Current Equity Exposure |
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The Factors |
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Valuation
Valuation metrics for equity remained negative. P/E increased from 25.6 at the end of June to 25.8 at the end of July. Forward P/E increased to 23.0 at the end of July from 22.6 at the end of June. Inflation-adjusted valuation metrics continued to be negative. Equity valuation metrics relative to bonds turned neutral with falling bond yields. |
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Sentiment
U.S. manufacturing activity contracted again in June, with the ISM manufacturing index falling to 48.5 from 48.7 in May.The University of Michigan Consumer Confidence Index continued to fall in July to 66.4 from 68.2 in June, with high interest rates and a moderating labor market weighing on sentiments. The NAHB index inched down 1 point to 42 in July, with elevated mortgage rates. |
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Technical
Technical indicators were positive overall, with positive momentum and fear signals outweighing negative reversal signals.The S&P 500 was 11% above its 200-day moving average, 4% above the 100-day average, and 1% below the 50-day average. The VIX index climbed in the second half of the month with significant rotations from growth to value stocks. It settled at 16.4 at the month-end. |
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Macroeconomic
Nonfarm payrolls rose by 206,000 in June, and the unemployment rate increased to 4.1%. Initial jobless claims remained steady, with the four-week moving average edging up to 235,500 as of July 20.Retail sales were unchanged in June, with lower vehicle sales contributing to the decline. U.S. industrial production continued to expand by 0.6% in June. |
What's Driving the Markets?Cooling Inflation: In June, inflation moderated again more than anticipated, with the headline CPI falling 0.1% from May, resulting in a decrease in the year-over-year inflation rate from 3.3% to 3%, the lowest level since March 2021. Core CPI (excluding food and energy) rose 0.1% in June, with year-over-year growth slowing down from 3.4% to 3.3%. The encouraging news is that shelter inflation contributed most to the downside surprise of June’s inflation, rising only 0.2% in June, the slowest increase in about three years. This long-awaited moderation is essential for our prediction that inflation will continue cooling this year. Vehicle prices declined in June, with used vehicle inflation falling 1.5% from the previous month. Additionally, the Fed’s preferred measure of inflation, the core Personal Consumption Expenditures (PCE) index, rose 0.2% in June, with the annual rate down to 2.6%, providing more evidence to the notion of a gradually cooling inflation. June’s cooling inflation strengthened markets’ expectation that the Fed will likely announce its first rate cut at September’s meeting.
Rotation from Growth to Value Stocks: The market has witnessed a rotation in leadership from growth stocks to small-cap and value shares. The Russell Value index outpaced the Russell Growth index by 6.8%, while the Russell 2000 index (small caps) outperformed the S&P 500 index by 8.9%. One of the major factors contributing to the retreat of growth stocks was concerns over potential additional U.S. restrictions on chip exports to China, after the Biden administration’s announcement that it was considering severe export limitations. Also, the rising probability of a Republican victory in the upcoming November elections seemed to benefit value stocks. One of the examples is that the value-oriented financial sector appeared to be boosted by the anticipation of less banking regulations. Furthermore, Q2 corporate earnings were in focus. On July 24th, the S&P 500 Index declined 2.3%, while the Nasdaq suffered a 3.6% loss, impacted by a 12.3% drop in Tesla and a 5.0% decrease in Alphabet following their earnings reports. However, the second-quarter corporate earnings have exceeded expectations so far on average, with 40% of S&P 500 companies reporting, 76% beating 2Q earnings, and 54% beating revenue estimates.
U.S. Elections: The 2024 presidential election cycle continued to take unexpected turns, prompting investors to consider its potential impact on financial markets. Assuming Harris wins the Democratic nomination, her economic policy is expected to closely align with Biden’s current agenda. Markets are particularly concerned about the implications of a Trump presidency combined with a Republican Congress, which could potentially lead to policies that include high tariffs, reduced taxes, less regulation, and decreased immigration. For example, Trump has proposed a 10% tariff on all imports to the US and a 60% tariff on Chinese imports, though actual tariffs ultimately implemented may be lower. There could be some sector implications too. For instance, a Republican win would likely boost fossil fuel developments, while a Democratic victory might further promote renewable energy development. While it’s still too early to precisely predict the election results and game out exactly how policies will unfold, we are closely monitoring any developments in the election cycle. |
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