What happened in the markets - 17-21 July 2023
Introduction
In the past weeks, we've witnessed a flurry of news impacting the two key aspects of the Fed's mandate - full employment and inflation. While the job growth declined in June, the unemployment rate ticked down slightly, and retail sales data painted a picture of a resilient economy. On the other hand, inflation continues to decelerate. As analysts anticipate another Fed rate hike, we must consider how to construct a well-rounded investment portfolio that can weather uncertainty and market downturns.
Key Takeaways
Stocks have shown resilience, rallying off the October bear-market low and posting gains despite mixed earnings during this season.
While certain indicators signal emerging fatigue in the labor market, a more benign slowdown is expected, forming a "rolling recession."
Optimism remains for the markets, driven by growth resilience, strong labor market support, and potential rate cuts in the future.
Stocks Push Higher Despite Mixed Earnings Week
As we progress through earnings season, the Dow and S&P 500 have experienced positive momentum, while the NASDAQ saw slight declines. Many S&P 500 companies exceeded analysts' quarterly net income expectations, with regional banks also delivering robust earnings results. However, some of the NASDAQ's biggest companies fell short of expectations, leading to a one-day percentage decline in the index.
Mixed Retail Report
U.S. retail sales rose in June, though slightly below expectations, indicating continued resilience as inflationary pressures ease. The labor market remains a pillar of support, driving consumer-spending growth above GDP rates. While a slowdown is anticipated, elevated job openings suggest ongoing demand for workers, which should soften the economic downturn. Experts expect the upcoming GDP report to reflect moderate growth despite earlier recession concerns.
Interest Rates
Government bond yields stabilized ahead of the Federal Reserve meeting, where a quarter percentage point hike is widely expected. A slowdown in the economy may lead to a more accommodating interest-rate policy, potentially mitigating market pullbacks.
Investment Themes
In this evolving landscape, there are three key investment themes to consider:
Holding Tight: Central banks are keeping policy tight to combat inflationary pressures, leading analysts to favor short-dated U.S. Treasuries.
Pivoting to New Opportunities: Greater volatility calls for a granular approach to security selection and identifying uncorrelated exposures. Expertise and skill are essential to achieving above benchmark returns, and relative value opportunities may emerge from potential market mispricings.
Harnessing Mega Forces: Structural changes, like digital disruption, the transition to a low-carbon economy, and other mega forces, will create shifts in profitability across sectors. Identifying catalysts and beneficiaries of these changes is critical to optimizing investment strategies.
Conclusion
Navigating uncertainty requires a carefully constructed investment portfolio that accounts for market trends and economic shifts. By holding tight to short-dated U.S. Treasuries, pivoting to new opportunities through granular security selection, and harnessing the power of mega forces shaping the global landscape, investors can position themselves for success amidst market fluctuations.
Source: EdwardJones, Investopedia, T. RowePrice, Fidelity, J. P. Morgan Asset Management, Charles Schwab
