Market Memo | July 2024

With the eyes of the world focused on Paris and the Olympic Games, investors watched to see if the S&P 500 would continue its positive returns for the third month in a row. July is typically a month for positive returns; leading up to this year the month of July had positive returns for nine years in a row.

To maintain the streak this year, the market needed to overlook several challenges including slowing economic growth, softening in the labor market, increased hostilities in the Middle East, wildly unpredictable US political events, and valuations that are historically stretched. These stretched valuations were especially evident in the largest technology stocks and semiconductors that have ballooned in price due to the promise of artificial intelligence.

A minor slip in earnings, not sticking to the forward guidance, or a stumble in one division could lead to harsh judgments on a company’s stock The market’s demand for perfection in earnings reports for S&P 500 stocks is akin to the high expectations for Simone Biles at the Olympics—anything less than gold is unacceptable. This included a miss from Microsoft on cloud computing, concerns about YouTube revenue from Google, lower forward guidance from Amazon, and rivals’ earnings reports affecting Nvidia. Yet, despite everything, the S&P 500 was positive for July, increasing 1.22% for the month.

Political Drama and Market Volatility

The month started strong but ended with significant volatility in the last week. It is difficult to determine what is “normal” anymore, but certainly an assassination attempt on a leading political candidate and a sitting president declining to run for a second term still qualifies as abnormal, with 1968 being the only parallel since WW II.

Historically, the quarter prior to an election is the most volatile, while the period after the election tends to have the best returns of an election year. The S&P 500 has risen in every election year since Truman in 1948, except for 2008 and 2000. The stark differences between candidate platforms and potential changes in Congress create opportunities for significant market shifts. The range of outcomes is wide, favoring a balanced approach to stock holdings, especially with falling interest rates, global issues, and the aforementioned valuations.

Global Political and Economic Shifts

Volatility outside of the US has been increasing as well. A majority of the world population will be choosing new leaders, and the economy and immigration seem to be the top issues in just about every country. In Japan, the yen carry trade has been unnerving investors for much of the year, as the Bank of Japan has raised interest rates to combat inflation. The Yen has made significant moves throughout the past few months relative to the dollar. A strong Yen, and rising rates in Japan could set off negative returns globally. Despite this concern, the MSCI EAFE was up 2.93% for the month, outpacing the S&P 500.

Interest Rates and Smaller Companies

Small and midsized companies had a breakout performance for the month, with the Russell 2000 up 10.16%. The broadening of returns into different markets is welcomed by investors as it signals more strength in the market. Much of the move was based off the growing prospects of rate cuts from the Federal Reserve.

The smaller company stocks tend to be more interest rate sensitive due to having fewer options to finance operations relative to larger companies. Also, small and mid-size stock indexes have more exposure to interest rate sensitive sectors such as real estate and banks. Smaller company stocks were not spared from the month-end volatility, which could indicate a rough August.

Investor Shift to Bonds

This volatility led investors to seek shelter and safety in the bond market. As a result, the Bloomberg US Aggregate Bond index was up 2.34% for the month, bringing it into positive territory for the year. As investors piled into bonds, prices went up and yields decreased leading to the 10-year treasury ending the month at 4.09%.

Expectations from the Federal Reserve

Investors around the world are expecting interest rate cuts in the US. The Federal Reserve has been slow to move and have followed their recent history under Chairman Powell’s leadership of getting the timing wrong. The slowdown was evident in several data points over the past few months, warranting a rate cut in July. Now, the Fed is once again in the position of playing catch-up, which may mean a rate cut in August or a larger-than-expected rate cut in September. Either of these possibilities is likely to reduce market confidence in the short run but will start a rate-cutting cycle that is expected to have the intended effects in the long run. Certainly, Chairman Powell is not winning the gold for his handling of monetary policy.

Staying Balanced in Uncertain Times

Much like the US features the best athletes in the Olympics, we also have the best companies and most dynamic stock market in the world. We continue to maintain a balanced investment approach, as stretched valuations can cause investors to quickly reconsider their positions if global events shift market sentiment.

At Central Trust, we continuously assess the rapidly changing investment landscape for both risks and opportunities. If you are wondering how your assets translate into securing your future, a financial plan is a great place to start. Please reach out to your team here at Central Trust to create or update a financial plan. To access our full monthly outlook, please click here. As always, we are ready to help!

* Data from Morningstar

Investment commentary by Jason Flores, CFA, CAIA – Executive Vice President & Chief Investment Officer at Central Trust Company.

At Central Trust Company, we continue to reassess the rapidly changing investment landscape for both risks and opportunities. If you would like to access our full monthly outlook and additional investment commentary, visit our Investments Learning Center. As always, if you have questions or concerns, please contact your Central Trust Company team. We are always ready to help.