Investors rushed back into the market after a dreadful first six months of the year. The first half of the year markets plummeted, pessimism reigned, and investors lowered growth expectations. The S&P was down 21% for the first six month of the year marking its worst first half performance in any year since 1970.

July staged a dramatic rebound. The S&P 500 was up 9% and long -term bond prices rose as fixed income yields dropped over 20 basis points even in the face of the Federal Reserve raising overnight rate and additional 75 basis points on July 27th. Additionally, U.S. GDP was negative for a second consecutive quarter indicating to most that we are currently in a recession.

Could this be a case of the market pricing in too much negative news in the first half of the year or was July a short-term bear market rally? The answer is more likely than not somewhere in the middle. The economy is clearly slowing. July’s Purchasing Manager’s Index, widely used as measurement for economic trends in manufacturing and services dropped to a 2-year low. Weekly jobless claims, an index that tracks first time unemployment claims touched a 4-month high in July.
Even with a 9.1% CPI print, the market priced in a less aggressive rate hike path in July. To illustrate, at the close of business June 30th, the Federal Funds overnight rate 1 year forward was projected to be 3.33%. As of the end of July that rate projection was down to 3.02%. Lower rate hike projections fueled the rally in interest rate sensitive equity indexes.

The chart below details returns for major US Stock Indexes.

Weaker economic news led to gains in the bond market as investors seem to be counting on a slower paced Federal Reserve, almost despite their continued Hawkish rhetoric. The market appears to be playing a dangerous chicken and mouse game. I do feel weaker economic news will weigh on Federal Reserve’s decision, but the risk of excessive inflation persists. One of the only tools in the Fed’s arsenal to combat inflation is monetary policy. Continued high inflationary prints, regardless of an economic slowdown, will lead the Fed to take action. This could lead to Stagflation. Stagflation is an environment where the economy slows with both prices and unemployment going higher.

As we mentioned in our previous newsletters, short term volatility has little impact on long term investment results. A well-diversified balance portfolio is a time-tested strategy for long term capital. This was never more evident than bounce back in July. This market volatility is common.

As always if you have any questions feel free to reach out.

Best,
Bob

Opinions are those of the author and not necessarily those of Guardian or its subsidiaries

The S&P 500 Index is a market index generally considered representative of the stock market. The Index focuses on the large-cap segment of the U.S. equities market. The Hang Seng Index (HSI) is a market-capitalization-weighted stock market Index in Hong Kong. It is used to record and monitor daily changes of the largest companies of the Hong Kong stock market and is the main indicator of the overall market performance in Hong Kong.

Indices are unmanaged, and one cannot invest directly in an index. Past performance is not a guarantee of future results. All investments contain risk and may lose value. Investing in the bond market is subject to certain risks including market, interest rate, issuer, credit, and inflation risk. Equities may decline in value due to both real and perceived general market, economic and industry conditions.

Statistics sources from Central Bank Rates, Bloomberg, and Nasdaq

2022-140562 EXP/ 7/24