August 2, 2024
Market Monitor: July Update
Headlines and Highlights
- Powell opens door for September rate cut: Federal Reserve Chair Jerome Powell said a long-awaited interest-rate reduction “could be on the table” as soon as the Fed’s next meeting in September if economic data continues on its current path. His comment came after the central bank voted to keep the benchmark rate at the elevated range of 5.25% to 5.5% where it has been since July 2023. Recent data has shown inflation sinking toward 2% while the once-overheated labor market slows, both in line with the Fed’s goals. Two other global central banks, the European Central Bank and the Bank of England, have cut rates for the first time in years.
- U.S. economy cooling after strong quarter: Economic reports showed a distinct moderation in activity last month after a strong second quarter in which gross domestic product, adjusted for inflation, grew at a 2.8% annual rate. Fewer jobs (114,000) than expected were added, the jobless rate rose to a nearly three-year high (4.3%) in nearly three years, job openings continued to decline, and the manufacturing sector contracted further. All provide additional incentive for the Fed to loosen its restrictive rates policy in order to ensure a soft landing for the economy.
- Small caps, REITs thrive in turnaround month: The Magnificent 7 tech stocks that have dominated the S&P 500’s gains this year took a back seat to previously lagging asset classes in a topsy-turvy July. Small-cap stocks delivered a double-digit return and U.S. REITs were not far behind as interest-rate-sensitive stocks gained favor with cuts nearing and consumer spending still strong. The market’s reallocation to small caps resulted in monthly declines for five of the Mag 7 (Alphabet, Amazon, Meta, Microsoft and Nvidia) and a comparatively modest (1.1%) rise for the S&P 500. Taxable bonds posted a third straight month of gains, their longest winning streak since 2021, as yields fell in anticipation of rate cuts. Prices move inversely to yields.
Selected Market Returns
Sources: Morningstar, Altair Advisers
Our Views
- U.S. interest-rate cuts appear all but certain to begin at the next Federal Reserve meeting on September 18th based on the Fed’s own statements and consistent cooling in inflation and the labor market. The market now anticipates cuts lowering the benchmark rate by at least a full percentage point by year-end, but we do not believe the economy is softening so fast that the Fed will reduce rates that aggressively.
- Market concerns about whether inflation is under control have shifted to “Are Fed rate cuts taking too long?” in light of weakening economic data. We do not believe the Fed’s policy loosening is yet too late as long as cuts start at the next meeting in September.
- The stock market rally broadened significantly in July, a trend we expect to persist with the arrival of rate cuts. While stocks tied to artificial intelligence weakened, we anticipate the Magnificent 7 and other giant tech stocks to regain their footing based on their underlying strength.
- Dramatic developments in the U.S. presidential campaign have created new variables for investors to ponder. Vice President Kamala Harris’ policy priorities are not yet fully delineated, and a reshaped race leaves open the possibility of a November sweep of Congress and the White House by either Republicans or Democrats. While we are paying close attention to the investment implications of various election scenarios, we believe it is far too early and risky to start positioning for a specific outcome.
- Geopolitical uncertainty tied to the ongoing wars in Gaza and Ukraine is among the biggest current risks for investors, particularly with hostilities between Israel and Hezbollah increasing. Inflation remains a lesser threat as it continues to ease, although any new flareup in price growth is likely to result in market volatility.
The material shown is for informational purposes only. Forward-looking statements are subject to numerous assumptions, risks, and uncertainties, and actual results may differ materially from those anticipated in forward-looking statements. As a practical matter, no entity is able to accurately and consistently predict future market activities, and all investments are subject to the risk of loss. While efforts are made to ensure information contained herein is accurate, Altair Advisers LLC cannot guarantee the accuracy of all such information presented. Material contained in this publication should not be construed as accounting, legal, or tax advice.