A Look Back at the Markets in July and Ahead to August 2019Learn more about this firm
In July, U.S. markets were up overall, between 1 percent and 2 percent, and bonds also had gains as interest rates declined. Although international markets were down slightly, by about 1 percent or so, they remained above their long-term trend lines. From a financial perspective, July wasn’t a great month, but it was a pretty good one for investors.
A look back
Solid economic growth. It was an even better month for the economy. The first estimate of second-quarter growth came in at 2.1 percent, well above the 1.8 percent expected. Still, this result was down from 3.1 percent for the first quarter. Now, that decline doesn’t sound great. But the second quarter incorporated a pullback in inventories and the trade balance, which pushed the first quarter up. Averaging the two, growth was about 2.6 percent for the first half of the year, which is very solid.
Strong underlying data. July’s data also told us that the growth was well founded. Consumer spending increased substantially in the second quarter, by 4.3 percent. At more than two-thirds of the economy, consumer spending is the biggest single factor in economic growth, and it was supported by strong employment growth and continued wage growth. Consumer spending was also supported by a rebound in confidence, leaving consumers both able and willing to spend. That confidence should provide support for more growth in the future. Government spending was also a significant factor in growth and, with the recent budget deal, should also continue.
Economic news not all good. Business investment was down, which is a concern. Here again, the recent data was better, with durable goods orders showing reasonable growth, well above expectations. The housing market also remains a worry, and this is an area of continued weakness. A decline in mortgage rates has not yet improved demand, which may be a more serious threat. The prospect of these and other risks led the Fed to cut rates at the end of the month for the first time since 2008. Although this move does show concern, it should also help cushion the impact of any risks and will likely end up being a positive influence.
Supportive market fundamentals. Despite the real economic concerns, however, market fundamentals remained solid in July. Rising spending pushed corporate earnings up well past expectations. As of the end of the month, earnings for the S&P 500 were up by 0.8 percent, against an expected decline of 2.2 percent. This is a big swing, and the gap will likely continue to widen, which should support the financial markets.
A look ahead
Positive economic data. Looking forward into August, so far the economic data remains positive. The ISM Manufacturing survey was down but remains in expansionary territory. Plus, today’s jobs report was solid, with 164,000 new jobs and wage growth rising from 3.1 percent to 3.2 percent year-on-year. Business investment also showed growth.
Risks remain. With the economy reasonably solid, and with earnings doing much better than expected, the real risks come from policy and politics. Although we saw markets hiccup after the Fed news at the end of the month, the announcement of new U.S. tariffs on Chinese goods on August 1 has resulted in a more significant pullback. As I write this, that pullback is ongoing. So far, however, it is still well within the normal range of market volatility—and nothing to worry about yet.
A good place. Even if the market decline worsens, the solid economic foundation should limit any sustained impact. Indeed, August can be a volatile month. But the fact that the data has been improving through July and into this month should help cushion the effects. With fundamentals solid, investors are still in a good place.
Brad McMillan is the chief investment officer at Commonwealth Financial Network, the nation’s largest privately held Registered Investment Adviser-broker/dealer. He is the primary spokesperson for Commonwealth’s investment divisions. He is also the author of Crash-Test Investing, a must-read primer for Main Street investors seeking to help insulate their portfolios against a market crash. This post originally appeared on The Independent Market Observer, a daily blog authored by Brad McMillan. Forward-looking statements are based on our reasonable expectations and are not guaranteed. Diversification does not assure a profit or protect against loss in declining markets. There is no guarantee that any objective or goal will be achieved. All indices are unmanaged and investors cannot actually invest directly into an index. Unlike investments, indices do not incur management fees, charges, or expenses. Past performance is not indicative of future results.