August 6, 2024

Much like its namesake holiday, this July was a month full of fireworks in financial markets. While global equities posted relatively tepid headline returns, a burst of eye-catching spectacles were seen for those willing to look a little harder. Bond markets experienced their own gyrations over the month with the Treasury yield curve falling markedly over July in growing anticipation of coming rate cuts. Overall, July was another solid month for markets in what has been a strong year for investors’ portfolios.

For July, U.S. equities were a mixed bag. Large caps turned in a modestly positive month while small caps posted historic returns. The large-cap-biased S&P 500 closed up 1.22% while the small cap-oriented Russell 2000 index lit off like a Roman candle returning 10.16% for the month. That July return for the Russell 2000 falls within the top 5% of all monthly returns for the index, dating back to its inception in 1984. Even more dazzling than the absolute returns is the level of relative performance between small and large caps. July’s 8.94% performance differential versus the S&P 500 is the third  largest month of Russell 2000 outperformance ever.²

That’s quite a departure from what we have seen in recent years as large and mega caps have dominated small caps. Surprisingly, Mega cap technology stocks, which dominate the top end of the S&P 500, were the primary detractors to July returns with the top ten holdings in the S&P averaging a negative return of nearly -2% on the month. In tandem with the resurgence in small caps, value-oriented strategies also saw strong performance in July. The broad-based Russell 3000, which encompasses stocks of all sizes, saw significant deviation between its Value and Growth sub-indices over the month with the Russell 3000 Value Index returning 5.46% versus -1.27% for the Russell 3000 Growth.

This 6.73% return differential marks the largest monthly divergence between the two indexes since March of 2001. Perhaps the softening interest rate environment or disillusionment with the Artificial Intelligence (AI) boom is driving these thematic shifts that we’ve observed in July. Whatever the case, there were certainly a few bursts of action this month, but it remains to be seen whether these developments portend some larger regime shift or whether this dazzling display will fizzle out.

Like their domestic counterparts, headline returns for international equities were modest. Developed international markets, as represented by the MSCI EAFE Index, returned 2.93% in July while the MSCI Emerging Markets Index closed up slightly at 0.30%. The U.K., Japan, and Switzerland drove the lion’s share of gains in the developed index while China and Taiwan detracted most significantly from emerging market returns. Although they have not achieved the heights of U.S. markets this year, international equities are collectively delivering a solid mid-single digit year to date return. Given the geopolitical turmoil and ongoing bouts with inflation across the globe it should be appreciated that international equity markets have been relatively tame.

It was an eventful month for U.S. bonds as we saw dramatic yield curve shifts in reaction to expectations around future Fed rate cuts. Ahead of the July 31 Federal Open Market Committee (FOMC) statement futures markets have priced in an additional cut to policy rates, bringing the expected total to nearly three cuts before year end 2024.³ Assuming we were to get all three-quarter percent cuts, we’d exit 2024 with a Fed target rate below 5%.Over the course of July, the Treasury curve reacted with drops in most mid- and long-dated tenors ranging from 20 to 50 basis points.⁴ The Bloomberg Aggregate Bond Index, which encompasses a wide swath of the investable U.S. bond universe, returned 2.34% on the month while the ICE B of A US High Yield Index returned 1.96%. Disappointingly, the Aggregate Index is up only about 1%year to date, but High Yield bonds have benefitted from below average defaults and tightening credit spreads to return 4.6%Year-to-Date (YTD).¹ Abroad, global fixed income returns have been somewhat disappointing given where yields have been recently. But in many countries shifts in sovereign yield curves have been negating higher interest rates as it’s becoming more apparent that higher absolute yields may not be a passing fad.

As we turn our attention to the remainder of 2024, economic data has been largely encouraging. U.S. wage growth has been moderating, now down to 4% year over year since its peak in March of 2022.¹ The unemployment rate has been creeping up but remains well below its long-termaverage.¹ Headline Consumer Price Index (CPI) figures have also continued its grind down and are  now below its long-term average.² The Fed has signaled their consideration of rate cuts, which could also provide tailwinds to the economy in the back half of the year.

All in all, 2024 has been a very solid year for investors thus far. Despite broadly disappointing returns from bonds, most other asset classes have delivered strong year to date performance. It remains to be seen whether the thematic developments we’ve seen in July will carry through the rest of the year, but well diversified investors can take solace in the fact that whatever may come they will be participants in those prevailing trends.

Hunter Brooks
Portfolio Manager

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