Equities Advance Yet Remain Cautious – Domestic Stock Market Review

U.S. equity markets advanced in July as positive earnings momentum and some optimistic economic news helped propel the market. The Dow Jones Industrial Index, the S&P 500, and the Nasdaq all saw increases in July as well as posting positive year-to-date returns as of the end of July.

A concern that many analysts share is the valuations of equities. The S&P 500 index is trading at a 20x multiple on forward earnings which compares to 17x at the start of the year. The higher multiple, or earnings calculation, is considered high relative to prior historical trends. At these levels, companies are under pressure to either increase earnings or see a possible decrease in share prices. (Sources: Dow Jones, Standard & Poor’s, Nasdaq, Reuters, Bloomberg)

Credit Rating Concerns Push Yields Higher – Fixed Income Overview

Government and corporate bond yields saw a slight increase in July as the Fed raised short-term rates and increased government debt levels.

Shorter-term bond yields remained higher than longer-term bond yields at the end of July, also known as an inverted yield curve, indicative of eventual lower yields in the future. The recent downgrade by Fitch of U.S. government debt has propelled yields higher for the time being. The last downgrade of government debt in August 2011 by Standard & Poor’s produced a short-term effect on bond yields where yields ended 2011 nearly the same as when the downgrade occurred.(Sources: U.S. Treasury, Fitch, S&P, Federal Reserve)

Inflation Slows To A Two-Year Low – Inflation Trends

Inflation measured at 3% in June, a two-year low not seen since March 2021. Inflation peaked at a four-decade high of 9.1% in June 2022, more than three times the latest inflation figure. Other factors indirectly affecting inflation include a weakening U.S. dollar and the recent debt rate cut on U.S. government debt.

Reasons behind the causes of inflation vary, such as June 2022’s inflation was abnormally high due to Russia’s invasion of Ukraine. Headline inflation is more volatile to events of this sort because it considers the volatile factors of food and energy. However, the Fed prioritizes core inflation, which even though it has dropped from previous months is still at 4.8%. This remains much higher than the Fed’s 2% target rate, and many Fed officials are focused on ensuring that inflation does not return to higher levels.

A significant concern for the Fed is the strong labor market, where jobs are being added at a robust pace despite employers finding difficulties in recruiting qualified employees. June’s inflation data saw airline fares and used car prices decline. However, increases in housing costs composed 70% of June’s monthly rise in consumer prices.

Sources: Federal Reserve Bank of the United States, Bureau of Labor Statistics, Bloomberg.

Dollar Losing Value As Fed Continues To Raise Rates – Currency Overview

When the Fed began increasing its Fed Funds Rate in 2022, the U.S. dollar became stronger as higher rates attracted foreign funds. Other currencies, such as the euro, simultaneously lost value due to global turmoil stemming from the Ukraine war. Thus, in much of 2022, exchange rates were very favorable for Americans and holders of U.S. dollars. Since then, the dollar has seen a decline in value over the past year.

In July, the dollar’s nominal value index fell to a 14-month low, down over 8% from its peak in October 2022. The Fed Funds Rate, which is the Fed’s primary tool for altering interest rates, continues to rise as it reaches upwards of 5.25%. For reference, the Fed Funds Rate was just 0.25% in early 2022 before the Fed’s aggressive fight against inflation.

With the dollar being the primary reserve currency of the world, a weak dollar could have a wide range of consequences for both Americans and the global economy. A weaker dollar would reduce import prices for developing nations, easing the inflationary pressures on emerging markets. It could also bolster currencies currently at lower values in comparison to the dollar. A weaker dollar would boost American firms’ exports, yet would make imported goods more expensive for U.S. consumers. Since the U.S. has a sizable trade deficit, this could likely make goods more expensive for American consumers and increase domestic inflationary pressures. (Sources: Board of Governors of the Federal Reserve System, Federal Reserve)

Diminishing Global Water Supplies – Water Industry Overview

With the global population continuously rising, and water demand greatly outweighing supply, the global water supply has decreased dramatically. However, water treatment innovations may be a growing field that attempts to combat the world’s water crisis by making fresh water more accessible. Over 4 billion people experience severe water scarcity for at least a month each year, and half of the global population will be living under constant water scarcity as early as 2025. By 2040, around 1 in every 4 children will suffer from severe water stress. Global freshwater usage is at a historic high, with the annual usage sitting at around 3.88 trillion cubic meters as of 2017. This is a 65% increase in usage from 1970 and over a 400% increase in the past century. Across the world, droughts and water scarcity are shocking populations. The current American Western mega drought, in states from California to Montana between 2000-2022, is considered the driest period in over 1200 years. Further, four days in July were measured as the hottest day on Earth in over 100,000 years. (Sources: Yale University; UNICEF; A. Park Williams et al.; Our World in Data; Food and Agriculture Organization; AQUASTAT, World Bank, University of Maine, U.S. National Centers for Environmental Prediction.)