Economic Commentary

The dog days of summer have arrived and it’s a time of year where things slow down and the pace of life becomes more relaxed and leisurely, right? As July began, the presidential contest, at the time a rematch between two well-known candidates, moved along. Then, over a few days, we observed a failed assassination attempt of one candidate and the withdrawal of the other. At the Republican National Convention, Donald Trump named his running mate, Ohio Senator JD Vance. Upon his withdrawal, Joe Biden endorsed Vice President Kamala Harris for the Democratic nomination. Sometime in July we also experienced the largest global IT outage in history when a buggy cybersecurity update from Crowdstrike temporarily crashed 8.5 million Microsoft Windows devices. Dog days, indeed.

Financial markets took the headlines in stride. While there were some setbacks – Crowdstrike shares didn’t fare so well – overall, there weren’t any meaningful or lasting reactions to the headline events that shaped the month. Rather, investors seemed focused on fundamental factors like second quarter earnings, economic data, and monetary policy. One notable development was the reversal of a few long-standing trends over the last few weeks, namely: meaningful outperformance of small caps and value stocks relative to their large cap and growth stock counterparts.

After climbing almost 4% in the first half of July, the S&P 500 closed the month just 1.2% higher. In comparison, the S&P 600 small cap index gained more than 10%. At the same time, growth stocks fell about 1.3%, while value counterparts gained more, nearly 5%. For some time now, large growth-oriented companies have been the main driver of domestic equity returns. For example, in the first half of 2024, large caps and growth stocks returned 15.3% and 23.6%, respectively, while small caps fell about 1% and value stocks gained just 5.8%. Some degree of profit-taking in the mega cap tech space and realization that smaller companies have more to gain from lower interest rates appears to be driving the shift.

Focusing on interest rates, the U.S. ten-year treasury yield moved lower throughout July, driven primarily by economic data indicating a higher likelihood of rate cuts from the Fed. Ten-year yields fell 43 bps from a starting point of 4.46% with notable declines following the June jobs and CPI reports, both of which indicated gradual cooling of the economy. As a result, investors increased rate cut expectations from one-to-two 0.25% cuts in 2024 to two-to-three as the month progressed. As a reminder, Fed projections provided in June call for just one 0.25% cut this year.

For what it’s worth, I do appreciate the gravity of the headline events I outlined in the introduction. My “dog days” characterization was intended as sarcasm. Those familiar with my content know that I try to avoid the realm of politics as much as possible. I am human and hold my own personal political beliefs, but in my capacity as Greenleaf Trust’s Chief Investment Officer I frankly hope they aren’t conspicuous. Regardless of which side of the aisle you favor, we can all agree that the notion of a single individual using violence to disrupt Americans’ ability to vote for their preferred candidate is a deeply disturbing and unfortunate threat to our democratic process. As President Biden said upon his withdrawal, “democracy lies in the hands of voters.” As it should… as it should.

I remind clients to be wary of headlines suggesting one candidate or another will disproportionately help or harm the stock market. The fact that investment markets didn’t react strongly to the political events of the last month lends credence to my long-held belief that the best way to vote in an election year is with your ballot, not your portfolio.

Despite an ever-changing landscape, our disciplined approach and long-term orientation serve us well as we endeavor to create comprehensive investment solutions that help our clients reach their financial goals. On behalf of the entire team, thank you for allowing us to serve on your behalf.