July 2024 Market Lookback

Even though the S&P 500 finished July higher than it started, you’d be hard-pressed to hear someone describe it as a strong month for the market. It seems as though the days of investors cheering weak economic data as good news for the market are over, and bad news is back to being bad news. Despite a solid number of jobs added, the unemployment rate continued rising while data such as the quits and hires rate are near decade-lows. Treasury yields fell across the curve by 30-40bps, as rate cut expectations intensified.

Macro

•   The FOMC held the fed funds target rate at a range of 5.25%-5.50%.

•   Federal Reserve Chair Jerome Powell indicated that if the economy evolves as expected, it may be appropriate to lower interest rates at their next meeting in September.

•   GDP grew at a seasonally adjusted annualized rate of 2.8% in the second quarter, above consensus estimates of 2.0%.

•   While 206k nonfarm jobs were added in June, the prior two months saw net revisions of -111k and the unemployment rate ticked up from 4.0% to 4.1%.

•   June CPI surprised to the downside on both headline (-0.1% m/m, 3.0% y/y) and core (0.1% m/m, 3.3% y/y) measures.

•   The Japanese Yen appreciated from ¥161 to ¥150 against the dollar in July, as the Bank of Japan raised rates to an upper range of 0.25% and announced plans to halve bond purchases.

•   Crude oil prices fell from $82 to $78 per barrel in July, while crack spreads remained near their lows of the year.

Equities

•  Weighed down by mega-cap tech companies and semiconductor stocks, the Nasdaq Composite fell 0.7% in July.

•  Small-cap stocks outperformed large-caps by 8.7 percentage points, the most since February 2000.

•  Value stocks outperformed their growth stock counterparts by 6.7 percentage points, the most since March 2001.

•  Bottom-up 2024 EPS estimates for the S&P 500 remained steady at $244 in July, while top-down strategist estimates fell from $248 to $246.

Fixed Income

•  The 10-year U.S. Treasury yield fell from 4.49% to 4.03% in July, while the 2-year yield fell from 4.79% to 4.25%.

•  High yield and investment grade credit spreads initially narrowed to start the month before widening toward the end, finishing the month largely unchanged.

Solid But Cracks Forming

Another month came and went, and as usual debates over when the Federal Reserve will lower interest rates dominated market commentary. However, unlike previous months when investors focused almost solely on inflation dynamics, the labor market has garnered more attention of late.

Recent inflation prints have been relatively low after a surprisingly hot first quarter, while the unemployment rate has steadily ticked higher. That’s despite the fact that the nonfarm payrolls report has consistently shown a solid amount of jobs added each month.

Whether through pre-meeting commentary, the meeting statement itself, or Fed Chair Jerome Powell’s post-meeting press conference, the Fed has indicated that risks to their dual mandate have become more balanced. One of the clearest illustrations of that is in the spread between job openings and labor supply. In March 2022, openings outnumbered available workers by 4.9 million, but that gap completely disappeared in June.

And there’s no guarantee that the supply-demand balance stays where it is. If anything, the current trajectory suggests the labor market could be on its way from solid to weak, replacing the inflation problem with a jobs problem.

Chink in AI’s Armor

Cracks in the economy haven’t been isolated to just the labor market. They’ve also been felt in the current batch of earnings results. With 68% of S&P 500 companies having reported, the earnings surprise rate stands at 4.7%. While beats are still beats, companies are surprising by less than they have over the last year (6.5%) and five years (8.6%), though the surprise rates are in-line with the historical average since 1994.

And investors haven’t been in much of a rewarding mood thus far either. The average two-day price reaction to beats has been just +0.1%, while the price reactions to in-line results and misses have been -1.7% and -2.9%, respectively.

This has held true for the thematic darling – artificial intelligence – as investors have become slightly more discerning when it comes to mega-cap tech companies’ AI plans. In particular, there has been greater focus on AI-related capital expenditures, and in turn, how they plan on monetizing AI in coming quarters. These stocks lagged in July after dominating the first half of the year.

It’s probably not a coincidence that this shift has happened around the same time the economy has cooled. When times are good, spending is less criticized and investors can afford to look toward future opportunities, but attention might be turning back to the present.

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