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Markets in July: Sector Rotation, Economic Signals, and Strategic Adjustments Thumbnail

Markets in July: Sector Rotation, Economic Signals, and Strategic Adjustments

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Markets In July


  • Equities experienced some turbulence in the second half of July but the S&P 500 finished up 1.2% thanks to a solid first half of the month. 
  • The real story was the rotation that occurred with money fleeing the best performing mega-cap tech stocks and moving into previously underperforming areas of the market. The small-cap Russell 2000 was up 10.2%. The top three sectors for the month were value-oriented sectors, Real Estate, Utilities, and Financial were up 7.2%, 6.8%, and 6.4% respectively. The only sector to end in the red was Technology down 3.3%.
  • It was yet another month of mixed economic data. Inflation data continued to show progress and Q2 GDP came in much better than expected. The reports showed continued strength in consumer spending and business investment. However, the job market is showing signs of cooling.
  • The Fed left interest rates unchanged once again but signaled that they could begin to cut in September.
  • Interest rates continued to come down pushing U.S. Aggregate Bond index up 2.4% in July.


Why It Could Go Higher From Here

  • The primary driver of U.S. economic growth is the U.S consumer and most Americans are fully employed and enjoyed significant wage gains over the past couple years. Most with low debt service costs.
  • Inflation continues to decelerate, albeit slowly and the Fed has signaled that they plan to cut rates sometime this year.
  • Earnings are expected to grow between 8% - 12% in 2024.
  • Fiscal policy is still providing a tailwind to economic growth.
  • Artificial Intelligence capex and promises of productivity gains are still in the early stages.
  • There is a lot of cash still on the sidelines and investors may put it to work on the fear of missing out.

Biggest Risks

  • Inflation and the Fed’s response to get it under control are still the biggest risks the economy faces currently. Fed policy impacts the economy with a significant lag so it is hard to determine what the future effects will be from the current rate hikes.
  • Valuations are stretched and if earnings do not live up to expectations, a sell-off could occur.
  • Some research reports indicate that excess savings accumulated during the pandemic may have already been depleted and consumer spending is showing signs of cooling.
  • Credit card debt has reached an all-time high. Delinquency rates are rising on auto loans and credit card balances, and we’re starting to see an increase in bond defaults, albeit all from below average levels.
  • If the economy does begin to slow down, high wage costs may force employers to lay off workers to maintain profit margins.
  • Additional bank failures and commercial real estate defaults.


Economic Data

  • Q2 GDP came in at 2.8% vs 1.4% in Q1.
  • CPI fell for the first time month over month and came in at 3%. Core CPI came in at 3.3%.
  • Core PPI rose to 3% over the year. The fifth consecutive monthly increase.
  • Core PCE is up 2.6% over the year, the same as May.
  • Nonfarm Payrolls posted the second smallest gain in 3 ½ years with an increase of 114k. Average hourly earnings growth eased to 3.6%.
  • Retail Sales minus autos rose the most since January 2023.
  • ISM Manufacturing PMI dropped to 46.80.
  • Existing Home Sales fell 5.4% and the median home price increased 2.3%, setting a new all time high.


What We Are Doing

We are still optimistic that the most important metric for stock market performance, corporate earnings, will continue to grow into the next quarter. However, with valuations high, economic data and consumer spending showing signs that they may be weakening, and the U.S. election moving closer we used some of the recent rally to take a little growth off the table on our more aggressive allocations. However, we also continue to expect more volatility ahead and we would see any market pull backs as a likely buying opportunity rather than the start of a significant bear market. With inflation moving lower we added to fixed income with the expectations the Fed will begin cutting rates in September. One of the main areas we are watching closely is if the recent cooling in employment data begins to level off or shows signs of cracking. We will continue to watch the economic dynamic carefully to take advantage of opportunities as they present themselves.