2022 marked the worst first half of a year since 1970 per the DOW Jones. July gave us a strong start to the second half of the year, so can the market prepare for a strong 2nd half?
Before looking ahead into the 2nd half, we have to take a look at the market and economic backdrop in the first half.
Year to Date Return
Bloomberg Barclays US Aggregate Bond
Oil (WTI Crude)
Source: ClearPeak Capital Management Research, Bloomberg 8/10/2022
Indexes are unmanaged and cannot be directly invested into.
Past performance is no guarantee of future results
Stocks Finish July Higher: Most indexes finished July higher as expectations of slowing growth had investors believing the Fed will have to slow the pace of interest rate hikes this year. Also, most companies in the S&P who have reported earnings so far have beaten expectations. This was a pleasant surprise considering the high inflationary landscape we're in.
Even most developed international indexes finished July higher despite the Russia-Ukraine war causing stickier inflation across the pond. Emerging markets were a bit lower due to growth concerns in China stemming from their property development struggles. The strength of the USD weighed down returns in the international space.
Fixed Income: Bonds had a good July as bond investors began anticipating a slowing of interest rate hikes by the Fed. This was seen across the board from treasuries, corporate, high yield, international, and emerging market bonds.
Commodities and Agricultural Goods: Oil and major metals fell in July after their dominating runs this year from the threat of a slowing economy despite current inflationary conditions.
Agricultural products have seen increasing prices in the past couple of years only to see another price surge from the Russia-Ukraine war (2 countries with a high amount of agricultural exports from wheat, cereal, fertilizer, etc.). Rising prices of agricultural products in some countries have caused government placing export bans as well as civil unrest.
Inflation: July CPI rose 8.5% down from 9.1% in June, so consumers spent 8.5% more on goods and services than from last July. The July CPI print should be a relief for consumers and investors despite being high, it shows inflation has likely peaked.
U.S. Consumer: University of Michigan's Consumer Sentiment didn't change much in July. In June it was at a record low of 50 rising to 51.5 in July. Driving factors have been rising food and energy costs weighed down by global events, deteriorating personal financial conditions, and consumer assumptions of a worse economy in the 2nd half of the year.
Retail Sales: July numbers aren't out yet, but it's a positive sign that during a month of decades high inflation and historically low consumer sentiment, June retail spending increased more than expected.
U.S. Home Sales: New home sales decreased 17.4% year over year and 8.1% month over month due to rising mortgage rates. This is one of the areas of the economy the Fed is getting its way in raising rates after having a red hot housing market the past couple of years.
Labor Market: The U.S. added 528,000 jobs in July driving unemployment down to 3.5%. There are currently 10.7 million job openings in the US with 5.21 million people actively looking for jobs. Despite this tight labor market, small businesses report 50% of job openings being unfilled.
The Fed: July saw rates rise by 0.75% as expected bringing them to neutral (2.5%, which is neither restrictive nor accommodative). Powell said he's willing to slow hikes since 0.75% hikes are considered large and unusual. He also indicated the Fed will stop forecasting data. We believe this is a good sign and should've come sooner because this Fed administration has done a very poor job of forecasting economic data.
Looking Forward to the 2nd Half
The 2 main forces helping stocks were inflation peaking and a decrease in commodity prices. We believe the market needs more of this in the 2nd half if it's going to continue higher. Price stability is essential for any functioning society and inflation is still high.
This Fed was late to raise rates, so they raised aggressively, and now want to slow the pace of their rate hikes. We don't want them to slow down too much too early. We just started cooling, let us cool off at a leisurely pace in the 2nd half without surprises from the Fed.
We're technically in a recession, but it doesn't feel like it. The economy is too strong and so are corporate earnings which decreases the chances of an earnings recession this year. The yield curve however is more inverted than Maverick in the first Top Gun, the spread between the 2 and 10 yr treasuries is 45 bps. This increases the chances of recession in the future and make the Fed's job of finding their soft land harder.
2022 is the 3rd worst start to a year for the market and it's a midterm year, so stocks historically do better in the 2nd half considering both these factors. However, bear markets see rallies to the bottom. Maybe June was the bottom. However, the chances of July and the past couple weeks being another rally to the bottom are just as high given how much uncertainty is still clouding the market. Investors have gotten pretty excited this week, but we're not optimistic nor pessimistic. We're pretty neutral right now.
Have a strategy and have a plan, no they're not the same, and stick to them. Volatility happens. Talking about this, looking at charts, and holding through a bear market/volatility all sounds easy, but actually holding through is much harder and much more nerve wrecking. Perhaps that's what separates good investors from bad ones.
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