US Stocks
Modest gains were posted for large-cap US equities in July while small caps and foreign stocks fell slightly. After posted huge gains through much of the first half of the year, diversified investors have seen their portfolios’ pace of gains slow. That’s not a bad thing as markets can often turn volatile after periods of intense growth. Sometimes a breather is needed.
A big theme in July was the impressive earnings growth companies posted during the second-quarter reporting season. Each quarter, CFOs and CEOs post financial results to Wall Street analysts and their shareholders. Market experts analyze how sales and earnings per share numbers verify versus the consensus estimate. Companies manage to “beat estimates” most of the time—imagine that. It’s one of the games that firms play with the firms analyzing them.
This earnings season has been particularly strong for corporate America. The “beat rate” averages about 75% over the long-term, but it has been 88% for 2Q 2021.[i] As a result, the S&P 500’s P/E ratio, a gauge of how expensive the market is, has remained above average but not stunningly high.
Let’s tally up then July performances. The S&P 500 rose 2% while the Dow and Nasdaq were up just 1%. The small-cap Russell 2000 index was down 4%. Large-cap growth stocks led the way with Apple, the biggest stock in the world, up 6.5%. Microsoft, Google, and Facebook all posted solid gains. Amazon was the problem child among the glamour stocks with a 3% loss.
US Stock Index July Performances[ii]
Across the eleven sectors, defensive areas led—Health Care, Real Estate, and Utilities. Traders often get jittery when a safe group of stocks like utility companies sees an influx of buyers, which could signal uneasiness in the market. Is there cause for worry? It’s possible, but also consider that the S&P 500 made several new all-time highs last month. The Energy sector was the biggest laggard despite high oil prices.
US Stock Market Sector July Performances[iii]
International Stocks
It was a mixed bag across the foreign stock spectrum. Developed markets like UK, France, Germany, and Japan collectively rose 2% while Emerging Markets, dragged down by China, fell 6%. You might have seen headlines in the papers regarding China’s crackdown on education firms, technology, and some consumer industries. Shares of some of the biggest companies outside of the US saw big losses, though they bounced back toward the end of the month. China’s internet technology index, which debuted one year ago, fell more than 50% from its February high.
Moral of the story—keeping a diversified portfolio and rebalancing is wise. These stocks will likely recover over time, and volatility in the Emerging Market area is quite common. Interestingly, foreign small caps had a solid month, matching the return of the US total stock market, as measured by the iShares MSCI EAFE SC index fund.
US Stock Market and Foreign Equity Index July Returns[iv]
Fixed Income
Interest rates continued their decline in July. The benchmark US 10-Year Treasury yield peaked in March above 1.7% and its nadir was just above 1.1% a few weeks ago. Investors continue to seek the safety of government-backed bonds despite a rising stock market and elevated inflation expectations. Elsewhere in the fixed income space, the US aggregate bond market ETF posted a 1% return while long-term Treasuries sported a 4% advance. US high yield and Emerging Market debt, two risky spots, had small gains. With lower yields, mortgage rates once again ticked back down near record lows. A typical 15-year mortgage now averages just 2.10% according to FreddieMac.[v]
US 10-Year Treasury Yield Year-to-Date[vi]
Inflation remains top of mind for consumers as we see higher prices each day at the grocery store, gas pump, and at our favorite eateries. The Labor Department reported that the Consumer Price Index soared 5.4% from a year ago, marking the fastest pace since August 2008.[vii] “Core CPI”, which excludes the volatile food and energy components, rose 4.5% year on year. Going forward, the market expects a more moderate rise in prices in the 2.4% to 2.6% range, but still higher than we’ve seen in the past decade.
US Dollar & Crypto
The US Dollar Index fell slightly last month. The Federal Reserve’s easy money policy relieved investors at last week’s Fed Policy meeting, which helped lower the Greenback. When the Fed assuages stock market traders, it often comes at the expense of the Dollar’s strength. The USD has been generally steady for the last year despite many unforeseen economic events and financial aid packages from the government. Often, foreign stocks do better when the Dollar drops in value, so owning foreign equities can be an effective hedge should the US Dollar decline.
US Dollar Index 1-Year[viii]
Checking on cryptocurrencies: Bitcoin was up nearly 20% last month while Ethereum was higher by 11%.[ix] The ever-volatile market dropped to multi-month lows on July 20 when Bitcoin briefly fell beneath $30,000. Tesla CEO Elon Musk voiced support for the asset class, helping to ease the selling pressure. More bullish news came from another of the world’s richest companies, Amazon. The commerce giant posted a job opening for a digital currency and blockchain expert.[x] It doesn’t take much news to send crypto prices up big or down big!
The Point
Inflation continues to run high while US firms are posting very impressive profit numbers. The economy is growing at the fastest rate in nearly four decades as the government continues to support families (via the Child Tax Credit) and some businesses. The housing market remains lava hot while commodity prices are elevated. It’s an unusual time, to say the least! As it always does, uncertainty lies ahead concerning how the Delta Variant impacts school re-openings and a return to the office. Stay tuned for more market updates, but always remember that your situation is the biggest X-factor of all.
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[i] https://www.factset.com/hubfs/Website/Resources%20Section/Research%20Desk/Earnings%20Insight/EarningsInsight_073021A.pdf
[ii] https://stockcharts.com/freecharts/perf.php?$SPX,$INDU,$COMPQ,IWM&p=1&O=111000
[iii] https://stockcharts.com/freecharts/perf.php?$SPX,XLY,XLC,XLK,XLI,XLB,XLE,XLP,XLV,XLU,XLF,XLRE&B=$SPX&p=1&O=110011&I=$SPX
[iv] https://stockcharts.com/freecharts/perf.php?ITOT,SCHF,SCZ,SPEM&p=1&O=111010
[v] http://www.freddiemac.com/pmms/
[vi] https://stockcharts.com/h-sc/ui?s=%24TNX&p=D&st=2021-01-01&id=p36572457934
[vii] https://www.wsj.com/articles/us-inflation-consumer-price-index-june-2021-11626125947
[viii] https://stockcharts.com/h-sc/ui?s=%24USD&p=D&yr=1&mn=0&dy=0&id=p06118325869
[ix] https://www.tradingview.com/markets/cryptocurrencies/prices-all/
[x] https://www.wsj.com/articles/bitcoin-jumps-20-to-a-six-week-high-11627287544