July Market Recap
August 1, 2022
The bear market is not yet dead, but a month-long hibernation was a welcomed change for investors growing more grizzled with every selloff.
The S&P 500 gained more than 9% in July, effectively clawing back all of its June losses and posting the benchmark index’s best month since 2020. The NASDAQ performed even better, increasing more than 12% thanks to strong earnings from several large technology companies.
Each of the 11 sectors in the S&P 500 recorded positive returns in July, a complete reversal from June when all 11 sectors booked losses. Consumer Discretionary (+18.9%) and Technology (+13.5%) climbed highest. Energy (+9.6%) also resumed its upward trend. Consumer Staples (+3.1%) and Health Care (+3.2%) lagged in relative terms.
|Index||July 2022||YTD 2022|
July brought a quartet of market-moving events worth circling on the calendar: Fed hikes, inflation reports, second-quarter GDP, and corporate earnings.
On July 27, the Federal Reserve raised its benchmark Fed Funds Rate by another 0.75%, the second consecutive month it has done so. Rumors had swirled of a possible 1% hike, which failed to materialize. Stocks rallied sharply as a result. The NASDAQ surged 4.1% on July 27, its best single-day performance in more than two years (4/6/2020).
Here’s the money quote from Fed Chair Jerome Powell: “As the stance of monetary policy tightens further, it likely will become appropriate to slow the pace of (rate) increases while we assess how policy adjustments are affecting the economy and inflation.”
The size and pace of future rate hikes, in other words, will be data-dependent. With two months until the next scheduled Fed meeting (September 16), the hope is that forthcoming economic data reveals enough slowing to warrant less aggressive monetary policy.
Inflation, of course, is the most obvious gauge of whether recent Fed policy is achieving its goals. The latest Consumer Price Index (CPI) released July 13 revealed 9.1% inflation from a year earlier. It was another high-water mark for 2022 inflation, and fueled temporary speculation that the Fed might amp up hawkish policy even further.
One day after the Fed’s July rate hike, we learned the US economy contracted by 0.9% annualized in the second quarter (April-June). This comes after a 1.6% drop in Q1. Based on the traditional definition (two consecutive quarters of negative GDP growth), this puts our economy into a recession, although Powell and several politicians are doing their best to claim otherwise.
It was encouraging to see the stock market not overreact to this news. It was far from breaking news that economic growth is slowing. Even if the latest GDP number had been slightly positive, the overall narrative would not have changed. The S&P 500 increased 1.4% on July 28 following the GDP report, which of course can still be revised retroactively (higher or lower) in August.
That leaves second-quarter corporate earnings as the final area of focus last month. With slightly more than half the S&P 500 companies having reported so far, earnings are on pace to increase by 6% from a year earlier. That’s better than consensus expectations forecasting 4% earnings growth.
Apple, Alphabet (Google), and Amazon were among the mega-cap companies that met or exceeded earnings expectations in late July. Those three companies alone make up nearly 15% of the S&P 500 index.
While the change in momentum helps calm nerves and sooth portfolio values, it’s still too early to tell whether the ultimate bottom of this bear market is behind us. July’s bounce certainly creates a larger buffer. As of month-end, the S&P 500 was only 2% below the midway point between its all-time high and the mid-June low.
Evolving Fed policy will ultimately have a big impact on how this plays out, and the bond market is suggesting that policy will moderate from here. 10-year US Treasury yields fell further in July, ending the month at 2.64%. That’s down from a 2.97% yield at the end of June and a recent peak of 3.4% in mid-June.
It was a mixed bag for international equities in July. Non-US Developed equities gained 5.2% last month, but Emerging Market stocks fell 0.3%. That performance gap is mostly attributable to China, whose government implemented another round of shutdowns in several large cities in response to proportionally minimal cases of COVID-19.
It’s not a coincidence that the stock market has performed better as gasoline prices have fallen. According to AAA, the national average for gas was $4.22 per gallon as of July 31, down from the peak of $5.02 per gallon in mid-June.
Investment Advice offered through Marks Group Wealth Management, a Registered Investment Advisor.
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