Benchmark Review & Monthly Recap, July 2019

Fed Acts, Markets React


  • The S&P 500 Index achieved a new all-time high in July, eclipsing the 3,000 mark for the first time in history.
  • As U.S. equity markets continued to advance, international stocks moved lower. The U.S. dollar rallied in July to its strongest level since the first half of 2017 and created a significant headwind for non-U.S. dollar holdings.
  • The 10-year U.S. Treasury yield traded below 2% early in July, but moved back above that level for most of the month. However, it slipped lower as July progressed and closed the month at 2.02%.
  • As measured by the difference between the 10-year U.S. Treasury and 3-month T-Bill yields, the yield curve flattened during July and for one day, moved into a positive sloped position. However, the inversion resumed and the month closed back in an inverted yield curve position.
  • The current economic expansion in the U.S. is the longest on record passing the 10-year mark. Based on current economic data, we continue to expect ongoing economic growth through 2019 and into 2020.
  • For the first time since 2008, the Fed cut interest rates in July. Although this cut was well telegraphed, the market reacted negatively as Chairman Powell dampened expectations that this cut was the beginning of an extended rate-cut cycle.

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The S&P 500 Index achieved a new all-time high in July and broke above the 3,000 level for the first time in its history. The momentum from June continued in July as the market’s recovery from the May sell-off, which was triggered by a negative turn in the China trade negotiations, kept going. Although trade issues remained unresolved, they were trumped by rising expectations of a more accommodative Fed and a likely rate cut in July, which indeed occurred.

Most major U.S. equity indices gained in July, but international stocks could not overcome U.S. dollar strength and declined during the month. It is worth noting that although U.S. equity indices posted gains for the month, a portion of those gains were lost on July 31 following the FOMC meeting as equities sold off sharply to close out the day.

The numbers for July were as follows: The S&P 500 gained 1.44%, the Dow Jones Industrial Average (DJIA) rose by 1.12%, the NASDAQ Composite advanced 2.15%, and the Russell 2000 Index, a measure of small-cap companies, edged higher by 0.58%. Large-cap value stocks, as measured by the Russell 1000 Value Index, lagged their growth counterparts once again in July with an advance of 0.83%.

Comparatively, large-cap growth stocks, as measured by the Russell 1000 Growth Index, advanced 2.26%. Although this continues to be a challenging period for managers using value characteristics, we believe the value/growth relationship continues to become more and more stretched and over the long-term, value companies will be rewarded once again.

International equities slipped lower in July. Despite the anticipated and ultimate rate cut by the Fed during the month, the rest of the world remains more accommodative than the U.S. on a relative basis and the U.S. dollar rallied. In fact, the U.S. dollar index rose to its highest level in more than two years in July. With this backdrop, emerging market equities, as measured by the MSCI Emerging Markets Index, fell by -1.22% in July and the MSCI ACWI ex USA Index, a broad measure of international equities, declined -1.21% for the month. Year-to-date returns have still been solid for international stocks, but in general, they have not been able to keep pace with U.S. equities so far this year.


The 10-year U.S. Treasury yield has dropped dramatically so far in 2019. The yield ended June at 2.0%, and early in the month (July 2nd and 3rd), it closed below the 2% mark for the first time since 2016. Although it bounced up from those lows as the month progressed, it slid lower later on in the month and ended July at 2.02%. (Quick update: Following the FOMC meeting on July 31st, the 10-year U.S. Treasury yield dropped dramatically below the 2% mark at the beginning of August.)

The Fed is trying to engineer a challenging balancing act by supporting economic growth but at the same time, not cutting rates too much too soon. Markets will continue to monitor any information from the Fed closely as investors try to figure out the pending course of Fed action. The situation seems to be complicated by ongoing pressure from the Trump administration to cut rates, which should, by definition, not be a consideration as the independent Fed determines policy action.

The yield-curve inversion (comparing the 10-year U.S. Treasury and 3-month T-bill yields) shallowed in July and had a brief day back in a positive position. However, the yield curve inversion resumed from that point and ended the month back in inverted territory. History shows us that the length of the inversion matters, and the yield curve has been in that position for the most part since late May.

We acknowledge that an inverted yield curve has historically been a negative signal for the direction of the U.S. economy. At the same time, other economic readings that tend to be on the front end of the economy, like the leading economic indicators index and job market data, are not showing the same cautionary signals. We continue to monitor developments in this area closely, but we believe economic growth will continue through 2019 and into 2020.

In this environment, fixed income results were as follows: The Bloomberg Barclays U.S. Aggregate Bond Index was up 0.22% for the month, the Bloomberg Barclays U.S. Credit Index gained 0.52%, the Bloomberg Barclays U.S. Corporate High Yield Index advanced by 0.56% and the Bloomberg Barclays U.S. Treasury Index fell by -0.12%. TIPS showed gains for the month and muni bonds were among the best performers in the fixed income space in July.


