Summer Rally Heats Up
US stocks – much like the July summer weather – were red hot during the month as the major indices notched robust gains, with the tech-heavy NASDAQ leading the way. That index joined the S&P500 to log a fifth straight month in the green, good for the longest winning streak since middle 2021. The July rally was uniform across all sectors and industries, lifting everything from small regional banks to the biggest tech companies in the country. Year-to-date, the S&P500 is up 19.5% - one of the best starts to a year that we have ever seen – while the NASDAQ is up 37%, and the Dow Jones Industrial Average is higher by 7.3% in total. Regarding the Dow, we saw an epic run in July where the “old-school” index closed higher for 13 consecutive trading days, tying 1987 for the second longest winning streak in history. What a year it has been so far, especially coming off a disastrous 2022 with peak negativity and bearishness that dominated sentiment on January 1st.
In terms of economic data, the war on inflation rages on, and with each month it appears more and more likely that inflation will eventually be proven the loser. In July, the Consumer Price Index (CPI) rose 0.2% month-over-month and was up a modest 3% from just a year ago. This reflected a deceleration in costs and other inputs, but also an easy comparison against a time a year ago when inflation was at a 40-year high – approximately 9% per annum. Nevertheless, cooling inflation data were yet another driver of positive returns for equities during the month. Other data, while not as headline grabbing as the CPI, continue to pour in and point to lower inflation: the PCE index, wholesale used car prices, and slightly declining US home prices and rents all point to lower prices in the future.
July’s GDP report was also encouraging. Economic growth as measured by GDP came in at a 2.4% annual rate, which was significantly higher than consensus expectations of 1.8%. It was also the fourth consecutive quarter of growth coming in at 2.0% or greater. So, while GDP growth may be slowing on a relative basis, many of the dynamics that were acting as a drag on the economy are fading, which should allow for moderate growth to continue and for the economy to avoid a recession in 2023 (and possibly in 2024).
Jerome Powell and the Federal Reserve raised the federal funds rate (FFR) by 0.25% at the July meeting, which was widely expected by investors and economists. This was the 11th rate hike of this cycle, and the FFR now sits at the highest level in over 22 years (5.25-5.5%). Consequently, monetary policy remains tight and restrictive, with the FFR 2.4% higher than the US inflation rate. So, was the July hike the 11th and last step higher? The markets emphatically say “yes.” The federal funds futures markets are pricing in no further rate hikes in 2023, and they expect the central bank to begin cutting rates sometime in spring 2024. Of course only time will tell, and these expectations will shift as each data point is digested. The Fed could easily change its outlook on a meeting-by-meeting basis, and Chair Powell certainly left the door open for more tightening at his July press conference. But for now, it would appear that we should expect interest rates to be steady for the remainder of the year.
Taking a temperature reading going into August, all signs point to a soft economic landing – the Federal Reserve threading the needle and taming inflation without pushing the economy into a recession. This is a best-case scenario, and investors should be aware that it would not take much in terms of poor economic data to throw us off course. Soft landings are indeed rare, and all expansions eventually end in recession, but for now the skies look clear and the forecast calls for continued heat as we round out the summer.