Major global equity markets saw mixed performance in July amid several bouts of volatility. Developed equity markets garnered an overall positive return, outperforming their emerging-market counterparts, which recorded a modest aggregate loss for the month. In the U.S., softening inflation data, and dovish comments from the Fed following its monetary policy meeting, bolstered hopes that the central bank will begin to reduce interest rates as soon as September. Investors rotated out of the mega-cap technology stocks that have led the U.S. equity market rally thus far in 2024, into shares of small-cap companies, which typically outperform large caps in declining interest-rate environments. Late in the month, the tech-heavy Nasdaq Composite Index and the broad-market S&P 500 Index recorded their steepest one-day declines in nearly two years. Consequently, the Cboe Volatility Index (VIX)—dubbed the “fear gauge” as it measures the constant 30-day volatility of the U.S. equity market—surged to a three-month high.

 

The Far East was the strongest-performing region among developed equity markets for the month, led by Japan. In a reversal of a recent upward trend, the Nordic countries recorded negative returns and were the worst developed-market performers, hampered mainly by a significant downturn in Denmark. The Jordan + Egypt + Morocco region comprised the topperforming emerging market in July. The Gulf Cooperation Council (GCC) countries—Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates (UAE)—also performed well due primarily to notable strength in the UAE and Qatar. In contrast, the Far East was the primary emergingmarket laggard due to weakness in Taiwan and China. Eastern Europe’s underperformance was attributable mainly to a downturn in Poland.1

 Global fixed-income assets, as measured by the Bloomberg Global Aggregate Bond Index, gained 1.1% in July. Mortgage-backed securities (MBS) were the strongest performers within the U.S. fixed-income market, followed by high-yield bonds, U.S. Treasury securities, and investment-grade corporate bonds. Treasury yields moved higher for all maturities during the month, with the exception of 1- and 2-month bills. (Bond prices move inversely to yields.) Yields on 2-, 3-, 5- and 10-year Treasury notes fell 0.42%, 0.36%, 0.33%, and 0.17%, respectively, in July. The spread between 10- and 2-year notes narrowed from –0.35% to –0.20% over the month, and the yield curve remained inverted.

Global commodity prices, as measured by the Bloomberg Commodity Total Return Index, fell 4.0% during the month. The West Texas Intermediate (WTI) and Brent crude oil prices declined 4.5% and 4.9%, respectively, amid concerns that China’s slowing economy could hamper demand for oil in the second half of this year. The New York Mercantile Exchange (NYMEX) natural gas price tumbled 21.6% over the month due to relatively large inventories in the U.S., as well as worries that expected cooler weather in the Midwestern and Western U.S. in August could reduce demand for natural gas-generated electricity. The gold spot price rose 5.7% in July as rising geopolitical tensions in the Middle East led investors to seek “safe-haven” investments. Wheat prices were down 8.1% for the month due to relatively strong harvests (increasing supply) in the U.S., as well as a decline in exports from the country.3

 

As widely expected, the Federal Open Market Committee (FOMC) left the federal-funds rate unchanged in a range of 5.25% to 5.50% following its meeting on 30-31 July, but appeared to be open to a rate cut in September. In a statement announcing the rate decision, the FOMC commented, “Inflation has eased over the past year but remains somewhat elevated. In recent months, there has been some further progress toward the Committee’s 2 percent inflation objective.” The Fed’s characterization of inflation as “somewhat elevated” represented a more dovish tone. The FOMC reaffirmed its dual mandate of achieving both maximum employment and price stability, noting, “The economic outlook is uncertain, and the Committee is attentive to the risks to both sides of its dual mandate.” This language was a departure previous statements that the FOMC members were “highly attentive” to the risk of inflation.

At the end of July, the CME Group’s FedWatch Tool implied an 88% chance that the central bank will implement a 25-basis-point rate cut following its meeting on 17-18 September, and indicated that the probability of further 25-basis-point cuts at the November and December meetings were 66% and 65%, respectively.4 The FedWatch Tool provides a gauge of the markets’ expectations of potential changes to the federal-funds target rate while assessing potential Fed monetary policy actions at Federal Open Market Committee (FOMC) meetings.

