July Market Recap
August 2, 2021
It was a relatively quiet month by modern market standards as the major US equity benchmarks rose modestly in July. Stocks generally began the second half of 2021 right where they left off thanks to yet another round of strong corporate earnings. The S&P 500 ticked higher for the eighth time in the last nine months (January was the lone exception). That said, there was some definite thrashing below a mostly calm surface.
The Chinese government imposed a shock to the financial system when it announced raft of regulatory crackdowns against publicly-traded Chinese companies. So far, the shockwaves have remained mostly contained to Emerging Markets, but investors can probably expect more ripple effects given the size of China’s economy.
Nine of the 11 sectors in the S&P 500 delivered gains in July with Health Care (+4.7%), Real Estate (+4.6%), and Utilities (+4.2%) recording the best returns. Energy (-8.4%) and Financials (-0.6%) were the only sectors to move lower.
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July began with a better than expected employment report showing 850,000 new jobs created, with 40% of those in travel/leisure and hospitality, the industries hit hardest during the pandemic. The unemployment rate, nationally, remains just under 6%.
Consumer spending was also unexpectedly positive. Retail sales grew 0.6% in the most recent batch of monthly data, compared to a 1.7% decline in spending the previous month. Consumer spending is now higher than pre-pandemic levels. Initial estimates suggest GDP grew around 6.5% in the second quarter, below most economists’ expectations.
With nearly 300 of the companies in the S&P 500 companies having reported second quarter earnings as of July 31, almost 90% have beaten consensus estimates. Cumulatively, S&P earnings have grown 85% compared to a year earlier, with the obvious caveat that second quarter 2020 included the darkest period of last year’s pandemic-induced shutdown.
For one day at least, the market showed renewed concerns that rising cases of the delta COVID variant could derail this economic recovery. US stocks opened sharply lower on July 19 and the Dow flirted with a 1,000-point decline. It finished the day 729 points in the red (-2.1%), the worst daily performance since October 2020. Those losses were quickly erased, however, as equity prices recovered most of that slide the following day. The buy-the-dip mentality remains as strong as ever.
The Federal Reserve held its regularly scheduled meeting in late July but the comments afterward demonstrated no departure whatsoever from previous statements. Fed Chair Jerome Powell was plainspoken in his summary of the Fed’s current approach: “The Fed is nowhere near considering raising rates,” Powell said on July 28.
While the Fed’s friendly policy framework has allowed US stocks to continue churning higher, the opposite was true in Emerging Markets last month. The Chinese government asserted new policies in July designed to curb the growth in certain technology industries, Internet platforms, and education/tutoring. Propaganda has suggested these restrictions are being implemented in the name of “national security,” but the announcements had some eye-popping effects.
China’s two largest companies, Alibaba and Tencent, offer a glimpse of how investors reacted to the news. Alibaba fell more than 20% from its June 30 closing price before a modest rebound in the final few days of July. Tencent fell more than 25% over the same period. Those losses are roughly equivalent to what Apple and Google shareholders experienced in February and March 2020, when the realization of a global pandemic shook equity prices.
China makes up roughly one-third of the MSCI Emerging Markets Index, which fell 6.4% last month. It will be interesting to see if capital continues to flee from the world’s second-largest economy or if, in hindsight, this will represent a buying opportunity. For now, it’s too early to tell.
Small cap stocks also underperformed in July. The Russell 2000 Index dropped 3.7%. Bond yields continued to sink. 10-year Treasury yields finished the month at 1.24%, compared to 1.44% a month earlier. Gold prices rose 2.5%. Oil closed July relatively close to where it began, near $74 per barrel, although West Texas Intermediate Crude fell to $66 mid-month.
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