July 2024 Market Update: Rotation?

CPI inflation slowed again to 3.0 percent in June (year-over-year) from 3.3 percent in May. Manufacturing data also slowed and the labor market, while choppy, is slowly weakening from a very strong starting position. The second quarter GDP print of 2.8 percent surprised to the upside, but with a slowing consumer indicated by retail sales figures and increasing debt levels and delinquencies, the consensus outlook is for a downshifting economy.

The month of July also marked the beginnings of a rotation for stocks and bonds. Small capitalization stocks (+10.2 percent) dominated the large cap growth names (-1.7 percent) that have led the market year to date. Meanwhile, bond yields declined on growing conviction in forthcoming rate cuts and the back of a 2.3 percent return for the month, which resulted in the Bloomberg U.S. Aggregate turning positive (+1.6 percent) year to date.

Last but certainly not least in terms of importance, the month saw a big change in the U.S. election backdrop.

Equity markets

As highlighted earlier, the move to small capitalization stocks was strong; they led the way in July, bringing the year to date return to a positive 12.1 percent. In yet another stark reversal, value stocks also performed well in July, with the Russell 1000 Value index returning 5.1 percent versus -1.7 percent for the Russell 1000 Growth index. The strong relative performance for value stocks narrowed the huge outperformance of the large growth companies year to date to 18.6 percent for Russell 1000 Growth index versus 12.1 percent for the Russell 1000 Value index. For reference, through the end of June, the Russell 1000 Growth index returned 20.7 percent year to date versus 6.6 percent for the Russell 1000 Value index. In a measure of a broader participation of stocks in the month, the S&P 500 equal weighted index return was 4.5 percent versus the standard S&P 500 market cap weighted return of 1.2 percent.

Non-U.S. markets also had a positive month, with the EAFE up 2.9 percent, outperforming the S&P 500. Emerging Markets were up just 0.3 percent, as both China and Taiwan were negative. Taiwan, in particular, suffered the same technology-related sell-off as in the U.S.

Fixed income

There was a shift of sentiment towards a first rate cut on the horizon following the Federal Reserve’s most recent meeting. The Bloomberg Aggregate index returned 2.3 percent for the month and bonds moved into solidly positive territory year to date with a return of 1.6 percent.

Issuance in both high yield and investment-grade credit-related bond markets continued to exceed expectations, with year to date issuance of high yield bonds of $176 billion running at nearly double the pace of 2023. High yield bonds returned 1.9 percent and outperformed the S&P 500 during the month.

Looking ahead

Markets will continue to focus on the economic backdrop to support the rate cut scenario now priced in. The performance of the U.S. economy has led the world year to date, and the performance of the stock market has similarly outperformed. We will enter the final innings of the election cycle in the fall and with it likely uncertainty as to the outcome and the commensurate impacts on the economy. The adage “may you live in interesting times” certainly comes to mind as we look out over the balance of 2024.

Enjoy the dog days of summer.