Economic readings continue to get more scrutinized as this expansion’s length moves further into record territory. Information released in July, which largely covered the month of June, was rather mixed. The widely followed Institute for Supply Management (ISM) manufacturing index for June was modestly better than expected, but was a drop from the prior month. At an almost two-year low at 51.7, this reading has moved closer to the all-important 50 level over the last several months. Uncertainty in the global trade situation is likely impacting manufacturers, among other factors.

The ISM non-manufacturing index, which represents the much larger service industries in the U.S. economy, also dropped in June and was below expectations at 55.1. Recall that ISM readings above 50 indicate expansion and both readings remained in growth territory. Most housing data was below expectations as well.

However, retails sales (ex. auto and gas station sales) were stronger than expected in June, increasing by 0.7% for the month when a 0.3% gain was anticipated. Also, the first reading of second quarter GDP showed annualized growth of 2.1% when a 1.8% gain was expected. Job market data showed strong gains as well in June. Non-farm payroll additions were 224,000 in June, which was well ahead of the expectations of 160,000. The unemployment rate ticked a bit higher to 3.7% when it was expected to stay at 3.6%, but that coincided with an increase in the labor force participation rate as well. Average hourly earnings remained at 3.1% on a year-over-year basis in June when wages were expected to tick higher to 3.2%.

The dovish tone from the Fed, which has been a dominate theme this year, turned into action in July with the first rate cut since 2008. This cut has been widely expected since the June FOMC meeting. Rather than if the Fed would cut rate, the debate seemed to center around whether the Fed would lower rates by 25 or 50 basis points with little doubt a cut would occur at the July FOMC meeting.

Although we thought a cut was likely in July, we believed the expectations of 75-100 basis points of cuts over the next year were too aggressive under current conditions considering both first and second quarter GDP came in better than expected, the unemployment rate sits near a multi-decade low at 3.7% and stocks are near all-time highs. These market expectations could be a source of disappointment if the market and the Fed are out of step on the timing and amount of rate cuts. Some of the volatility we’ve seen early in August can be attributed to confusion following Chairman Powell’s press conference when he seemed to dampen expectations of an extended period of rate cuts.

We continue to expect economic growth through 2019 and into 2020 and anticipate further market gains over the balance of the year. However, due to uncertainty in upcoming Fed policy decisions, unknowns on the trade front, and some slowing U.S. economic activity, we also believe that the range of outcomes for the market is wider than usual and volatility might come more to the forefront during the second half of 2019.

Event Period Estimate Actual Prior Revised
ISM Manufacturing June 51 51.7 52.1
ISM Non-Manf. Composite June 56 55.1 56.9
Change in Nonfarm Payrolls June 160k 224k 75k 72k
Unemployment Rate June 3.60% 3.70% 3.60%
Average Hourly Earnings YoY June 3.20% 3.10% 3.10%
JOLTS Job Openings May 7470k 7323k 7449k 7372k
PPI Final Demand MoM June 0.00% 0.10% 0.10%
PPI Final Demand YoY June 1.60% 1.70% 1.80%
PPI Ex Food and Energy MoM June 0.20% 0.30% 0.20%
PPI Ex Food and Energy YoY June 2.10% 2.30% 2.30%
CPI MoM June 0.00% 0.10% 0.10%
CPI YoY June 1.60% 1.60% 1.80%
CPI Ex Food and Energy MoM June 0.20% 0.30% 0.10%
CPI Ex Food and Energy YoY June 2.00% 2.10% 2.00%
Retail Sales Ex Auto and Gas June 0.30% 0.70% 0.50%
Industrial Production MoM June 0.10% 0.00% 0.40%
Building Permits June 1300k 1220k 1294k 1299k
Housing Starts June 1260k 1253k 1269k 1265k
New Home Sales June 658k 646k 626k 604k
Existing Home Sales June 5.32m 5.27m 5.34m 5.36m
Leading Index June 0.10% -0.30% 0.00%
Durable Goods Orders June P 0.70% 2.00% -1.30% -2.30%
GDP Annualized QoQ 2Q A 1.80% 2.10% 3.10%
U. of Mich. Sentiment July P 98.8 98.4 98.2
Personal Income June 0.40% 0.40% 0.50% 0.40%
Personal Spending June 0.30% 0.30% 0.40% 0.50%
S&P CoreLogic CS 20-City YoY NSA May 2.40% 2.39% 2.54% 2.53%
P=Preliminary, A=Advanced
Source: Bloomberg

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