Weekly Market Update

After the worst start to a year for both stocks and bonds since the 1970s, investors limped into the second half of 2022, but fortunately July was exactly what the doctor ordered. Fueled largely by optimism that inflation and as a corollary, the pace of interest rate hikes from the Federal Reserve might finally be peaking, the S&P 500 registered its best month since November 2020, rising over 9%. Bonds quietly were also quite strong, with the Bloomberg Aggregate US Bond index rising over 2.3%, its best monthly gain since August 2019. Few things change sentiment like a change in market prices and as a result, bulls go into August feeling better than they have in some time.

While this rally has been encouraging and could certainly continue, we want to voice some caution as we keenly remember similar stock market rallies that were subsequently derailed by hot consumer price index (CPI) releases. For example, per data from Bespoke, the last full week of performance for the S&P 500 over the last 3 months were +6.58% (May), +6.45% (June), and +4.2% (this week of July). Despite these very strong market rallies, the S&P 500 is slightly negative since the start of May as every CPI report has come in hotter than expected and stocks have generally given back any recent gains. However, the S&P 500 has bounced over 8% since the July 13th CPI release crushed estimates (9.1% vs. 8.6%) as investors instead chose to key on falling commodity prices and bet that the August 10th CPI release would be meaningfully cooler. Today the market shrugged off higher than expected inflationary data from the PCE (personal consumption expenditures) and consumer sentiment reports, but ultimately, we believe that August 10th CPI release is likely to be a major make it or break it moment for this rally. Until that time, the July jobs report next Friday will be very closely watched, particularly after this week’s US GDP report for the second quarter indicated the second consecutive quarter of negative growth in a row and pundits enthusiastically debate about whether we are in a recession.

Ian G. Browning, CFA
Managing Director, Investment Strategies | Shareholder