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JULY 2022 In Review

JULY 2022 IN REVIEW

U.S. Markets Had a Great July

U.S. equity markets jumped significantly in the month of July, helping offset the declines for most of the previous months this year (as markets were down in January, February, April, May and June). In fact, U.S. equity markets turned in their best performance since November 2020.
And in line with U.S. equity markets, developed markets outside the U.S. turned in great performance in July too – as 35 of the 36 developed markets tracked by MSCI were positive. Performance in the emerging markets tracked by MSCI were mixed, however, as 18 of those 46 declined.
For the month of July:
  • The DJIA jumped 6.7%;
  • The S&P 500 rose 9.1%;
  • NASDAQ leapt 12.4%; and
  • The Russell 2000 advanced 10.4%.
The themes that drove market performance in July were many, but as has been the case for most of this year, inflation and the Fed seemed to dominate more than the others. But July also saw a slew of negative macroeconomic data and corporate earnings that were not as bad as feared – some of the time at least. The most significant negative news that should have hampered Wall Street was threefold: first, inflation hit a 40-year high; second, the Fed raised rates by another 75 basis points; and finally, the U.S. economy entered into a technical recession – defined as when GDP growth is negative for two quarters in a row.
Volatility, as measured by the VIX, decreased in July, declining from a high of about 27 and ending the month just over 21.
West Texas Intermediate crude also declined in July, beginning the month around $108/barrel and ending the month just under $97/barrel. For perspective, at this time last year, the price of a barrel was about $70.
 

Market Performance Around the World

Investors looking outside the U.S. saw great performance too, as 35 of the 36 developed markets tracked by MSCI advanced in July, with at least half of those advancing by more than 5%.
Performance for emerging markets, on the other hand, was much more mixed, with 18 of the 46 developing markets turning in negative July numbers.
Index Returns JULY 2022
MSCI EAFE +4.93%
MSCI EURO +4.77%
MSCI FAR EAST +4.55%
MSCI G7 INDEX +8.19%
MSCI NORTH AMERICA +8.99%
MSCI PACIFIC +5.01%
MSCI PACIFIC ex-Japan +3.82%
MSCI WORLD +7.86%
MSCI WORLD EX-USA +4.90%
Source: MSCI. Past performance cannot guarantee future results
 

Sector Performance Was Very Good

For the month of July, sector performance was very good, as 10 of the 11 sectors advanced for the month, with only Communication Services (-1.38%) retreating. Contrast that with the month of June, which saw all 11 retreat for the month.
And while seven months is not very helpful when trying to draw conclusions, it is interesting to see the difference a few months can make, as investors were reeling in January when 10 of the 11 sectors were red (with only Energy gaining that month); March saw 10 of the 11 positive; April and May saw a mixed bag, June was all negative and July was overwhelmingly positive.
In addition, for July the range in sector-returns was unusually wide, with the Consumer Discretionary and Information Technology sectors both jumping more than 7% and the Communication Services sector losing more than 1%.
Here are the sector returns for the month of July and June (two very short time-periods):
S&P 500 Sectors July 2022 June 2022
Information Technology +7.17% -10.01%
Energy +1.89% -18.35%
Health Care +2.30% -4.17%
Real Estate +5.89% -8.72%
Consumer Staples +2.93% -3.58%
Consumer Discretionary +7.76% -10.22%
Industrials +5.72% -8.29%
Financials +2.97% -11.37%
Materials +1.56% -15.45%
Communication Services -1.38% -7.33%
Utilities +5.33% -6.44%
Source: FMR
 

GDP Drops as We Enter a Technical Recession

Shortly before the month ended, the Bureau of Economic Analysis reported that real gross domestic product decreased at an annual rate of 0.9% in the second quarter of 2022. In the first quarter, real GDP decreased 1.6%. Two consecutive negative quarters indicate a technical recession.
Chart 1"The decrease in real GDP reflected decreases in private inventory investment, residential fixed investment, federal government spending, state and local government spending, and nonresidential fixed investment that were partly offset by increases in exports and personal consumption expenditures (PCE). Imports, which are a subtraction in the calculation of GDP, increased."
The decrease in private inventory investment was led by a decrease in retail trade (mainly general merchandise stores as well as motor vehicle dealers). The decrease in residential fixed investment was led by a decrease in "other" structures (specifically brokers' commissions). The decrease in federal government spending reflected a decrease in nondefense spending that was partly offset by an increase in defense spending. The decrease in nondefense spending reflected the sale of crude oil from the Strategic Petroleum Reserve, which results in a corresponding decrease in consumption expenditures. Because the oil sold by the government enters private inventories, there is no direct net effect on GDP. The decrease in state and local government spending was led by a decrease in investment in structures. The decrease in nonresidential fixed investment reflected decreases in structures and equipment that were mostly offset by an increase in intellectual property products. The increase in imports reflected an increase in services (led by travel).

