Market Update: July 29, 2022

Welcome to the weekly market update from Signature Wealth Management. I’m Brian Ransom, Research Director from Signature Wealth and here’s what happened in the market this week.

 

The S&P 500 continues to rally this week and is now up 11% from the June bottom. This is in spite of a flurry of seemingly poor economic news like the Federal Reserve raising interest rates by 75 bps and a second quarter in a row of negative GDP growth.

In the news this week, as mentioned before, the Fed increased interest rates. Consumer spending unexpectedly grew in the month of June. And U.S. GDP fell by .9% for the second quarter of 2022. With the flood of bad news this week, the question I often get is “why is the market moving higher on bad news?” Well, the common answer is the market is forward looking and the bad news was expected. Remember, the market anticipates events yet to come and there were some subtle changes in the economy this week.

First, it appears the Fed is starting to pivot from rapid contraction of money supply to something a little less “hawkish.” The very first sentence of the press release this week is “recent indicators of spending and production have softened.” Implying that the interest rate increases are indeed slowing the economy and that’s beginning to show in the data. This allows the Fed to transition from fighting inflation through rising interest rates, to either holding steady on money supply constriction or even further down the road, lowering interest rates once again.

Furthermore, bad news often comes during the recovery following a recession. This is a chart of the S&P 500 following the Global Financial Crisis. During this time, the market received a smorgasbord of bad news including the eventual bankruptcy of General Motors. Yet the market continued to move higher because A. That news was expected and B. The market is forward looking, anticipating a long recovery that lasted a number of years.

However, just because the market is moving higher, doesn’t necessarily mean that we’ve seen a bottom yet as a number of indicators are still flashing red. For one thing, low risk Staples relative to high-risk discretionary stocks are still in an upward trading pattern. Yes, discretionary has outperformed staples through the month of July, but the upward trend still remains intact.

Furthermore, the yield curve still remains inverted. Typically, the yield curve un-inverts prior to the recession hitting.

This un-inversion often precedes bear markets as seen in 2007 and in 2019. Thus, it is fair for investors to proceed with caution despite a seemingly strong market rally off of the low established in June.

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Sources:

1.FactSet Research Systems. (n.d.). S&P 500 (Interactive Charts). Retrieved July 29, 2022, from FactSet Database.

2.Federal Reserve Open Market Committee. “Federal Reserve issues FOMC statement” Updated July 27, 2022. Retrieved from https://www.federalreserve.gov/newsevents/pressreleases/monetary20220727a.htm

3.FactSet Research Systems. (n.d.). S&P 00 (Interactive Charts). Retrieved July 29, 2022, from FactSet Database.

4.FactSet Research Systems. (n.d.). Equal weight staples relative to equal weight discretionary (Interactive Charts). Retrieved July 29, 2022, from FactSet Database.

5.Federal Reserve Bank of St. Louis, 10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity [T10Y2Y], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/T10Y2Y, July 28, 2022.

6.FactSet Research Systems. (n.d.). S&P 500 (Interactive Charts). Retrieved July 29, 2022, from FactSet Database.

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