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More Blog PostsJuly 2022 - Market Update
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Key Observations
The market decline of 2022 finally showed some signs of abating in July. As of August 2nd, the S&P 500 is down about 14% from the highs, retracing approximately 10% from the lows we witnessed in mid-June. Q2 GDP data was released in late July and showed the second consecutive quarterly decline, sparking a debate among market participants over whether or not we are truly in a recession.
Federal Reserve Chairman weighed in with his take: “if you think about what a recession really is, it's a broad-based decline across many industries that sustain for more than a couple of months and there are a bunch of specific tests in it. And this just doesn't seem like that. Now. What we have right now doesn't seem like that. And the real reason is that the labor market is just sending such a signal of economic strength that it makes you really question the GDP data.” An official ruling on the debate can only come from the National Bureau of Economic Research. Where we go from here depends on the resolution of a number of global issues, many of which have been at play since the global pandemic in 2020.
Data Dashboard
Stock Market
US Stocks rebounded in July as data showed that the economy is showing signs of resilience in the face of raising rates. Earnings from the second quarter were mixed, and there is some sense that companies may have used this quarter as an opportunity to clean house and to create easier comps going forward. Retailers such as Walmart and Target reported lower margins and weaker consumer activity, seemingly caused by rising prices. The softening price of oil is negative for the Energy sector, but gives some relief to the consumer’s wallet. Up about 18.4% and 3.2%, the best and worst performing US sectors were Consumer Discretionary and Consumer Staples respectively.
Foreign stocks have suffered largely due to the stronger US Dollar and the effects of global inflation. The war in Ukraine and the attempts at a coordinated response to Russia’s actions have impacted European economies. China is dealing with cooling consumer demand and is attempting to avoid a housing crisis.
July Monthly Returns (by US Sector)
Bond Market
The treasury yield curve flattened in July as the short end increased and the long end stayed relatively consistent. The 2yr yield ended the month at 2.96% and the 10yr at 3.02%. Inflation breakeven rates (the forward inflation rate priced into bonds) declined in July, consistent with the view that inflation will cool in the second half of the year. In the credit markets, high yield corporate bonds are demanding an additional 1.7% in yield vs treasuries compared to last month, with an average spread of 5.66% compared to 3.96% in June. This spread “widening” indicates that bond investors are increasingly cautious regarding corporations’ ability to satisfy their obligations.
Economics
The Federal Reserve raised rates again with a second consecutive 75bp hike, bringing the Fed Funds rate to a range of 2.25-2.5%. While caveating that there will be a time when the pace of interest hikes slows, Chairman Powell and the committee reiterated that the moves will be data dependent and easing price pressure remains the number one goal.
As stated above, the US Economy shrank 0.9% in the second quarter after factoring in inflation. While an official “recession” is determined by the National Bureau of Economic Research, two quarters in a row of negative Real GDP growth is a simpler indicator. With a tight labor force and less accommodative monetary policy, the goal of a “soft landing” is working so far.
The US dollar may be helping the Fed’s goal of lowering prices by making imports less expensive. The US is a net importer and the US Dollar has appreciated enough to put a dent in goods priced in foreign currencies. On the flip side, global companies are feeling the effects of weaker earnings from their global operations.
Tactical Updates
For Tactical Equity portfolios, we ended the month of July with positions in the utility and healthcare sectors, Chinese and Japanese equities, and biotech and lithium battery companies. China has given back its gains from mid-June in light of a broad US stock market rebound. Throughout the month, we dropped our exposure to any energy and commodities in light of favorable momentum from the healthcare and biotech sectors. We realized sizable gains on our Solar Energy ETF after a recent rise in value attributed to news that Democratic senators were able to come to an agreement on a bill that incorporates funding to fight climate change.
As for Tactical Fixed Income portfolios, we ended the month of July in short-term Treasury Bills and short-term municipal bonds. We sent out an email earlier this month explaining the tax benefits of municipal bonds and how you wouldn’t typically hold them in a retirement account. In this specific case, we have purchased them due to their current price trends in the fixed income markets relative to their alternatives' and are not holding them for the purpose of tax-free interest. Additionally, we traded out of TIPS due to a decaying price trend that’s reflected a decrease in inflation fears.
General Client Considerations
Please remember that we are here as a partner to answer your questions and advise you to the best of our ability. As always, if you have any questions or concerns regarding your account, please reach out.
Thanks,
The Friedenthal Financial Team