On the geopolitical front, Israel took responsibility for the death of Fuad Shukr, a senior military commander for Iran-backed Lebanese militia Hezbollah, in retaliation for the bombing of a soccer field in the Israelicontrolled Golan Heights on 27 July, which resulted in the deaths of 12 children and teenagers. Additionally, Iran and Hamas blamed Israel for the assassination of Hamas political leader Ismail Haniyeh in Iran on 30 July. The events ignited concerns that the ongoing Israel-Hamas military conflict may lead to a wider war in the Mideast.


Economic data

U.S. The Department of Labor reported that the consumer-price index (CPI) dipped 0.1% in June, following a flat reading in May. The 3.0% year-over-year advance in the index, down from the 3.3% annual rise in May, was below expectations. Gasoline prices fell 3.8% in June and 2.5% year-over-year, respectively. Housing costs rose 0.2% for the month and posted an increase of 5.2% versus the same period in 2023. The 3.3% rolling 12-month rise in core inflation in June, as measured by the CPI for all items less food and energy, was down 0.1 percentage point from the annual rise for the previous month, and represented the smallest year-over-year increase since April 2021. 

According to the initial estimate from the Department of Commerce, U.S. GDP increased at a greater-than-expected annualised rate of 2.8% in the second quarter of 2024—doubling the 1.4% rise in the first quarter of the year. The largest contributors to GDP growth for the second quarter included consumer spending, private inventory investment (a measure of the changes in values of inventories from one time period to the next), and nonresidential fixed investment (purchases of both nonresidential structures and equipment and software). The government attributed the higher GDP in the second quarter relative to the previous three-month period to upturns in private inventory investment and consumer spending.

 

U.K. 

The Office for National Statistics (ONS) reported that inflation in the U.K., as measured by the CPI, edged up 0.1% in June, down from the 0.3% increase in May. The CPI’s 2.0% year-over-year advance matched the annual upturn for the previous month. The largest contributors to the 12-month rise in inflation included alcohol and tobacco, health care, and restaurants and hotels. These more than offset declines in costs for housing and household services, and furniture and household goods. Core inflation, which excludes volatile food prices, rose at an annual rate of 3.5% in July, matching the year-over-year increase in May.5 

According to the second estimate of the ONS, U.K. GDP grew 0.4% in May (the most recent reporting period), following stagnant growth in April. The economy expanded 0.9% for the three-month period ending May 31. Output in the services sector increased 1.1% over the three-month period, while production output was flat and construction fell 0.7%.6

Eurozone

Eurostat pegged the inflation rate for the eurozone at 2.5% for the 12-month period ending in June, marginally from the 2.5% annual increase in May. Costs in the services sector rose 4.1% for the period, unchanged from the annual gain in May. Prices for food, alcohol and tobacco were up 2.4% year-over-year in June, down from the 2.6% annual rate for the previous month. Non-energy industrial goods increased 0.7% over the previous 12 months, matching the annual rise in May, while energy prices ticked up 0.2% following a 0.3% year-over-year decline in May. Core inflation, which excludes volatile energy and food prices, rose at an annual rate of 2.9% in June, matching the yearover-year upturn in May.7

 

Eurostat also reported that eurozone GDP edged up 0.3% in the second quarter of 2024, matching the growth rate in the first quarter, and grew 0.6% year-over-year. The economies of Ireland, Lithuania, and Spain were the strongest performers for the second quarter, expanding 1.2%, 0.9%, and 0.8%, respectively. Conversely, GDP in Latvia and Sweden declined by corresponding margins of 1.1% and 0.8% during the month.8 

Central banks 

At a news conference following the FOMC meeting, Fed Chair Jerome Powell said that a rate reduction in September “could be on the table. It’s just a question of seeing more good data.” Powell acknowledged that the FOMC members even discussed reducing the federal-funds rate during the current meeting before voting to keep the benchmark rate steady. He also said that the central bank has “made no decisions about future meetings.” Powell noted that the U.S. labour market is robust but not overheated. “I don’t think the labour market in its current state is a likely source of significant inflationary pressures, so I would not like to see material further cooling in the labour market,” he stated. 

