With summer in full swing, are things starting to heat up for markets? Looking back on July, it was another good month for stocks. The U.S. indices all saw gains in the low single digits. Here, the Nasdaq performed best, with tech stocks continuing their rally. We also saw positive results on the international side. Developed markets were up by about the same as the U.S., and emerging markets jumped sharply. On the other hand, there was one not-so-bright spot: fixed income was weaker, with the U.S. Aggregate Bond Index down slightly.
Overall, financial markets were in a risk-on mode, which benefited riskier investments (e.g., tech stocks and emerging markets) at the expense of less dynamic ones.
Economic Growth Drives Market Performance
Last month’s market performance reflected the underlying economy. Economic growth for the second quarter beat expectations during the month and was even faster than the already strong first quarter. Strong job creation pushed consumer confidence up significantly, supporting both income and spending growth. That growth, in turn, has been good for corporate earnings, based on the reports we’re seeing so far this earnings season.
Inflation Drops, Still Too High
Despite growth for the economy, inflation continued to decline in July. Headline inflation dropped to 3 percent for the past year, the lowest level seen in some time. Further, producer prices dropped to 0.1 percent, close to zero. This marks real progress.
While things did look better on the inflation front, the Fed raised rates again (as expected), noting that inflation remains too high. The Fed is committed to lower inflation, and there is real evidence its policy is working. As such, rates could stabilize at or close to current levels.
On the whole, last month’s news was good. The economy continued to grow, as more people got jobs, worked, and spent. Inflation is still too high, but it is moving in the right direction. And while the Fed is alert for inflation, it is very likely nearing the end of the rate increases.
Risks Remain
While the outlook remains positive, there are, of course, risks. The biggest domestic risk is that inflation spikes again, which could drive interest rates higher and force the Fed to keep hiking. Looking beyond the U.S., we still have a war in Europe, as well as the China wild card. And that’s not even considering the risks we don’t see yet. Nothing is guaranteed.
A Good Place to Be
Despite those risks, the fundamentals remain healthy. The economy may be slowing, but it is still growing. The biggest problem out there, inflation, continues to get better. That is a good place to be as we get close to the end of the summer.
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