Market Commentary - July 2024

Monthly Update

Pendulums are meant to go both ways. And in the stock market, it certainly reflected that in July after seemingly leaning in only one direction for a while. By early July, the Russell 2000 was down on the year and flat on the month but finished July up 10% while the S&P 500 was higher by just 1% and the tech heavy NASDAQ was lower by .75%[1]. The catalyst was the June CPI print that reflected further deceleration in the pace of inflation, albeit still glacial, that gave markets further confidence that the Federal Reserve would cut interest rates in September. That was further reinforced by the July Fed meeting where Jay Powell leaned to cutting rates then. The fed funds futures market is now fully priced for a 25-basis point trim at this point and for a second one by year end, most likely in December as the November meeting is one day after the Presidential election.

The reason for the easing bias now at the Fed is not only that inflation has moderated but also because the labor market is showing some softness, and we know the Fed must balance both. While still historically low, the 4.1% unemployment rate as of this writing is at the highest level since November 2021. We just saw the highest number of people filing for initial jobless claims since last August and the employment component of the monthly ISM manufacturing index fell to its softest since 2009, not including the Covid plunge[2].

Because of worries though that we’ll get a repeat of the 1970’s where inflation flared up again and again after cooling, the Fed right now is only going to be tweaking rates rather than us being on the cusp of a major rate cutting cycle. I’m thus referring to this as a rate tweaking cycle rather than a rate cutting one. The same can be said for the European Central Bank, the Bank of England and Bank of Canada who each recently cut interest rates but are being careful as to when to do so again.

Threading an economic needle is what central banks are trying to do now by taking the edge off the sharp rise in interest rates to ease some of the pressure on the economy but at the same time being on alert so that inflation doesn’t reverse higher.

Lower interest rates are a particular help to small and medium sized businesses, whose stocks rallied the most in July, because many borrow with floating rate debt. The sharp rise in rates beginning in March 2022 was an interest rate shock for those that didn’t have rate hedges on. On the flip side of the markets in July, the big cap tech stocks finally saw some hits. Particularly, three of the most popular seven names, that being Microsoft, Google/Alphabet and Tesla each didn’t meet the high bar of earnings expectations. As the divergence between growth and value stocks has gotten so extreme, to the point where the top 10 S&P 500 stocks made up 37% of the index vs 27% in the year 2000, some pendulum swinging was way overdue.[3]

As mixed and uneven the stock market has been between the haves and the have nots, the global economy has been as well. We can start with the US economy where the higher income consumers, along with many baby boomers, are spending at a healthy rate, especially on cruises for example. On the other hand, the lower to middle income consumer is much more price conscious and value seeking with their spend. We’ve heard from a slew of consumer touching businesses in retail, restaurants, and leisure/hospitality that corroborate this view.

Within the housing market, the pace of existing home transactions hovers around the lowest level since the mid 1990’s but the new build market is doing better trying to fill the supply vacuum hole that we have. And even within the homebuilder business, the big companies are taking market share from the smaller ones. On the manufacturing side, we’ve been in a recession for about two years now and the most recent ISM index which measures this, fell to the lowest since November. Global trade too is mixed with the softness in China and only slight growth in Europe but strength in India and other parts of Southeast Asia. Also reflecting a mixed picture, some companies, particularly big tech companies, have really ramped up their spend on AI models with hopes for future monetization. That spending though is not enlarging the capital spending pie but instead is taking pieces from other areas of allocated cap ex.

On the other hand, the US government is running a $2 trillion deficit, about 6% of GDP, and that money has to end up somewhere[4]. Beneficiaries have been the healthcare sector with our aging population, in addition to defense and those holding Treasuries and receiving interest income, along with government programs that are pushing money into infrastructure and the building of semiconductor plants and EV battery factories.

In contrast to the central banks cutting interest rates, the Bank of Japan is moving in reverse because they waited so long to respond to the jump in inflation. At the end of July, they announced that they were taking their overnight rate to .25% from a range of 0-.10%[5]. Also, they said they will cut in half the amount of JGB bond purchases they’ve been doing but that won’t start until Q1 2026. The weak yen has been a growing problem for the Japanese economy because it has both stoked higher inflation and reduced the purchasing power of the Japanese citizenry. It has also made it much more expensive to import their energy needs, where they rely on others for most of it and to even upgrade their military as they buy most of their defense needs from others. So, in response to the BoJ move, and leading up to it, the yen has finally rallied off its weakest level since 1986 but the impact had global repercussions. Some in the markets have put on a so called ‘carry trade’ where they borrow low-cost money in Japan and use the proceeds to buy other speculative things. When the yen rallies, those carry trades unwind as traders buy back their short yen. We’ll continue to watch this situation closely.

Conclusion

It was a wild month with so much going on and now that we are just a few months away from the US Presidential election, along with continued geopolitical worries, on our toes we will continue to be. As said, as mixed and uneven the US economy is, as well as the global economy, it also is reflected in a very mixed and uneven stock market. For every pro there is a con, for every AI driven stock, there is a company dealing with lackluster sales growth. Just as we thought that the market only cared about the biggest tech stocks, smaller ones finally showed some signs of life.

In the investment and forecasting business, that is most impacted by what comes next rather than what has already occurred, it’s why we’re always humble about what we do but always diligent when it comes to investing client money in terms of constantly gauging the risk and reward and taking a long-term time horizon perspective. That allows us to ignore much of the short-term noise and focus most on the bigger picture. I say this all because it now seems like we’re in an even more uncertain time with so many cross currents to juggle.

We acknowledge that we live in a different macro world than enjoyed in the 15 years pre Covid and the resumption of easy money that took place to help economically get us out of the self-imposed shutdowns. While the interest rate levels currently seen could be construed as ‘normal’, there is still an adjustment period to them because the past few decades saw interest rates as ‘abnormal.’ There is an ongoing debate within the Fed as to what is restrictive monetary policy and what is not. The answer is not it is, or it isn’t. It is for those that have debt coming due this year or next, or have a big ticket item to buy. It isn’t for those receiving interest income and enjoying the higher stock market.

Whatever comes our way though in this very tricky investing landscape, it remains vital that investors have adequate short-term liquidity over the next 2-3 years. Knowing that period is covered can help separate the balance of one’s portfolio from the ups and downs of the markets. Time horizon is always crucial and is always the best friend of any investor. We are not just in the asset management business but also in the risk management business and always believe that by watching our back and focusing on the risks, the upside should take care of itself.

Disclaimer

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. The market and economic data is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The information in this report has been prepared from data believed to be reliable, but no representation is being made as to its accuracy and completeness.

The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The NASDAQ Composite Index measures all NASDAQ domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index.

The Russell 2000 Index is an unmanaged index generally representative of the 2,000 smallest companies in the Russell 3000 index, which represents approximately 10% of the total market capitalization of the Russell 3000 Index.

The Stoxx Europe 600 index also called the STOXX 600 is an indicator of the performance of the European stock market. It measures the performance of large mid and small-cap companies across 17 countries in Europe. The number of constituents is fixed at 600.

The Hang Seng Index is a freefloat-adjusted market-capitalization-weighted stock-market index in Hong Kong. It is used to record and monitor daily changes of the largest companies of the Hong Kong stock market and is the main indicator of the overall market performance in Hong Kong. These 82 constituent companies represent about 58% of the capitalization of the Hong Kong Stock Exchange.

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[1] Bloomberg

[2] Bloomberg

[3] Bloomberg

[4] Bipartisan Policy Center

[5] Bloomberg