Markets have thus far had little change in direction as a result of an uptick in COVID cases due to the Delta variant. The US has seen a rise in COVID cases off the bottom, led by states with lower vaccination rates, which has caused some businesses to delay their office openings or re-institute some of the protective policies from earlier in the year. Despite this trend, the US stock market had another positive month in July, and yearly returns continue to be quite strong.
All eyes were on the July US Federal Reserve meeting and commentary from Chairman Jerome Powell for their take on economic trends and the direction of interest rates. Despite trends that continue to strengthen, Chairman Powell stated that the US economy has not reached “substantial further progress” and the Fed would continue to keep short-term rates at near zero to support economic growth. With regard to inflation, the Fed maintained its view that elevated consumer price inflation is temporary and is expected to abate once demand and supply reach more normalized levels.
Further, the US Gross Domestic Product (GDP) for the period of April to June was reported in July. While the annualized growth rate of 6.5% reflects a strong economy, the growth was below expectations. The US economy, however, has now surpassed the pre-pandemic level despite a labor market that has not rebounded as quickly.
Despite significant growth in the economy and elevated inflation trends, long-term US Treasury rates continued to decline in July. The 10-year US Treasury rate ended the month at 1.24%. This is still up from 0.93% at the beginning of the year but is down over 30% from the recent high of 1.78% in March. As a result of the rate decline, bonds posted a positive month in July but remain largely flat over the last year.
Contrary to US strength, emerging market stocks experienced a correction in July. This was led by a decline in Chinese stocks based upon worries about continued government intervention into their businesses and the stock markets. Chinese companies represent a significant component of emerging market stocks, and large Chinese technology and consumer companies like Alibaba, Tencent, and JD.com have faced significant declines since March.
As we look forward, we are still positive on the long-term trends of the stock market but continue to favor short-term prudence over aggression. The US market has not had a 5% correction since last October, which is an unusually lengthy period with little volatility. We also continue to believe that current interest rates are not reflective of the near or intermediate-term trends in the economy. Any directional change upward in interest rates would be a negative for the bond market. It is our recommendation to remain invested within the pre-defined investment plan, but some level of protection, profit-taking, and rebalancing back to prior risk levels should be considered.