Monthly Market Report: July 2023
Stock Markets Continue to Rise
Prepared by Brandon Yee, CFA, CAIA, and Thomas Connelly, CFA, CFP
Developed Markets Rise
In the month of July, international developed stock markets returned 3.24%. Pacific ex Japan and the U.K. recorded returns of 4.37% and 3.44%, respectively. Europe ex U.K. and Japan lagged other markets. International developed markets are up 14.89% YTD while the U.S. market is up 20.83%. The relative outperformance of the U.S. market is due to the rally in U.S. technology stocks. However, this current rally in the U.S. market may not be sustainable as the outperformance is being driven by a very narrow number of stocks.
China Bounces Back
Broader emerging markets posted a 6.14% return for the month. China and Korea recorded returns of 10.76% and 6.50%, respectively. China’s economy continues to be weighed down by weaker corporate capital expenditures and a shaky real estate sector, but investors responded favorably to the possibility of upcoming Chinese government stimulus. India and Mexico lagged other markets in July. Low valuations relative to the U.S. and international markets may help emerging market investors going forward.
Energy and Telecommunications Outperform
Energy and telecommunications recorded returns of 6.32% and 6.09%, respectively, in July. Healthcare and utilities lagged other sectors this month. The information technology sector has rebounded this year after its steep 2022 decline. Much of the rally in this sector has been driven by a small number of technology companies, especially companies benefiting from increasing adoption of artificial intelligence applications. Further tightening of monetary policy by central banks could create a tough environment for the information technology sector.
Value Stocks Outperform
In July, value outperformed growth in the large-cap space and the small-cap space. Momentum recorded a return of 3.06%. Value stocks across the world continue to trade at large discounts relative to growth stocks. Value-oriented sectors such as energy, financials, and materials have underperformed this year after a strong performance in 2022.
Value Stocks Keeping Pace with Growth Stocks in International Markets
In the international developed markets, value outperformed growth in the large-cap space and small-cap space for the month. Momentum recorded a return of 2.40% while small-cap emerging market stocks posted a return of 6.51%. The YTD performances of value stocks and growth stocks are similar. Small-cap value stocks have outperformed small-cap growth stocks over the past five years. Valuations of value stocks are still very low relative to growth stocks in both international developed and emerging markets, which is consistent with the US market. Rising interest rates may also pose more of a risk to growth stocks than value stocks.
Year Over Year CPI Continues to Decline Steadily
In July, the three-month Treasury bill index returned 0.40%. From the beginning of 2022 through the end of July 2023, the annualized interest rate on the 90-day Treasury bill increased from 0.08% to 5.55%. Savers are now getting paid much more interest. Real interest rates are positive with the CPI only increasing by 3.09% over the past year through the end of June.
Fixed Income Investments Mixed
The returns of deflationary hedges were mixed for the month. The Bloomberg Barclays U.S. Agg Bond Index returned -0.07% for the month. In July, high yield bonds and emerging market bonds recorded returns of 1.42% and 1.61%, respectively. Interest rate sensitive investments such as long-term Treasuries lagged the market as interest rates rose. Catastrophe bonds are up 11.76% YTD. Insurance-linked securities like catastrophe bonds are benefiting from higher premiums that insurance companies are demanding from buyers. The higher premiums are a result of the larger realized losses in recent years experienced by the insurance companies.
WTI Crude Oil Surges
Inflation-sensitive investment returns were mostly positive for the month. WTI crude oil and MLPs returned 16.09% and 7.10%, respectively, in July. The Bloomberg Commodity index posted a return of 6.26%. Gold bullion is up 8.65% YTD even though short-term interest rates and real yields continue to rise. Oil prices were up for the month as OPEC extended their production cuts. Capital expenditures by oil companies have been muted in recent years, which will impact future supply. Consumers may face spikes in oil prices if demand picks up and supply remains constrained.
U.S. Dollar Mixed Versus Other Currencies
Over the past three months, the U.S. dollar depreciated against the Euro, British Pound, Mexican Peso and Swiss Franc. Over the past year, the U.S. dollar strengthened against the Japanese Yen, Australian dollar, and Chinese Yuan. The continuation of U.S. fiscal and trade deficits may weigh on the U.S. dollar in the medium-term to long-term. Gross federal debt to GDP stands at 121% and is forecasted to increase throughout the decade.
Brandon conducts investment due diligence for Versant Capital Management, and designs and implements tools and processes to support the firm’s research. His background in biology and finance help him to look at challenges from multiple angles, resulting in unique and well-rounded approaches and solutions.
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