While the first half of the year saw several risks negatively impacting markets, the concerns around the debt ceiling standoff and the banking sector have cooled notably, and most of the initial impact has faded. July ended with encouraging signs of continued economic growth combined with declining inflation.
BREAKING IT DOWN
July Federal Reserve Meeting
The Federal Reserve (Fed) hiked the federal funds rate by 25 basis points at its July meeting, which investors and economists widely anticipated due to the Fed's fight against inflation. The major takeaway was that the Fed no longer expects to see the economy enter into a recession anytime soon. This positive revision to the Fed's outlook suggests the central bank is unlikely to hike rates again at its September meeting and could even signal an end to the Fed's current rate hiking cycle.
While this stance could certainly change if we see an uptick in inflation or notable weakness in the job market, the Fed's impact on the economy and markets may swing from restrictive to supportive in the second half of this year or early 2024.
Equity markets rallied in July, with rising investor confidence helping to support stocks to start the second half of the year. The three major U.S. indices finished the month near their all-time highs, set in late 2021 and early 2022, and well above their respective 200-day moving averages (a technical signal that can indicate a shift in investor sentiment when there are prolonged breaks) for the seventh consecutive month.
While results were encouraging, market fundamentals showed signs of a slowdown in specific sectors. The weakness was largely concentrated in the energy and materials sectors, but a larger-than-expected decline in healthcare earnings also contributed to the overall drop in quarterly earnings.
International markets had positive gains. These results ensured that technical factors remained supportive, with the MSCI EAFE Index and the MSCI Emerging Markets Index indices finishing above their respective 200-day moving averages in July.
Ongoing Challenges for Fixed Income
While stocks continued to rally to start the year's second half, the same can't be said for bonds. Rising rates weighed on bond prices, with the 10-year U.S. Treasury yield rising modestly at the end of July and the Bloomberg Aggregate Bond Index losing.
High-yield fixed income, which typically performs well when equity markets rally, saw gains in July. Falling credit spreads supported high-yield bond returns, signaling a growing investor appetite for investing in higher-yield securities and helping support prices for existing bonds.
Economic Growth Beats Expectations
Economic updates released in July showed better-than-expected economic growth, supported by improved consumer confidence and spending. Meanwhile, consumer sentiment improved notably during the month as well, with both major measures of consumer confidence coming in better than expected. The Conference Board Consumer Confidence Index sat at its highest level in two years, supported by rising optimism about current economic conditions.
Looking forward, genuine risks for consideration remain. Domestically, the primary risk is that inflation could spike again if growth continues to exceed expectations, leading to further unexpected rate hikes, negatively impacting both stock and bond valuations. And while the immediate market impact from international risks (the ongoing war between Russia and Ukraine and concerns surrounding a slowdown in China) remains, the initial effect from these risk factors is limited. However, these areas could lead to further uncertainty for investors.
A Positive Outlook
Despite the risks, the strong economy is a tailwind for investors. Better-than-expected economic news to start the year's second half continued to paint a picture of a healthy economic expansion, which should support stock prices. The outlook for the rest of the year is positive for both markets and the economy. Of course, there is always a potential for short-term disruptions. Therefore, a well-diversified portfolio that matches investor timelines and goals remains the best path forward for most.
Please do not hesitate to contact our office if you have questions or want to check in. We are happy to walk you through our approach and explain what we are doing to keep you on track to meet your financial goals and needs. We look forward to hearing from you and hope you have a wonderful week.
Charles D. Dodds, Jr., CFP®, CLU®, ChFC®, CIMA®
President, Sr. Portfolio Manager
Adrian F. Dodds, CFP®
Managing Partner, Sr. Financial Advisor