Weekly Market Update

Despite investors digesting rising odds of a recession, stocks kicked off the second half of 2022 with strength, as four of the first five trading days in July saw the S&P 500 close higher while the tech heavy Nasdaq Composite posted five consecutive gains for the first time since November. Obviously recession is generally not good for risk assets, but concerns of slowing economic growth have cooled surging commodity prices (i.e., gas prices have declined for 24 straight days) as well as interest rates and stocks, particularly the beaten down growth names. They seem to have taken comfort in hopes that perhaps inflation is showing signs of peaking and the Federal Reserve’s runway for financial tightening is shrinking. In addition, while the first quarter (Q1) saw negative US GDP of -1.6% and the Atlanta Fed’s real-time GDP tracker for Q2 is forecasting -1.2% (as of July 8th), Friday’s jobs report for June complicated matters, as it crushed expectations by coming in at 372K payrolls added, versus consensus expectations of 275K (per FactSet). As a result, investors must now reconcile slowing economic growth with a strong labor market and odds of a soft landing, or the rare occasion where the Fed successfully hikes rates without throwing the economy into recession, seem to have risen.

While markets have recently cheered a broad decline in commodity prices, increased indications of discounts from retailers, and signs of softening in the housing and rental markets, inflation concerns continue to loom large, and the importance of Wednesday’s consumer price index (CPI) cannot be overstated. Investors are looking for year-over-year headline inflation of 8.8% in June, up from 8.6% the month prior, and the market reaction will once again be very binary. A hot inflation number will likely see the S&P 500 give back July’s 3% gain and potentially more, while a lower-than-expected inflation print will likely add credibility and momentum to the recent rally. Also noteworthy, the Q2 earnings season will unofficially kick off on Thursday with JPMorgan and Morgan Stanley reporting and with fears of recession growing, investors will be monitoring corporate profits and guidance particularly closely. Ultimately, while we view this week’s market action as constructive, we remember similar stock market strength heading into the April and May CPI reports and caution investors from making major portfolio adjustments before Wednesday’s (July 13) inflation report for June.

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