Investors, reposition your portfolios now!

– The macroeconomic data reported in July wasn’t great. While inflation seemed to drop, the US economy showed real signs of a slowdown. FED Chair Jeremy Powell reiterated that even though lowering inflation was important, it was also a priority to keep a healthy labour market, and the data showed it was weakening. With that, FED signaled its first potential rate cut in September. With this positive news, equity markets fared well in the first part of the month.

– It was also earnings season in the US and some companies like Tesla didn’t fare as well. This combined with the unprecedented set of events in the US Presidential election, on July 24^th the US stock market had the largest one day drop since 2022. S&P 500 slid -2.3% in just one session, underlining again potential volatility going into the US elections in November.

– With all the noise going on in the markets in July, global equities were first up and then after the assassination attempt, they were down with almost flat in July. As of July 26^th, the US equity index S&P 500 was down -0.03% on the month, bringing its year-to-date return to +14.5%. The European stock index Euro Stoxx 50 was down on the month losing -0.6% over the same period dragging its year-to-date return down to +7.5%. Emerging markets were also slightly down on the month.

– Global emerging market equity index MSCI EM dropped by -0.5% in July bringing its year-to-date return to +5.4%. The global equity market returns also reflected this cautious outlook with global equity indicator MSCI All Country World Index (ACWI) up slightly by +0.3% in July reaching +10.8% since the year end. Similar to May and June, in July bond prices had another up month.

– Contrary to their general tendency, crypto currencies didn’t move in tandem in July. As of July 26^th, while Bitcoin was up by +9% on the month Ethereum was down by -4.7%. Despite its weak performance in July, Ethereum maintained its impressive year to date performance with up by +42.6%. With its solid return in July, Bitcoin’s year to date return climbed up to +58.7%. Despite a slight negative return in June, in July gold continued its climb that commenced in 2023.

– Crude oil had a down month in May. Even though it course corrected In June, crude continued its decline in July. Weakness in global macroeconomic fundamentals and additional supply provided by US strategic oil reserves weighed on crude oil prices. As of July 26^th, the first month futures contract for US crude oil WTI was down by -5.4% on the month, bringing its year-to-date return to +7.7%.

– The Turkish stock market continued to climb up in July. As of July 26^th, Borsa Istanbul Index BIST100 was up by +2.3% in local currency terms (+1.7% in US dollar basis) over the month bringing its year-to-date return in local currency terms to +45.8% (+30.7% in US dollar basis). The year-to-date performance of BIST100 in US dollar terms visibly underperforming its return in local currency is due to the appreciation in the greenback against Turkish Lira by +11.6% since the end of 2023.

– This kind of an environment calls for caution given the potential drawdown risks. This is also an opportune time for investors to review and reposition their portfolios. As we have noted before, investors can continue to exploit this scenario by a careful underweight in their equity allocations, possibly with a slight overweight tilt to their bonds, and/or other investments such as gold, US dollar and US dollar index which tend to provide a level of protection to portfolios in visible market downturns and during periods of volatility. At the end of the day, there is no such thing as a bad trade; there is only bad sizing.

The world was shaken up by very unexpected news on July 13^th. There was an assassination attempt on the US Presidential Candidate Donald Trump at a rally in Pennsylvania. This wasn’t shocking just because of the obvious reasons, ie that there was a threat on the life of an ex-President, but also because Trump was about to be disclosed as the candidate for the Republican party merely two days after on July 15^th. What complicated the matters was the debate between Trump and the current President Joe Biden on July 2^nd which didn’t really go as planned. While Trump was answering all questions and doing well, Biden was just frozen throughout the event.

A series of formal explanations were provided for Biden’s “low” performance ranging from his international flights to his early sleep schedule. Regardless, the pressure on Biden to step down grew throughout July. Biden finally caved in and passed the baton to his Vice President, Kamala Harris. That is why Trump’s assassination attempt came at a very interesting time because if it had succeeded, the US Presidential election would have lost not one but both candidates just couple months before the elections, totally unprecedented in the US.

FED SIGNALED ITS FIRST RATE CUT

The macroeconomic data wasn’t great either. While inflation seemed to drop, the US economy showed real signs of a slowdown. As our readers will remember from our previous issues, the US economy particularly the labor market wasn’t doing great and that is one of the core focus areas for the US Central Bank FED. Indeed, Jeremy Powell reiterated that even though lowering inflation was important, it was also important to keep a healthy labour market, and the data showed it was weakening. With that, FED signaled its first potential rate cut in September. Markets appreciated the positive news. Consequently, equity markets fared well in the first part of the month. Yet, with Biden stepping down and the assassination attempt on Trump, markets took on a very cautious outlook for the remainder of July.

It was also earnings season in the US and some companies like Tesla didn’t fare as well. This combined with the unprecedented set of events in the US Presidential election, on July 24^th the US stock market had the largest one day drop since 2022. S&P 500 slid -2.3% in just one session, underlining again potential volatility going into the US elections in November.

