The U.S. labor market improved further in July, as the unemployment rate dipped to a 16-year low and 209,000 jobs were added to the economy. Among major asset categories, global equities marched higher—with particularly impressive gains witnessed internationally—while high yield credit continued to post solid returns. In real assets, crude oil’s price rebound during the month served as a tailwind to energy-related asset categories, such as master limited partnerships.
U.S. Labor Market Strength Continues Through July
In July, the Bureau of Labor Statistics Employment Situation report showed that employers added 209,000 jobs during the month, exceeding the Bloomberg median consensus estimate by a healthy margin and in-line with smoothed measures of payroll gains witnessed in the current expansion. After ticking 0.1 ppts higher in June to 4.4%, the headline (U-3) unemployment rate dropped back down to 4.3% in July, matching May’s 4.3% print as the lowest unemployment rate since February 2001 (4.2%).
Despite the lowest U-3 rate in nearly two decades, payrolls growth remains solid, with monthly payrolls growth averaging an impressive 179,000 in the trailing six-month timeframe. While some momentum has been lost on the jobs front since 2015, on balance, employers continue to add to headcounts at a healthy and expansionary pace. Moreover, after appearing to have settled near 5% in 2016, the unemployment rate has resumed descent to even lower levels, concurrent with historically subdued layoff activity (i.e., initial jobless claims).
The subsequent chart compares the U-3 rate with monthly payrolls prints, juxtaposed against the previous three recessionary environments.
In summary, the U.S. labor market witnessed further improvement in July, driven by strong payrolls gains, an improving unemployment rate, and a modest increase in broad labor participation rates. Furthermore, after a slight loss of momentum in fundamental improvement from 2015 to 2016, the labor market is on the path to even stronger levels, likely serving as a tailwind to tighter Fed policy over the coming quarters.
U.S. stocks continued to grind higher, with large cap outpacing smaller peers amid an environment of low volatility. The S&P 500 hit a record high during the month, topping 2,400.
Growth outperformed against value, as technology stocks—particularly the FAANG stocks—rallied during the month following a brief sell-off at the end of June. Supported by the FAANG stocks, growth funds are on pace to outperform their value brethren this year by the largest margin since the Global Financial Crisis.
International equity markets maintained strength as underlying economic readings continued to improve. German and French manufacturing purchasing manager’s indices (PMIs) were 58.1 and 54.9, respectively, indicating continued expansion in both countries. Euro zone inflation readings remained muted, offering optimism for continued quantitative easing.
Emerging markets were the best performing global equity market on the back of strong economic readings out of China. GDP growth surprised to the upside and measured 6.9% year-over-year. Chinese industrial production and retail sales also beat expectations.
Corporate earnings have exceeded expectations providing support for the Fed to continue the long-term path to normalization.
The Fed’s meeting on July 26 included a few minor policy comments, including an expectation to begin shrinking the size of the balance sheet relatively soon. Expectations for a near-term rate hike declined. The market implied a 42% probability of a third rate hike by year-end, down from 57% at the end of June.
The yield curve remained largely unchanged for the month across all maturities; with relatively stable rates, almost all major fixed income indices provided positive returns.
Developed and emerging market international debt performed well due to the broad decline in the U.S. dollar.
Domestic real estate securities rose 1.3% during July and 6.2% year-to-date. Shopping centers (+7.7%) rebounded with the strongest retail sales growth all year.
International real estate securities were positively affected by a weaker U.S. dollar and an improving economic environment in Europe.
There was growth in overall construction throughout the international markets due in part to
accessiblecapital markets and to the summer construction season.
Oil prices rose 9% in July and closed at $50.17/barrel, benefitting from factors including ongoing instability in Venezuela, OPEC’s reiteration of commitments to curb production, and declining U.S. inventories. The gain in July was the largest since April 2016, and sentiment appeared to be improving after the sharp declines witnessed in the second quarter.
The broad commodity market, as measured by the Bloomberg Commodity Index, rose 2.3% for the month, supported by the energy sector's gain of 4.6%. Livestock and grains negatively impacted returns due in part to weaker beef demand and growing supply.
Merger arbitrage deals and spin-offs were down in the U.S. but were notably increased across Europe. The European economy is driving the uptick in event activity, as corporations are inclined to transact in stronger economies. A number of idiosyncratic situations became available, providing event managers with a deep pipeline, despite general high market valuations.
Volatility remained suppressed, as the Federal Reserve policies continued to act as a backstop whenever markets encounter any sort of turbulence. In fact, during the month of July, the CBOE Volatility Index, the VIX, hit its lowest intraday level on record.
Hedge funds enjoyed a strong start to the year, with nearly all strategies posting gains. The industry also experienced net inflows for the first time in nearly two years. Both data points are a welcome sign for an industry that has come under pressure of late, especially in the financial media outlets.
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