Mercer market review 

Markets can move rapidly and conditions can change based on macro- and micro-economic news and data. At times, it can be difficult to keep up and to determine the important information from the noise.

Our global investments analysts and researchers, and market and asset class specialists, are constantly monitoring markets to identify the most important developments and potential opportunities. 

Our monthly and quarterly insights reports provide a summary of what we believe to be the most significant news points and market movements and attempt to explain them, aiming to keep you on track and informed while still allowing you to keep a focus on the long term.

Global equities and fixed income generally posted positive returns in July. US equities underperformed international equities due to a weaker US dollar but outperformed emerging market equities. Growth significantly underperformed value during the month (as measured by the Russell 3000).

Investor sentiment remained bullish during the month as inflation eased in developed markets. Notably, headline inflation in the US declined to 3.0% year-over-year, better than expected. This was a second consecutive month of lower-than-expected inflation, contributing to markets now pricing a high likelihood of a rate cut in September. US GDP growth of 2.8% year-over-year surprised to the upside, showing continued resilience in the economy. Nonfarm payrolls for June also surprised to the upside, although previous months were revised downward. The unemployment rate rose to 4.1%, which suggests a slowing labour market. Forward looking purchasing manager indicators remained in expansionary territory in developed markets, with the US composite PMI climbing to a 27-month high. All this contributed to optimism that a resilient yet slowing economy will lead to further reduction in inflation without triggering a recession.

Yields fell across the curve in the US as the prospect of looser monetary policy was priced in, which contributed to fixed income generally outperforming equities. This also contributed to a rotation from large growth stocks into small cap stocks, as investors expect these stocks to benefit most from a rate pivot. Disappointing earnings from large tech company and stalling momentum for the AI story contributed to a rotation from growth into value stocks.

The Federal Reserve kept interest rates unchanged at their July meeting, but primed markets for a possible rate cut in September. US headline inflation eased by more than expected, while inflation in other developed markets continues to trend downward. The Bank of England cut interest rates for the first time since 2020 by 25 bps in early August now that inflation has remained at its 2% target for two months in a row. Inflation in China remained low in June as the country is still emerging from a deflationary period. The ECB held interest rates steady. The Bank of Japan surprised markets by raising rates.

In the US, Donald Trump was injured in an assassination attempt and was subsequently nominated as the Republican candidate while President Biden announced that he was dropping out of the US presidential race and endorsed his current vice president. This contributed to volatility as investors vacillated in their conviction level in ‘Trump trades’ in line with shifting odds of the election outcome.

The US dollar weakened against major developed currencies, especially the yen. Listed real assets outperformed broader equities while commodities underperformed, as oil prices decreased by almost 5%.

Global equity markets had a solid second quarter although dispersion within equities was large. Expectations for rate cuts were pushed out. However, markets were upbeat amid improving inflation readings, the AI narrative, strong corporate profit growth and a generally solid economy, which benefited US large growth stocks the most. Returns for small cap and value were negative. International equities suffered partly due to heightened political uncertainty in Europe, while emerging markets performed strongly.

Treasury yields were up slightly during the quarter as markets expected the Fed to hold off with rate cuts until later this year given inflation uncertainty remains elevated. The 2-year Treasury yield rose by ~10 bps from 4.6% to 4.7% during Q2, while the 30-year Treasury yield rose by ~20 bps from 4.3% to 4.5%. Credit spreads declined during this risk-on quarter.

The Bloomberg US Aggregate Bond Index returned 0.1% in Q2 as high coupons offset the negative rate impact except for longer durations, while the MSCI ACWI returned 2.9%. As a result, a traditional 60/40* portfolio returned 1.8%