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The month of July moved along in relatively benign fashion with light summer volumes and no material economic surprises, until the last day of the month. On July 31st, large caps, small caps, Treasuries, oil, credit, gold, silver, platinum, palladium, and copper all traded lower. Only the USD escaped the volatility. No clear fundamental or technical metric was a clear culprit and economic data remained on a positive trajectory over the course of the month.

Overall, we saw equities decline across the board in July with only select emerging markets (China, Brazil, India, Mexico) and Japan posting gains. Small caps in particular bore the brunt of the selling, losing over 6% on the month. The average stock in the Russell 3000 fell 7.6% in July and 1/3 lost more than 10% on the month.

Bonds lost ground as well as rates moved higher and credit spreads widened from 350bps over comparable Treasuries to over 400bps. In fact, the 2yr U.S. treasury hit a 3yr high in July as rate on the short end began to move higher.

Strong economic data and a slightly hawkish reading of the July FOMC meeting stirred up interest rate speculation toward month end. 2Q GDP (4%) surprised on the upside, labor market indicators continued to improve, and various inflation metrics came in relatively strong including core PCE +2% and the Employment Cost Index coming in stronger than expected (0.70%).

Fundamentals look strong as second quarter earnings season was in full swing and results have surprised largely on the upside. Year over year large cap results are on pace for impressive 4.3% revenue growth and 9.9% earnings growth. Small caps are on an even more robust pace of 8.7% revenue growth and 14.7% earnings growth.

Bearish arguments point to yet another Argentinian default, Russian defiance of the international community, stretched valuations, Israeli‐Palestinian conflict, and a slowdown in the housing market. All things considered, the overwhelming accommodative stance of global central banks (37 central banks maintaining negative real interest rates) will likely remain a key driver to asset prices for the foreseeable future.

*Source: Taiber Kosmala & Associates, LLC

A week that started off relatively benign turned south in a hurry as a confluence of events tested risk markets globally. Equity markets sold off globally with European stocks getting hit particularly hard. The S&P 500, DJIA, NASDAQ, and Russell 2000 all broke below their 50 day moving averages this week. Bond yields and credit spreads moved higher on inflation concerns and risk aversion respectively.

It was a busy week including an FOMC meeting, a large amount of economic data (31 releases) and heavy corporate earnings reports (800 companies). Economic data was mixed overall but likely contributed to market volatility. Upside surprises included Q2 GDP (+4.0%), ISM Manufacturing activity (57.1), and improving consumer confidence. Offsetting misses included a very disappointing Chicago PMI (biggest miss since 2005), poor housing market readings, lower payrolls/an uptick in unemployment, and some inflation readings indicating potential price pressures in the system.

An elevated PCE (Personal Consumption Expenditures) in the Q2 GDP report and Thursday’s Employment Cost Index have many market participants thinking the Fed must take notice. Additionally, the confluence of continued violence in the Middle East, material slowdown concerns in Europe, a crippled large Portuguese bank situation, defiant Russian foreign policy, and a second Argentinian sovereign debt default in the past 13 years worked to rattle market participants.

We are in the midst of the fourth longest and strongest bull market on record. This is also the fourth longest S&P 500 rally without a 10% correction. All the while, Fed liquidity remains in place (for now), rates hikes haven’t been moved up (yet), growth continues (moderately), and inflation is not a concern (so far).

An up then down week in the equity markets ended with most indices finishing flat to ‐0.50% on the week. Geopolitics was front and center again this week but unlike last week, didn’t materialize in any meaningful volatility. It seems that central banks have desensitized markets to a certain extent as the downing of a passenger airliner, escalating violence in the Gaza Strip, a looming sovereign debt default in Argentina, and financial woes at a Portuguese bank have yet to upset the financial markets in any meaningful way.

Corporate earnings season continued along at an encouraging pace with S&P 500 top line revenue and bottom line earnings rising 0.89% and 5.87% thus far respectively. 516 companies reported last week and 63% beat top‐line estimates while 64% beat EPS estimates. FOMC meetings, Q2 GDP, PCE, and the conclusion of earnings season will be closely watched this week.

Bond yields marched lower last week with the 10yr dropping below the 2.50% level again. The yield curve flattened further as 2yr yields crept up slightly to 0.53%. Influencing bond yields was a relatively light economic calendar with highlights being Tuesday’s inflation reading coming in as expected at 2.1%, and Thursday’s new home sales indicating a concerning slowdown in the residential home market.

Commodity markets last week saw many industrial metals book solid gains between 1.5%‐3.0% while precious metals (gold, silver, palladium, platinum) dropped 0.50%‐1.60%.

For the week ending July 18th, markets dealt investors a slice of volatility for the first time in several weeks. In fact, Thursday marked the first session in two months with a move greater than 1% on the day. Congressional testimony from Fed Chairman Janet Yellen, corporate earnings, and geopolitical tensions fueled markets on the week. Yellen’s testimony both pushed and pulled markets as she acknowledged stretched valuations in some areas of the stock market (biotechnology and small caps), concern surrounding a slowdown in the housing market recovery, while also speaking about noticeable improvement in labor market and overall positive economic backdrop. She made clear that Fed policy of continued low interest rates is soundly in place. The FOMC will be closely monitoring the economy to guide future policy decisions, but unemployment and stable price goals may be converging faster than the market is discounting.

Second quarter earnings were in full focus last week with solid major bank earnings getting much attention. Earnings are on track to grow 5.5% at this point. Attention grabbing economic highlights included disappointing June retail sales, increasing PPI, and a second consecutive month of declining new housing starts. Despite poor June results, overall 2Q retail sales are up a respectable 4.2% year-over-year. Increasing producer prices (June PPI +0.4%) suggest producers are seeking price increases to offset higher wage expectations given the improved labor market backdrop.

Interest rates fell sharply on news of Israel / Gaza conflict escalation and the downed commercial jetliner in eastern Ukraine. The 10yr UST finished the week at 2.48%, just shy of the 2014 low of 2.4%, continuing to confound market consensus for higher interest rates.