Overall Market Backdrop for July
- The new quarter brought with it newfound positivity for developed equity markets; seeing strong gains with the S&P 500 leading the way with 8.97%.
- While equity markets showed promising returns in July there was still evidence of a slowing global economy coupled with inflation reaching new highs.
- The US 10-Year Treasury yields saw a change in trend and dropped by 33 basis points, ending on 2.64%.
- Small-Cap has been the best performing factor for July, returning 8.89%.
Drivers of Market Conditions in July
- While markets have been anticipating restrictive monetary policy to continue, they have had strong performance in July. Early on in the month markets were helped by easing oil prices however, this was short-lived as global equities had a drawback due to a hotter-than-expected US inflation print. But this was the last headwinds US equities would have during July as for the remainder of the month US equities continued to climb. A better-than-expected corporate earnings results fueled investor optimism amid recent economic pressures. Markets now anticipate that a second-quarter GDP contraction may foreshadow an end to the Fed’s aggressive hiking cycle.
- The UK and European equity markets started strong with improved sentiment following the resignation of UK Prime Minister, Boris Johnson. UK and European equities continued to feel the blow from high energy inflation but there was some relief with the resumption of Russia’s Nord Stream 1 pipeline gas flow. European markets also ended the month well on the back of positive news from earning reports.
- Inflation has been plaguing global equity and fixed-income markets YTD and we have seen price pressures strengthen globally, driving sustained and elevated inflation that hasn’t been seen in decades. While drivers of inflation do vary slightly from country to country there are some persistent factors, such as global supply chain issues and energy trade disruptions.
- The European Central Bank (ECB) made a 50 basis points rate hike which was unanticipated by markets and also adopted a “meeting-by-meeting” approach for additional policy measures.
- Throughout the chaos, US earnings have remained resilient. In the second quarter, 52% of companies have beaten consensus earnings estimates which is above the average of 47%.
- The Federal Reserve made its second consecutive 75 basis points interest rate hike last week, which was in line with the June Federal Open Market Committee (FOMC) meeting minutes. This is now the fastest tightening policy since the 1980s. Just like the ECB, the FOMC indicated that future hikes will be determined on a meeting-by-meeting basis.
- The US economy shrank by more than expected in the second quarter on the back of slower spending and investments and is now reaching the point of an economic recession with a second consecutive negative GDP quarter. The National Bureau of Economic Research has not officially declared a recession and this may continue as other recession indicators remain strong (unemployment rate).
- While Global yields decreased by the end of the month, they started the month by rising due to strong labour prints and hawkish FOMC minutes. However, this has left the yield curve inverted which normally foreshadows a recession. The rest of the month tells a story of recession fears outweighing concerns of a steeper rate hike policy as Treasury yields continue to fall. As a result, the yield curve continued to flatten. Market expectations further pushed the yield curve inversion wider as tighter monetary policy was being anticipated by markets.
How did Factors Perform in July?
- Small-Cap and Quality were the factors that performed the best in July. The strong earnings report highlighted how well these factors have performed. Quality stocks in particular are known for having better structural tailwinds, strong balance sheets, and strong cash flows.
- While equities around the world have overcome their struggles in July, as we would expect the Minimum Volatility index has taken a backseat as there was no drawdown to restrict.
Blog Post by Raj Chana
Investment Analyst at ebi Portfolios.
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