indices were supportive during July. All three indices stayed above their 200-day moving averages.

International markets pulled back in July. The MSCI EAFE Index declined by 1.27 percent, and the MSCI Emerging Markets Index dropped 1.14 percent. Technicals for developed and emerging markets remained supportive.

Fixed income had a solid month. The Bloomberg Barclays U.S. Aggregate Bond Index returned 0.22 percent, driven by declining interest rates. The 1-month Treasury started the month at 2.17 percent and then fell to 2.01 percent. The 10-year Treasury started July at 2.03 percent and finished at 2.02 percent.

These declines were driven by the Federal Reserve’s (Fed’s) decision to cut the federal funds rate to 2.25 percent. Fed Chairman Powell indicated future rate cuts are possible-but not guaranteed.

High-yield fixed income had a positive month. The Bloomberg Barclays U.S. Corporate High Yield Index returned 0.56 percent. High-yield spreads declined but remain above 2018 lows.

Consumer spending drives economic growth
Consumer spending data was especially positive, with 0.7 percent growth in June’s core retail sales. Strong consumer spending drove economic growth in the second quarter. The first estimate of second-quarter gross domestic product growth came in at 2.1 percent annualized. This result is down from the 3.1 percent of the first quarter but higher than estimates of 1.8 percent. Personal consumption grew at a 1.1 percent annualized rate in the first quarter, jumping to 4.3 percent in the second quarter.

Increasing consumer confidence supported consumer spending. The Conference Board Consumer Confidence Index jumped from 124.3 to 135.7 in July. It now sits near highs last seen in 2018 (see Figure 1).

Figure 1. Conference Board Consumer Confidence Index, 1999-2019

One driver of consumer confidence was the June jobs report: 224,000 new jobs were added. Annual wage growth was 3.1 percent, and unemployment remained near 50-year lows.

Potential areas of concern remain
The story was different for businesses, which are being affected by slowing global trade. The Institute for Supply Management Manufacturing and Nonmanufacturing indices declined, although both remain in expansionary territory.

Business spending data was mixed. Durable goods orders rose by 2 percent in June, following a 1.3 percent decline in May. Despite June’s uptick, business investment declined for the quarter.

Housing also continued to struggle. Existing home sales fell by 1.7 percent in June. Some anticipated faster sales growth due to declining mortgage rates and a surge of mortgage applications in May. Those hopes failed to materialize given rising prices and limited supply in some regions.

Shifting policy risks
The major U.S. story was the Fed’s decision to cut the federal funds rate by 25 basis points, indicating that the Fed is becoming more supportive of the economy. With lowered interest rates, borrowing costs should decrease for individuals and businesses.

Another key development was Congress’s passage of a budget to increase government spending and suspend the debt ceiling for two years. This was seen as a positive outcome for markets.

Internationally, Prime Minister Theresa May was replaced by Boris Johnson. Johnson said he will lead the British exit from the European Union by the October 31 deadline, whether there is a trade deal in place or not. This could be a source of volatility for international markets.

Steady economic growth in the face of global slowdown
Risks remain, but the economic picture is positive. Solid economic data shows that American consumers are willing and able to spend. With improving fundamentals, a supportive Fed, and the passage of the budget and debt limit bill, markets could continue to move upward.

Still, the global trade slowdown has started to affect business confidence, and political risks can arise. A well-diversified portfolio that pairs an investor’s goals and time horizon is 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.

 

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