U.S. equities finished July in upbeat risk-on fashion, courtesy of solid earnings from mega cap technology and major oil companies. Overall monthly gains were led by a strong recovery in cyclical growth-oriented companies, especially among smaller capitalized firms. The S&P 500 broad-market benchmark surged over 9% for its best month since November 2020 after losing 8.3% in June. Equity markets reversed last month’s losses, looking past concerns about high inflation and recessionary indications.
Investors seemingly took an intense litany of headwinds in stride last month. The consumer price index (CPI) reached a new 40-year annualized high of 9.1%, the Fed aggressively raised interest rates with a second 0.75% hike to a range of 2.25%-2.50% In an advance second- quarter GDP report, the U.S. economy contracted by 0.9%, following a 1.6% decline in the first quarter. While two successive quarterly GDP contractions meet the common definition of a recession, the second quarter decline was the first of three estimates, so the picture may change as more data becomes available. Moreover, Federal Reserve Chairman Powell signaled that future rate increases may be smaller and market-implied expectations for upcoming policy tightening slowed to less than one percent by the end of this year.
Corporate profits are coming in much better than feared given earlier views for intense inflationary pressures and severe profit-margin compression. So far, 279 S&P 500 firms have reported with 71% topping analysts’ estimates, beating projections by approximately 4.6%. Value stocks are delivering stronger year-over-year revenue and earnings per share (EPS) growth (+12.8% and +16.7%) than growth stocks (+9.5% and -1.8%). Final second- quarter sales and EPS growth are expected at +11.9% and +8.4%, respectively.
In July, growth-oriented companies did better regardless of company size. Mid cap Growth took top July honors, up 12.24%. However, value is outperforming growth by at least 12% YTD across all market caps. Large cap value (-7.08%) is the best style performer, down the least YTD.
Style Box Index returns above are represented by: Large Value (Russell 1000 Value), Large Core (Russell 1000), Large Growth (Russell 1000 Growth), Mid Value (Russell Mid Cap Value), Mid Core (Russell Mid Cap), Mid Growth (Russell Mid Cap Growth), Small Value (Russell 2000 Value), Small Core (Russell 2000), Small Growth (Russell 2000 Growth). Source: Morningstar Direct, total return based, including reinvested dividends.
Top & Bottom Performers
In sector performance, all 11 major groups posted July gains, led by double-digit returns in Consumer Discretionary and Technology. Energy was the third largest monthly gainer, extending its 2022 sector dominance, up over 44% YTD. Defensive sectors, including Utilities and Consumer Staples were also top performers on a YTD basis.
Foreign equity markets trailed the U.S. in July, with the MSCI EAFE Index (representing developed markets outside of the U.S. and Canada) near 5% return underperforming the S&P 500’s 9.2% gain. Japan led with gains of 5.70%, while Germany (Europe’s largest economy) trailing half as much, up 2.35%. The Eurozone remains hampered by its ongoing energy crisis with Russia dialing back its natural gas pipeline flows into the region to just 20% of capacity. Emerging markets declined fractionally, with strong July gains in India (+9.32%), South Korea (+5.81%) and Brazil (+5.53%) overshadowed by sharp declines in China (-9.50%).
Turning to fixed income markets, Treasuries ended July with the yield on 10-year Treasury notes at 2.64%, down from June’s peak near 3.50%. Investment-grade bonds of all types rebounded by over 2.4% last month, led by investment-grade corporates (+3.24%), its best month in two years. Bloomberg’s U.S. High Yield Bond Index, representing holdings of below investment-grade (junk-rated) corporate bonds, sharply rebounded last month, up 5.90% for its best performance in over a decade (since October 2011). Despite the gain, high-yield credit is down 9.12% YTD. Municipal bonds of all types outperformed the U.S. Aggregate Bond benchmark index, up over 2.6% to dampen its YTD loss to 6.58%.
This report is created by Cetera Investment Management LLC. For more insights and information from the team, follow @CeteraIM on Twitter.
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The Bloomberg Barclays Capital U.S. Aggregate Bond Index, is a broad based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government–related and corporate debt securities, MBS (agency fixed-rate and hybrid ARM pass-throughs), ABS and CMBS (agency and non-agency) debt securities that are rated at least Baa3 by Moody’s and BBB- by S&P. Taxable municipals, including Build America bonds and a small amount of foreign bonds traded in U.S. markets are also included.
