by Larry Adam, CIO, Raymond James
Equity markets built on a strong first half of 2023 in July, continuing to push upward.
Have the steady hand of the Federal Reserve (Fed) and the resilience of the U.S. economy created the much-hoped-for “soft landing” at the bottom of the inflation crisis? Time will tell – even as it declines, inflation remains above target levels – but the market seems willing to give the benefit of the doubt.
In July, equity markets built on a strong first half of the year and continued to push upward. The S&P 500 marked a 3% climb for the month and the Dow Jones Industrial Average reported 13 consecutive days of gains, falling one day shy of a record run that dates back to 1897. It’s the ninth straight year July has closed with positive market performance. The clarity of the Fed’s forward messaging has likely helped, allowing it to raise interest rates as part of its inflation-fighting program by another quarter of a percentage point in July without causing much of a blip. The target federal funds rate, now set between 5.25% and 5.5%, is the highest in 22 years.
“July was a microcosm of what has propelled the equity market most of this year – bearish sentiment fading on the back of a resilient economy, decelerating inflation, and better-than-expected earnings,” said Raymond James Chief Investment Officer Larry Adam. “And with the Fed near the end of its tightening cycle, a glimmer of hope for the elusive soft-landing led to a broadening of performance beyond just tech.”
It's worth reiterating that soft landings for the economy infrequently occur, and a confluence of data still suggests a mild – and brief – recession on the horizon.
Before we dive into the economic data and other topics of interest, let’s look at our year thus far.
|12/31/22 Close||7/31/23 Close*||Change
Year to Date
Year to Date
Aggregate Bond Index
*Performance reflects index values as of market close on July 31, 2023. MSCI EAFE and Bloomberg Aggregate Bond numbers reflect July 28 closing values.
Economy grows while consumer spending slows
The U.S. economy grew at a better-than-expected annualized rate of 2.4% during the second quarter of the year, bolstered by non-residential investment growth, while growth in consumer consumption slowed considerably.
- Private employment creation, at 149,000 in June, was the lowest reading for payroll jobs since December 2020. However, payroll employment increased by 209,000 in June, supported by 60,000 new state and local government jobs.
- Home prices continued to increase in May after falling in late 2022 and stabilizing earlier this year.
- Data suggests the service economy expanded in June while the manufacturing side of the economy remained in contraction territory in June.
- Surveys showed that consumer sentiment improved in June.
Inflation falling and the Fed's forward message
U.S. consumer price inflation slowed to 3.0%, year-over-year, in June, the lowest calculation since March 2021. While good news, Fed Chair Jerome Powell took the opportunity after announcing July’s interest rate hike to reiterate the Fed’s determination to fight inflation, suggesting rates may remain elevated – or could go higher – until the 2.0% target rate of inflation is achieved.
The bond narrative continues
The story of fixed income persisted in July: Spreads moved very little, remaining at levels not seen in around 15 years, and the yield curve is still in its longest-ever inversion – historically a strong indicator of a coming recession. Regional banking fears have receded after spring volatility and successful stress tests, which helped to calm the bond market.
Relief in the developed world
Financial markets have responded positively as inflationary pressures have subsided across the developed economies of the U.K. and euro zone. The main focus over the month has been the debate regarding to what extent and for how long key interest rates will be raised. U.K. rates remain elevated compared to the U.S. – a historical trend – but some of the current difference can be explained by the former’s high energy prices. More central to the U.K.’s inflation, however, may be its persistently tight labor supply, which is partially the consequence of a health service under stress.
U.S.-China de-escalation continues
Treasury Secretary Yellen's visit to China in July was an overall positive development in the ongoing U.S.-China effort to reduce tensions and reestablish regular contacts in the bilateral relationship. During her visit, Yellen focused on reestablishing contacts with key members of Beijing's economic apparatus and reopening dialogues around key issues. In official statements following those meetings, Yellen struck an optimistic tone about the path forward.
The bottom line
The soft-landing narrative and the surge of enthusiasm for AI technology have contributed to the market’s good mood, but there are plenty of concerns to consider which could upset those cheerful feelings in the coming months: inflation, the lagging effects of higher interest rates, or price adjustments as the reality of even a soft landing emerges.
As that information presents itself, we may see a fair bit of market choppiness. This is why, even though the market’s monthly moves are fascinating and informative, they are far from instructive for a long-term investor.
Investing involves risk, and investors may incur a profit or a loss. All expressions of opinion reflect the judgment of the authors and are subject to change. There is no assurance the trends mentioned will continue or that the forecasts discussed will be realized. Past performance may not be indicative of future results. Economic and market conditions are subject to change. The Dow Jones Industrial Average is an unmanaged index of 30 widely held stocks. The NASDAQ Composite Index is an unmanaged index of all common stocks listed on the NASDAQ National Stock Market. The S&P 500 is an unmanaged index of 500 widely held stocks. The MSCI EAFE (Europe, Australasia and Far East) index is an unmanaged index that is generally considered representative of the international stock market. The Russell 2000 is an unmanaged index of small-cap securities. The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. An investment cannot be made in these indexes. The performance mentioned does not include fees and charges, which would reduce an investor’s returns. The companies engaged in the communications and technology industries are subject to fierce competition and their products and services may be subject to rapid obsolescence. International investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility. Bond prices and yields are subject to change based upon market conditions and availability. If bonds are sold prior to maturity, you may receive more or less than your initial investment. There is an inverse relationship between interest rate movements and fixed income prices. Generally, when interest rates rise, fixed income prices fall and when interest rates fall, fixed income prices rise.
Material created by Raymond James for use by its advisors.