The Week in Review: August 22, 2022
A Surprise Rally
Since hitting a near-term bottom on June 16, the S&P 500 Index retraced over 50% of its peak-to-trough decline, rallying 17.4% to its most recent high on August 16, according to S&P 500 data from the St. Louis Federal Reserve. From the August 16 peak, the index climbed to within 10.2% of its January 3 all-time closing high.
Inflation is high, interest rates are rising, and there is no shortage of economic uncertainty. What accounts for the recent rally? Here are three important reasons.
Second quarter earnings season is nearly complete, and earnings are topping a low bar, according to Refinitiv. Put another way, the biggest fears of a disastrous earnings season didn’t materialize.
July’s Consumer Price Index was unchanged, according to the U.S. Bureau of Labor Statistics. The tame number and lower-than-expected core CPI (Investor’s Business Daily), which excludes food and energy, raised hopes that the Federal Reserve might not be as aggressive later in the year and next year.
Investors expect that a weaker economy could force the Fed to cut interest rates next year.
Risks
Markets are never without risks. While there are cautiously encouraging signs that inflation may be peaking or has peaked, it’s not a foregone conclusion.
Oil and gasoline prices have fallen, which heavily influenced the CPI in July, but the future direction of energy is highly uncertain.
Meanwhile, most Fed officials have insisted that investors may be too sanguine on the rate outlook and have pushed back on a so-called Fed pivot.
Unlike the 1970s, when the Fed was quicker to release its foot off the monetary brakes, helping inflation become ingrained in the economy, central bankers seem more willing to stay the course until its goal of price stability is in sight.
Though the path remains narrow, odds the Fed may actually engineer a soft or ‘softish’ economic landing have recently inched higher. Stocks have a long-term upward bias, but volatility should never be discounted.
If you have any questions or concerns, please don’t hesitate to let me know.
Two for the Road
Historical data shows a new bull market typically starts three months after the end of a bear market and jumps an average of 40% in the 12 months after the bear market bottoms. -MarketWatch, June 28, 2022
The international telephone code for Russia is 007. - Russia Beyond, June 24, 2021
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