Markets continued to march higher in July with the majority of global equity and fixed income indices posting modest gains for the month, including the S&P 500, which climbed 1.4%.
Economic data remained generally positive for July as second quarter GDP growth reached 2.1%, better than the 1.8% market forecast; employment data remained strong with the unemployment rate steady at historic lows of 3.7%; and consumer confidence climbed to near record highs at 135.7 from 124.3 in June. The strength of the U.S. consumer is helping to offset slowing growth among businesses as the ISM manufacturing index slowed in the month to 51.2, though it remains expansionary.
Companies also began reporting second quarter results in mid-July with the majority posting sales and earnings ahead of consensus expectations. These results contributed to the modestly positive move in stocks over the course of the month.
Among the most significant drivers of the market throughout the month was the debate surrounding the anticipated outcome of the late July Fed meeting: While a rate cut was viewed as a virtual certainty, investors debated how significant the cut would be and what message the Fed may telegraph to the markets. As it turned out, the Fed did, indeed, cut interest rates by 25bps, but also suggested the market should not necessarily anticipate further cuts. This was not well received by the markets, as investors had anticipated continued easing through the remainder of the year.
Across the pond, Boris Johnson was elected as the new Prime Minister of the UK, a move that has heightened the market’s anxiety about the Brexit situation, given Johnson’s hardball tactics. Johnson is demanding a better deal from the EU while also insisting that negotiations will not extend beyond the current October 31 deadline. This has dramatically increased the risk of a “no deal” Brexit, which we strongly believe is not the optimal outcome.
While key events and performance from July are the focus of this note, we’d be remiss not to touch upon the volatility the markets have experienced in early August, which stemmed from another escalation in the U.S.-China trade war. Recall in June the U.S. and China reached a truce and agreed to continue discussions. At the time, we wrote that we would not be surprised to see continued volatility as negotiations continued; after all, talk is cheap, and we felt like we’d heard this line before. Thus, we were not surprised when news broke that President Trump was implementing a 10% tariff on an additional $300B of Chinese imports effective September 1. China, in turn, retaliated by halting imports of U.S. agricultural products and devaluing the yuan to near record lows.
In short, there are many data points that confirm the health of the U.S. economy, as well as some major geopolitical events that need to be resolved. Perhaps the most significant concern related to the geopolitical issues, namely the trade dispute between the U.S. and China, is that failure to reach a resolution will derail the already slowing economic expansion. While we monitor these risks and developments daily, we remain pragmatic and deliberate in the management of the portfolios irrespective of the latest tweet.
The monthly Market Overview is written by two members of MACRO’s Investment Committee: Mark Cortazzo, CFP®, CIMA®, and Christopher Moffett, CFA.