July was another dickens of a month—at once the best of times and the worst of times. For the financial markets, the news was largely good. The U.S. markets ended up across the board, hitting new all-time highs during the month. Earnings reports continued to substantially beat expectations. That good news, combined with dropping interest rates, drove markets higher. Bond markets continued to rally on those lower rates. From a financial perspective, July was a very good month here in the U.S.
Abroad, the news was more mixed. Developed markets also did well, although less so than U.S. markets. Emerging markets, however, got hit hard on rising worries about the pandemic. They ended the month down substantially, which brings us to the bad news.
Medical risks surge. July saw a substantial increase in infections globally, due largely to the spread of the Delta variant of the COVID-19 virus. This explains the market declines in emerging markets. In the U.S., despite the strong market performance, we saw a similar—or even larger—surge in infections. After declining to low levels in June, daily case growth grew by six times throughout July. The seven-day case growth average, which was 13,400 on June 30, rose to 81,900 on July 31. This trend took us back to where we were in mid-February. Clearly, July saw a major resurgence of medical risks here in the U.S.
Strong U.S. economy. Yet, despite that resurgence, the economic data and markets in the U.S. did just fine. Consumer confidence was mixed, but in general held up. Business confidence rose. Consumer spending and business investment continued strong. As of this morning, the jobs report came in above expectations, showing that hiring actually increased in July—despite the faster case growth. So while there were some signs of slowing in the economy, the real message from the data was the continued strength of our recovery. And that is what markets reacted to. Despite the rising medical risks, markets expect the economy to keep moving ahead.
Economic momentum. That note brings us to the prospects for August. The first question we have to ask is whether the economy can continue to grow in the face of higher infection rates. So far, the answer looks to be yes.
During the first part of the pandemic, the primary cause of economic damage was shutdowns that forced businesses to close and lay people off. In many respects, the recession we saw then was a policy recession. At this time, there are reasons to believe we will not see widespread shutdowns. The infection growth is primarily localized in a handful of states with low vaccination rates, so there will be no need to shut down in most of the country. In those states where a shutdown might be helpful, it is politically unlikely. As we saw in the jobs report this morning, an open economy should keep hiring and spending moving forward, at least for a while.
Effect of behavior changes. Furthermore, as demonstrated earlier in the pandemic, people are now starting to change their behaviors in ways that should bring infection growth back down. Vaccination rates have moved higher, and mask wearing and social distancing are on the rise again. As we have seen before, behavior changes can bring the pandemic under control, and that is what we should start to see in August. If we do, expect the economic momentum to continue.
Positive Trends Should Continue
To sum up, July was a terrible month on the medical front, but a good one on the economic and market fronts. In August, the positive economic trends will continue, although we will be looking to see whether the medical news starts to improve—or at least stops getting worse. If the news gets better, we can reasonably expect the positive economic trends to continue through the rest of the year.