By a slim 5-4 margin, the Bank of England (BOE) voted to reduce the Bank Rate by 25 basis points to 5.00% at its meeting on July 31. Four BOE Monetary Policy Committee (MPC) members voted to maintain the Bank Rate at 5.25%. In its announcement of the rate decision, the MPC commented, “It is now appropriate to reduce slightly the degree of policy restrictiveness. The impact from past external shocks has abated and there has been some progress in moderating risks of persistence in inflation. Although GDP has been stronger than expected, the restrictive stance of monetary policy continues to weigh on activity in the real economy, leading to a looser labour market and bearing down on inflationary pressures.”

The European Central Bank (ECB) left its benchmark interest rate unchanged at 4.25% following its meeting on July 24, but hinted that there could be a rate cut in September. The ECB reduced its benchmark interest rate by 25 basis points in early June—its first cut since 2019. During a news conference following the meeting, ECB President Christine Lagarde commented, “So the question of September and what we do in September is wide open.” In a statement announcing the rate decision, the ECB’s Governing Council noted, “While some measures of underlying inflation ticked up in May owing to one-off factors, most measures were either stable or edged down in June. In line with expectations, the inflationary impact of high wage growth has been buffered by [corporate] profits.” 

The Bank of Japan (BOJ) raised its benchmark interest rate a range of 0.0%-0.1% to 0.25%—the highest level since 2008— after its meeting on July 29-30, BOJ Governor Kazuo Ueda indicated that the central bank could implement another rate hike before the end of 2024. During a news conference following the announcement of the rate increase, Ueda said, “If data shows economic conditions are on track, and if such data accumulates, we would of course take the next step.” In response to the rate hike and Ueda’s hawkish comments, the U.S. dollar fell below 150 Japanese yen for the first time since March of this year.

 

SEI’s view

Today’s equity market dynamics remind us that diversifying exposures across geographies, sectors, factors and individual companies are as important as ever for investors, and we remain committed to this foundational principle. This is particularly acute for passive investors who, at this stage of the cycle (concentrated and expensive), may want to begin diversifying into actively managed strategies. We continue to view both concentration and valuation as concerning for U.S. equity investors. We believe the current size and future growth expectations of the top names set the bar exceedingly high even for the most stellar companies in the most transformative industries. 

The Fed kept interest rates steady for its eighth consecutive meeting at the end of July. We think that a 25-basis point reduction in September still seems likely, with an additional cut perhaps occurring in December. Despite the recent slowdown, inflation remains somewhat elevated, with core CPI running 3.3% year-over-year. The labour market still appears to be on the tight side, and nominal wage growth remained relatively high through the first quarter; real wages, however, are finally rising owing to the lower inflation rate. We expect nominal wages to continue to post more moderate gains in the third quarter.

The eurozone economy appears to be accelerating modestly following a year of stagnation and mild recession, but the recovery still appears rather tentative. We think that the recent strengthening of the euro against the U.S. dollar, were it to be sustained, improves the chances of another rate cut by the European Central Bank (ECB) in September. The outcomes of the recent parliamentary election in the European Union (EU) and the National Assembly election in France aren’t expected to prevent a modest easing of policy rates, as long as inflation continues to moderate. It may, however, limit the decline in longer-term sovereign bond yields, as investors price in the impact of higher-for-longer fiscal deficits, especially in France. SEI emphasises that a return to 0% and negative policy rates in the eurozone is highly unlikely in the years ahead, even against a recessionary backdrop.

We expect a positive cyclical and structural macroeconomic environment to prompt a strong recovery in commodities for the second half of 2024. The asset class peaked in mid-2022 along with global inflation rates and has suffered as the disinflation trend took hold around the globe. More recently, we have seen surprising production discipline from OPEC+, AI-influenced demand, and central bank gold purchases influencing year-to-date returns. We believe that seasonality factors will add to the positive momentum in this space as summer travel demands remain robust and weather related volatility provides asymmetric upside pressures.

