The summer has been kind to capital markets thus far, with relatively little volatility to speak of as we approach the dog days of August. Much of the economic focus remains on inflation, which continues to creep higher on the back of rising food, energy, and housing costs. Used cars meanwhile have gotten so expensive, that prices are now equivalent to what the owners originally paid for them (see figure below). Nevertheless, the 10-year Treasury yield remains fairly low on a historical basis, trading as low as 1.13% in the middle of July, although it has since bounced higher off those levels, and is currently trading a little north of 1.3%. Lower yields have been a boon to both bond and tech investors, which allowed the NASDAQ to bounce back from its late-spring swoon.
Specific to technology companies, earnings were mixed, with most companies handily beating expectations, while simultaneously guiding expectations lower for the quarters ahead, most notably Apple and Amazon, as they expect slower levels of growth in the second half of the year.
Although all has been quiet on the Western front so far this summer, the same can not be said for the Eastern, where China roiled emerging markets with an unprecedented regulatory crackdown across sectors, as policymakers in the country increasingly tighten controls. Well-known companies like Didi and Alibaba have not been spared, with some of China’s most well-known companies trading lower by anywhere from 30-50% over the past several months, although major Chinese indices have partially recovered in the first couple weeks of August.
Looking ahead, we believe the second half of the year will be heavily dependent on the state of the U.S. labor market and inflation outlooks. If inflation continues to rise, and the job market continues to tighten, it’s likely that the Fed will begin removing some of their monetary accommodation later this year (i.e., tapering bond purchases). If the Fed does remove some of the liquidity from markets, it’s likely that volatility will rise, but for the time being, it’s still smooth sailing as we approach the later stages of summer.