The Fed Raised Rates Again

A few days before the beginning of August 2022, Wall Street's eyes and ears were on the Federal Reserve, and as expected, the FOMC raised the fed funds rate by 75 basis-points. It was the Fed's second consecutive 75 basis-point increase, taking its benchmark rate to a range of 2.25%-2.5%.
But what was surprising, at least to some, was that the Fed seemed to signal that the pace of rate hikes might slow down in 2022, as Fed Chair Jerome Powell said there will be a point where the Fed starts to slow hikes to assess their impact.
And while Powell didn't rule out another 75 basis point rate hike in September, he did say that the Fed would let the data drive its decision. Interestingly, the fed funds futures market is calling for two rate cuts in the first half of 2023, according to the CME's FedWatch Tool.
Chart 2

Inflation Jumps to a 40-Year High

On July 13th, the U.S. Bureau of Labor Statistics reported that the Consumer Price Index for All Urban Consumers (inflation) increased 1.3% in June after rising 1.0% in May. Over the last 12 months, the all items index increased 9.1%.

Worse:

  • The all items index increased 9.1% for the 12 months ending June, the largest 12-month increase since the period ending November 1981
  • The all items less food and energy index rose 5.9% over the last 12 months
  • The energy index rose 41.6% over the last year, the largest 12-month increase since the period ending April 1980
  • The food index increased 10.4% for the 12-months ending June, the largest 12 month increase since the period ending February 1981
While the Consumer Price Index received a lot of media attention, what didn't get very much attention was when the Bureau of Labor Statistics released the Producer Price Index just a couple of days later. In case you don't know, the Producer Price Index (PPI) is a family of indexes that measures the average change over time in prices received by domestic producers of goods and services. In other words, PPIs measure price changes from the perspective of sellers (versus CPI which measures from the perspective of consumers).
On July 15th, the BLS reported that the Producer Price Index jumped to 11.3% over the past 12 months, growing 1.1% in June alone (after rising 0.9% in May and 0.4% in April). It was the 6th consecutive month of increases.
Chart 3Most of June's increase (90%) could be attributed to a 10.0% jump in prices for final demand energy, as gasoline prices leapt 18.5%.

Corporate Earnings Were Decent

As of the end of the quarter, 56% of S&P 500 companies had reported Q2 earnings results and 73% of those reported a positive EPS surprise and 66% of S&P 500 companies reported a positive revenue surprise. Further, according to research firm FactSet's July 29th press release:
  • Earnings Growth: For Q2 2022, the blended earnings growth rate for the S&P 500 is 6.0%. If 6.0% is the actual growth rate for the quarter, it will mark the lowest earnings growth rate reported by the index since Q4 2020 (4.0%).
  • Earnings Revisions: On June 30, the estimated earnings growth rate for Q2 2022 was 4.0%. Four sectors are reporting higher earnings today (compared to June 30) due to upward revisions to EPS estimates and positive EPS surprises.
  • Earnings Guidance: For Q3 2022, 28 S&P 500 companies have issued negative EPS guidance and 17 S&P 500 company has issued positive EPS guidance.
  • Valuation: The forward 12-month P/E ratio for the S&P 500 is 17.1. This P/E ratio is below the 5-year average (18.6) but above the 10-year average (17.0).

Housing Takes a Step Back

The U.S. Census Bureau and the U.S. Department of Housing and Urban Development jointly announced the following new residential construction statistics for June 2022:

Building Permits

  • Privately-owned housing units authorized by building permits in June were at a seasonally adjusted annual rate of 1,685,000.
  • This is 0.6% below the revised May rate of 1,695,000, but is 1.4% above the June 2021 rate of 1,661,000.
  • Single-family authorizations in June were at a rate of 967,000; this is 8.0% below the revised May figure of 1,051,000.
  • Authorizations of units in buildings with five units or more were at a rate of 666,000 in June.

