- The S&P 500 was up for the six straight month in July. Small Caps cooled as the Russell 2000 was down 3.65%.
- Q2 Earnings season has begun. 59% of the S&P 500 companies have reported and 88% have beaten their earnings expectations. However, some mega-cap tech companies have cautioned a slowdown in growth ahead.
- 850,000 jobs were added in June, the largest monthly gain since last August.
- CPI grew at its fastest pace since August 2008 and Core inflation (excluding food and energy had the largest increase since Sept 1991. More small businesses are raising prices than at any time since the 1980s.
- Q2 GDP came in at 6.5% annualized vs expectations of 8.4%. However, the main drag was from global supply chain shortages which once fixed could mean further gains down the road.
- The 10-year Treasury yield surprised by dropping 20 basis points. This was caused by a combination of factors such as: technical short covering, concerns about the Delta Variant and the significant rise in new Coved cases causing the Fed to move slower than previously expected to begin raising rates.
- China has taken several regulatory actions which have caused significant concerns to investors in investing in the country. China makes up roughly 40% of MSCI Emerging Markets Index, causing the index to drop 6.44% in July.
Why It Could Keep Going Higher
- There are still 8 million Americans that remain unemployed.
- Consumers have significant excess savings to spend.
- Businesses have a lot of inventory to build back up.
- Continued vaccine rollout.
- Additional stimulus.
- Covid cases have been rising dramatically. It is yet to be seen how the world will react to this but it has the possibility to significantly slow down the economic recovery.
- If inflation continued at its current rate the Fed would be forced to raise rates which in turn is designed to slow down an over-heating economy. However, our belief is that much of the inflation we are seeing is transitory and will self-correct as supply chain dynamics return to normal.
What We Are Doing
We have continued to maintain a well-diversified allocation. We are still overweight equities and underweight fixed income, but have reduced some of that overweight. We’re still investing in areas that should benefit from the world returning to normal, as well as potentially higher interest rates, such as industrials, banks and value. However, we believe longer term trends will continue to favor technology that we added to during their recent sell off.
With interest rates anticipated to rise over the next couple of years, we plan to maintain our underweight to investment grade fixed income and overweight to high yield. Going forward we continue to favor high yield, preferred stocks, private debt and private real estate as a way to create income.