Key Points:
- The US economy grew 2.4% (annualized) in the second quarter of this year despite fears of a slowdown.
- Stocks continued to outperform bonds with the S&P500 advancing 3.21% in July.
- The Federal Reserve raised their benchmark rate an additional quarter point as inflation remains above their target.
The economic environment turned more favorable in July as economic growth proved resilient and inflation continued to fall. The US economy grew at an unexpected 2.4% annualized rate in the second quarter, marking the fourth consecutive quarter of over 2% growth. The prospects of a soft landing for the economy grew as recession fears faded. Business investment surged 7.7% in the second quarter as onshoring and automation picked up pace. As a result of the positive economic conditions, risk assets continued their march higher for the year with stocks significantly outperforming bonds.
The S&P500 gained 3.21% in July pushing its year-to-date total return to 20.65%. The risk-on sentiment was clear in small cap stocks as the Russell 2000 gained 6.12% for the month. There was more breadth to the market rally in July as opposed to the top stocks moving the indices higher as seen in previous months. Energy stocks (+7.4%) were the best performing sector as stronger economies demand more energy. Communication services (+6.9%) and financials (4.9%) also saw strong returns.
Inflation continued to ease from 2022 highs as the Consumer Price Index rose just 3% in June from a year earlier. Despite the drop, the Fed Reserve increased the Federal Funds rate an additional 25 basis points in July in an effort to get inflation to its 2% target. The market expects another small increase this year, but the heavy lifting appears to be over. The main concern for the Fed seems to be wage inflation which is a biproduct of a strong and tight labor market.
The bond market was relatively flat in July with a dip in treasury prices. High yield bonds performed best amid the risk-on sentiment. For the year the Bloomberg US Aggregate Bond Index has gained 2.02%. Short maturity treasury yields are higher than those with a longer duration. This inversion in the yield curve typically precedes a recession as investors expect lower rates in the future. The mild recession that has been expected for quite some time may not come to pass.
Sources: Morningstar Direct, Wall Street Journal, BEA.gov