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The Quick Facts

• Rotation and profit-taking increased volatility, with the S&P 500 up 1.2% in July and 16.7% YTD.
• Growth mega-cap stocks that powered gains in the first half of the year stumbled in July.
• Most S&P factor-based indices posted gains, led by Dividend and Value strategies, a sign of the market’s rotation away from Growth and Momentum.
• Treasuries and all our reported Fixed Income indices (U.S. Aggregate, Muni Bond Index, Investment Grade, High Yield, etc.) posted gains in July.
• The muted increase in core inflation in June strengthens the case for a September rate cut.
• Federal Reserve (Fed) fund futures are now pricing in an 80% probability of at least one rate cut at the September meeting.
• Markets have largely taken with calm the dramatic events in the U.S. presidential race over the month of July.

The S&P 500 posted seven new closing highs in July, resulting in 38 new highs YTD and a +1.2% return for the month. However, the Growth mega-cap stocks that powered gains in the first half of the year stumbled in July. In fact, the market witnessed a significant rotation toward Value and smaller-cap stocks in July due to positive economic data and a strong expectation of the first Fed interest rate cut coming at the September meeting. As for the Magnificent 7, Apple and Tesla added 0.6% to the index, while Microsoft, Nvidia, Alphabet, Meta, and Amazon reduced it by 1.3%. The July 1.2% S&P 500 total return would have been 1.9% without the seven. Year-to-date, the S&P 500 total return of 16.7% would have been 8.3%, according to data compiled by S&P Dow Jones indices.

Real Estate (+7.2%), Utilities (+6.8%), and Financials (+6.4%) led among sectors, while Technology (-3.3%) and Communication Services (+0.2%) were the laggards. Most S&P factor-based indices posted gains, led by Dividend and Value strategies, a sign of the market’s rotation away from Growth and Momentum, which remain the leaders YTD.

July Asset Class Performance

Value significantly outperformed Growth, with the Russell 1000 Growth down 1.7% in July (+18.6% YTD) vs. +5.1% for the Russell 1000 Value (+12.1% YTD). Over the last three years, the total return of the Large-cap Value index has lagged the total return of the Large-cap Growth Index by 8.7%. The Russell 2000 Index – the world’s most closely followed gauge of smaller companies – was up as much as 10.2% in July and up 12.1% YTD. The ESG segment of the market, as measured by the MSCI USA ESG Select Index, was up 2.3% in July, 1.1% more than the S&P 500. Over the last three years, the ESG index is up 22.6% and 9.0% behind the S&P 500 on a total return basis. Emerging markets equities underperformed in July, with a +0.3% total return. They continue to lag U.S. equity returns YTD (+7.8%), over the last 12 months (+6.3%), and over the last 3 years (-8.0%). The EAFE (Europe, Australasia, and the Far East) equity index recovered from election uncertainty. The index was up 3.0% in July and is now up 8.9% YTD, behind the U.S. but ahead of Emerging Market returns for equities.

The muted increase in core inflation in June strengthens the case for a September rate cut. The June Consumer Price Index (CPI) published on July 11 decreased by 0.1% (the first decline in four years), when it was expected to increase by 0.1%. Core CPI was up 0.1% (+0.2% in May), as the year-over-year rate reached 3.3% from the prior month’s 3.4%. The first report on 2Q 2024 GDP posted a 2.8% year-over-year increase (vs. 2.0% expected), an acceleration from the 1Q 2024 rate of 1.4%.

At the Federal Open Market Committee (FOMC) July 31 meeting, Fed Chair Powell said a rate cut could come as soon as September after the Committee voted to leave its benchmark rate unchanged. Fed officials made several adjustments to their language in the statement released after their meeting, signaling they were closer to reducing Fed funds. The Committee notably shifted to saying it was “attentive to the risks to both sides of its dual mandate” rather than prior wording singling out inflation risks. Fed officials also adjusted their assessment of the labor market, noting the unemployment rate had moved up and job gains had moderated. Fed fund futures are now pricing in an 80% probability of at least one rate cut at the September FOMC meeting.

