Markets Heat Up in July
Favorable economic data fuels risk assets as markets post solid gains during July.
Key Observations
• Markets posted favorable returns in July as investors found renewed optimism in economic data being reported, even in the face of year-over-year earnings declines.
• The Federal Reserve raised rates in July, now targeting 5.25-5.5% for the Fed funds rate. Markets have all but priced in a pause at this level for the remainder of the year.
• Private credit has garnered attention. The asset class has the potential to provide portfolio diversification and yield above traditional fixed income, but investors must consider the added cost, reduced liquidity and increased credit risk when contemplating an allocation.
Market Recap
Financial markets were hot in July, starting the second half of the year off with a bang. There was a clear appetite for riskier segments of the market as equities generally outperformed fixed income. Even in the face of negative year-over-year earnings growth so far for the second quarter, favorable economic data helped bolster returns. The U.S. economy grew by 2.4% in the second quarter according to the advance estimate from the BEA1 and inflation continued to moderate as well, with year-over-year CPI touching 3% in June.2 U.S. equities performed well, posting mid-single digit returns. Small capitalization stocks (Russell 2000 Index) outpaced large cap companies (S&P 500 Index) during the month, driven in large part by strong smaller regional bank performance relative to large money center banks. Non-U.S. markets also posted favorable returns, with both developed and emerging markets in positive territory. Emerging regions (MSCI Emerging Markets Index) fared better than developed (MSCI EAFE Index) on the back of strong performance from China, Columbia and South Africa. Europe, however, lagged as the region continues to grapple with sluggish economic activity and higher inflation.