Housing Starts

  • Privately-owned housing starts in June were at a seasonally adjusted annual rate of 1,559,000.
  • This is 2.0% below the revised May estimate of 1,591,000 and is 6.3% below the June 2021 rate of 1,664,000.
  • Single-family housing starts in June were at a rate of 982,000; this is 8.1% below the revised May figure of 1,068,000.
  • The June rate for units in buildings with five units or more was 568,000.

Housing Completions

  • Privately-owned housing completions in June were at a seasonally adjusted annual rate of 1,365,000.
  • This is 4.6% below the revised May estimate of 1,431,000, but is 4.6% above the June 2021 rate of 1,305,000.
  • Single-family housing completions in June were at a rate of 996,000; this is 4.1% below the revised May rate of 1,039,000.
  • The June rate for units in buildings with five units or more was 366,000.
Chart 4

Personal Income Increased

The Bureau of Economic Analysis reported that "current-dollar personal income increased $353.8 billion in the second quarter, compared with an increase of $247.2 billion in the first quarter. The increase primarily reflected increases in compensation (led by private wages and salaries), proprietors' income (both nonfarm and farm), personal income receipts on assets, and rental income."
Chart 5"Disposable personal income increased $291.4 billion, or 6.6 percent, in the second quarter, in contrast to a decrease of $58.8 billion, or 1.3 percent, in the first quarter. Real disposable personal income decreased 0.5 percent, compared with a decrease of 7.8 percent. Personal saving was $968.4 billion in the second quarter, compared with $1.02 trillion in the first quarter. The personal saving rate—personal saving as a percentage of disposable personal income—was 5.2 percent in the second quarter, compared with 5.6 percent in the first quarter."

Consumer Confidence Fell for 3rd Month

The Conference Board announced that its Consumer Confidence Index declined in July, after experiencing a larger decline in June and a decent decline in May.
  • The Index now stands at 95.7 (1985=100), down 2.7 points from 98.4 in June.
  • The Present Situation Index – based on consumers' assessment of current business and labor market conditions – fell to 141.3 from 147.2 last month.
  • The Expectations Index – based on consumers' short-term outlook for income, business, and labor market conditions – ticked down to 65.3 from 65.8.
Chart 6

Present Situation

Consumers' appraisal of current business conditions was less favorable in July.
  • 17.0% of consumers said business conditions were "good," down from 19.5%.
  • 24.0% of consumers said business conditions were "bad," up from 22.8%.
Consumers' assessment of the labor market was less optimistic.
  • 50.1% of consumers said jobs were "plentiful," down from 51.5%.
  • 12.3% of consumers said jobs were "hard to get," up from 11.6%.

Expectations Six Months Hence

Consumers were mixed about the short-term business conditions outlook in July.
  • 14.0% of consumers expect business conditions will improve, down from 14.6%.
  • Conversely, 27.2% expect business conditions to worsen, down from 29.7%.
Consumers were also mixed about the short-term labor market outlook.
  • 15.7% of consumers expect more jobs to be available, down marginally from 15.9%.
  • Conversely, 21.4% anticipate fewer jobs.
Consumers were more pessimistic about their short-term financial prospects.
  • 14.7% of consumers expect their incomes to increase, down from 16.1%.
  • 15.7% expect their incomes will decrease.

Manufacturing Activity Declined

According to the Philadelphia Fed, "manufacturing activity in the region declined overall in July, as the indicators from its Manufacturing Business Outlook Survey for current general activity and new orders declined further into negative territory."

Further:

Chart 7
  • The shipments index was positive and rose slightly, while the indexes for inventories and unfilled orders were negative.
  • The employment indicators declined but remained positive. Both price indexes fell but remain elevated.
  • The future indicators suggest that firms expect overall declines in activity and new orders but increases in shipments and employment over the next six months.
 
Sources
census.gov philadelphiafed.org bea.govConference-board.org factset.com cmegroupmsci.comfidelity.comnasdaq.comwsj.commorningstar.comcensus.gov ;
MMC–JULY-2022
 
 
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