Strong July for markets
July marked a strong start to the second half of the year for markets, as all three major U.S. equity indices ended the month in positive territory. The Dow Jones Industrial Average (DJIA) gained 2.51 percent for the month, and the S&P 500 impressed with a 5.64 percent return. The Nasdaq Composite, with its heavy weighting to technology, was the leader, rising by 6.85 percent.
These positive returns were boosted by better-than-expected fundamentals during the month. According to Bloomberg Intelligence, at the end of July, the quarterly earnings growth rate for the S&P 500 in the second quarter stood at –35 percent. This is significantly better than initial estimates for a 43.4 percent decline. The results were widespread, as 83.4 percent of companies that have reported earnings for the quarter surpassed analyst expectations. If estimates hold, this would mark the best quarter for positive earnings surprises for the index in 27 years. Although the decline during the quarter is concerning, these results, combined with analyst expectations for a return to earnings growth by the first quarter of 2021, indicate that companies were able to withstand the economic damage in the second quarter better than expected.
Technical factors were also supportive for U.S. equity markets during the month. All three major indices finished above their respective 200-day moving averages for the first time since January. Technicals have been mixed throughout the pandemic. The DJIA took longer than the S&P 500 and Nasdaq to recover after hitting lows in March. The 200-day trend line is an important technical signal that is widely followed by market participants. Prolonged breaks above this trend line could indicate a longer-term shift in investor sentiment.
The story was much the same for international markets. The MSCI EAFE Index gained a solid 2.33 percent during the month, bolstered by a new stimulus package for the European Union. Emerging markets did even better, with the MSCI Emerging Markets Index rising by 9.03 percent. Emerging markets were supported by a weakening dollar, as the Dollar Spot Index fell to its lowest point in more than two years in July.
Technicals for international markets were mixed during the month. The MSCI EAFE Index spent much of July above its 200-day moving average trend line. Volatility at month-end brought the index below trend for the sixth month in a row, however. The MSCI Emerging Markets Index spent virtually all of July above its 200-day moving average. It ended the month above trend for the first time since the start of the pandemic.
Fixed income markets had a positive month. The 10-year Treasury yield fell from 0.69 percent at the start of July to 0.55 percent at month-end. This brought the 10-year yield to its lowest level since March and near all-time lows. Shorter duration bonds also saw yields fall, with both the 3-year and 5-year yields setting new intraday lows near month-end. Declining yields led the Bloomberg Barclays U.S. Aggregate Bond Index to a gain of 1.49 percent during the month. High-yield bonds were also strong, with the Bloomberg Barclays U.S. Corporate High Yield Index gaining 4.69 percent. High-yield spreads dropped to their lowest level since the start of the pandemic.
U.S. sees public health progress
July was a mixed bag on the pandemic front, as measures to combat localized outbreaks led to some signs of progress by month-end, despite rising national case counts. While new and total case numbers remain high, the daily growth rate showed improvement later in the month. It fell from around 2 percent to approximately 1.5 percent by month-end. This indicates that the pausing or rolling back of reopening efforts in certain states is starting to help control the spread of the virus.
We continued to see improved testing capability, with average daily new tests increasing to around 800,000 by the end of the month. We still don’t have enough daily tests to get a full understanding of the pandemic, however. We can see the impact of this in the positive test ratio, which remains elevated at around 8 percent. The World Health Organization recommends a target positive test rate of 5 percent.
Ultimately, although case counts remain high, July’s public health results were encouraging. They showed stabilization and, in some cases, real progress in tamping down localized outbreaks. There is still work to do before we have the virus under control in the U.S., but the results in July showed we are on the right path.
Economic data shows signs of moderating recovery
The economic updates in July were mixed and pointed to a slowing recovery, following the strong rebound in activity we saw in May and June. Although many of the spending reports from July have not yet been released, the data we have seen so far is concerning. Weekly initial jobless claims, which show how many new Americans filed for unemployment each week, rose for two weeks in a row in July. This marks the first increase for weekly initial claims since March and highlights the challenges rising case counts created for the job market.
Consumer confidence was also disappointing in July. Both major measures of consumer confidence fell after rebounding in May and June. As you can see in Figure 1, the University of Michigan consumer sentiment survey was especially disappointing, as the larger-than-expected decline in July brought the index near lows set in April. Typically, rising consumer confidence supports faster consumer spending growth. So, these declines in July will likely serve as a headwind for further consumer spending gains.
Disclosures: Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. All indices are unmanaged and are not available for direct investment by the public. Past performance is not indicative of future results. The S&P 500 is based on the average performance of the 500 industrial stocks monitored by Standard & Poor’s. The Nasdaq Composite Index measures the performance of all issues listed in the Nasdaq Stock Market, except for rights, warrants, units, and convertible debentures. The Dow Jones Industrial Average is computed by summing the prices of the stocks of 30 large companies and then dividing that total by an adjusted value, one which has been adjusted over the years to account for the effects of stock splits on the prices of the 30 companies. Dividends are reinvested to reflect the actual performance of the underlying securities. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a market capitalization-weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index. The Bloomberg Barclays US Aggregate Bond Index is an unmanaged market value-weighted performance benchmark for investment-grade fixed-rate debt issues, including government, corporate, asset-backed, and mortgage-backed securities with maturities of at least one year. The U.S. Treasury Index is based on the auctions of U.S. Treasury bills, or on the U.S. Treasury’s daily yield curve. The Bloomberg Barclays US Mortgage Backed Securities (MBS) Index is an unmanaged market value-weighted index of 15- and 30-year fixed-rate securities backed by mortgage pools of the Government National Mortgage Association (GNMA), Federal National Mortgage Association (Fannie Mae), and the Federal Home Loan Mortgage Corporation (FHLMC), and balloon mortgages with fixed-rate coupons. The Bloomberg Barclays US Municipal Index includes investment-grade, tax-exempt, and fixed-rate bonds with long-term maturities (greater than 2 years) selected from issues larger than $50 million.
Authored by the Investment Research team at Commonwealth Financial Network®.
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