Two In A Row

“Good investors gather information, put that information into current and historical context, then make sound decisions.”

Two Thumbs Up. You could even turn this image upside down, for two thumbs down, if you like.

July has been very productive for equities. Not as robust as June, which is just fine, but the broadening in market participation has continued to expand. Once again, Mid Cap and Small Cap equity indexes have been outperforming the Large Cap indexes for the month. Once again, every single equity market sector index that we follow is in positive territory for the month. And once again, we are seeing positive market rotation in the month of July, which is also a quarterly portfolio rebalancing month. In effect, there was ‘positive rebalancing’ instead of rotational rebalancing. This requires a substantial injection of ‘new money’ from non-equity sources. The traditional source, and the most logical source, is the bond markets. Which is exactly what has happened.

The pace has slowed down from June’s rush, and major market indexes are approaching the all-time highs set back in January of 2022. It is natural to expect some hesitation as equities close in on those numbers. The S&P 500 Index set the high water mark at 4818.62 on January 4, 2022. On Friday, July 28, 2023 the S&P 500 Index closed at 4582.23, a mere +5.16% away from that all-time high. The Mid Cap and Small Cap indexes have further to go before they reach old highs, which may indicate that they have more room to run in the current rally. The S&P 400 Mid Cap Index needs another +7.70% to reach its all-time high last seen on November 8, 2021. The S&P 600 Small Cap Index needs another +16.23% before it touches its all-time high, also last seen on November 8, 2021.

The best performing equity sectors in July have been transportation, energy, internet, and financials. The Dow Jones Transportation Average is up +7.51% MTD, the S&P Composite Energy Index is up +5.84% MTD,  the Dow Jones Internet Composite Index is up +5.36%, and the S&P Composite Financial Index is up +4.92% MTD. Even the poorest performing equity sectors are up in July. These include, in ascending order, Dow Jones Real Estate Index, +1.17%, S&P Composite Health Care Index, +1.74%, S&P Composite Consumer Discretionary Index, +2.08%, S&P Composite Information Technology Index, +2.48%,  S&P Composite Consumer Staples Index, +2.62%, and finally the S&P Composite Industrials Index, +2.48%. This has been a two-month positive run for every single major sector index!    

Once again, international equities are tracking right along with U.S. equity markets. The MSCI EAFE Index is up +3.09% MTD, the MSCI Europe Index is up +3.04% MTD, and the MSCI Emerging Markets Index is up +5.84% MTD. All three of these indexes are now up double digits for the year. Once again, bond markets are having a much more restrained month. The Bloomberg US Aggregate Bond Index is down -0.20% MTD, the Bloomberg Municipal Bond Index is up +0.41% MTD, and the Bloomberg US Corporate High Yield Bond Index is up +1.17%. All three of these indexes remain in single digit positive territory for the year. But as we said in the opening paragraph, the source of ‘new money’ is evident in the decline in the US Aggregate Bond Index.

After two full months of gains, there is certainly room for equity markets to ‘exhale,’ and August has the track record to absorb a pullback. August has historically been a good month to ‘harvest’ equities. Since 1987, August has been the worst month for the DJIA and the second worst month for the S&P 500 Index. Looking back farther, August has been the tenth best month of the year for both of the indexes. The twelfth best month for both indexes continues to be September, so this is a period that has put a lot of investors in cautionary mode. Of course, past poor performance is no guarantee of future poor performance, but it bears mentioning.

Edward D. Foy, Manager, SELECTOR® Money Management, Chief Investment Officer, Foy Financial Services, Inc.

© 2023 Edward D. Foy.  [email protected], www.foyfinancial.com.

Sources: StockCharts, Morningstar, Stock Trader’s Almanac.