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Markets in July 2023 Thumbnail

Markets in July 2023

Markets in July

  • Stocks continued their climb higher with the S&P 500 up 3.2% in July. This marks the best start through July for the S&P since 1997 and the best start for the Nasdaq since 1975. The Dow Jones index tied an all-time record of 13 consecutive positive days. 
  • All 11 sectors were up again for the second consecutive month. The leaders were Energy up 7.8%, Communication Services 5.7%, and Financials 4.8%. Laggards were Health Care up 1.07%, Real Estate 1.33%, and Consumer Staples 2.13%.
  • Economic data keeps reflecting a slowing but still resilient economy and expectations for a soft landing are rising. Several large investment firms have thrown in the towel on their bearish recession calls for this year. Even the Fed changed their outlook suggesting they no longer expect a recession this year. 
  • The first estimate of Q2 GDP came in at 2.4% vs 1.8% expected and up from 2% in Q1. Increases in consumer spending and nonresidential fixed investment led the growth.
  • The Fed raised rates another 25 bps to 5.25% - 5.50% after skipping last month. Their next meeting isn’t until September and whether they raise rates again will likely be determined by economic data between now and then.
  • Headline CPI came in at 3% for the first time since March 2021 and Core CPI at 4.8% was the lowest since Nov. 2021.
  • The US economy added 209k jobs in June, below forecasts of 240k. The unemployment rate fell back to 3.6%. Wages increased more than expected, up 0.4% in June from May and up 4.4% over the past year.
  • Halfway through Q2 earnings season, 80% are beating earnings expectations, which is above average but by a much smaller margin than average. Earnings are currently on track to drop by 7.3%. Profit margins are coming down slightly as well. On average companies have been able to raise prices more than they’ve had to raise wages for their employees since the pandemic. However, that seemed to have ended in May. So, we’ll see whether businesses will be able to protect their margins moving forward. Markets are expecting earnings to flatten out in Q3 and then rebound sharply in Q4 through 2024. 

Why It Could Keep Going Higher

  • The primary driver of U.S. economic growth is the U.S consumer and Americans still have excess savings they’re able to spend. Although data shows this may be running low.

  • Employment is still strong and that has always begun to slip before a recession.

  • Inflation continues to decelerate and the Fed may be close to pausing rate hikes.

  • Analysts are projecting that earnings will begin to rebound in Q3.

  • There is a lot of cash on the sidelines and investors may put it to work on the fear of missing out.

Biggest Risk

  • Most foreign central banks are tightening policy at the same time, which may further amplify a global contraction.

  • Employers may be forced to lay off more of their labor force to maintain margins in a slowing economy.

  • The S&P 500 may be over-valued at almost 20 times forward earnings.

  • Additional bank failures and commercial real estate defaults.

  • Further Geopolitical tensions.

Economic Data

  • The NFIB Small Business Optimism Index rose to a seven year high of 91.
  • US Industrial production dropped 0.5% in June.
  • US Retail sales rose 0.2% in June vs 0.5% expected.
  • The Conference Board’s consumer confidence index reached its highest level since July 2021. 
  • The ECB raised rates 25 bps but signaled they may pause in September.
  • Core PCE came in up 0.2% for June from May, and up 4.1% over the year.  This is the lowest print since Sept 2021 and below expectations of 4.2%.
  • The Employment Cost Index was up 4.5% over the past year. The lowest reading in two years but economists believe that it needs to retreat to 3.5% to be consistent with 2% inflation.
  • ISM Manufacturing PMI came in at 46.4 in July, remaining in contraction for the ninth consecutive month.
  • JOLTs report showed that job openings fell to 9.58M in June. 

What We Are Doing 

 The latest inflation data is showing promising signs that inflation may be able to retreat further without devasting impacts to the economy. That said, the year over year comps become more challenging moving forward. This might keep the Fed’s fight stronger and longer than expected, inevitably pushing the economy into this highly telegraphed yet elusive recession. 

With the S&P 500 trading at almost 20 times forward earnings, even if the markets move higher from here, it may be limited on how it can go until earnings improve. In July, we decided to reduce further some of our defensive positioning, reducing our allocation to health care and consumer staples and increased exposure to the S&P 500 Equal Weighted Index.

Interest rates have also moved higher recently as the outlook for a soft landing becomes more entrenched. We used this increase to move some of our overweight in money markets into intermediate and longer-term bonds. We will continue to watch the economic dynamic carefully to take advantage of opportunities as they present themselves.