Monthly Commentary: Looking Back at July

The market was clearly taken for a loop this Monday. For our take on that, please click HERE.

Here's our take on July.

We can’t believe it is already August!  We probably say that every month, but it doesn’t make it any less true.  While the changes in the election are much more interesting talking points, we'll let you all enjoy that discourse with others. We are going to stick to the market update(we have discipline)!

• The S&P 500 hit 5,600 for the first time in July.  The market ended higher on the month, but the end of the month had some turbulence related to concerns around the semiconductor industry, one of the leading aspects of the Artificial Intelligence craze.
• Interest rates dropped significantly in July (measured by the 10-year yield on U.S. Treasury bonds). The drop was a combination of lower inflation data and weaker-than-expected economic data.  Concerns are starting to mount that the Federal Reserve has kept policy too restrictive and is causing the economy to sputter out.
• We had some big changes in the upcoming U.S. Presidential election. Former President Donald Trump survived an attempted assassination on July 13^th and pulled significantly ahead in the polls versus President Joe Biden. Later in the month, President Biden stepped down as the Democratic Nominee and was replaced by Vice President Kamala Harris. While we don’t have great insight to share on the political side, we can say that both events were followed by strong up days in the market. 
• Market predictions suggest the Federal Reserve will cut rates in September.  In the last meeting, the committee added the language, “risk to both sides” regarding their concerns about growth and inflation. While this may seem like a subtle shift, the market interpreted it as a sign for upcoming changes.

Don’t let the recent market turbulence distract you from the banner year it’s having.  Pullbacks like the one we just experienced are normal when a market goes up so fast and so fierce. Both the uptrend and “buy the dip” mentality are still in place. In fact, we see new market strength in small cap stocks. This is exciting because it’s what we call a rally “expanding its breadth”.  These are generally good signs and are indicative of a continuation of strength we have seen in the past 18 months.

Interest rates can be confusing, so I won’t dive in too deep here, but the simple explanation is that interest rates have been relatively high for the past 30 months or so. The main driver has been high inflation. The Federal Reserve has a dual mandate: stable prices and economic growth. The inflation we saw after Covid caused the Fed and many economic pundits great concern over the mandate of stable prices.  While prices remain high, the rate of change of those prices is back down to a more reasonable level. With a less than expected second quarter GDP print, new concern has emerged over the economic growth part of the mandate. 

This gives the Fed a little more latitude to cut rates, and it seems the concerns over possible future raises has been stamped out for now. The market currently expects the Federal Reserve to cut short-term interest rates in September. By all traditional measures that the Fed uses for determining Fed Funds Rate policy, they should be cutting by now, but inflation is a scary thing, and they seem timid to claim victory here. Other central banks, such as the Bank of England, has already begun cutting rates, but they have a weaker economy than the one we have in the U.S.

As always, we continue to work hard for you.