Investors saw some wild moves in equities during July, from days where markets tested lows not seen since 1997 to days where the Dow posted record gains. Economic reports confirmed that a slow recovery is underway but were not on investors' radar. New accounting scandals and reports of corporate malfeasance really hammered equities throughout the month. The FOMC did not meet in July, although Fed Chairman Alan Greenspan did tell Congress that economic activity was moderate and uncertain, particularly with respect to capital spending. Greenspan also intimated that Fed officials were keeping a watchful eye on stock markets. The Fed worries most about stock prices in their relationship to consumer spending and wealth effects.

The month of July began slowly as weakness from June and a fresh batch of earnings warnings weighed on the market. Much like June, investors remained pessimistic about corporate profits. Major indices declined from the levels at the beginning of the month, but there were some strong one-day performances. Stock prices rallied sharply in the technology sector as the Dow hit its highest level for the month on July 5th. This positive momentum could not be maintained after news of a major accounting scandal hit the market, this time in the telecommunications sector. The rest of the month saw heavy selling whenever authorities announced new investigations, in turn followed by bargain hunting. July 10th, July 19th, and July 22nd saw major triple-digit declines focused in the telecommunications, banking, and consumer goods sectors.

Stock prices in the technology sector were mixed in July, with telecommunications stocks plummeting on corporate accounting concerns. Retailers had a fairly stagnant month as hot weather discouraged store traffic, though discount retailers did keep the sector up. Energy stocks continued to trade well. Health care stocks declined for the second straight month as product difficulties and earnings warnings weighed. Housing-related stocks continued to outperform all others, thanks to surprisingly resilient consumer demand. The financial sector was mixed in July as a number of different financial institutions were investigated for their involvement in past and present accounting scandals. Travel and leisure stocks crept slightly higher from June's negative performance. The airline industry continued to dip, while automobile stocks traded slightly higher.

Looking at the performance of major indices week-by-week, only the final Friday of the month traded higher than the previous week. The best performances, July 5th, July 24th, and the 29th, came on days when major technology and financial stocks showed better earnings. Yet these positive sessions proved to be brief rebounds from major losses, making it difficult for investors to build any momentum. The Dow closed the month with a 5.5 percent loss, while the NASDAQ recorded a decline of 9.3 percent. The S&P 500 also declined, finishing down 7.9 percent for July. Both the NASDAQ and the S&P 500 are trading near 1997 levels. The Russell 2000 was the worst performer among these major indices, falling by 15.2 percent in July. This may have had something to do with the rebalancing of the small-cap market index. Until just recently, the Russell 2000 had outperformed other indexes. The market-encompassing Wilshire 5000 index showed a decrease of 8.2 percent for the month.

Treasury Markets:
The only way?
The Treasury market in July continued to gain what the stock market lost. Treasury yields fell early and often with a number of weak equity sessions, and later with some end-of-month economic reports that came in favorable for the fixed-income sector (negative for the economy). Yet economic reports still showed a recovery in progress. On July 31 the Commerce Department reported that real GDP in the second quarter grew much less than predicted and revised widely lower three years of historical data. The data, pointing to easing demand for credit and dovish monetary policy, put upward pressure on bond prices (and downward pressures on yields). Weak consumer confidence and manufacturing reports also helped Treasuries regain some losses in the final days of the month.

With last month's Treasury confusion gone, when auction schedules went awry due to political wrangling, equity markets were the only distraction available. Even Greenspan's testimony had little overall effect on the Treasury market. The Treasury's quarterly refunding announcement came at the end of July, but this typically negative event was overshadowed by the negative GDP figures.

As can be seen in the chart above, yields declined in July. The mid-month figures saw a large downward-trend in yields, which abated slightly before month-end. The 30-year bond traded well throughout July as it shed 20 basis points from its yield, while the 10-year note decreased by 33 basis points. The 5-year note outperformed the rest of the yield curve in decreasing by 56 basis points. The 2-year note also had a strong showing for the month, declining by 55 basis points. The 3-month bill showed little movement throughout the month and closed July with a 1-basis point gain in its yield.

Damir Fonovich, Economist, Econoday