July Market Summary
July was yet another positive month for the markets. Over the month of July, the S&P 500 and the Nasdaq 100 saw a total return of 2.38% and 2.82% respectively. The main indices reached a new all-time high just a couple of days before the end of the month. Markets had dipped noticeably in the middle of the month but recovered strongly at the end of the month.
Of the eleven Sectors of the S&P 500, 8 were in positive territory with the best performers being Real Estate (+4.25%) and Healthcare (+ 4.1%) and the worst performing sectors by far was Energy (-10.6%).
The Main Index in China fell 5.5% in the month as the government instituted strong measures against such sectors as online education and technology companies.
UK stocks were also positive in July. The FTSE 100 gave a modest total return of 0.1% while the FTSE 250 was up 2.7% in July. UK Mid-caps have been performing well for some time.
The valuation of UK companies is low by international standards especially when compared to the USA. US Private Equity firms, who are very cash-rich, have bought several UK quoted companies in the last few months (in just the last three weeks we have seen two different US buyers for UK defense firms – Ultra Electronics and Meggitt Plc.) and more deals are likely to emerge in the next few weeks and months.
The most notable market moves were in the bond markets as prices rose and yields fell despite significant worries about and evidence of incipient inflation. In July, the US Treasury yield fell from 1.45% to 1.22%. This is a remarkable decline in yields especially as virtually all market commentators were expecting yield to rise due to inflation fears.
This huge move in Treasury Bonds was not fully reflected in Corporate and Financial bonds. Therefore, credit spreads widened. Commodity Prices and the Dollar were relatively stable in July.
The second quarter corporate results season in the US has started well and many companies have reported strong numbers. The growth in revenues and earnings looks particularly strong as the comparable Mar to June quarter in 2020 was badly affected by the Covid Crisis. Therefore, the most recent results are reflecting the post-covid “bounce back” to a significant degree.
Managements are more cautious about the next two quarters as they expect sales and demand growth to normalize. In some cases, the immediate market response to lower-than-expected outlook has been to take profits.
However, this is not a cause for worry as the overall health of the corporate and banking sector is remarkably strong. Most companies are expecting good growth in revenues and profits and are forecast to maintain high levels of profitability. For many companies, balance sheets are very strong and likely to become even stronger.
There are areas of speculative excess and high valuations in specific assets and sectors, but many large and established companies are not greatly overvalued. However, given the markets are at all -time highs, it is extremely difficult to find quality growth companies which have valuations that can be described as cheap.