July diverged from the pattern we had been seeing for the first 6 months of the year as small and mid cap stocks led the market and value stocks outperformed growth stocks in July. The S&P 500 as a whole was just slightly positive by 1.22% and is positive by 16.70% year-to-date. In a trend reversal, the S&P 500 Value index was up 4.75% for the month while the S&P 500 growth index was negative by 1.3%. The tech-heavy NASDAQ was also negative for the month by 0.73% but its year-to-date return remains strong at 17.71%. The market was actually led by small cap stocks as the S&P 600 Small Cap Index was positive 10.80% for the month and is now positive 9.99% year-to-date even as the index came into July slightly negative for the year. Mid cap stocks also performed well in July as the S&P 400 Mid Cap Index was up 5.81% for the month and is now up 12.33% year-to-date.
The theme of trend reversal continued in the S&P 500 sector performance. The top two sectors from a year-to-date perspective, Information Technology and Communication Services, were the worst performing sectors in July and the bottom performing sector year-to-date, Real Estate, was the best performing sector of the month. Real Estate led the way in August, positive by 7.22% and is now positive 4.59% year-to-date. Utilities were the next best performing sector in July as they were up 6.79%. The Financial sector also performed well and was up 6.46% and is now positive 17.29% year-to-date. There were two negative sectors in July as Information Technology was down 2.09% and Communication Services was down 4.01%. Tech remains the top performing sector year-to-date up 25.57% followed closely by communication services at 21.60%. There are now no negative S&P sectors for the year.
The returns within the international markets were positive as the MSCI EAFE developed international index was up by 2.95% in July and is now up 8.86% year-to-date. Looking at emerging markets, The MSCI Emerging markets index was slightly positive in July by 0.37% and is positive by 8.08% year-to-date.
July was another great month for bond investors. The Bloomberg US Aggregate Bond index returned 2.34% in July and is now positive by 1.61% year-to-date. Yields were down sharply in July as the 10-year treasury fell from 4.48% to 4.09% during the month which helped push bond prices higher.
So why was there such a reversal in trend during July? To simplify, there was a lot of data pointing towards inflation cooling and the Federal Reserve reducing interest rates sooner rather than later. Fed Chair Jerome Powell testified before Congress this month and stated that the Fed did not need inflation to reach 2% before reducing rates. Both CPI and PCE inflation readings that came out this month also pointed to cooling inflation. The jobs data showed a weakening labor market which could help to reduce wage inflation. And then on the last day of the month, the Federal Reserve Open Market Committee concluded their July meeting by keeping rates the same for now but also indicating they are nearing the point of reducing them.
A lower interest rate environment could boost many of the lagging areas of the market such as Small Cap stocks, Mid Cap stocks, Value stocks, and Real Estate. Mega Cap and Technology stocks had been on such a run that investors may have been looking for a signal to reallocate capital to seemingly undervalued areas of the market. I think the question is will this rotational movement of capital in the market be a short-lived phenomenon or will this be the new trend moving forward as we near the Federal Reserve’s anticipated rate cutting. Diversified investors have been looking forward to this broadening out of market returns as they have avoided the concentration risk of solely investing in Mega Cap Growth and Technology stocks.
The Presidential election looms on the horizon in the aftermath of the attempted assassination of former President Trump and President Biden ending his re-election campaign and endorsing his Vice President Kamala Harris to take his place on the top of the Democratic ticket. It remains to be seen how the remaining few months of the election cycle will move markets as well as several key data points coming out before the next Federal Reserve meeting.
