Just when you thought things could only get worse, the S&P 500 rallied 9% in July as the bears went on vacation.
The index made a June 17th low of 3,636.87 and closed July at 4,130.29. That rally totaled 13.5% off the June bottom, giving the bulls hope. The S&P 500 begins August -13.3% YTD, as some call the June low the market bottom, while other pundits council caution.
This "bear market" rally took place as the Fed continues to battle inflation by raising rates. PMIs (Purchasing Managers Indices) around the globe went below 50, indicating a global recession may be upon us. Another sign of a possible recession is the yield curve which is inverted at its highest level this cycle.
There continues to be a very large gap between the Fed inflation target of 2% and last quarter's 9% inflation as measured in CPI. Rates on the short end appear to be headed higher while the long end has stabilized.
Bulls are betting on a soft landing for the US economy as the Fed eases off their tightening tools of higher rates and ending quantitative easing. Bears believe tightening will continue; rates will rise into 2023 and inflation will come down grudgingly. This implies a slowdown in the economy as measured by GDP along with high inflation resulting in a stagflation period.
Earnings have beaten expectations according to FactSet. 73% of companies have reported earnings above expectations. Blended earnings grew 6% for Q2. Blended revenue growth is 12.3%. Calendar year 2022 earnings are expected to grow 8.9%. This implies all this year's selloff has been the result of price earnings multiple contraction. Profits will begin to erode moving into 2023 in the face of a strong US dollar and a weakening consumer.
War in Ukraine continues to threaten world food supplies. Oil prices remain elevated while other commodity prices remain high, but well off their 2022 peaks.
China continues to be belligerent regarding the Island Republic of Taiwan, which manufactures 92% of the advanced semiconductors necessary for smart phones, laptops, and ballistic missiles.
China's economy is weakening due to its housing crisis, draconian Covid policies, and too much central planning. Chairman XI is soon to be appointed ruler of the CCP for life and he may need a distraction from his domestic woes to secure his power.
“Beware of the bear market surge,” according to John Authers of Bloomberg. The key force behind July's rally was the investor pessimism that preceded it. The key to near future price movements is likely to be investor psychology, earnings trajectory, and political forces shaping our future and affecting the US economy.
We remain cautious but optimistic that the nation will navigate its many pressing issues and America's leading companies will continue to deliver positive results. We believe a recession will likely be mild, unlike the 2008-09 experience.
The bulls caught their breadth in July, but the balance of the year will likely see more volatile markets.
We wish you a wonderful balance of your summer!
Doug Coppola - Executive Director & Investment Committee Chairman
Steve Lindgren - Chief Investment Officer & Partner