Major stock market indices rebounded in July after falling in June. The S&P 500, Dow and Nasdaq rose 9.1%, 6.7% and 12.3%, respectively. The S&P 500 is technically no longer in bear market territory, although the index is still down 13% year-to-date. Of the major U.S. indices, only the Nasdaq is still at bear market levels, having fallen 20.8% this year. Interest rates also plummeted despite another Fed rate hike due to signs of a slowing economy. The VIX index of stock market volatility fell to 21.33, the lowest level since April. The price of Bitcoin ended July at $23,807 which, while representing a significant month-over-month gain, is still well below its previous peak near $67,000. What drove many major markets in July?
- The Federal Reserve raised rates again in July. The Fed announced that it would raise rates by 0.75 percentage points (three quarters of one percent) for the second consecutive meeting, a move that was highly anticipated by investors. This brings the federal funds rate to a range of 2.25% to 2.50%, matching the peak level prior to the pandemic. Despite signs of a slowing economy, the Fed raised rates in order to combat inflation which markets applauded with a rally late in the month.
- Inflation accelerated again by 9.1%. Multiple economic reports in July confirmed that inflation continues to rise rapidly. These reports including the Consumer Price Index, which showed that consumer prices increased 9.1%, and the Producer Price Index which showed that the prices charged by suppliers jumped to 11.3%. Rising prices hurt consumer pocketbooks, especially for necessary purchases such as food and energy.
- The economy shrank in the first half of the year. The second quarter GDP report showed that the economy contracted by 0.9% after shrinking 1.6% in the first quarter. While this has many wondering if we may be in a recession, the reality is that these numbers are small compared to historical recessions and the job market is still strong. In fact, the silver lining is that an economy that is slowing may help to reduce inflation.
- There are signs that inflation could begin to ease. Oil prices, which have been a major driver of higher inflation, are at the low end of their range since March. West Texas Intermediate ended the month of July under $100 per barrel. This, along with falling gasoline prices, suggest that some inflation measures could begin to ease in the coming months.
July is a reminder to all investors that while economic factors are important to understand, how they affect the stock market can often be counterintuitive. In a month when the Fed raised rates by a historic amount and we received confirmation that the economy shrank in the second quarter, the stock market rallied significantly in the second half of the month. Investors should consider focusing on the long run and not just on any individual economic data point. If inflation does begin to ease later this year, many investor concerns may begin to lift as well.
The economy contracted in the first half of the year after strong growth during the pandemic recovery. Still, these negative GDP reports are small in comparison with historical economic pullbacks.
Sources: Clearnomics, Bureau of Economic Analysis
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