July has historically been the best month of the year for the market and, while we often say history is simply a guide, this month it was a good guide, as the market moved nicely higher for most of the month. Coming into the month analysts thought 2nd quarter earnings reports would help move the market higher and that is exactly what happened. At of the end of the month approximately 50% of the companies in the S&P 500 had reported earnings and nearly 90% of them were been better than analysts had expected. We mentioned in last month’s update that any sign of a trade agreement should help the market, and late in the month there appeared to be movement on that front. Disappointing earnings from market darling Facebook ignited a 3 day 4% selloff in large cap tech near month end, but the S&P 500 managed to gain 3.6% for the month, its second best month this year, and is now 5.3% higher for the year.
The month began with an Independence Day holiday shortened week that only had 3 ½ days of trading, but it was one of the best weeks of the month for the S&P 500. Ahead of the holiday, trade war concerns weighed on the market, with a partial day of trading on the 3rd that saw the Dow drop 130 points, but on the lowest volume of the year. Coming back from the mid-week holiday the markets moved nicely higher on rumors of trade deals. On Friday the government reported a much stronger than expected 213,000 new jobs were created and the S&P 500 ended the week with a strong 1.5% gain. The next week began with a strong rally as talk of trade wars were replaced by excitement over the upcoming earnings reports. The Dow gained 320 points on Monday and another 140 on Tuesday. On Wednesday Trump announced more tariffs on China and the Dow lost 220 points but, when China didn’t retaliate, the Dow gained 225 points on Thursday and finished the week with a nice rally on Friday. At the end of the 2nd week the S&P 500 was up another 1.5%, for a 2 week total gain of 3%. The 3rd week was a busy week for earnings reports but, after having gained 3% in just 8½ days of trading, the market spent the week digesting those gains. During the week Google, Facebook and Amazon all hit new all-time highs, but a disappointing earnings report from Netflix sent those shares 13% lower. Wednesday was a 5th consecutive day of gains for the Dow and a 10th day of gains out of 12. Despite news on Thursday that weekly first time jobless claims hit the lowest level in 49 years, the markets drifted lower towards week’s end, with the S&P 500 closing the week flat. Last week was the busiest week of earnings reports this quarter. Google’s parent company, Alphabet, reported strong earnings early in the week that sent the stock and the NASDAQ to record highs, but mid-week GM and Boeing both issued disappointing guidance that sent those shares lower. On Thursday Facebook issued its disappointing report which sent those shares plunging to the biggest one day market value loss of any stock in history. We ended the week with strong earnings from Amazon that sent those shares to a new all-time high at the open, but the stock quickly sold off as the rotation out of tech took a toll. We also had a government report that 2nd quarter GDP grew at an annual rate of 4.1%, the strongest in 4 years. The S&P 500 ended the week with a .6% gain. The rotation out of tech continued early this week, but we ended the month with a nice tech rally on the last day.
Over the last 90 years August has produced an average gain of .6% and finished higher 58% of the time. We are going to begin the month with a large number of corporate earnings reports which should be a positive for the market. Trade is likely to continue to be a market mover, with news of deals being a positive and continued threats being a negative. The July rally has pushed stock valuations back into the “rich” category, which does make the market vulnerable to any negative “surprises”. The macro picture remains strong with the economy gaining strength and corporate earnings accelerating. This is an environment which should bode well for stock prices and we would be surprised, barring some headline making event, to see a large decline. Technology has been a leadership group, so a continuation of the rotation out of technology we saw near the end of last month would be a negative. There have been other times, even this year, when traders rotated out of tech, but they tend to be short lived. In summary, we continue to be buyers on weakness.
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