EQUITIES HAD A MIXED JULY

With all the noise going on in the markets, global equities were first up and then after the assassination attempt, they were down with almost flat in July. As of July 26^th, the US equity index S&P 500 was down -0.03% on the month, bringing its year-to-date return to +14.5%. The European stock index Euro Stoxx 50 was down on the month losing -0.6% over the same period dragging its year-to-date return down to +7.5%. Emerging markets were also slightly down on the month. Global emerging market equity index MSCI EM dropped by -0.5% in July bringing its year-to-date return to +5.4%. The global equity market returns also reflected this cautious outlook with global equity indicator MSCI All Country World Index (ACWI) up slightly by +0.3% in July reaching +10.8% since the year end.

LONG TERM BOND PRICES CONTINUED TO INCREASE

Similar to May and June, in July bond prices had another up month. The highlight in July was that the shape of the US yield curve continued to become more inverted (gray line in the graph below) compared to April (red line) and June (blue). What that means is the longer-term yields have been going down since earlier in the year as illustrated below.

Source: Bloomberg

As a quick recap, the reason for the increased inversion in the US yield curve (the yield curve is generally expected to be upward sloping as opposed to being inverted) has been driven by the markets’ expectation of lower inflation. See the graph below that shows how the bond markets’ 5- and 10-year inflation expectations have been coming down over the last couple months.

As our readers may remember from our previous issues, each implied inflation for a certain maturity is calculated using the US Treasury yield for that maturity which represents the nominal rate and the US Treasury Inflation-Protected Securities (“TIPS”) rate for the same maturity which represents the real rate. Taking the difference between the two (e.g. 5-year nominal interest rate – 5-year real interest rate) then gives the implied (or breakeven) inflation for that maturity expected by the markets (e.g. 5-year implied inflation).

Source: Bloomberg

In line with the drop in long-term bond yields, as of July 26^th, Bloomberg Global Aggregate Bond Index, High Yield Bond Index as well as the Global Corporate Bond Index were all up by +1.3%, +1.5% and +1.4% on the month bringing their year-to-date returns to +1.4%, +5.4% and +1.7% respectively.

CRYPTO PRICES WERE MIXED IN JULY

Contrary to their general tendency, crypto currencies didn’t move in tandem in July. As of July 26^th, while Bitcoin was up by +9% on the month Ethereum was down by -4.7%. Despite its weak performance in July, Ethereum maintained its impressive year to date performance with up by +42.6%. With its solid return in July, Bitcoin’s year to date return climbed up to +58.7%.

GOLD CONTINUED ITS ASCENT IN JULY

Despite a slight negative return in June, in July gold continued its climb that commenced in 2023. With inflation still in the back of investors’ minds and the approaching US elections, the price of gold had a decent month. As a brief reminder, investors turn to gold as a store of value and a hedge against uncertainty and inflation. As of July 26^th, the first month futures contract for gold was up by +3.8% on the month pulling its year to date return up to +17.2%.

CRUDE OIL DROPPED ONCE AGAIN IN JULY

Crude oil had a down month in May. Even though it course corrected In June, crude continued its decline in July. As a brief recap, crude oil prices are driven by both demand and supply dynamics. Despite the ongoing conflict in the Middle East, a major oil-producing area, and production cuts by OPEC+ countries continued to threaten the future crude oil supply, weakness in global macroeconomic fundamentals and additional supply provided by US strategic oil reserves weighed on crude oil prices. As of July 26^th, the first month futures contract for US crude oil WTI was down by -5.4% on the month, bringing its year-to-date return to +7.7%.

TURKISH STOCKS HAD A POSITIVE JULY

Despite the relatively negative outlook in global equity markets, the Turkish stock market continued to climb up in July. As of July 26^th, Borsa Istanbul Index BIST100 was up by +2.3% in local currency terms (+1.7% in US dollar basis) over the month bringing its year-to-date return in local currency terms to +45.8% (+30.7% in US dollar basis). The year-to-date performance of BIST100 in US dollar terms visibly underperforming its return in local currency is due to the appreciation in the greenback against Turkish Lira by +11.6% since the end of 2023.

IT IS A GOOD TIME FOR INVESTORS TO REPOSITION THEIR PORTFOLIOS

As we have discussed in our previous issues, the uncertainty surrounding the FED rate policy combined with the looming US elections in early November has caused a level of volatility in the global markets. We expect it to continue going into the last quarter of the year. While this kind of an environment calls for caution given the potential drawdown risks, it is also an opportune time for investors to review and reposition their portfolios.

As we have noted before, investors can continue to exploit this scenario by a careful underweight in their equity allocations, possibly with a slight overweight tilt to their bonds, and/or other investments such as gold, US dollar and US dollar index which tend to provide a level of protection to portfolios in visible market downturns and during periods of volatility. This scenario could also allow for credit investments, such as corporate and high yield bonds, which are priced off of government bonds, to appreciate particularly for longer maturity instruments similar to what happened in May, June and July.

Of course, as we have discussed before, it is not just about what you invest in, but also how much you invest in it. Therefore, a balanced portfolio is key to portfolio success. At the end of the day, there is no such thing as a bad trade; there is only bad sizing.

ELA KARAHASANOGLU, MBA, CFA, CAIA

International Investments Director

karahasanoglu@turcomoney.com

ela.karahasanoglu@ekrportfolioadvisory.com

https://www.linkedin.com/in/elakarahasanoglu/