The first half of the year passed the baton along to July, and the month did not disappoint. The Dow, S&P 500, and Nasdaq all reached new 52-week highs during the month. Though Nasdaq has been the clear winner by a wide margin so far this year, the Dow managed to play some catch-up in the month of July, helped by value stocks in the energy, financial, and transportation sectors.
Foreign equities and high yield corporate bonds also had a positive showing for the month of July, though they lost some momentum starting mid-month. The higher-quality bond market, however, was negative for the month as the broader bond market continues to struggle against the headwinds of Fed tightening.
With the first half of the year behind us, it’s natural to look ahead to what the second half might bring. There are reasons to be optimistic that equities will continue their upward momentum to the end of the year:
- Inflation data reports continue to be better than expected. While the Federal Reserve raised rates by a quarter percentage point as expected in July, some believe the Fed might be near the end of the rate hike cycle.
- Second quarter GDP came in better than expected, providing evidence of a resilient economy. No recession on the horizon?
- Equities have been bolstered by positive earnings and revenue surprises, especially by companies in the technology sector, i.e., Meta (Facebook) and Alphabet (Google).
- Participation in the stock market rally broadened in the month of July, meaning more areas of the equity market performed well. Small-cap stocks marched ahead of large-cap stocks, value stocks performed just as well as growth stocks, and foreign stocks matched domestic in performance. Broader participation is a sign of a healthy market.
On the other hand, there are also reasons to be cautious:
- The equity market’s performance in the first half of this year was primarily driven by AI-related technology stocks. Some argue that the buzz around artificial intelligence is creating a bubble that will burst, while others argue the increased productivity AI brings to companies will boost profit margins for years to come, fueling a longer bull market. Nevertheless, AI-related stocks have had an enormous impact on stock market performance. The chart that follows shows if AI-related stocks were removed from S&P 500 returns, the S&P would be flat to down this year so far. This raises the concern that if these stocks stumble and fall, they could trip the overall market.
- The S&P 500 rally from the low reached in October of last year is nearing an important level. Over the past nine months, the S&P 500 has risen over 30%, a stunning number for a short period of time. Investors in the “too far, too fast” camp would argue that after such an impressive run, the equity market is ripe for a pullback.
- Given the rally, the S&P 500 is now less than 5% away from its January high of last year. Certainly, FSA is paying close attention as the broad market nears that high. We will be watching for whether that high will act as tough resistance for stocks to break through, causing the rally to fade, or whether stocks will power through, giving the all-clear sign for the rally to continue.
Changes to Portfolios in July
With the strategies more fully invested to their equity allocations at the end of June, the trading in July centered more around fixed income. We added high yield corporate bonds to the Conservative Growth and Income & Growth strategies. This represents the only current bond position in most Conservative Growth accounts. With many areas of the fixed income market struggling, FSA is content to hold some extra cash in a money market that is yielding over 5%.
Wishing you all relief from the excessive heat as the summer months near a close.
Mary Ann Drucker
Assistant Portfolio Manager
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