Is the tide moving out?
A summary of the stock market performance:
Overall Performance:
The major U.S. stock indexes had a strong month, with all three major indexes (Dow Jones Industrial Average, S&P 500, and Nasdaq Composite) finishing higher [1].
The S&P 500 recorded its fifth consecutive monthly gain [1].
The Nasdaq Composite achieved its fifth straight monthly gain for the first time since April 2021 [1].
Global equities rose by 3.7% in July (in USD terms) [2].
Sector Performance:
Energy was July's strongest-performing sector in the S&P 500, with the Energy Select Sector SPDR Fund up 7.7% month-to-date [1].
Technology stocks had a particularly strong month, with the sector surging 59.1% for its best performance since 2009[3].
Communications Services ranked second among stock sectors, gaining 54.5% [3].
Key Drivers:
Better-than-expected second-quarter earnings reports boosted investor sentiment [1].
Ongoing labor market strength and cooling inflation contributed to the positive market performance [1].
Enthusiasm around artificial intelligence, particularly following Nvidia's strong earnings report in May, continued to drive tech stocks [3].
Notable Events:
The Federal Reserve raised interest rates to their highest level in over 22 years [1].
Economic activity remained robust in the U.S. but appeared softer in Europe [2].
China's economic recovery remained patchy, but policymakers signaled support ahead [2].
Market Breadth:
The market rally broadened beyond the "Magnificent Seven" stocks, which had dominated earlier gains [3] [2].
Large-growth stocks outperformed large-value stocks by a significant margin [3].
International Markets:
Global government bonds edged lower by 0.3% (USD, hedged terms) [2].
Emerging market stocks (MSCI EM) rose 6.2% in July [2].
Looking Ahead:
Investors were anticipating key earnings reports from tech giants like Amazon and Apple in early August, which could set the tone for the market going forward [1].
In summary, July 2023 was a strong month for the stock market, characterized by broad-based gains across sectors, continued enthusiasm for tech and AI-related stocks, and positive sentiment driven by better-than-expected earnings and economic data.
Summary of the bond market performance in July 2023:
Overall Performance:
The bond market showed mixed results in July, with some segments experiencing gains while others faced challenges. The Bloomberg U.S. Aggregate Bond Index, a broad measure of the U.S. bond market, declined slightly by 0.07% for the month [4] [5].
Treasury Yields:
Treasury yields increased across most maturities, particularly in the intermediate and long-term segments of the yield curve. The 10-year Treasury yield rose significantly, closing July at 3.95%, up from 3.80% at the beginning of the month[6] This increase in yields put pressure on bond prices, as they move inversely to yields.
Federal Reserve Action:
The Federal Reserve raised interest rates by 25 basis points in late July, bringing the federal funds rate to a range of 5.25% to 5.50%, its highest level in over 22 years [7].
Corporate Bonds:
Investment-grade corporate bonds performed relatively well, with the Bloomberg U.S. Corporate Investment Grade Index earning a monthly total return of 0.34% [4]. High-yield bonds also saw positive returns, benefiting from a relatively stable economy.
Municipal Bonds:
Municipal bond yields saw relatively muted changes during the month. The Bond Buyer reported that total municipal bond issuance for July was nearly $26 billion, down 8% from the previous year [4].
Credit Spreads:
Investment-grade corporate bond spreads tightened by 10 basis points, closing July at an option-adjusted spread of 112 basis points [4].
Sector Performance:
The best-performing sectors in the corporate bond market included Independent Energy, Oil Field Services, and Life Insurance. The worst-performing sectors included Wirelines, Supranationals, and Telecommunications [4].
Emerging Markets:
Emerging market bonds showed strong performance, with the typical emerging markets bond fund gaining around 10.7% for the month [5].
Market Sentiment:
Investors appeared to be adopting a view that the Federal Reserve might be achieving a "soft landing" scenario, balancing inflation control with economic growth [4].
Looking Ahead:
As of the end of July, market participants were closely watching for signs of economic slowdown and potential changes in the Federal Reserve's policy stance for the remainder of the year [7].
In conclusion, July 2023 presented a challenging environment for bonds due to rising yields, but certain segments of the market, particularly corporate and emerging market bonds, showed resilience and positive returns.
Commentary:
The stock market is not the economy. There has always been a disconnect between the real economy and what Wall Street produces as a stock market. There are leading indicators and lagging indicators, there are indices that track all kinds of different metrics. So, what's underneath the hood? The stock market continuously rising despite economic headwinds of inflation, higher interest rates, and those living paycheck to paycheck.
The majority of Generation Z and millennials live paycheck to paycheck or are somewhat dependent upon their parents. These two demographic groups make up a large part of the overall populace in the United States and globally. However, Wall Street is still painting rosie pictures and saying everything is great! Everything must be great then, right? Wrong. The divergence from what Wall Street says and what Main Street feels, is an indication that something is amiss.
In a conversation with the founder of a regional trucking company in St. George Utah, he indicated to me that from his perspective not all is as it seems with the general economy. Earnings of his company had been struggling despite having a record number of hauls, the price per haul has dropped significantly while the cost for each unit has increased considerably. As our friends from Hedgeye confirmed in a recent newsletter, “Knight-Swift Transportation (KNX) shareholders were assured earlier this year that earnings wouldn’t drop below $4 (even in a recession). Well, over the past two quarters, the trucking company’s floor has been nearly halved, dropping to $2.30 per share recently.
It’s another case of a cyclical company being exposed during truth-telling season.”
As Warrant Buffet once said, “Only when the tide goes out, do you learn who has been swimming naked.”
Conclusion:
Inflation continues to be high; earnings appear to be slipping lower, yet the indices continue going higher and higher. It is not until you look at the attrition of the indices that you see these indices are being pulled higher by only a select few stocks. A defensive position continues to be pervasive throughout all our managed portfolios. We plan on holding this defensive position until the underlying economics and indicators start to shift away from Quad 4 back towards a Quad 1 or 2.
[1] https://www.cnbc.com/2023/07/30/stock-market-today-live-updates.html
[2] https://www.jpmorgan.com/insights/outlook/market-outlook/2023-in-review-rates-rallies-and-reflections
[3] https://www.morningstar.com/markets/15-charts-surprise-everything-rally-2023
[4] https://www.breckinridge.com/insights/details/july-2023-market-commentary
[5] https://www.morningstar.com/funds/how-bond-funds-fared-2023
[6] https://www.nasdaq.com/articles/treasury-yields-snapshot:-july-14-2023
[7] https://www.cashdollarandassociates.com/july-monthly-report
Model Performance Update
Our Moderate model portfolio returned 1.94% during the Month of July and finished the month with 2.74% Year To Date (see charts below).
For the first time this year, Hedgeye signals have identified ETFs that appear to be in areas of the markets where we can see some longer term trends develop. Japan, Emerging Markets and Asia (Ex China), Commodities, Nuclear Energy, and Precious Metals are areas beginning to show longer term trends. The current market appears to be going through a topping phase, we will keep our positioning small and look to add over the coming months.
Changes to the Model Portfolio in July
- Buy PRF, PXH, FRDM, XLE, XHE, COM, DBA, ITA
- Maintain 20% allocation in T-bills in client accounts.
July 2023 performance with benchmark
2023 Year to Date Performance with Benchmark
If you were to have any questions regarding the above, please reach out to us to set up a one-to-one meeting to review your situation.
Sincerely,
Bryant Andrus, MSF, CFP®
President
SBC Investment Management
P: (602) 641-5996
M: (319) 520-2033
E: bandrus@sbcinvestmentmanagement.com
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