July 2024 Market Insights
BY: RYAN P. JOHNSON, CFA, CFP® - MANAGING DIRECTOR OF INVESTMENTS
The Federal Reserve will have a rate announcement on July 31st, but no change is expected until mid-September. The S&P 500 hit new highs in July, but as of this writing, the index had a small loss for the month; there was quite a bit of rotation beneath the surface of the stock market. Bond yields remain attractive, but Fed cuts may change how cash needs to be managed.
Stocks:
So far in the month of July, there have been big moves in stocks despite the S&P 500 being down less than 1%. Small cap stocks gained over 8%, the large cap value style outperformed growth by over 6.5%, and the Technology and Communications sectors were down the most, after having the largest gains in the first half of the year. Several companies have reported second quarter earnings, but it is still early in the cycle. The profit-taking in Tech, paired with gains in other parts of the market, is not a worrying sign. As we have previously mentioned, there may be short-term pullbacks or volatility, but we are broadly positive on the outlook for stocks due to the expected double-digit growth in earnings this year and next.
Economy:
Inflation readings have improved, unemployment rose slightly, and consumer spending has been inconsistent, which together are being taken as signs that the Fed’s mission of slowing the economy has been achieved and that they can cut rates later this year. The early July jobs report showed 4.1% national unemployment, which is still historically low. The latest consumer inflation readings, such as the monthly core PCE at 2.6%, continue to show improvement from the start of the year. Second quarter reports from individual consumer companies have been hit-or-miss, with one clear trend being that consumers are seeking value.
Bonds & the Federal Reserve:
Since our last Insights, interest rates have declined to levels last seen in March. Yields on 2-year Treasury bonds were recently 4.39%, 5-year bonds 4.08%, and 10-year bonds 4.20%. Investment grade corporate bonds are still yielding over 5% across all maturities. As bond yields fell, bond prices rose, increasing total returns. Recent 1-year returns on bonds in client portfolios have been around 6%, the highest seen in many years. Forward returns from bonds are highly correlated with current yields, with some variation if yields rise or fall. Better inflation readings and increasing odds that the Fed will start cutting rates have gone hand-in-hand with lower rates. Mortgage rates are below 7% and are also the lowest since March.
Money Market Rates:
Banks’ default checking and savings yields, as well as brokerage cash sweep yields, are typically very low, even though short-term rates to borrow are fairly high. We have been using purchased money market funds (that take a day for the trade to settle) to help our clients earn extra yield on cash needed in the very short term. As Fed rate cuts occur, yields on money market funds will fall. If you are keeping some of your cash for short-term needs at a bank, for example, now is a good time to reevaluate the timing of your cash needs over the next couple of years. Consider matching your needs with short-term fixed income options that lock in today’s decent rates for various periods of time over the next 6, 12, or 18 months, for example.
Buckingham is here for you:
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