Commentary for July, 2024

Hello all - we hope your July was a nice one.

The markets started the month strongly, but later declines saw stocks close the month relatively unchanged.  The major indexes again saw a wide divergence in performance, with the Dow up 4.4%, the S&P 500 rose 1.1%, and the Nasdaq, which has a higher concentration of tech stocks, was lower by 0.8%.

 

Here’s a look at how the markets moved this month:

Here’s a look at how the various sectors performed.  Notice how many of the sectors performed well?  And notice how poorly the market return was for the month…

Volatility in the markets ticked up sharply this month.

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July was a very odd month for the markets.

We’ve commented for many months about how unhealthy the market was.  A handful of very large companies – all tech companies – are driving the direction of the market.   Microsoft, Apple, and Nvidia alone make up more than 20% of the S&P 500 index. When these stocks go up, the market goes up.  However, this month we saw that the opposite is true.  
 
Investors sold out of these high-flying stocks and put money into the other stocks that have not performed as well.  The stocks of these tech names fell sharply and that  caused the overall market to also fall sharply several times this month.  It was odd because while these tech names were all lower, the rest of the market was green.

Below is an image of a heatmap from just one day, showing what stocks are up and the ones that are down.  We see red in the big tech names, but green in most other names.  We can see how big hose red boxes are, though, which shows how much impact they have on the overall market.

We didn’t find the declines in the markets very concerning.  The money didn’t leave the market – it just rotated into other areas of the market didn’t perform as well.  We see that as healthy.

We’ve talked about the “equal-weighted” index before.  It looks at the S&P 500, but it gives every stock the same weighting.  This index performed very well this month, showing a healthy market.

Small stocks did very well, too, as a lot of new money moved into smaller companies that have lagged behind the overall market.  The Russell 2000 Index of small cap stocks saw a gain of about 10% this month.

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INSIDER SELLING

One interesting note has been the amount of corporate insiders (like executives and board members) who have been selling rapidly recently.  Its always good to be aware of what the insiders are doing. 

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EARNINGS

We’re about halfway through earnings season as companies release their results from the latest quarter.  

Earnings have actually been pretty good.  Companies are on track to see their earnings grow 9.6%, which is above the original estimate of about 8.8%.  Additionally, revenue (what the company makes before the costs are subtracted) has grown by 5%.  These are pretty solid numbers.  

However, the market has not been very generous in rewarding the good results.  There remains concerns about slowing growth in the coming quarters as more companies warn about a slowdown in sales as higher costs leave shoppers with less money to spend.  

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FED

The Fed held another policy meeting this month and announced no changes to their economic policy right now, as expected.  

However, they did seem to lay the groundwork for a rate cut at their next meeting in September.  A rate cut acts like a stimulus for the economy because it lowers borrowing costs so people and governments can borrow more money to buy more “stuff.”  The markets like stimulus and rose as a result. 

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INFLATION

Let’s look at the inflation data from this month.  

The annual inflation level saw a nice improvement this month as inflation ticked lower.  For the first time in four years, there was a month where inflation actually declined! 

 

Here’s a look at the monthly chart, where we can see that monthly decline in inflation.  I guess we can actually call it “deflation.” 

It was also a lower level of inflation when excluding energy and food from the calculation, (which economists call the “core” measurement). 

The PPI, which is the inflation at the business level before they pass on the price increases to us, was the outlier and it showed an increase in inflation.

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ECONOMIC DATA

Economic data released this month was mixed, but leaned negative.

We’ll start with the leading economic indicators, which we’ve talked about for many months.  This index combines several indicators that tend to signal the direction of the economy (like weekly unemployment numbers, building permits, etc.).  

This index had been lower for 22-straight months before finally turning higher four months ago.  Unfortunately, the positive report is looking like a one-off, as the index continues to deteriorate.  This report is a good recession indicator, so it is an important one to watch. 

 

The manufacturing part of our economy was looking like it was improving; however, the last three months showed a decline as it moved back into contraction territory (a number below 50 indicates contraction).

The services sector showed a surprisingly sharp drop, too.

Retail sales were exactly flat on the month.

Durable goods (these are items with a longer life, like a phone or refrigerator) showed a nice improvement. 

Consumer confidence moved slightly higher:

Small business optimism moved slightly higher, too:

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Where does the market go from here?

We reached very oversold levels in the last week of the month, and it was a good time to do some buying as the market rebounded quickly from those lows.  It looks like there could be some more room for markets to run higher.

This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.