July Monthly Report

Monthly Market Report

July 2016

US markets

The British vote to leave the European Union (“Brexit”) ignited a global stock price decline that shaved off $3 trillion in market value before staging a recovery to close out the month.1

For the month, the Dow Jones Industrial Average rose 0.08 percent while the Standard & Poor’s 500 Index added 0.09 percent. The NASDAQ Composite fell 2.13 percent.2

Brexit Polls

The markets were fixated on the stream of Brexit polls all month. Early on, the polls suggested that the “Leave” camp might prevail and it caused markets to stumble, especially in Europe. Anxiety over the vote’s outcome drove a risk-aversion mentality that dragged stock prices and bond yields lower.

Even as oil broke the $50 per barrel mark and the Fed announced its decision not to raise rates in July, the markets remained focused on Brexit. In the days leading up to the referendum, spirits improved as new polls showed stronger voter support for remaining in the EU.

Surprise Vote

Also reported, voters surprised analysts and commentators alike, delivering a rebuke to the EU. Markets opened lower in the Pacific region and the selling wave swept across Europe and the U.S. The flight to safety was on, as stock prices cratered, yields fell, and the U.S. dollar and Japanese yen rose.

The market’s two-day dive sent domestic stocks into negative territory for the year, but recovered in the ensuing days, recapturing much of the losses realized in the wake of the British vote.

Sector Performance

The majority of S&P 500 sectors were lower for the month, including Financials (-5.50 percent), Materials (-3.33 percent), Technology (-2.72 percent), Consumer Discretionary (-2.31 percent), Industrials (-1.73 percent), and Health Care (-0.20 percent). Only Utilities (+5.18 percent), Consumer Staples (+1.77 percent), and Energy (+0.85 percent) ended higher.3

World Markets

Much like the U.S. markets, overseas markets were volatile following the British decision to exit the EU, with the MSCI-EAFE Index falling 4.45 percent for the month.4

Despite a recovery in the last week of June, major markets, such as Germany and France, were hit hard. Smaller markets, such as Italy and Spain, experienced even larger losses.5

Some markets in the Pacific region fared better, with more modest declines in Hong Kong and Australia.6

Indicators

Gross Domestic Product: The final revision to the first quarter’s GDP growth rate was 1.1 percent, up from an earlier reading of 0.8 percent. Higher exports and business spending accounted for the positive revision, though the growth rate still reflects a struggling economy.7

Employment: Despite a sharp drop in the unemployment rate, from 5.0 percent to 4.7 percent, new hiring increased by just 38,000, the fewest jobs created since September 2010. This weak number, combined with downward revisions in the previous two months, brought the average monthly job gains over the last three months to 116,000, a significant deceleration from the 219,000 average increase over the prior 12 months.8

Retail Sales: Retail sales rose 0.5 percent in May, led by gains in online and gas purchases. Following a gain of 1.3 percent in April, consumer spending, which accounts for about two-thirds of economic activity, has rebounded substantially from the numbers posted in the first quarter of this year.9

Industrial Production: Industrial output declined in May by 0.4 percent, weighed down by declines in autos and electric utilities. Capacity utilization also dropped by 0.4 percentage points to 74.9 percent, indicating sizeable slack in American industries.10

Housing: Housing starts slowed in May, falling 0.3 percent from April. Despite the weak report, housing starts year-to-date are 10.2 percent higher from the same period last year.11

Sales of existing homes rose 1.8 percent in May, the biggest jump since February 2007, and were higher over May 2015 by 4.5 percent. Slowing inventory of both existing homes and new homes have led to rising prices, with the median price of an existing home climbing 4.7 percent from a year earlier, to $239,700.12

New home sales dipped 6.0 percent, following a surge in April. Despite the decline, sales of new homes in May were still the second-best performance since the recession ended.13

CPI: For the third consecutive month, consumer prices rose, increasing 0.2 percent in May. It has now been seven straight months that core prices (excluding the volatile food and energy components) have matched or exceeded 2.0 percent—a target threshold followed by the Fed in its interest rate decision-making process.14

Durable Goods Orders: Orders for goods designed to last three or more years fell 2.2 percent, led by a 34.1 percent fall in military aircraft orders. Business investment remains weak, with nondefense capital goods orders down 3.5 percent this year.15

The Fed

The Federal Reserve policy makers left rates unchanged and lowered their sights on how much they expect to raise rates over the remainder of the year and through 2017. Continued slow economic growth and low inflation have contributed to the Fed’s cautious approach to raising rates.16

In her two-day testimony to Congress on June 15, Federal Reserve Chair Janet Yellen gave little indication that rates would be hiked in July, conceding that there was considerable uncertainty in the economic outlook, though she did not expect a recession this year. In addition to the economic headwinds that have not abated, Yellen cited additional concerns, including the June 23 vote in Britain to exit or remain in the EU and the economic transition China is undergoing.17

What's Ahead

The “Brexit” vote may take months for the financial markets to digest. In reality, the process of exiting the European Union will be counted in years, which may mean an overhang of uncertainty, or an incremental march that allows markets to adjust more smoothly to the exit’s impact.

As investors peer ahead into the second half of 2016, they may want to look for what may lead markets to put “Brexit” in the rearview mirror.

In the months ahead, investors may want to watch for:

• A continued rise in the U.S. dollar—A stronger U.S. dollar could impact export sales and may become a drag on the economy.
• Whether consumer spending—the primary driver of economic growth
  —remains steady or improves.
• If corporate earnings, which have been sluggish in recent quarters, improve and give businesses the confidence to increase capital investments.
• The pace of China’s economic growth, which has been flagging as it transitions from an export-led economy to a consumer-demand based economy.
• Whether Europe’s economy can overcome the uncertainty of a British exit and accelerate its growth rate.