August 4, 2022
Rising interest rates, rising oil prices and rising inflation sent the S&P 500 down over 20% in the first 6 months of this year. The fear of a severe economic downturn had many hitting the sell button in a panic. The market had a better tone this month as some started seeing beaten down shares as an opportunity and while we clearly have a slowing economy, the fear of a deep and prolonged downturn was replaced by a growing belief that perhaps it would not be as severe as some had feared. The market moved higher on the first day of July and continued to gain strength throughout the month. At the end of July the S&P 500 had gained 9.1%, its best monthly performance since November of 2020. Year to date the widely followed index is still down 13.3% but closed the month with strong gains.
The month began with the Independence Day holiday that featured a light volume rally. At the end of the week we learned a better than expected 372,000 new jobs were created in June and at the end of the first 5 days of trading the S&P 500 had gained 3%. During the second full week of the month we started to see the first quarterly earnings reports. We learned inflation in June was up 9.1%, but retail sales showed a surprising 1% gain that some were attributing to inflation. This was the only down week for the entire month and the S&P 500 lost .9%. The third full week was all about quarterly earnings reports which, as expected, showed a slowing economy, but perhaps not as bad as some had feared. The week ended with a 2.6% gain. The final week of the month was one of the strongest this year after the Federal Reserve hinted they may be able to slow rate increases if commodity prices continue to move lower. The selling panic from earlier this year was replaced by a buying panic that saw the S&P 500 gain 4.3%.
Runaway inflation that would cause the Federal Reserve to raise interest rates to extreme levels has been a primary concern. During July we saw the price of many commodities, including oil, decline as it appears the Fed rate increases are starting to slow economic growth. We have now had two consecutive quarters of declining GDP, a technical measure that we are in recession. Recessions are a normal part of the economic cycle and the question to be answered is how long and how deep the recession will be. The Fed wants the economy to continue to slow and they will be successful. We believe the current rally has some more room to run, but we do not believe it is time to be aggressive. We will look to increase our “hedges” on further strength as we work our way through the recession.
