Paul Tarins, RICP®,WMCP®,CSRIC™
Supporting the conventional wisdom to hold through market drawdowns, July’s stellar recovery surpassed June’s disappointing losses, bringing the stock market retrace back into the low- to mid-teens for the year. While it was a significant positive to observe the steady series of higher-lows and higher-highs on reduced volatility, many are calling the move a “self-defeating rally”. Why? The naysayers’ point is that the farther this recovery goes, the more aggressive the Federal Reserve may be forced to become even as the rally itself has been based on the premise of greater Fed dovishness ahead. The point is fair enough, as piercing last year’s market bubble has been one of the Fed’s larger successes in fighting inflation-inducing speculation.
Naysayers aside, US Large-cap stocks gained a whopping +9.2% in July (‘SPY’ ETF Proxy), reducing losses to just -12.6% on the year. However, developed overseas and emerging market stocks performed less well, which was unsurprising given the on-going Russia-Ukraine situation and deteriorating economic conditions in China. Fixed income also closed in the green, with the Bloomberg Aggregate Bond Index up +2.5% (‘AGG’) on the month. Indeed, the notion of slowing growth ahead brought the ten-year treasury note yield down from a closing high of 3.48% in mid-June, to 2.64% by month’s end. On a related trade, commodities fell about -2.0% (‘DBC’) and have now given up about half their annual gains. This should help significantly to lower headline inflation later in the year.
While it was a welcome respite to bond holders, it is important to note that choppiness remains high in the bond market, and rates remain far below estimations of the Federal Reserve’s final “normalized rate”, speculated to be in the mid-3.0% to 4.0% range. Even though the Federal Reserve removed its guidance on future rate increases to retain flexibility under market uncertainty, with the current Fed rate just at 2.50% and recent inflation coming in at 9.1% last June (Reuters, “US Federal Reserve delivers second super-sized rate hike”, 7/28/22), they could have quite a way to go before this hawkish cycle comes to an end.
Global Asset Class Returns July & Year-to-Date 2022
Meanwhile, some contend the US economy is now in a technical recession with Real Gross Domestic Product (“GDP” adjusted for inflation – nominal GDP continues to expand at an impressive rate) having fallen for two consecutive quarters (Fox, “US economy enters technical recession after growth tumbles 0.9%...”, 7/28/22). However, jobs (CNBC, “Payrolls increased 372,000 in June, more than expected…”, 7/8/2) and corporate earnings have remained strongly positive. Earnings are surprising to the upside at an estimated +6% annually (Factset, “S&P 500 Earnings Season Update”, 7/29/22). If this number holds, it is a full two percentage points higher than initial estimates, reflecting Corporate America’s notorious ability to quickly adapt to changing conditions.
Markets are now trading well from a technical perspective and the economic backdrop remains positive despite clear evidence that the economy is slowing and hawkish Federal Reserve. However, headlines such as today’s news of China’s reaction to House Speaker Pelosi visiting Taiwan remind us that this market may remain susceptible to a challenging global macro-outlook. While we remain positive for the balance of the year, investors and advisors alike need to be prepared for continued choppiness along the way.
Source: Index proxies based on dividend adjusted ETF time-series data from CSI Data, Inc. Data considered dependable, but not guaranteed. Past performance is no guarantee of future performance or profitability. Statements herein do not constitute individual investment advice.