Stocks rebounded in July despite rising inflation and pessimistic macroeconomic data. In the U.S., headline CPI trended higher, rising 9.1% over the 12 months ending in June. On an inflation-adjusted basis, the U.S. economy contracted at an annual rate of 0.9% in the second quarter, and entered a technical recession with two consecutive quarters of negative real GDP growth. As anticipated, the Federal Reserve hiked benchmark rates by 75 basis points to a range of 2.25%-2.50%, a new high since July 2019. In addition, the European Central Bank raised its key rates by 50 basis points, its first increase since 2011.
In equities, the S&P 500 Index outperformed in July, outpacing the MSCI ACWI ex U.S. Index 9.2% to 3.4%. Growth equities benefited from lower yields and outperformed value stocks with the Russell 1000 Growth and Value indexes up 12% and 6.6%, respectively. Outside of the U.S., the MSCI EAFE Index gained 5%, while the MSCI Emerging Markets lost 0.2%. Notably, the MSCI China Index fell 9.5% last month after disappointing economic data and lower-than-expected monetary stimulus exacerbated concerns around growth.
Global yields shifted lower amid increased demand for sovereign bonds. In the U.S., the Treasury yield curve inverted after the two- and 10-year Treasury yield decreased three and 33 basis points, respectively. High-yield assets benefited from falling rates and tightening credit spreads. As a result, the Bloomberg U.S. Corporate Index outperformed, rising 5.9% after spreads tightened by 100-to-469 basis points.
NEPC’s stance towards risk assets remains unfavorable given the uncertain growth and inflation dynamics. We recommend building exposure to short-term investment-grade credit as higher yields offer an attractive defensive position. We also suggest adding exposure to value stocks in U.S. large-cap equity to mitigate the portfolio impact of rising interest rates and inflation normalizing above market expectations. In addition, we still encourage a dedicated allocation to assets that support liquidity needs in periods of stress.
July Monthly Commentary
Stocks rebounded in July despite rising inflation and pessimistic macroeconomic data. In the U.S., headline CPI trended higher, rising 9.1% over the 12 months ending in June. On an inflation-adjusted basis, the U.S. economy contracted at an annual rate of 0.9% in the second quarter, and entered a technical recession with two consecutive quarters of negative real GDP growth. As anticipated, the Federal Reserve hiked benchmark rates by 75 basis points to a range of 2.25%-2.50%, a new high since July 2019. In addition, the European Central Bank raised its key rates by 50 basis points, its first increase since 2011.
In equities, the S&P 500 Index outperformed in July, outpacing the MSCI ACWI ex U.S. Index 9.2% to 3.4%. Growth equities benefited from lower yields and outperformed value stocks with the Russell 1000 Growth and Value indexes up 12% and 6.6%, respectively. Outside of the U.S., the MSCI EAFE Index gained 5%, while the MSCI Emerging Markets lost 0.2%. Notably, the MSCI China Index fell 9.5% last month after disappointing economic data and lower-than-expected monetary stimulus exacerbated concerns around growth.
Global yields shifted lower amid increased demand for sovereign bonds. In the U.S., the Treasury yield curve inverted after the two- and 10-year Treasury yield decreased three and 33 basis points, respectively. High-yield assets benefited from falling rates and tightening credit spreads. As a result, the Bloomberg U.S. Corporate Index outperformed, rising 5.9% after spreads tightened by 100-to-469 basis points.
NEPC’s stance towards risk assets remains unfavorable given the uncertain growth and inflation dynamics. We recommend building exposure to short-term investment-grade credit as higher yields offer an attractive defensive position. We also suggest adding exposure to value stocks in U.S. large-cap equity to mitigate the portfolio impact of rising interest rates and inflation normalizing above market expectations. In addition, we still encourage a dedicated allocation to assets that support liquidity needs in periods of stress.