July’s biggest news item came on the last day of the month. On July 31, Fed Chair Jerome Powell announced the first cut in the federal funds rate since 2008. The Fed cut rates by ¼% or 25 basis points. The cut in rates brought the target rate level to 2.0%-2.25%. The rate cut was expected, but market participants were disappointed the Fed Chair didn’t strike a more dovish tone. Federal Reserve Chairman Powell called the cut a “mid-cycle adjustment to policy.” The markets interpreted his comments to mean more aggressive cuts were unlikely to follow. However, fast-forward to the days immediately following Powell’s comments (which included the announcement of new tariffs on the remainder of Chinese imports), and markets are seemingly overlooking his remarks. At the time of this writing, the market is putting an 84% probability of another rate cut at the next Fed meeting in September (data from CME Group as of August 1). Concerns over a trade war between the U.S. and China, as well as continued uncertainty surrounding the Fed’s next move seem poised to grab headlines in the months ahead.

Domestic stock markets were relatively calm throughout July. The last day of the month was the only trading day during which the S&P 500 index moved more than 1% in either direction. U.S. larger-cap stocks finished the month up 1.4%, while smaller-cap stocks gained 0.7%. Year-to-date returns remain impressive: the Vanguard 500 Index is up 20.2% and the iShares Russell 2000 ETF is up 16.9%.

International equity markets did not fare as well as their U.S. counterparts even though they are cheaper based on current earnings expectations. Emerging-market stocks fell 1.8% in July (Vanguard FTSE Emerging Markets ETF). Developed international stocks (Vanguard FTSE Developed Markets ETF) dropped 2.0% last month, while European stocks fell 2.6% (Vanguard FTSE Europe ETF).

After failing to deliver on her Brexit plans, Theresa May resigned as UK prime minister and made way for another Conservative leader to lead Brexit negotiations. After taking office in July, the new prime minister Boris Johnson has until the October 31 deadline to negotiate the terms of the country’s withdrawal from the European Union. It is difficult to assess when or how Brexit will occur, and whether its resolution will be perceived as a positive to investment markets.

The Treasury curve remained inverted throughout the month (10-year yield minus 3-month yield), as it has been since May. There is much discussion on whether the inverted yield curve is a sign of economic challenges in our future. As global interest rates continued to fall, bond markets inched up 0.2% during July. This brings the U.S. core bond index (Vanguard Total Bond Market Index) year-to-date return to an impressive 6.3%.

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