Market Update: July returns (including dividends)

July Returns (including dividends):

S&P 500: -0.1%

S&P 500 Equal-Weight: 1.0%

Dow Jones:  0.4%

Nasdaq: -3.2%

MSCI EAFE:  2.0%

MSCI Emerging Markets: -3.1%

Bonds (US Aggregate):  -1.3%

 Economic & Policy Highlights

Interest Rates & Fed Outlook

• The US Federal Reserve kept rates unchanged at 3.5% to 3.75%, but 3 Fed members voted to raise rates
• The Bank of England kept rates unchanged, but 3 of 9 members voted to hike rates
• The Bank of Japan kept rates unchanged, but likely intervened in the currency markets to buy Yen
• Bank of Canada kept rates unchanged

Employment & Growth

• The wealthiest 10% of Americans now own 87% of all US stocks and mutual funds
• US capital spending is dominated by technology spending
• The US housing market remained subdued
• The US employment picture continued to stabilize
• NY State paused data centre permits for 1 year. Several other states may follow
• The Chinese economy stumbled, posting the weakest growth in 5 years

Consumer spending & sentiment

• 30 year mortgage rates hit 6.55%, a 1 year high
• Consumer sentiment hit a 5-month high
• The average car payment hit a record $777/month

Geopolitical Volatility & Energy

• The US began strikes on Iran again, after several ships were attacked in the Strait of Hormuz
• President Trump announced the ceasefire with Iran was officially over
• The US proposed allowing Ukraine to make Patriot missiles for their own defence against Russia
• The Houthis fired ballistic missiles at Saudi Arabia and threatened to close the Bab El-Mandeb Strait, which leads to the Red Sea
• The price of oil rose 21.8% in July as fighting in the Middle East reignited
• US refining margins hit all-time highs
• Gold rose 1.0%, as central banks quietly continued to buy bullion

Summary Impact

• The US and Iran recommenced hostilities with both sides threating further escalation
• Moonshot AI released Kimi K3 model that rivalled Anthropic and Open AI models, but at a much lower cost
• NASDAQ volatility rose to crisis level highs in July
• The 30-year Treasury bond yield rose to 5.2%, a level not seen since 2007

Commentary:

Global equities delivered mixed returns in July depending on their geography.  Developed market Int’l stocks posted positive returns, emerging market stocks experienced losses, and the US market was essentially flat.  Beneath the surface of all these markets was a bigger battle between growth stocks (technology) versus value stocks.  Once again investors started to worry about technology stock  valuations, debt levels and the massive spending needed to continue building out AI infrastructure.  Compounding the risk-off sentiment was the resumption of attacks in the Strait of Hormuz by both Iran and the US.  The renewed fighting reignited concerns over a possible rise in inflation and the probability that the Federal Reserve would move to raise interest rates.  The negative sentiment towards tech stocks caused NASDAQ volatility measures to reach previous crisis levels, not a sign of a healthy conviction in the AI trade, but we have seen these wild swings in sentiment before.  In fact, as the month drew to a close, investors cast their worries away and quickly began to rebuild their exposure to the most popular AI stocks.

July action in the bond market was decidedly negative as the confluence of concerns regarding the US fiscal situation, inflation, Iran war, massive AI debt issuance and doubts about the new Fed chair (Kevin Warsh), pressured yields higher.  At the same time, another series of metrics we watch closely, showed credit spreads widening and credit default swaps rising.  Both indicators pointed to growing concerns by bond investors, that the amount of debt being used to finance AI is becoming riskier and requires higher rates to compensate for that risk.  Private credit funds continued to struggle with redemptions and continued to eye US 401K plans as a potential source of demand for their problem loans.  It is our opinion that most private credit funds are not suitable investments for the average 401K investor.

We believe the bond market, as usual, is the first to start sniffing out risks and economic dislocations that the stock market chooses to ignore.  Long term interest rates are creeping higher, regardless of what the Fed says or does in the short-term.  Oil prices have come down due to jawboning by the US gov’t and China curtailing its imports temporarily, however, global inventories continue to fall. The oil shock caused by the Iran war didn’t go away, it just moved to the gasoline and diesel market.  International investor confidence in the Fed chair (Kevin Warsh) is wavering as questions mount regarding his commitment to fighting inflation.  Valuations continue to remain elevated and speculative activity in areas, such as levered ETFs and call option buying, point to excessive risk-taking behaviour.  Our experience and discipline remind us to take note of these risks and position accordingly.  We continue to find investments that meet our criteria and remain wary of pockets of the market exhibiting irrational optimism or worse, greater fool theory.