U.S. markets rallied to new highs during July. The S&P 500 climbed 3.7% and U.S. small stocks surged 6.0%. International stocks had a great month, with developed international large stocks returning 5.1% and international small stocks up 6.1%. Emerging markets returned 5.0%. Bond returns were modest as the 10‐year Treasury yield remained stable, but TIPS returned 0.9%. REITs had another great month, up 4.6%, and commodities fell 5.1% primarily due to lower energy costs.
- The initial estimate of second quarter real GDP growth came in at 1.2%, above the first quarter’s 0.8% growth. The increase reflected positive contributions from personal consumption expenditures and exports.
- The year‐over‐year inflation rate remained at 1.1%.
- The private sector added 255,000 jobs in July, well above analyst forecasts of 180,000. The unemployment rate remained unchanged at 4.9%.
- U.S. small stocks gained 6.0% and outperformed large stocks. The S&P 500 Index returned 3.7 % and U.S. large value stocks gained 3.0%. Technology was the top performing sector with a 7.9% return.
- International large stocks were up 5.1% and international small stocks gained 6.1%. Australia had the strongest return at 8.2% but all major countries posted positive returns.
- Emerging markets continued their positive trajectory, gaining 5.0% for the month which brought their year-to-date return up to 11.8%.
- The 10‐year U.S. Treasury yield remained relatively unchanged at 1.5%.
- Both intermediate‐term bonds and international bonds returned 0.3%. TIPS gained 0.9%.
- REITs jumped 4.6% while managed futures were flat for the month.
- Commodities fell 5.1% as gains in precious and industrial metals were more than offset by declines in energy, grains, and livestock.
A New Market High - But Is It a Top?
In case you hadn’t noticed, the S&P 500 index reached record territory in July, and the NASDAQ briefly crossed over the 5,000 level before settling back with a more modest gain. At 2,137.6, the S&P 500 finished above the previous high of 2,130.8 set on May 21, 2015.
We’ve waited more than a year for the market to get back to where it was before the downturn in January, before Brexit, and before a lot of uncertainties in the last 12 months. The market top itself is an uncertainty; after all, many investors regard market tops warily.
When stocks are worth more than they have ever been (so goes the thinking), it may be time to sell and take your profits. However, if you followed this logic and sold every time the market hit a new high, you’d probably have been sitting on the sidelines during most of the long ride from the S&P at 13.55 in June 1949, which was the bull market high after the index started at 10. New highs are a normal part of the market, and it is just as likely as not that tomorrow will set another new one. In fact, overall, the market spends roughly 12% of its life at all‐time highs.
We all know that the next bear market will start with an all-time high, but we can never know in advance which one. Market highs do not necessarily become market tops. Let’s see if we can all celebrate this milestone without the usual dose of fear that often comes with new records.
Sources: Bureau of Economic Analysis (BEA), Federal Reserve, Institute for Supply Management, JP Morgan, Morningstar Direct, Standard and Poor's, Wells Fargo, Yahoo! Finance, BofA Merrill Lynch, wsj.com, Bob Veres