Treasuries extended gains in July. The 10-year U.S. Treasury closed July at 4.03% vs. 4.40% at the end of June, 3.88% at the end of December 2023, and from a peak of 5.0% in October 2023. Shorter-term 2-year U.S. Treasury closed 50 basis points lower on the month at 4.26% vs. 4.25% at the end of 2023. The 2y x 10y yield curve remains inverted by 23 basis points at the end of July. The U.S. Aggregate bond index was up 2.3% in July, bringing the YTD return to 1.6%. The Municipal Bond Index was up 0.9% in July and is now in the green YTD (+0.5%).

Days after miraculously surviving an assassination attempt, Donald Trump became the official Republican candidate for president at the Republican convention on July 15. On July 21, President Joe Biden withdrew from running for re-election and endorsed his vice president, Kamala Harris, to be the Democratic candidate. Markets have largely taken these dramatic events in stride, but a close race now appears to be back on the table, with polls showing Harris and Trump neck-and-neck. Bear in mind that elections are mostly irrelevant when investing for the long-term other than exacerbating short-term volatility.

Gold prices were up strongly in July (+5.2%), closing at $2,448 per ounce and up +18.6 YTD. Oil futures, as measured by the WTI Crude il $/bbl, were down 4.5% in July to $78 bbl. The U.S. Dollar Index, which indicates the general international value of the U.S. Dollar, weakened by 1.7% in July, bringing the YTD gain to 2.7%.  Bitcoin’s value increased by 4.3% in July (+51.9% YTD). Ethereum, on the other end, was down 5.7% in July (+41.1 YTD) despite the new listing of spot Ethereum ETF products.

The CBOE Volatility Index (“VIX”) saw a spike in July. The VIX closed at 16.4, trading as high as 19.4 compared to the post-GFC average of 18.5. A low VIX can be a sign of complacency in the stock market.

Chart of the Month – Consumer Loan and Credit Card Delinquency Rates, %

Consumer loan and credit card delinquency rates are key indicators of financial health for both consumers and the broader economy. Monitoring these rates helps in understanding the broader economic environment and making informed financial decisions.

Delinquency in consumer loans refers to the percentage of borrowers who are behind on their loan payments. This includes various types of loans such as auto, personal, and student loans. High delinquency rates can indicate financial distress among consumers, which might lead to tighter credit conditions and higher borrowing costs. For lenders, increased delinquencies can signal higher risk and potentially impact their profitability.

Delinquency on credit cards refers to the percentage of credit card accounts that are overdue on their minimum payments. This typically includes accounts that are 30 days or more past due. High delinquency rates can affect a lender’s profitability and may lead to increased interest rates or tighter credit limits for borrowers. For consumers, it could mean higher interest rates and fees, and potentially negative impacts on credit scores.

Delinquency rates for consumer loans and credit cards have been relatively stable in recent years but are now rising in response to economic conditions, such as higher interest rates, inflation, and changes in the labor market.

According to data from the Fed, the share of credit card balances that are past due recently reached the highest level since 2012. The U.S. consumer is showing some signs of stress.

Quote of the Month

“It is not the employer who pays the wages. Employers only handle the money. It is the customer who pays the wages.”  – Henry Ford

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RELATED LINKS

Macro & Markets: An Update from Beacon Pointe CIO – August 13, 2024 @ 11am PT / 2pm ET

Beacon ‘Pointe of View’ – A Market Update July 2024

Important Disclosure: The information contained in this article is for general informational purposes only. Opinions referenced are as of the publication date and may be modified due to changes in the market or economic conditions and may not necessarily come to pass. Forward-looking statements cannot be guaranteed. Past performance is not a guarantee of future results. Beacon Pointe has exercised all reasonable professional care in preparing this information. The information has been obtained from sources we believe to be reliable; however, Beacon Pointe has not independently verified or attested to the accuracy or authenticity of the information. The discussions, outlook, and viewpoints featured are not intended to be investment advice and do not consider specific investment objectives or risk tolerance you may have. All investments involve risks, including the loss of principal. Consult your financial professional for guidance specific to your circumstances. 

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