What happened in the markets - 24-28 July 2023

Introduction

The past week was marked by a series of significant events, including robust corporate earnings, a Federal Reserve interest rate hike, crucial inflation data, and a record-tying winning streak for the Dow Jones Industrial Average. Encouraging signs of moderating U.S. inflation, coupled with strong performance in the tech sector, helped major U.S. stock indexes rebound after a slight dip, ending the week with widespread gains. In this summary, we'll discuss the key takeaways from the week's market developments and what to expect in the upcoming week.

Key Takeaway on this week

The upward momentum in the markets was initially fueled by enthusiasm around artificial intelligence (AI). However, more recently, investors have focused on three positive macro trends: the potential end of rate hikes by the Federal Reserve and other central banks globally, a gradual moderation of inflation, and resilient economic growth. These trends have led to a broader leadership in the markets, with economically sensitive segments like small-cap stocks and cyclical sectors outperforming in recent weeks. While some volatility may persist after the recent market gains, compelling opportunities are still anticipated in both the equity and bond markets.

Dow notches longest winning streak since 1987

Stocks closed higher for the week, highlighted by the Dow Jones Industrial Average's impressive 13 consecutive daily gains, marking its longest winning streak since 1987. However, trading activity was relatively subdued as the summer vacation season diverted some attention from crucial data releases, the Federal Reserve's policy meeting, and significant corporate earnings reports. Growth stocks outperformed value stocks, with the Nasdaq Composite leading the gains due to its tech-heavy composition. Positive economic readings, particularly related to inflation, contributed to market sentiment. On Friday, stocks opened strongly following news that the core personal consumption expenditures (PCE) price index, the Fed's preferred inflation gauge, rose by 0.2% in June, down from 0.3% in May, resulting in a year-over-year increase of 4.1%, the slowest since September 2021. Additionally, the employment cost index, a crucial measure of wage inflation, rose 1.0% in the second quarter, below consensus expectations and the smallest increase in two years.

Weekly market stats

Source: Factset 28/07/2023.Bonds represented by the iShares Core U.S. Aggregate Bond ETF. Past performance does not guarantee future results. *4-day performance ending on Thursday.

Rising rates return & 10-year yield hits 4.00%

As anticipated, the U.S. Federal Reserve resumed its series of interest rate hikes after a pause in June, resulting in a quarter-percentage point increase in its key benchmark rate. This brought the rate to the highest level since 2001 and marked the 11th rate hike since March 2022, initially implemented in response to surging inflation during that period. Concurrently, the European Central Bank also raised its key interest rate to 3.75% and hinted at the possibility of halting its rate-hiking cycle starting in September. However, the ECB's rate remains significantly lower than the current benchmark rate range of 5.25% to 5.50% set by the U.S. Federal Reserve.

Following the U.S. Federal Reserve's recent interest rate increase, the yield on the 10-year U.S. Treasury bond closed above 4.00% on Thursday for the fourth time this year. Although the yield slightly retreated on Friday, it was still trading around 3.97%, considerably higher than the previous week's closing level of 3.85%.

U.S. GDP data this week had something for everyone: Growth remains resilient, and inflation continues to moderate.

The U.S. economy gained momentum in the second quarter, easing concerns about a recession amid interest rate hikes. GDP expanded at an annual rate of 2.4%, surpassing economists' consensus forecast and an improvement from the 2.0% rate in the first quarter. The Fed's preferred inflation gauge showed that consumer prices increased in June at the slowest monthly pace in over two years. The Personal Consumption Expenditures Price Index rose at a 3.0% annual rate, down from 3.8% in May. Core inflation, excluding volatile food and energy prices, also decreased to 4.1% in June, compared to 4.6% in May.

U.S. inflation metrics continue to ease

Source: Bloomberg

Stock Market Recap

The stock market remained active, with the Dow Jones Industrial Average experiencing its first decline since July 7 after a record-tying winning streak of 13 consecutive days, similar to the streak set in 1987. The Federal Reserve's rate hike announcement on Wednesday, raising the rate to a range of 5.25% to 5.5%, influenced market movements. On Friday, the June PCE report, a closely monitored inflation measure by the Fed, revealed a 4.1% increase—the slowest growth since September 2021—potentially supporting expectations that the Fed might not raise rates further this year. Earnings reports were a mixed bag, with companies like Alphabet, Intel, and Roku delivering favorable results, while Ford and others experienced declines due to missing investor expectations. The best-performing sectors during the week were tech, energy, and health care, while utilities, real estate, and industrials underperformed.

Source: EdwardJones, John Hancock Investment Management, Fidelity, Charles Schwab, T.RowePrice