U.S. equity markets saw broad-based gains in July, bouncing off lows reached during the previous month. Stocks were generally moving sideways until the middle of the month when the economic and earnings calendar started to heat up, and investors seemed to like what they saw. Amid another inflation report that surprised to the upside, an additional 0.75% interest rate hike by the Fed, and an unexpected second straight quarter of GDP contraction, investor concerns have appeared to be assuaged by an earnings season that’s been “so far, so good.” Growth stocks outperformed value stocks during the month, and small caps outperformed their larger counterparts; however, both of those segments still trail meaningfully year-to-date.
International developed stocks rose during the month as well, albeit at a slower pace than onshore companies. The path of the European economy remained top-of-mind for international markets as consumer confidence fell and the European Central Bank took aim at high inflation by raising interest rates for the first time in 11 years. Nonetheless, economic data for the 2nd quarter surpassed expectations to the upside as the Eurozone economy grew at 0.7% (in contrast to negative growth in the U.S.). Of course, investors also remain wary of the effects of the war in Ukraine – namely, concerns surrounding potentially spotty supplies of Russian natural gas to the region warrant ongoing monitoring. Emerging market equities were essentially flat for the month, with the relatively muted returns driven in part by a slump in Chinese economic activity in the midst of ongoing disruptions stemming from Covid lockdowns.
Bond markets also got some relief during July with both taxable and municipal bond indices paring back losses sustained earlier in the year. As mentioned, the Fed hiked short term rates by 0.75% for the second consecutive month, and similar increases are expected for the next few meetings as combatting inflation continues to be top priority. However, Fed Chair Jerome Powell also suggested that it could be appropriate to slow the pace of rate hikes in the months ahead if inflation peaks and the economic growth slows. With that said, we remain prepared for a wide range of outcomes due to the data-dependent nature of upcoming policy decisions.