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The Monthly Harvest: July 2023 Market Recap & Insights

Welcome to The Monthly Harvest's July newsletter - your comprehensive source for market insights and updates. July proved to be a riveting month in the world of finance, characterized by broad-based growth and positive momentum across different sectors.

Market Recap: July 2023

  1. The U.S. Market Rally Picks Up Pace: The optimism surrounding eased inflation coupled with impressive earnings from the Big Tech sector propelled the U.S. market rally. The S&P 500® saw an increase of 3%, showcasing the robustness and resilience of American enterprises in these fluctuating global circumstances.

  2. SmallCap Scores Big: The S&P SmallCap 600 outperformed the S&P 500® Top 50 by 2%, illustrating an expanded market breadth and a growing investor inclination towards smaller companies that present considerable return potentials.

  3. Factor Indices & Sector Performance: All our reported factor indices registered gains in July, with Enhanced Value leading the pack with a notable 6% increase. High Beta continued to overshadow Low Volatility, indicative of a sustained risk-on sentiment in the market.

All sectors displayed gains, with the Energy sector making a robust reversal from its losses in the previous quarter. This comeback underscores the dynamism of the Energy sector and its ability to rebound swiftly.

Federal Reserve Interest Rate Decision

As anticipated, the Federal Reserve raised interest rates by 0.25% during the July FOMC meeting, pushing the federal funds rate to 5.25% - 5.5%. Jerome Powell, the Fed Chair, was careful not to declare “mission accomplished," emphasizing the absence of a firm decision on future rate hikes or on the September meeting.

Two additional CPI inflation readings and two U.S. jobs reports, set to be released between now and the September 20th meeting, will inform the trajectory of future interest rates.

Powell acknowledged that inflation is now significantly off its peak. While headline CPI inflation decreased year over year from 9.1% in June 2022 to 3.0% in June this year, core inflation remains elevated at 4.8%. This is due to robust services demand and wage growth that has yet to meaningfully ease. The Fed's rhetoric is expected to stay hawkish, keeping the possibility of an additional rate hike alive until core inflation cools further.

Our Perspective

In our view, this rate hike could indeed be the last in this cycle. The Fed has raised rates by over 5% in the past year and a half and will likely hit the brakes to assess the impacts on inflation and the economy. Leading indicators, such as the ISM prices paid indexes for manufacturing and services, suggest potential cooling of inflation. Plus, a moderation in housing and rental prices has not yet impacted the core CPI basket.

However, we believe that rate cuts remain unlikely this year. If inflation continues to gravitate towards a 2% target, the Fed may signal rate cuts early in 2024, given the current restrictive fed funds rate versus a potential neutral rate of around 2.5%. Consequently, we foresee an extended rate pause from the Fed through the beginning of 2024.

As we proceed into the next month, we will keep a keen eye on these developments, as well as the potential ramifications of the rate hikes. Look forward to our monthly updates for a comprehensive examination of these developments, arming you with the knowledge and insights necessary for well-informed financial decisions.

Bond Market

In bond markets, we see a compelling opportunity to supplement shorter-duration and cash-like assets with longer-duration bonds, specifically in the investment-grade space. Historical trends show that extending duration works best ahead of significant inflection points in rates. The next such inflection point could occur when the Federal Reserve ultimately pivots to rate cuts.

Investing in longer-duration assets in the months ahead could prove beneficial. Not only can investors capture better yields, but there is also potential for price appreciation as yields move lower over time.

We anticipate this dynamic to present a unique opportunity for investors seeking to balance their portfolio and potentially improve their risk-return profile. However, as with all investments, it is important to consider individual risk tolerance and investment goals.

What's Next?

As we navigate through the upcoming month, several critical areas will be under our radar. These include the performance trajectory of the tech sector in the face of potential regulatory challenges, the stability of the energy sector, and the sustainability of the SmallCaps' recent outperformance.

Our monthly updates will provide a detailed examination of these developments. This way, we aim to equip you with the most pertinent insights and knowledge to make well-informed financial decisions.

Thank you for trusting us to keep you informed about the financial markets. We look forward to serving you with more valuable insights in our next update.

Your Trusted Advisors,

Grape Wealth Management

Investments | Tax & Estate Planning

31285 Temecula Pkwy Suite 235

Temecula, Ca 92592

P: (951)338-8500

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