Monthly Market Monitor - July 2014 Recap
Despite reaching an all-time high on July 24th, the S&P 500 Index ended July on a sour note, down 1.4% including dividends for the month. Investors moved to the sidelines on July 31st after a series of geopolitical risks, earnings disappointments and worrisome economic data converged to challenge their optimism. Among negative catalysts, the major concern was over an unexpected 0.7% 2Q rise in wages as measured by the Employment Cost Index, spurring inflation fears and with it, the potential for an earlier-than-forecast Fed rate hike. The Dow Industrials lost 317 points (-1.9%) that day, erasing gains for the year, while the S&P 500 retreated 2%, its worst single-day performance since April 10th. The benchmark S&P 500 has gone without a 10% correction since 2011 and now trades at 17.6 times reported earnings, its highest level since 2010. Meanwhile, U.S. economic growth rebounded in the 2Q, up 4% after a 2.1% 1Q contraction. Also positive, corporations are poised to report their strongest quarterly profit gains in almost three years, up 11% so far for S&P 500 companies.
Small-cap stocks underperformed large-caps by a wide margin as the Russell 2000, a proxy for small-cap equities, retreated 6.1% in July, erasing year-to-date gains. Mid-cap stocks, as measured by the Russell Mid Cap Index, fell 3% last month, trimming 2014 gains to 5.5%. In a reversal from June, growth regained leadership over value as the Russell 1000 Growth Index fell 1.5% in July, whereas the Russell 1000 Value Index lost 1.7%. YTD however, the Russell 1000 Value Index has outperformed the Russell 1000 Growth Index (6.4% versus 4.7% respectively).
Just three of the ten major sector groups posted gains in July: Telecom (+3.7%), Technology (+1.5%) and Healthcare (+0.1%). Utilities (-6.8%), Industrials (-4.1%) and Energy (-3.3%) fell the most. Utilities (+10.6%) lost its best YTD performing sector status to Healthcare, up 10.7%. Technology (+10.5% YTD) is this year's third best performing sector.
Overseas developed markets underperformed the U.S. in July as the MSCI EAFE Index fell 2%. U.S. equities maintain a sizable performance advantage over developed markets on a YTD basis. Emerging markets, as measured by the MSCI Emerging Markets Index, outperformed the U.S. and the EAFE last month and YTD, gaining 1.9% and 8.2% respectively. China's Shanghai Composite Index rallied 7.5% in July, its strongest gain in seven months.
Treasuries, as measured by the Barclays U.S. Government Bond Index, lost 0.2% in July, paring YTD gains to 2.5%. Despite increased volatility that brought its yield down to 2.47%, 10-year Treasury yields rose only three basis points during the month to 2.56%. U.S. investment grade bonds, as measured by the Barclays U.S. Aggregate Bond Index, lost 0.3% in July, trimming its YTD gains to 3.7%. The Barclays U.S. Corporate High Yield Index, a proxy for non-investment grade corporate bonds, fell 1.3%, paring its YTD returns to 4.1%. Municipal Bonds, as measured by the Barclays Municipal Bond Index gained 0.2% last month and rose 6.2% YTD.
This information is compiled by Cetera Investment Management.
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