The Bloomberg Barclays US Municipal Bond Index covers the USD-denominated long-term tax exempt bond market. The index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds, and prerefunded bonds. Eligible securities must be rated investment grade (Baa3/BBB- or higher) by Moody’s and S&P and have at least one year until final maturity, but in practice the index holding have a fluctuating average life of around 12.8 years.
The Bloomberg Barclays US Corporate High Yield Index measures the USD-denominated, non-investment grade, fixed-rate, taxable corporate bond market. Securities are classified as high yield if the middle rating of Moody's, Fitch, and S&P is Ba1/BB+/BB+ or below, excluding emerging market debt. Payment-in-kind and bonds with predetermined step-up coupon provisions are also included. Eligible securities must have at least one year until final maturity, but in practice the index holdings has a fluctuating average life of around 6.3 years.
The Barclays U.S. Government Bond Index is comprised of the U.S. Treasury and U.S. Agency Indices. The index includes U.S. dollar-denominated, fixed-rate, nominal US Treasuries and US agency debentures (securities issued by US government owned or government sponsored entities, and debt explicitly guaranteed by the US government).
The Bloomberg Commodity Index is a broadly diversified index that allows investors to track commodity futures through a single, simple measure. It is composed of futures contracts on physical commodities and is designed to minimize concentration in any one commodity or sector. It currently includes 19 commodity futures in five groups. No one commodity can comprise less than 2% or more than 15% of the index, and no group can represent more than 33% of the index (as of the annual reweightings of the components).
The Cboe Volatility Index® (VIX®) is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices.
The MSCI EAFE is designed to measure the equity market performance of developed markets (Europe, Australasia, Far East) excluding the U.S. and Canada. The Index is market-capitalization weighted.
The MSCI Emerging Markets is designed to measure equity market performance in global emerging markets. It is a float-adjusted market capitalization index.
The MSCI All-Country World Index (ACWI) is a market cap weighted index designed to represent performance of the full opportunity set of large- and mid-cap stocks across 23 developed and 26 emerging markets, covering more than 2,700 companies across 11 sectors and approximately 85% of the free float-adjusted market capitalization in each market.
The Russell 1000 Growth Index measures the performance of the large-cap growth segment of the U.S. equity universe. It includes those Russell 1000 Index companies with higher price-to-book ratios and higher forecasted growth values.
The Russell 1000 Value Index measures the performance of the large-cap value segment of the U.S. equity universe. It includes those Russell 1000 Index companies with lower price-to-book ratios and lower forecasted growth values.
The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe and is a subset of the Russell 3000 Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership.
The Russell 3000 Index measures the performance of the largest 3,000 U.S. companies representing approximately 98% of the investable U.S. equity market.
The Russell Midcap Index measures the performance of the mid-cap segment of the U.S. equity universe and is a subset of the Russell 1000 Index. It includes approximately 800 of the smallest securities based on a combination of their market cap and current index membership. The Russell Midcap represents approximately 31% of the total market capitalization of the Russell 1000 companies.
The S&P BSE SENSEX Index is a free-float market-weighted index of 30 well-established and financially sound stocks on the Bombay Stock Exchange, representative of various industrial sectors of the Indian economy.
The S&P 500 is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ.
The NASDAQ Composite Index includes all domestic and international based common type stocks listed on The NASDAQ Stock Market. The NASDAQ Composite Index is a broad-based capitalization-weighted index.
The Shanghai Composite Index is a stock market index of all stocks (A shares and B shares) that are traded at the Shanghai Stock Exchange.
The U.S. Dollar Index is a weighted geometric mean that provides a value measure of the United States dollar relative to a basket of major foreign currencies. The index, often carrying a USDX or DXY moniker, started in March 1973, beginning with a value of the U.S. Dollar Index at 100.000. It has since reached a February 1985 high of 164.720, and has been as low as 70.698 in March 2008.
West Texas Intermediate (WTI) is a crude oil stream produced in Texas and southern Oklahoma which serves as a reference or "marker" for pricing a number of other crude streams. WTI is the underlying commodity of the New York Mercantile Exchange's oil futures contracts.