July Market Insights – Markets Rebound In Strong Start Second Half

Monday, August 8, 2022

Index Performance

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U.S. Equities Higher

The major market indexes finished the month well into the green. A sharp rebound for stocks in July came as expectations concerning slowing growth has some investors believing the Federal Reserve (Fed) will have to scale back interest rate increases later this year. In addition, with the majority of the S&P having reported Q2 earnings so far, well over half of companies have beaten their consensus estimates. This is better than many investors anticipated amid the present inflationary landscape. All sectors had a strong showing, with consumer discretionary leading the pack on the back of Tesla and Amazon’s better than expected earnings.

Even amid concerns about the European economic landscape, given the Russia-Ukraine war along with sticky inflation, developed international equities finished the month higher.  Emerging markets finished the month slightly lower on Chinese growth concerns amid COVID-19 lockdowns.  Moreover, concerns are renewed over the real estate market in China.  Chinese home sales fell nearly 30% last month on worries that struggling property developers will not be able to deliver on housing construction contracts.

Commodities Lower

Oil fell in July, as some believe that energy’s dominating run in 2022 might be stalling on the potential for a slowing economy but natural gas was up sharply over concerns about Europe pipeline supplies. The major metals, gold, silver, and copper lost ground for the fourth straight month even amid inflationary conditions.

Down on the Farm…

Over the past few years, prices for agriculture products have increased sharply given the global pandemic and related supply-chain issues, weather, and the Russia-Ukraine war. A palm oil export ban was recently lifted in Indonesia causing a drop in its price. In addition, there have been sharp drops in canola as well as soybean oil prices. High vegetable oil prices seem to have reduced demand and thus prices. Food prices are a large part of consumer spending in emerging markets and rising prices have already contributed to civil unrest in some countries such as Sri Lanka.

Wheat prices for future delivery have come off their high. Prices for wheat were $1,000 per metric ton during the middle of June but are currently $837 per metric ton. The price for wheat was highest after Russia invaded Ukraine.

Cotton has lost more than a third of its value since early May. The same price movement can be seen with corn. Corn reached $813.50 during mid-April, now the price of corn is just over $596 per 5,000 bushels. Finally, soybean prices have dropped over 17% for the last three months and over 19% for the month.  The Fed’s actions on U.S interest rates could be curbing some of the agriculture inflation.

Fixed Income Solid in July

The Bloomberg Aggregate Bond Index finished higher as some bond investors believed that the Fed may scale back rate hikes. Moreover, high-yield corporate bonds, as tracked by the Bloomberg High Yield index, finished solidly higher on better than expected Q2 earnings. Both developed international bonds (Citigroup World Government Bond Index) and emerging market debt (JP Morgan Emerging Markets Global Bond Index) gained ground in July.

U.S. Economic Data Recap

Inflation: June headline inflation rose over 9% from a year ago. This was above consensus estimates. Key drivers were the large increase in energy prices last month and an increase in transportation costs. June gas prices were up 60% from a year ago and over 10% month-over- month. Excluding food and energy, the CPI rose close to 6% year-over-year and at a slightly slower pace from May.

June’s producer price index increased over 11% compared to June 2021. The monthly rise of over 1% exceeded economists’ expectations. Excluding food and energy, core PPI increased over 6% year-over-year in June. That being said, the monthly gain was below economists’ expectations.

U.S. consumer:  June’s consumer confidence report came in at a 16-month low as the inflationary effects of rising gas and food prices affect consumers’ outlook for the economy.  In addition to June’s weaker-than-expected consumer confidence reading, consumer expectations for the economy fell to roughly a 10-year low.  Per the report, many consumers consider the possibility that economic growth will weaken significantly in the second half of this year.

Retail sales: Consumer spending held up during June’s inflation surge, with retail sales rising slightly more than expected for the month even with rising prices across most categories. Rising costs for food and energy in particular helped propel the increase, which was broad-based against the various metrics in the report.

U.S. home sales:  According to the National Association of Realtors, signed contracts to purchase existing homes dropped 20% in June compared to June 2021. Moreover, pending June home sales also declined more-than-expected over 8.5% from May. The decline was due to mortgage rates increasing to over 6% in June.

Small business sentiment: The National Federation of Independent Business (NFIB) June Small Business Index continued to show that many of the same challenges that have affected small businesses for over a year have not dissipated. The index dropped to the lowest level in nearly 9-1/2 years in June amid concerns about inflation, but demand for labor remained solid as businesses continued to grow their operations.  Inflation and labor shortages continue to weigh heavily on short-term expectations. The survey showed that 50% of small business owners are reporting job openings that cannot be filled.

Federal Reserve News:  The Federal Reserve ended its July Federal Open Market Committee (FOMC) meeting with the outcome broadly in line with market expectations. The Committee raised short-term interest rates by 75 basis points (0.75%) as expected to take the Fed Funds rate to 2.5% (upper bound). The 2.5% level is, by the Fed’s estimate, neutral; this is the level where monetary policy is neither restrictive nor accommodative. However, Chairman Jerome Powell seemingly indicated a willingness to slow the pace of rate hikes citing 75 basis point hikes as “unusually large”.

U.S. employment: In July, the U.S. economy added over 500,000 jobs as the unemployment rate fell to 3.5%. Economists expected job growth would total just 250,000 last month. Because of last Friday’s employment report, market participants believe that the Federal Reserve is on track to continue its hawkish monetary policy, likely increasing rates by 0.75% in September.

Looking ahead

July witnessed a solid rebound for equities amid a pessimistic economic landscape. Long-term investors who stayed with their investment plan were rewarded in July after the first half of 2022 yielded the worst six month for stocks since 1970.  An aggressive Federal Reserve with a mixed, to poor, track record of navigating a soft landing, stagflation, China economic concerns, disrupted supply chains, overly optimistic earnings estimates, and the ongoing Russia-Ukraine war, gave a lot for investors to ponder.

Two major factors aided equities this past month.  First, the belief that inflation may have reached its peak given the Fed’s hawkish sentiment, as well as the major pullback in commodity prices which helped sentiment and will feed into lower inflation data with a lag. Also, corporate earnings, which is the major cause of long-term stock appreciation, came in better than expected amid inflation and geopolitical concerns. This all being said, we recognize that inflation is still a major factor, as even if inflation has peaked it will still be at extremely elevated levels, and as such we will be keeping a close eye on this for the rest of 2022.



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