 

Glossary of Financial Terms 

Yield is the income returned on an investment, such as the interest received from holding a security. The yield is usually expressed as an annual percentage rate based on the investment’s cost, current market value, or face value. 

Yield curve represents differences in yields across a range of maturities of bonds of the same issuer or credit rating (are (which is used to assess the risk of default of companies or countries). A steeper yield curve represents a greater difference between the yields. A flatter curve indicates that short- and long-term yields are closer together. 

An inverted yield curve occurs when short-term yields exceed long-term yields. While an inverted yield curve historically has predicted economic recessions, it is an indicator—not a forecast. 

The federal-funds rate is the interest rate charged to lending institutions on unsecured overnight loans. It is set by the U.S. Federal Reserve’s Federal Open Market Committee. The rate is increased when the Federal Reserve wants to discourage borrowing and slow the economy and decreased when the Federal Reserve wants to spur economic growth.

Economic output comprises a quantity of goods or services produced in a specific time period. 

Monetary policy refers to decisions by central banks to influence the amount of money and credit in the economy by managing the level of benchmark interest rates and the purchase or sale of securities. Central banks typically make policy decisions based on their mandates to target specific levels or ranges for inflation and employment.


Index Descriptions

All indexes are quoted in gross performance unless otherwise indicated. 

The MSCI ACWI Index is a market capitalization-weighted index that tracks the performance of over 2,000 companies, and is representative of the market structure of 48 developed and emerging-market countries in North and South America, Europe, Africa, and the Pacific Rim. The index is calculated with net dividends reinvested in U.S. dollars. 

The Cboe Volatility Index (VIX) measures the constant 30-day volatility of the U.S. stock market using real-time, mid-quote prices of S&P 500 Index call and put options. A call option gives the holder the right to buy a stock at a specified price; a put option gives the holder the right to sell a stock at a specified price.

The Bloomberg Global Aggregate Bond Index is a market capitalization-weighted index that tracks the performance of investmentgrade (rated BBB- or higher by S&P Global Ratings/Fitch Ratings or Baa3 or higher by Moody’s Investors Service) fixed-income securities denominated in 13 currencies. The index reflects reinvestment of all distributions and changes in market prices. 

The Bloomberg US High Yield Index tracks the performance of fixed-rate, publicly issued, non-investment-grade (rated BB+ or lower by S&P Global Ratings and Fitch Ratings or Ba1 or lower by Moody’s Investors Service) bonds. 

The Bloomberg US Treasury Index tracks the performance of fixed-rate, nominal debt issued by the US Treasury. 

The Bloomberg US Mortgage Backed Securities Index tracks the performance of fixed-rate agency mortgage-backed securities (MBS) guaranteed by the Government National Mortgage Association (GNMA), Federal National Mortgage Association (FNMA), and Freddie Mac (FHLMC). 

The Bloomberg US Corporate Investment Grade Index tracks the performance of the investment-grade, fixed-rate, taxable corporate bond market. 

The Bloomberg Commodity Total Return Index comprises futures contracts and tracks the performance of a fully collateralized investment in the index. This combines the returns of the index with the returns on cash collateral invested in 13-week (three-month) U.S. Treasury bills. Consumer-price indexes measure changes in the price level of a weighted-average market basket of consumer goods and services purchased by households. 

A consumer price index is a statistical estimate constructed using the prices of a sample of representative items whose prices are collected periodically.

 

Important Information

This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events or a guarantee of future results. Positioning and holdings are subject to change. All information as of the date indicated. 

This information should not be relied upon by the reader as research or investment advice, (unless you have otherwise separately entered into a written agreement with SEI for the provision of investment advice) nor should it be construed as a recommendation to purchase or sell a security. The reader should consult with their financial professional for more information. Statements that are not factual in nature, including opinions, projections and estimates, assume certain economic conditions and industry developments and constitute only current opinions that are subject to change without notice. Nothing herein is intended to be a forecast of future events, or a guarantee of future results. 

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