Please find our most recent market review below. We hope these perspectives are valuable to you.
– The AdvicePeriod Team
Monthly Market Review
By Nathan Sonnenberg
AdvicePeriod Chief Investment Officer
Stocks posted a solid July amid resilient corporate earnings and signs that inflationary pressures may be starting to ease.
The S&P 500 gained 9.2%, the Dow Jones Industrial Average rose 6.8% and the tech-heavy Nasdaq-100 Index advanced 12.6%. Global stocks enjoyed a strong month as well, with the MSCI ACWI global equity index gaining 7.0%. Despite the positive month, all the indexes remain in the red for the year. The hardest-hit gauge, the Nasdaq, was still down 20.4%. In the bond arena, the Bloomberg U.S. Aggregate Index gained 2.4% in July.
Investors have been spooked throughout 2022 by persistent high inflation, continued rising interest rates, and the possibility of declining corporate earnings. But it seems clear that the market had become too pessimistic heading into July.
Corporate earnings have been robust, profit margins strong and future earnings guidance better than most analysts expected. What’s more, commodity prices, a key inflation driver, seem to be subsiding. The Bloomberg Commodity Index has declined 12% since peaking in early June. Key commodities—oil, natural gas, copper, corn, and wheat—have fallen more than 20% from peak levels. Market expectations for longer-term inflation have also been on the decline. The 10-year U.S. Treasury yield, which crested at 3.5% in early June, was recently at 2.6%.
In more positive economic news, employers added 528,000 jobs in July, far surpassing expectations, and the unemployment rate edged down from 3.6% to 3.5%.1 Job growth was widespread, with leisure and hospitality, professional and business services, and health care among the strongest sectors. Both nonfarm employment and the unemployment rate have now returned to their pre-pandemic levels of February 2020.
As for the growth of the economy, real gross domestic product decreased at an annual rate of 0.9% in the second quarter, following a decrease of 1.6% in the first quarter. While two-quarters of negative growth is often used as a rule of thumb to identify a recession, strong job growth and other factors seem to suggest otherwise. The Atlanta Federal Reserve currently projects that the economy will grow 1.4% in the third quarter.
Headline inflation remains high: Through June, the Consumer Price Index had risen 9.1% over the previous 12 months. In response, the Federal Reserve has raised the key federal funds rate by 2.25% so far this year and is expected to continue tightening until inflation shows clear signs of cracking.
Looking ahead, the market will be watching to see if inflation has indeed peaked and, if so, whether the Fed’s policies can drive it lower without stalling out the economy. The central bank is expected to raise short-term interest rates by 0.50% to 0.75% in September. Investors will also continue to focus on corporations’ thus-far resilient profit margins.
It’s often said that the key to successful long-term investing is time in the market, not timing the market. July’s market results served to underscore that point. It’s been a challenging year for investors, and many have been tempted to temporarily pull money out of the markets. Those who gave in to temptation at the end of June, when things looked bleak, not only locked in their losses but likely missed out on July’s rally. No one can predict when a rally will begin but missing one can substantially weaken the compounding power of a portfolio. Thus, it’s generally wisest to invest according to a well-thought-out plan and stick with it when the road gets bumpy.
1The Employment Situation, U.S. Department of Labor Statistics
Definitions:
The S&P 500 Index is a market-value weighted index provided by Standard & Poor’s and is comprised of 500 companies chosen for market size and industry group representation.
The Dow Jones Industrial Average (DJIA) is an index that tracks 30 large, publicly-owned companies trading on the New York Stock Exchange (NYSE) and the NASDAQ.
The Nasdaq 100 Index includes 100 of the largest domestic and international non-financial companies listed on The Nasdaq Stock Market based on market capitalization. The Index reflects companies across major industry groups including computer hardware and software, telecommunications, retail/wholesale trade and biotechnology. It does not contain securities of financial companies, including investment companies..
The MSCI All Country World Index (ACWI) is a broad global equity benchmark that represents large and mid-cap equity performance across 23 developed and emerging market countries.
The Bloomberg U.S. Aggregate Index represents the investment-grade, U.S. dollar-denominated, fixed-rate taxable bond market, including Treasuries, government-related and corporate securities, as well as mortgage and asset-backed securities..
Bloomberg Commodity Index (BCOM) is a broadly diversified commodity price index distributed by Bloomberg Indexes that tracks the prices of futures contracts on physical commodities on the commodity markets.
Disclosures:
The indices referenced are unmanaged and cannot be directly invested into. Past performance is no indication of future results. Investing involves risk and the potential to lose principal.
This commentary represents an assessment of the market environment through July of 2022. The views and opinions expressed may change based on market or other conditions. The forward-looking statements are based on certain assumptions but there can be no assurance that forward-looking statements will materialize.
The commentary is meant for informational and educational purposes only and does not consider any individual personal considerations. As such, the information contained herein is not intended to be personal investment advice or recommendation. Please consult a financial professional before making any financial-related decisions.
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Does past performance matter?
Major Market Index Returns
Period Ending 8/1/2022
Multi-year returns are annualized.
Mix Index Returns
Global Equity / US Taxable Bonds
Indexes are unmanaged and cannot be directly invested into. Past performance is no indication of future results. Investing involves risk and the potential to lose principal.
The Russell 3000 Index is a United States market index that tracks the 3000 largest companies. MSCI Emerging Markets Index is a broad market cap-weighted Index showing the performance of equities across 23 emerging market countries defined as emerging markets by MSCI. MSCI ACWI ex-U.S. Index is a free-float adjusted market capitalization-weighted index that is designed to measure the equity market performance of developed and emerging markets excluding companies based in the United States. Bloomberg U.S. Aggregate Bond Index represents the investment-grade, U.S. dollar-denominated, fixed-rate taxable bond market, including Treasuries, government-related and corporate securities, as well as mortgage and asset-backed securities. Bloomberg Municipal Index is the US Municipal Index that covers the US dollar-denominated long-term tax-exempt bond market. The index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds, and prerefunded bonds.
What You Pay For: The Percentage of Active Managers That Underperform Their Benchmarks
Trailing 10 Years Numbers As of December 31st, 2021 – S&P Spiva Scorecard
Percentage of US large-cap funds that underperformed their benchmarks
US large-cap benchmark:
S&P 500
Percentage of international funds that underperformed their benchmarks
International benchmark:
S&P International 700
Percentage of emerging market funds that underperformed their benchmarks
Emerging Markets benchmark:
S&P/IFCI Composite
The SPIVA Scorecard is a robust, widely-referenced research piece conducted and published by S&P DJI that compares actively managed funds against their appropriate benchmarks on a semiannual basis.
May 2023 Market Commentary