Market Update: July 15, 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 pulled back a bit this week but remains above the higher low established a week ago. Down volume selling has been fairly significant so it would not be surprising if this line does not hold in the coming days. Peak-to-trough, the market is still down 24%.

In the news this week, China recorded its slowest economic growth rate since the onset of the pandemic. Retail sales continue to increase month-over-month despite rapidly increasing prices. And inflation once again increased to 9.1% in the month of June.

There is a distinct possibility that the June CPI reading is the final peak for inflation. Primarily because commodity prices, shown here, are largely down over the last 3 months but A. haven’t fed through the rest of the economy yet, and B. A bulk of the declines happened over the last two weeks as the economy begins to price in a recession.

Since the June CPI reading, short term 2-year treasury bonds sold off causing a spike in short term interest rates. Subsequently, the yield on the 2-year treasury bond is now well above the 10-year causing a yield curve inversion. As discussed in previous videos, and inversion of the yield curve is a signal from the bond market of an upcoming recession.

Now, this spread is not always accurate at predicting upcoming recessions. However, the spread between the 10-year yield and the 3-month yield is now only 64 basis points. This spread, if inverted, is a far more accurate predictor of upcoming recessions.

Likewise, the stock market is projecting a similar economic environment. Staples relative to cyclical discretionary stocks continues to show a significant amount of strength indicating that equity investors are very risk-averse at the moment. This graph would need to show a reversal for the stock market to begin a recovery.

Despite all the evidence of continued volatility in the stock and bond market as well as a distinct possibility of an upcoming recession, investors need to balance the risk of a further drawdown vs the risk of missing out on the beginning of the recovery. As discussed in last week’s video, the market has already priced in a significant amount of the average recessionary bear market downside of -34% and thus the bulk of the losses in the stock market have already been realized with the S&P down 24%.

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Sources:

1.FactSet Research Systems. (n.d.). S&P 500 (Interactive Charts). Retrieved July 15, 2022, from FactSet Database.

2.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 14, 2022.

3.FactSet Research Systems. (n.d.). 10 year yield & 6 month yield, US treasury yield index (Interactive Charts). Retrieved July 15, 2022, from FactSet Database.

4.FactSet Research Systems. (n.d.). S&P 500 equal weight Staples relative to S&P 500 equal weight Consumer Discretionary (Interactive Charts). Retrieved July 15, 2022, from FactSet Database.

5.JP Morgan Asset Management. Market Insights: Guide to the markets 3Q 2022. Updated June 30, 2022. Retrieved from https://am.jpmorgan.com/us/en/asset-management/adv/insights/market-insights/guide-to-the-markets/?gclid=CjwKCAjwq5-WBhB7EiwAl-HEks4MiwrMFtDkQqAUEnPvw5mga4ZSSHzzU-EPaxDJ3HJHHt6UPAqavhoCq90QAvD_BwE&gclsrc=aw.ds

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