July was a good month for equity investors, as major indices were up nicely in the U.S. and internationally. More conservative investors had an uneventful month, as core bond investments were essentially flat.
We are mostly through earnings season, and while there were some high-profile surprises on the up and downside, the news was generally positive. Companies, more often than not, met or exceeded expectations and had a constructive outlook for the remainder of the year. As we move past earnings into August, we expect lighter activity and, as a result, incrementally more volatility.
When investors return from their summer vacations they will undoubtedly focus on the actions of the Fed, the midterm elections, and geopolitical events. Talking heads will eat up air time by making countless predictions on all kinds of things and the market’s reaction to those things. The content will not matter to the media as much as the high degree of confidence with which the prediction is made.
The only prediction we feel confident making publicly is that at least one more rate hike is on the table this year, most likely in September. We think the Fed would like to continue with “normalizing” policy, but what currently constitutes “normal” is an open debate. Some people think it is 1% above the Fed’s inflation target - in other words, 3%. Why ultra-conservative, short-term cash should generate any real (inflation-adjusted) return at all in a world awash in too much cash is not something normally opined upon.